CV Sciences, Inc. (CVSI) Earnings Call Transcript & Summary

Greetings, and welcome to the CV Sciences First Quarter 2021 Conference Call. [Operator Instructions] And this conference is being recorded. [Operator Instructions] I would now like to turn the call over to CV Sciences for an introduction. Please go ahead.

Thank you, and good afternoon, everyone. With us today with prepared remarks are CV Sciences' Chief Executive Officer, Joseph Dowling; and Chief Financial Officer, Joerg Grasser. I would like to remind you that during this call, management's prepared remarks may contain forward-looking statements, and management may make additional forward-looking statements during the Q&A session. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those anticipated by CV Sciences at this time. When used in this call, the words anticipate, could, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to CV Sciences are as such, forward-looking statements. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CV Sciences exclude certain expenses from its GAAP financial results. Please refer to CV Sciences' press release from earlier today for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This afternoon, May 13, the company issued a press release announcing its financial results. Participants on this call who have not already done so may wish to view the press release as the company provides a summary of the results on this call. The press release may be found at cvsciences.com. Following the prepared remarks, we will open up for questions from the analyst community. I would now like to turn the call over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling. Joe?

Thank you, Melissa. Good afternoon, and thank you for joining us for today's conference call. First quarter results are in line with our expectations. During Q1, we achieved our highest gross margin and EBITDA results since Q3 of 2019. Revenues were down slightly on a sequential basis due primarily to a shift in our strategic pricing. We constantly monitor product pricing by sales channel, balancing consumer access and profitability. One of our goals is to certainly grow revenue, and we will, but we also want to balance revenue growth with profitability, and we manage that carefully by sales channel investment and product offering mix. Going forward, we are optimistic about both revenue growth and profitability for several reasons. First, pandemic relief and recovery. As the economy reopens and B2B retail returns, we see a more normalized traditional retail channel emerging, including for FDM, natural products and other B2B channels. We are starting to see this now in conversations with our retail partners, and we believe continued improvement throughout 2021 will occur as the economy opens further. Second, we believe the digital sales channel is just starting, and there is significant room for growth with higher margins than traditional retail. Over the last year, investments to strengthen our digital capabilities across our platform have been made and are showing good results. We have seen positive trends in all of our KPIs, including site visitors, conversion and average order value. We have stood up digital program initiatives, including a robust SEO, e-mail, affiliate, social media and autoship programs, all of which are showing excellent progress. We recognize that the pandemic has likely accelerated a permanent change in consumer shopping behavior, making our investment and shift to digital more critical. We will continue to invest in and evolve our digital platform to position CV Sciences for growth in this important sales channel that, as I mentioned, is just starting. And third, we are positioning our product offering to meet consumer needs in the sales channels we are pursuing. We have always been well positioned for the natural product retail channel, and we will continue to evolve our product offering for this important channel, including just earlier this week, the launch of our PlusCBD Calm and Sleep gummies that support healthy stress response and sleep cycles for people getting back to their normal routines, including reentry to the workplace. Another example of new product development for growth is in our ProCBD line, which are clinical strength CBD products introduced in January, which are available exclusively for the medical practitioner sales channel. We see significant opportunity in this channel for several reasons, including consumers' desire for science-based products using natural plant-based alternatives. Also, our ProCBD product line is the only high-strength line on the market, supported by published investigations, randomized controlled clinical studies and post-marketing safety review. A focus on science is critically important to this discerning channel. This channel has a much higher barrier to entry with products that must be backed by science and by companies with a track record that can be trusted. We are certainly that company, and we believe the medical practitioner channel will become a significant component of our revenue mix in the future. As consumer demographics need states, preferences and shopping behaviors evolve, we will continuously manage our product offering to meet consumer demand. We are planning and expect to introduce in the second half of 2021, several new products targeted to the biggest market opportunities available, including for the digital, natural products and medical practitioner sales channels. We believe all of these factors provide a foundation for growth going forward. We recognize that the last year has been difficult, but believe that normalization will continue in the first half of 2021. And during the second half of 2021, we will start to see benefit from the initiatives I just mentioned: the economy reopening; our digital investment; and our targeted and evolving product offering and mix. On the science front, last month, we announced an ongoing partnership with Alkemist Labs, an established leader in botanical plant testing to collaborate with the National Institute of Standards and Technology in efforts to help cannabis testing labs demonstrate and improve measurement capabilities and comparability. This continued science leadership further demonstrates why CV Sciences is the most trusted company in the CBD category. On the regulatory front, we continue to lead the discussion with members of Congress and partner with the FDA for a sensible regulatory framework. We are involved with and support current legislative efforts, including H.R. 841, which would provide a clear set of rules for industry to follow and for FDA to enforce. The impact of this legislation would also help accelerate brand contraction and help with the industry of bad actors. Our nicotine cessation drug development program is advancing. We have completed our pharmacological toxicology studies and are currently focused on CMC activities or chemistry, manufacturing and controls, in support of our planned clinical studies, which we are planning for late 2021 or early 2022. As I have previously mentioned, in 2020, we received formal notice of patent issuance from the USPTO for the U.S. market, and approval notification from the Japanese patent office for the Japanese market. We are actively pursuing patent protection in other select worldwide countries and geographies that represent significant market opportunities. We continue to believe that this program represents significant hidden value for our company. As mentioned in prior calls, we expect to partner this program sometime in the future. Now let me turn it over to Joerg to run through our financials.

Thank you, Joe, and good afternoon, everyone. Our first quarter revenue was $4.8 million compared to $8.3 million in the first quarter of 2020 and was down sequentially from $5.2 million in the fourth quarter of 2020. The year-over-year decline is due to lower retail sales as we continue to be impacted by factors related to COVID-19 as well as competitive dynamics related to regulatory uncertainty. The sequential decline from Q4 was mostly related to lower sales in our natural product channel. Our retail store count was 7,346 as of March 31, 2021, up 27% versus a year ago and flat with Q4 levels. The FDM channel continued to be the primary focus relative to door expansion, accounting for 4,484 stores were 61% of the total as we continue to build our distribution network and foster partnerships with major retailers. Direct-to-consumer revenue represented 38.6% of total revenue in the first quarter compared to 24.4% a year earlier and 34.9% in the fourth quarter of 2020. E-commerce revenue was down 7% on a year-over-year basis, mostly related to price reductions we took earlier last year. On a sequential basis, our DTC revenue was up 3% from Q4. As Joe outlined, we made good improvements to all of our main digital KPIs, including website visitors, which have been trending upwards across all of our websites since the start of the pandemic. Gross margin for the first quarter of 2021 was 48.7% compared to 42.7% in the fourth quarter and 48.5% in the first quarter of 2020. The improvement in gross margin from the prior quarter was mostly related to lower discounts and E&O expense. We also saw favorability due to sales mix, reflecting a higher concentration of e-commerce revenue as a percentage of total sales. So 20 basis point improvement in gross margin versus last year was also due to favorable changes in our sales mix. SG&A expenses for the first quarter was $5.3 million, down from $7.8 million in the last year first quarter and about flat with Q4 2020. The year-over-year decline reflects reduced commissions due to lower retail sales, lower marketing activity and third-party consulting spending as well as decreased payroll and outside services. We continue to focus on reducing our cost structure and have now delivered on our goal of $10 million of annualized savings that was first outlined roughly a year ago. Adjusted EBITDA loss for the first quarter was $2.3 million compared to $3.9 million in the first quarter of 2020 and $2.2 million in the fourth quarter of 2020. The improvement in adjusted EBITDA is a result of our continued efforts to reduce expenses and minimize our cash outflow. On a GAAP basis, we reported a first quarter 2021 net loss of $3.1 million or $0.03 per share compared to a net loss of $5.2 million or $0.05 per share in the first quarter of 2020 and a net loss of $9.3 million or $0.09 in the first quarter of 2020. Let me now turn to our balance sheet, which we continue to manage conservatively. We ended the first quarter of 2021 with $5.7 million of total cash compared to $4.5 million at the end of fiscal 2020. Inventory was $9 million at the end of the first quarter, which was flat with a year earlier and slightly up compared to $8.8 million at the end of the fourth quarter. Cash used in operations during the first quarter was $1.7 million, consistent with a year earlier. During the first quarter, we received $3.2 million in proceeds from the sale of common shares under the agreement we announced in December that allows us to sell up to $10 million worth of our shares through the end of 2021. We continue to have adequate financial flexibility to execute our plans and look forward to improving trends as the year unfolds. Now I will turn the call back over to the operator for Q&A.

[Operator Instructions] Our first question is coming from Mike Grondahl of Northland Capital.

This is Luke on for Mike. Last call, you guys touched on the launch of the immunity line, pet line and pro line, which were launched in the second half of 2020. But it was a little early to evaluate traction for these brands. So I was just wondering if you guys have any more color to provide on these and sort of a rough trajectory, if any, on the B2B and B2C side as well as any color with the Calm and Sleep gummies, which were announced earlier this week?

Sure. Luke, thank you for joining the call. I think on a specific product-by-product basis, at this point, it's really difficult to be able to provide a forecast going forward. We're very, very pleased, not only with the product launches, but also the feedback that we're getting from our retail partners as well as consumers. I think the most recent and maybe exciting recent launch of our new gummies or just earlier this week that was announced. We've already had very positive response to these products. We've received a lot of enthusiastic feedback from retail partners and consumers. And based on the initial feedback, we are confident on future in-store product placement as well as sell-through. We also expect very strong e-commerce sales of these products as well. And so I think as it relates to any product though individually, Luke, it's difficult to give the kind of guidance that I think you're looking for. The one thing I can say though, is generally overall, that based on April sales, we do expect modest sequential growth in Q2 of 2021. We think the second half of 2021 will be better. And as we discussed during the recent year-end call, in 2020, we're really coming off the biggest economic contraction in 70 years, where consumer spending was $0.5 trillion less than 2019 levels. And so we still see 2021 as a reset year where the first half is working to normalize the economy. The second half of 2021 is stronger. And with all of that positioning, we see a much stronger 2022 across all of the products, including the new product introductions that you mentioned with immunity and pet and our Happy Lane products as well as for the recently announced structure function gummy launch earlier this week. So again, we see 2021 -- the 2021 positioning is ongoing from a brand, a product and distribution standpoint, and we're heavily focused on sort of being ready for the economy as it reopens with the right branding and products by channel. And so I know it's a long-winded answer, but we see all of those products really contributing to the overall revenue mix in a very strong way.

Yes. And then on the drug development side, as you guys mentioned, second half of 2021 or maybe early half of 2022 for the Phase I clinical trials. Is there any sort of like further time line down the line with that as far as how long it would take for those clinical trials and then kind of next steps or FDA approval?

Yes. It's a good question, Luke. Right now, we don't. We don't have a time line for the Phase I clinical study. It's a fairly straightforward and simple study. It does not -- the length of the study is fairly short. Getting the results, it takes some time though. But we do not have a time line that we are prepared to provide at this point.

Our next question is coming from Gerald Pascarelli of Cowen.

My first question is just -- I'd like to focus on the retail segment, obviously, still under pressure and understanding that we're not through the COVID recovery yet. You did begin lapping with a very favorable comps in March that's going to sustain through 2Q. And so Joe, I guess, could you just walk us through what you're seeing in the channel? How we get better trends over time when presumably, the comps like coming up into 2Q and 3Q are going to look as good as they ever going to look?

Yes. Thanks, Gerald. We think that the kind of the themes that I covered in my scripted remarks, including the vaccine programs that are ongoing. Obviously, the infection rate is coming down significantly. And the economy is reopening. There was just some feedback today from CDC about mask wearing. And so we see all of those signs as being very positive for the B2B retail channel reopening. I think it's changed forever though. I do think that it is going to be -- what normalized looks like is going to be hard to say, but I do think it's going to recover, but it's certainly going to lose some to the direct-to-consumer channel, which obviously we're focused on heavily. I think that some of the anecdotal feedback that we are getting from our retail partners is that they're seeing a little more foot traffic. We're -- the reorder laid is a little bit improved. I think as we see consumers go back into stores, we're going to see not just the push out onto the shelves but pull off from the shelves. And so we think that velocity has an opportunity to improve. And so we're optimistic, but cautiously optimistic going forward into 2021. On the FDM side, as Joerg mentioned, we've made some gains in distribution, and that continues to be a situation where we are maintaining and building those relationships and the shelf space. We're in constant contact with our FDM retail partners. And for the most part, I would say that they're still waiting for FDA clarity, and that will certainly be a major catalyst for category growth, and we'll be able to leverage our relationships and shelf space when that happens. But we also think it's possible that one or two FDM retailers could expand their product offering, absent FDA clarity. So we're ready when that happens. We also -- not necessarily for the FDM channel, but for potentially other channels, we think product innovation is going to be critical. And we are really excited about some of our product innovation that we're planning for the second half of 2021 that we think is going to be really, really targeted and focused on channels, not FDM, but potentially some of the other channels that we think are going to not only normalize but stabilize as we get through 2021 and into what we think will be as much stronger 2022.

Got it. Helpful color. My next question, I guess this is for Joerg, but the gross margin improvement was certainly encouraging, in particular with -- compared to the last 3 quarters. And so as we look to model this forward, not looking for guidance or anything like that. But is the 1Q margin the right margin to use as a base here going forward, given some of the structural changes you talked about? Just any color you could provide on how we should think about that going forward would be helpful.

Yes. Gerald, this is Joerg. Good question. So like you indicated, for the last several quarters, our gross margins have been trending in the mid- to high 40s. And in general, our new products are being priced with a gross margin in the mid-40s, based on our current cost structure where we currently are. So I would anticipate margins to continue to be in the mid-40s. But then as volume increases, our margins will improve as a result of economy of scale as we get better fixed cost absorption.

[Operator Instructions] Our next question is coming from Scott Fortune of ROTH Capital Partners.

Yes. I'm Scott Fortune. Just a quick follow-up on your -- so you're seeing all the products that have been called out on the immunity side that you're really high on the gummies side. So what are the gross margins on the gummies side? Are they a little bit below the kind of the ingestible or the tinctures and from that side going forward, but good volume expected?

Scott, yes, so we haven't disclosed gross margin on a product-by-product basis. Obviously, we internally, we manage this one very carefully. But overall of our entire portfolio of products, it is in the mid-40s plus the estimated volumes by the different product categories.

Okay. And then just another follow-up question on the natural channel. As far as competition and saturation there, it seems like we're starting to see the shrinkage of competitors, although we see some major Canadian producers come onboard here through M&A and such. But -- and then how are we expected to see pricing? And what's the pricing pressure going on in the natural channel holding up for you guys on the premium side? What's the gap between kind of more the average price versus your guys' more premium price side of things?

So the natural channel, I agree -- we agree with you about there being some brand contraction in the natural product retail channel, Scott. We -- we're not only seeing it when we are now kind of back into stores visiting with our customers, but we're also getting it anecdotally as retailers are really taking the brands off the shelf that are not moving or that are not supporting their brand with the proper level of marketing support and customer service. And so we see that happening every single day. So we think that's good for companies like CV Sciences. And so that is a real positive going forward for us. On the pricing side, we constantly evaluate our pricing, and we balance. And this really kind of gets to the Q1 pricing strategy. We're constantly balancing between pricing and accessibility to consumers and margin. And so it's a balancing. And we think we have really good value for our products. We're certainly not the most expensive product on the shelf, whether it's measured on a per milligram basis or on a per product basis. So we're real comfortable that we're at a good level for the natural product channel. And I think that extends over to the digital space as well. And so we think that we -- at least for the time being, we have pricing where we balance revenue growth, accessibility and profitability.

Okay. And then one last one for me. Why you haven't called out on the c-store side of things, that channel? And what's going on there? Can you provide a little more color on the c-store? And I assume the professional line is going to open up as we see more vaccinations and reopening. More people will start to go to more of those professionals, but that sounds like a positive channel going forward. More color on c-store side of things.

Sure. We continue to pursue the c-store channel with distributors, brokers and retailers and are very optimistic that we will have new distribution gains to discuss in the short term. It does take time to be successful in the c-store market, but we are confident that our Happy Lane brand will be successful in significantly increasing distribution in this channel. And so like I said, Scott, we expect to have is some kind of an announcement in the short term, and we're very excited about that. We think that is in and of itself as a catalyst for additional distribution gains. And on the pro side -- yes, on the pro side, I'll just mention briefly on the pro side. You're absolutely right. The pandemic had a really significant impact on medical practitioners, where they really sort of transition to remote visitation with their clients. And that had a huge impact on product sales. We see that changing significantly, certainly in the second half of 2021. And so we're very excited about our ProCBD line and think that the practitioner market is a real big opportunity, and one that really just is not available to just any CBD company. You really have to have your act together from a science and a quality standpoint, and being able to support those kind of customers with the type of science and education that we pioneered many, many years ago. And so we're excited about both the convenience and the pro channel.

Thank you. At this time, I'd like to turn the floor back over to Mr. Dowling for closing comments.

I'd like to thank everyone for joining our call this afternoon. We are excited about coming out of the pandemic and having the economy reopen and the anticipated positive impact for everyone, including CV Sciences. Again, thank you for your time, and I look forward to speaking soon.

Ladies and gentlemen, thank you for your participation and interest in CV Sciences. You may disconnect your lines and log off the webcast at this time, and have a wonderful day.