This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Greetings. Welcome to the CVSciences first quarter 2022 conference call. At this time, all participants are in 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.
spk00: Please go ahead. Thank you, and good morning, everyone. With us today with prepared remarks are CVSciences Chief Executive Officer Joseph Dowling and 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 forward-looking statements. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CVSciences excludes certain expenses from its GAAP financial results. Please refer to CVSciences press release from earlier today for full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This morning, 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.
spk01: Joe? Thank you, Dan. Good morning, everyone. We all know the impact from the external environment on our industry and company. In spite of this, we continue to make progress in developing products that customers want and that specifically address their need states. We are getting our products on the shelf at retail during a very challenging time, and we are selling our products more effectively than ever from our e-commerce platform. Our call this morning will cover areas that we are focused on to add long-term value. Let me start with product development. Consumers have been very clear about the type of products they want from us. In today's stressful environment, products that address specific need states that help with sleep, anxiety, pain, to name a few areas, are precisely what our customers are telling us they need to supplement their health and wellness plan. Over the last couple quarters, we have launched a complete wellness line of products. Our PlusCBD Sleep, PlusCBD Calm, and now during Q1, we released our PlusCBD Relief that is an adjunct to helping consumers with pain symptoms. These products are exactly what consumers have been asking for and early sales indications confirm this. Also during Q1, we launched four unique over-the-counter pain relief topical products that are formulated to address minor aches and pain. The feedback from our retailers and customers is overwhelmingly positive on these new products and most importantly, how these products are specifically addressing everyday health and wellness challenges that we all face with natural plant-based alternative medicines and self-care products. We are getting these products on the shelf. They are selling through. We expect strong replenishment orders and believe this type of product development positions the company for growth even during tough times. The market is telling us that we are on the right track. An example of this is the recent People's Choice Award that we just received from one of the largest retailers in the natural products channel. This award goes to the top brand across all categories and is based on a couple of factors, and they are what is the best product, in-store support, and importantly, customer service. We are very proud of this award, but more importantly, this recognition lets us know we are on the right track. Beyond product development, we plan to focus our sales and marketing efforts on our top selling products. While some companies may choose to develop and sell every product in every sales channel, our strategy going forward will be to focus on our top-selling products in the sales channels that provide the best return. Evolving our product offering to consumer needs and trends is critical. As we mentioned during our year-end 2021 earnings call, where we indicated that 44 percent of our net revenue for the year-end of 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. And we will focus on the most profitable sales channels rather than trying to be all things to all people. We know that focusing on the right sales channels is paying off, as indicated from recent SPINS data during the first quarter of 2022, which shows that we have regained the top spot as the leading brand in the natural products retail channel. We achieved this with far fewer resources than our competitors. We are very proud of this accomplishment. The next area of our focus is scaling our business to the new economic reality, achieving cost efficiency in every area of the business, managing our working capital to optimize cash flow, and taking steps to get our margins back in line. Over the last two years, we have taken numerous steps to right-size and operate as efficiently as possible. This is an ongoing and constant effort. We have evaluated every functional area, every vendor, every relationship of the company, and have made tough decisions to become more cost efficient. Jorg will discuss more specifically some of the initiatives that have and will realize significant cost savings. We are managing our working capital very closely. Actions to accelerate collections have been implemented. Also, we have a strong level of saleable inventory and are working diligently to ensure that we convert this valuable asset to cash timely and profitably. Because it is so critical to our industry, we will continue to play a leadership role at both the state and federal level to achieve a regulatory framework that will allow our industry to realize its potential. Of course, federal inaction has hurt our industry, created uncertainty for consumers looking for regulatory clarity, and has chilled investment. However, we see progress every day at both the state and federal level and will continue our role as a respected leader in the space to achieve regulatory clarity. The CBD addressable market is big. and has significant upside as we work to resolve the current challenges. 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 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. I will resume my comments in a few minutes. Let me pause now, and I will turn the call over to York.
spk04: Thank you, Joe, and also good morning to everyone. Our first quarter revenue was 4.4 million compared to 4.8 million in the first quarter of 2021, and 5 million in the fourth quarter of 2021. So decline is mostly due to lower sales in our B2B channel. On a sequential basis, our retail sales were mostly impacted by lower sales to FDM accounts. Our total number of units sold during the first quarter increased by 3% compared to the first quarter of 2021. The volume increase was offset by higher discounts for new product placements and changes in our sales mix. The overall market continues to be fragmented and highly competitive, which we believe is largely due to the lack of a clear regulatory framework. Direct-to-consumer revenue represented 42.5% of total revenue in the first quarter compared to 38.6% a year earlier and 38.8% in the fourth quarter of 2021. e-commerce continues to become a larger part of our business. Our online revenue increased slightly on a year-over-year basis, mostly related to our continued focus on this channel. We continue to make solid improvements to our main digital KPIs, including website visitors, which continue to trend upwards across all of our websites. Also, our brand loyalty with our flagship brand plus CBD continues to improve as our revenue with returning customers continue to increase. Gross margin for the first quarter of 2022 was 26% compared to 32.4% in the fourth quarter and 48.7% in the first quarter of 2021. So decline in gross margin on a sequential and year-over-year basis is mostly due to additional discounts, increased product cost, and changes in our sales mix in the fourth quarter of 2021. We are taking aggressive steps to get our margins back in line. We recently initiated a review of our overall pricing by SKU and our overall discount strategy. We are also evaluating if we should add a second distribution center on the East Coast to reach more of our online customers with next day delivery and reduced shipping costs. SG&A expense for the first quarter was $2.5 million and included the benefit of an employee retention credit under the CARES Act of $2 million. During the first quarter of 2022, we determined that we were eligible for the credit and properly amended our payroll tax filings with the IRS. Excluding the tax credit, our SG&A expense continued to decrease on a year-over-year and sequential basis as a result of ongoing efforts to reduce our overall cost structure. We have taken out costs from all areas of our business and continue to do so in order to get to cash flow break-even. We also made improvements to our adjusted EBITDA. Adjusted EBITDA loss for the first quarter was 2.5 million compared to 2.6 million in the fourth quarter and 2.3 million in the first quarter of 2021. The improved adjusted EBITDA loss is a result of our continued cost-saving efforts to minimize our cash outflow. On a gap basis, we reported first quarter 2022 net loss of 2.2 million or 2 cents per share compared to a net loss of 3.1 million or 3 cents per share in the first quarter of 2021. Now, let me turn to our balance sheet. We continue to manage our cash position very carefully and ended the first quarter of 2022 with 2.4 million in total cash compared to 1.4 million at the end of fiscal 21. Cash used in operations during the first quarter of 2022 was $400,000, a significant improvement from previous quarters. During the first quarter, we have more aggressively managed our overall cash position with improved cash collections on our outstanding AR and daily management of our inventory and vendor payables. We continue to work on reducing our cash usage in 2022, but anticipate that we will be dependent in the near future on additional capital to fund our growth initiatives. During the first quarter of 2022, we received proceeds of 1.4 million from the sale of convertible notes and preferred shares. From an operations perspective, We continue to adjust our cost structure to be in line with our expected revenue with the overarching goal to achieve cash flow break-even in the second half of 2022. In April, we entered into a new lease for our main operations. 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 $8.2 million at the end of the first quarter compared to $8.6 million at year-end, and we continue to focus on efficient cash management and convert our inventory back into cash. Now I will turn the call back over to Joe.
spk01: George, thank you. Jorg just covered several areas where we have taken aggressive action to properly scale our business, manage our working capital, take aggressive steps to get our margins back in line, and align operations with our growth initiatives. The recent financings that we have completed will help support operations and address some company structural issues that will be covered during our annual meeting on May 26th. During the call today, we have mentioned several steps that we have taken to align our cost structure with the scale of our company and the industry. Our goal of achieving cash flow positive by the end of 2022 is very doable. Achieving cash flow positive and fixing some of our structural issues will allow us to actively participate in the contraction and consolidation of the CBD industry. which we continue to do with our advisors. We are reviewing numerous strategies, including inbound and outbound merger, sale, acquisition, or other options for the company as a whole or for any business segment. We believe our drug development program continues to be a significant undervalued company asset. We are currently moving slowly on this effort 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, operating efficiently, and are focused on adding long-term shareholder value. I will now turn the call back to the operator for Q&A.
spk03: Thank you. I will now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Scott Fortune with Roth Capital. Please proceed with your questions.
spk02: Good morning. Thanks for the questions. Appreciate the color, but can you provide a little more color to what's going to drive growth again here with your focus? You mentioned focus on basically higher margin products and your focus on a fewer number of SKUs or products or lines here. Can you kind of just step us through your sense of what SKUs and products that are going to help drive growth as we look out going forward from these levels? That'd be helpful.
spk01: Sure. Well, good morning, Scott. Thanks for joining the call. We appreciate the early wake-up for you. So I think it's probably true for most companies that 80% of the revenue is derived from 20% of the products, and we're no different. And so we are constantly evaluating the products that move, that get on the shelf and off the shelf, and where replenishment orders are actively – happening. And so yet at the same time, we look at the products that aren't moving as well, and we have to make a decision as to whether we're going to apply resources to those products. So it's really just an ongoing sort of economic analysis on a skew by skew basis. Where does it make sense for us to apply resources? So kind of to your question, we're always looking at unit volume sales when we're evaluating this, as well as profitability by product. And so we're going to focus on the products that really generate the lion's share of our revenue, as well as profitability. There has been a mixed shift, though, Scott. One of the form factors that has really risen to the top over the last year is gummies. And It's a form factor that consumers really favor, and we can see that just in the sales data. Gummies, just because of the manufacturing process, have a slightly lower margin than other form factors. They're a little bit harder to manufacture. They just have a lot of complexity and formulation. The chemistry has similar complexity. And so as gummies have taken over a larger share of the mix, it's affected margins too. And so we're working hard, as Jorg mentioned, to really address that. We think there's some pricing opportunities. There's opportunities with manufacturing costs. There's opportunities with shipping, as Jorg mentioned. We're looking at adding a second distribution facility somewhere in the eastern half of the U.S. so we can be within 24 hours of... almost 95% of our customers, which would reduce shipping costs significantly. So we're looking at a whole bunch of things to make sure that we're really focused on those products that really drive the revenue as well as profitability of the company. I'm sure I've missed a few things. Jörg may want to add some color.
spk04: Yeah, so... Products which are very important to our customers address a need state. So our structure function products are super important and our sell-through information on those are the best ones of our products. And that's where we focus our continued product development efforts. like our Sleep Gummies, Calm Gummies, Relief Softshells. These are really, they have risen really into the top of our top 10 products and will continue to do so.
spk02: Thanks. I appreciate some of the color there. And then, you know, we're hopeful that AB45 in California will open up the ability to sell more into California retail. kind of what are you seeing on the channel side? You know, there's discussions that sell more into the C-store channels, but, you know, you have to go through big distribution partners there, but kind of your outlook or your opportunities to kind of drive better makeshift to the brick and mortar that, you know, obviously you mentioned gummies and the pricing pressure there, but what's your focus kind of going forward for, for expanding your channels and the brick and mortar side of things with, with these new products that you need state products that you want to sell into, into that side versus the DTC side, DTC side of things.
spk01: Yeah. So I, I think, uh, really across the country, Scott, we're seeing, uh, uh, consumer trends shift. As you mentioned, I think that the, the, the form factor, that is favored, and it's not to the exclusion of soft gels or liquids, but gummies have really risen to the top, as Jorg mentioned. And so we're seeing very good placement, good replenishment orders, and, you know, just very good turns for gummies in particular. Soft gels are still strong. I think liquids are always going to be strong, but gummies are certainly displacing some of those form factors in terms of the mix. As it relates to California specifically, AB 45 has helped, but having kind of a two-year hiatus really didn't help anybody, and we're having to kind of one at a time go back to the retailers here in California. Some of them are very aware of the legislation, and it's very easy to get back on shelf. Others are a little more reluctant, and it's taking some education and coaching to get placement with ingestibles at those locations. But overall, and in time, I'm real confident that we're going to be able to fully penetrate back to where we were in California in brick and mortar. You know, DTC, I think, as you mentioned, has been pretty consistent over the last several years. I think the same is true with DTC that, as Jorg mentioned, where we can make a structure function claim, where we can market to a specific need state, those are the products that consumers are telling us they want. And so we're really making sure that we address that specifically, as you know, with our sleep and our calm and now our relief soft gels. as well as our OTC topical line. So we're really have our ear to the ground and very in tune with what customers are telling us they want.
spk02: Perfect. One last one real quick. You mentioned the wellness line and the reserve collection, kind of those are the new product innovations or lines you're building out. How's that, you know, it's early, but how's that starting to trend in the second quarter? Or is this seeming to be more second half kind of growth story for these lines as they get completely rolled out here?
spk01: Now, we have sort of immediate feedback in the form of data, Scott. And the best form of data is what's happening at the cash register. And we receive that data in terms of what's happening at the cash register every four weeks from SPNS, which is a data aggregator, much like Nielsen, for the natural product retail channel. And the sleep and calm gummies have risen into the top 10 for the entire natural product sales channel. by both unit and dollar volume. And so we can see the immediate impact and where consumers are going and how it's trending.
spk02: Perfect. I'll leave it at that. Thanks.
spk03: Thank you. At this time, I'll turn the floor back to management for closing remarks.
spk01: Thank you. I would really like to thank everyone for your time this morning. We look forward to speaking again soon. Have a great day. Thank you.
spk03: This will conclude today's conference. Let me disconnect your lines at this time. Thank you for your participation.
Disclaimer