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spk01: Greetings and welcome to the CVSciences fourth quarter 2021 conference call. At this time, all participants are in the listen-only mode and this conference is being recorded. Following the formal presentation, management will take questions from the analyst community. I would now like to turn the call over to CVSciences for an introduction. Please go ahead.
spk00: Thank you and good afternoon, everyone. With us today with prepared remarks are CV Sciences Chief Executive Officer Joseph Dowling and Yura Grasser, Chief Financial Officer. I'd like to remind you that during this call, management's prepared remarks may contain forward-looking statements. 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 using 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 a forward-looking statement. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CV Sciences excludes 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, the company issued a press release announcing its financial results. Participants on this call who may not have already done so may wish to look at the press release as the company provides a summary of the results on this call. The press release may be found at www.cvsciences.com. I'd like to now turn the call over to CV Sciences Chief Executive Officer, Mr. Joseph Dowling. Joe?
spk02: Thank you, Dan. Good afternoon and thank you for joining us for today's conference call. Because it is so critical to our industry, I would like to start with some comments on regulatory matters, which have been at the front of mind for our industry since the passage of the 2018 Farm Bill. In passing the 2018 Farm Bill, Congress made clear its intent to support the production and sale of hemp and hemp derivatives such as CBD. Public statements and inaction by FDA have been disappointing, despite FDA announcements that they are investigating a regulatory pathway for CBD products. Federal inaction has hurt our industry, created uncertainty for consumers looking for regulatory clarity, and has chilled investment. So what does federal regulation mean for our industry? There are several critical areas. I'll cover three areas that define what federal regulation means. The first critical area is regulation means safety. The FDA has said they are hesitant to act because of insufficient safety data. However, we all know that public safety data for products in our industry is compelling. Regulation is the only way to further address consumer uncertainty and public health and safety. The science, the growing body of evidence, including data published by CB Sciences and other industry participants, clearly demonstrates that hemp-derived CBD especially at the levels found in many dietary supplements and food, is generally safe. There are now several studies, including our published toxicity studies from 2018, which found no evidence of liver toxicity. CV Sciences and other companies in the sector have completed studies that clearly demonstrate that hemp extracts containing CBD can be generally recognized as safe. In addition, even with the proliferation of hemp-derived products in the market, the number of adverse events continues to be remarkably low. The second critical area is regulation means quality. Consumers expect that they will be protected from unsafe products in the food supply. An industry that is seeking consumer trust should insist that all companies comply with good manufacturing practices. Retailers, e-tailers, and consumers should all insist on this basic standard to ensure quality. Federal regulation can be the guiding force to make this happen. The third critical area that federal regulation will deliver is Regulation will mean a brighter future. Federal regulation of our industry will help to further mainstream, legitimize, and create confidence in our category. It will improve product safety and quality, open sales channels, make hemp-derived ingredients available to more consumers, encourage and expand research, and it will bring much needed investment to our industry. Despite the absence of federal regulation for our industry, we see promising regulation at both the state and federal level. Certainly, two of the biggest markets, California and New York, have recently led the way with much needed legislation. The states are not waiting, which is positive. At the federal level, we are eager to join other industry participants in support of HR 841. HR 841 would require FDA to regulate CBD as a dietary supplement and would create a pathway utilizing the new dietary ingredient application process for responsible companies to demonstrate product safety and quality. We are prepared to begin the new dietary ingredient NDI process immediately. To summarize, federal regulation will improve safety, quality, consumer confidence, and create a much brighter future for hemp-derived ingredients and products. We are working diligently at both the state and federal level to advance much needed regulatory structure for our industry. Notwithstanding a continued challenging environment during 2021, With brand saturation and lack of federal regulation, we focused on building for the future with several key initiatives, including introduction of new product lines, expansion in existing and new B2B sales channels with distribution in over 8,400 U.S. retail locations, and implementation of cost efficiency measures to achieve cash flow positive. Our focus on product quality and innovation helped broaden our business in 2021, driving solid distribution gains despite significant headwinds stemming from the pandemic, competitive environment, and absence of federal regulation. As mentioned, we introduced several new product lines during 2021, starting with our new wellness line, which include our Sleep and Calm Gummies that support healthy stress response and sleep cycles to help people get back to their normal routines. And most recently, our newest product launch in our wellness line, Plus CBD Relief, which helps to support a healthy inflammatory response and manage occasional soreness. We listen carefully to our customers and their need states and work hard to develop products that specifically address the needs of our customers. Another product line introduced in 2021 includes our offering of OTC pain relief topical products that leverage our science-based approach with a clinical strength line of CBD products targeting health practitioners and consumers' strong interest in natural plant-based alternative medicine and self-care products. This new line includes products that are available exclusively through healthcare practitioners, a strategic sales channel for our company. And then that last new product line that I will mention is our Plus CBD Reserve Collection, a full-spectrum offering that is intended to provide the benefit of hemp cannabinoids, including CBD and THC, working synergistically for a balanced cannabinoid supplement. The new reserve products, along with our sleep, calm, and relief wellness offering, and our new line of OTC pain relief topical products are evidence of our strong innovation pipeline and ability to capitalize on opportunities for future revenue growth. Evolving our product offering to consumer needs and trends is critical, as indicated by new product contribution to our revenue base. 44% of our net revenue for the year ended December 31, 2021, was from new products launched since 2020. We will continue to innovate, develop, and launch new products that meet the needs of our customers. Our product development pipeline is innovative and will include high-quality, proven products that we believe position the company for future growth. With a total addressable market of $5 billion plus for CBD products, according to recent studies, we remain optimistic about our future growth prospects. The CBD industry continues to undergo a repositioning, and we expect to benefit from the evolving regulatory framework as well as further consolidation. Given the current market dynamics, we remain focused on driving cost efficiency and achieving cash flow positive in the near term, while also continuing to advance our brand awareness and innovation initiatives. Despite near-term challenges and uncertainties, we have positioned our company to participate in the consolidation and brand contraction of the CBD market by continuing to execute on our key strategic initiatives and leveraging core competitive advantages to drive long-term growth and shareholder value. Our priorities for 2022 reflect our focus on delivering value to our shareholders. We have taken the next step to improve shareholder value by commencing a strategic review, which includes consideration of inbound and outbound merger, sale, acquisition, and other options for the company as a whole or for any business segment. We have engaged AGP, Alliance Global Partners, to assist the company with the strategic review. I will now turn the call over to Jord to run through the financials.
spk03: Thank you, Joe, and good afternoon, everyone. Our fourth quarter revenue was $5 million compared to $5.2 million in the fourth quarter of 2020 and slightly down sequentially from 5.1 million in the third quarter. On a year-over-year basis, we continue to be impacted by the highly competitive environment, which is mostly caused by regulatory uncertainty. So slightly sequential decline from Q3 was concentrated in our retail channels. We had a significant increase in retail distribution during the fourth quarter. putting our year-end store count at more than 8,400 retail locations, a 16% increase over the fourth quarter of 2020. The FDM channel accounted for much of the increase as we ended Q4 with 5,700 stores in FDM, up approximately 800 stores from the end of the third quarter, mostly due to our new distribution win with GNC. Direct-to-consumer revenue represented 38.8% of total revenue in the fourth quarter compared to 34.9% a year earlier and 35.4% in the third quarter of 2021. E-commerce revenue increased by 6% on a year-over-year basis in the fourth quarter of 2021, mostly related to our continued focus on this channel. On a sequential basis, our DTC revenue was up 7% compared to Q3. We continue to make solid improvements to our main digital KPIs, including website visitors, which are trending upwards across our websites. Our conversion rates are also holding strong. We recently focused on improving our auto-ship functionality, as well as paid advertisement and email campaigns to drive additional visitors to our sites. Growth margin for the fourth quarter of 2021 was 32.4% compared to 46.2% in the third quarter and 42.7% in the fourth quarter of 2020. So declining growth margin year over year is mostly related to additional product reserves in the fourth quarter of 2021. SG&A expense in the fourth quarter was 10.1 million and included goodwill and intangible asset impairment charges of $5 million. Excluding the impairment charges, our SG&A expense remained flat sequentially and declined on a year-over-year basis. So decline reflects our ongoing efforts to reduce our cost structure. We also made improvements to our adjusted EBITDA. Adjusted EBITDA loss for the fourth quarter was 2.6 million compared to 2.7 million in the third quarter and 2.2 million in the fourth quarter of 2020. So improved adjusted EBITDA loss is a result of our continued cost-saving efforts to minimize our cash outflow. On a gap basis, we reported a fourth quarter 2021 net loss of $8.9 million or $0.08 per share compared to a net loss of $9.3 million or $0.09 per share in the fourth quarter of 2020. Now, let me turn to our balance sheet. We continue to manage our cash position very carefully and ended the fourth quarter of 2021 with $1.4 million of total cash compared to $4.5 million at the end of fiscal 2020. Cash used in operations during 2021 was $7.5 million. We continue to work on reducing our cash usage in 2022, but anticipate that we will be dependent in the near future on additional investment capital to fund our growth initiatives. In 2021, we received proceeds of $4.4 million from the sale of common shares on our equity line, which we terminated last November. Also last November, we entered into an SBA for the sale and issuance of convertible notes for up to $5.3 million. We issued the first note of $1 million in November, and so far approximately $0.9 million of the note has been converted into common shares. Just last week, we issued the second note of $1 million. In addition, just yesterday, we entered into an SBA to issue and sell preferred stock and warrants for an investor. From this transaction, we received gross proceeds of $0.7 million before deducting placement agent fees and other offering expenses. We also determined that we qualify for the Employee Retention Credit under the CARES Act and filed our amended tax returns in March. We expect to receive approximately $2 million of tax credits under the relief provision during 2022. From an operations perspective, we continue to adjust our cost structure to be in line with our expected revenue with this overarching goal to achieve cash flow breakeven in the second half of 2022. As previously discussed, we entered into a lease termination agreement for our main facility in San Diego. We are in the final stages of negotiating a new lease. The new facility will be more efficient, cost effective, and appropriate for our employees to support a hybrid work environment which we have embraced in the last couple of years and expect to continue in the future our inventory was 8.6 million at the end of the fourth quarter compared to 8.8 million a year earlier as we continue to focus on efficient cash management and convert our inventory into cash as a result Of the recent transactions I just described, we require additional time to finalize our financial statements to be filed as part of our 10-K. So additional time is required to incorporate the most recent subsequent events and work with our external auditors to ensure all related audit procedures have been performed. We plan to file our Form 10-K on or before April 15, 2022. Entering 2022, with the new financing agreements in place and our cost savings initiatives underway, we have the financial flexibility to continue executing our plan and look forward to improving trends as the year unfolds. Now, I will turn the call back over to Joe.
spk02: Jorg, thank you. Jorg just covered several areas where we have taken aggressive action to properly scale our business, achieve cash flow positive, and align operations with our growth initiatives. The recent financings that we have completed will also help support operations, but also address some company structural issues that we expect to discuss in our preliminary 14A filing in the next few weeks. During this call, we have mentioned several times that our company, Realignment, allows us to actively participate in the contraction and consolidation of the CBD industry, which we are actively doing with our advisors. Our drug development program continues and we believe is a significant undervalued company asset. We are currently moving slowly as we seek to partner the program. We remain optimistic about the long-term opportunity for our company and industry We have taken the necessary action to ensure that we are scaled properly and are focused on the things that matter to drive shareholder value. In closing, I would like to thank everyone for taking the time this afternoon to join our call. We look forward to speaking again soon. I will now turn the call back over to the operator for some closing remarks. Thank you again.
spk01: Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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