CV Sciences, Inc. (OTCQB:CVSI) Q3 2022 Earnings Conference Call November 14, 2022 10:00 AM ET
Company Participants
Joseph Dowling – CEO, Secretary & Director
Joerg Grasser – CFO
Conference Call Participants
Greetings, and welcome to the CV Sciences Third Quarter 2020 Conference Call. [Operator Instructions].
I would now like to turn the call over to CV Sciences for an introduction. Please go ahead.
Unidentified Company Representative
Thank you, and good morning, everyone. With us today with prepared remarks are CV Sciences’ Chief Executive Officer, Joseph Dowling; and Joerg Grasser, Chief Financial Officer. After the prepared remarks, we will take questions from the analyst community.
I would 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 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 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 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 cvsciences.com.
I would like to now turn the call over to CV Sciences’ Chief Executive Officer, Mr. Joseph Dowling. Joe?
Joseph Dowling
Thank you. Good morning, everyone. Over the last several quarters, we have discussed the challenging external environment on our industry and company. The challenges persist, but more important than ever is what we as a company are doing to position ourselves to compete in the current challenging environment. Over the last two years, we have streamlined our operations in numerous areas. We have a new operating partnership with an established three tier operator that has enabled our warehousing and fulfilment to become much more cost efficient, while at the same time, improving shipping times and customer service.
As the hemp oil market significantly expanded after the 2018 Farm Bill, we began to partner with US-based suppliers shifting from our in-house oil production. The impact has been lower ingredient prices per kilo while maintaining our strong commitment to the highest quality products on the market.
We exited a very expensive 30,000-plus square foot facility and have rightsized to an efficient 6,000 square foot facility that is also responsive to the new reality of remote work environment. We have achieved efficiencies in every functional area; sales, marketing, operations, general and administrative. Our headcount is now in the mid-40s, down from 100-plus pre-pandemic. These are all tough decisions, and they don’t stop when the decision is made. All of these initiatives require daily execution to be fully realized.
During Q3, we began to realize in measurable terms, the positive impact of our cost efficiency initiatives. First, in Q3, we achieved an operating loss of just $0.9 million, which is our best result in over two years. Our gross margin improved sequentially quarter-over-quarter to 41.6% from 30.7%.
During Q3, our cash used in operations was $0.6 million, significantly lower from prior quarters. These financial measures clearly show that we have made great progress in structuring a very lean, cost-efficient organization that is now repositioned to leverage the determination of our employees, the quality of our products, the trust in our brand and the strength of our distribution. We will be able to achieve profitability and cash flow positive at a much lower revenue number than many of our competitors.
The next step for us is simple, more revenue. Our third quarter revenues were slightly down from Q2, solely due to supply chain issues that caused out of stock for several of our best-selling products. We estimate the out-of-stock revenue impact for Q3 at approximately $500,000.
Without out of stocks, we would have achieved sequential growth during Q3. We are working diligently to address the supply chain issues that we and many other companies are facing, which include longer production lead times, ingredient shortages and packaging shortages such as for child-resistant caps, which are now required in many states.
Getting our company back to a $5 million-plus and much higher per quarter revenue run rate is in our near-term site. We know our customers love and trust our products and brand to effectively address their needs. We have a strong distribution asset in both B2B and B2C that is positioned for revenue growth.
First, let me comment on our B2B channel. The demise of the B2B retail channel is greatly exaggerated. B2B distribution strength is a critical component of an omnichannel approach and strategy to increasing and optimizing revenue. There are several positive indicators in our B2B sales channel. Brand contraction on shelf is continuing.
In the natural product retail channel, we are the number one selling brand and the top three brands continue to have more than a 50% market share, which has been increasing sequentially. Smaller, untrusted and unproven brands are simply being taken off shelf. This has taken some time to clear the excess inventory, but we are seeing results in the field and in the numbers from SPINS, the market measurement and analytics reporting firm, that compiles at the registered data for the natural products retail channel.
The flood of products into the market over the last several years created customer confusion. Also with so many bad actors producing low-quality products, consumer confidence and trust was negatively impacted. We know from our long-term commitment to the B2B channel that quality, safety and trust are critical to growing our product category. We also know education is critical to winning and keeping both retailers and customers.
And last, we are in the early days of understanding cannabis and hemp science, including for individual constituents like CBD or THC or in combination with other cannabinoids or noncannabinoid active ingredients. Growing the product category in the B2B channel and really all channels requires establishing confidence with unsure or reluctant new customers.
Several factors establish confidence, including a commitment to quality and safety, a commitment to continuing education of existing and new customers. And further investment in evidence-based science that consumers can trust. A commitment to quality, safety, education and evidence-based science embodies who we are as a company, and we believe is a winning strategy in scaling our operations profitably in the B2B channel.
The B2B sales channel is also a critical component of an omnichannel sales and marketing strategy. We believe that our B2B distribution stands on its own as a strong contributing sales channel, but also can be effective top-of-funnel lead generator for our B2C sales channel. We are developing assets to leverage our B2B distribution strength into our B2C sales channel.
Our B2C sales channel is getting stronger every day. We work continuously to improve our B2C infrastructure, which can be scaled infinitely. We are fine-tuning our B2C marketing investments to ensure revenue correlation and ROI. We are seeing results.
In Q3, we increased our subscription orders and subscription revenue each month of the quarter. We increased ROI and customer participation with our loyalty program, and we increased B2C profitability through optimized pricing and promotional strategies.
Our B2B and B2C sales channels are not independent. They can be leveraged across both channels. We believe our investment over the last 8 years in both channels is a significant asset and is a critical part of our revenue growth strategy.
Product development will continue to be a key component of our revenue growth strategy. Consumer trends and preferences are shifting rapidly. Consumers are looking for natural products with clean ingredients that specifically address the challenges of everyday life, including for anxiety, pain and sleep disorders.
Our product development will continue to focus on the needs of our customers with formulations and products that are supported by evidence-based science, such as our new reserve soft gel product that was launched during Q3 through extremely favorable customer reviews and demand.
We believe that strong science, which supports our product claims, will win the trust and loyalty of our existing and new customers.
On regulatory matters, we remain optimistic. There has been progress in the broader cannabis area. Given the recent election results, we believe passage of safe banking legislation, maybe even in the lame duck session is more possible than ever. Every incremental executive action and legislative win further creates a reality that cannabis is constructively legal at the federal level. This helps everyone in our industry.
At the FDA, we see progress. The recent hire of a cannabis policy expert is further evidence of momentum at the federal level.
I’d also like to comment on the recent move by Canopy Growth to consolidate its U.S.-based assets into a new U.S. holding company, which will allow them to consolidate their U.S. and non-U.S. operations. There is no certainty that a pathway to listening on a major U.S. exchange is clearly part of the strategy. We believe this is potentially an opportunity for big companies like Canopy Growth and smaller companies like us that are evaluating partnering opportunities with U.S. and non-U.S. cannabis-focused companies.
Let me pause now and I will turn the call over to Joerg.
Joerg Grasser
Thank you, Joe, and all good morning to everyone. As Joe indicated, during the third quarter 2022, we generated an operating loss of $0.9 million, which was the best operating result since Q2 2019. Let me dig into the details.
Our third quarter revenue was $3.8 million compared to $5.1 million in the third quarter of 2021 and $4.1 million in the second quarter of 2022. The decline is mostly due to lower sales volume into our B2B channel. Our sales were negatively impacted by supply chain challenges during the quarter, with the result that we were not able to fill all orders. The volume decline was partially offset by higher sales prices per unit.
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 43.8% of total revenue in the third quarter compared to 35.4% a year earlier and 44.6% in the second quarter of 2022.
E-commerce continues to become a larger part of our business. Our online revenue declined 9% on a year-over-year basis mostly related to lower sales volume. We made solid improvements to our main digital KPIs. We were able to continue to increase our visits to our website on a sequential basis, despite lower digital marketing spend.
Our conversion rate was negatively impacted by being out of stock for certain products and our higher sales prices. We also made good improvements during the quarter with our subscriptions and loyalty programs.
Gross margin for the third quarter of 2022 was 41.6% compared to 30.7% in the second quarter of 2022 and 46.2% in the third quarter of 2021. The improvement in gross margin on a sequential basis is mostly due to reduced shipping and fulfillment costs as well as our higher average sales prices, partially offset by lower volume.
We continue to work on further cost efficiencies in order to improve our gross margins. During the third quarter, we added a second distribution center on the East Coast for our B2C fulfillment to reach more of our customers with next-day delivery and reduced shipping costs. We are planning to utilize the new distribution center for B2B orders in the very near future.
SG&A expense for the third quarter was $2.4 million, significantly down sequentially from $3.6 million and from $5.3 million a year ago. SG&A expense included the benefit of an employee retention credit under the CARES Act of $0.5 million.
During the third quarter of 2022, we determined that we were eligible for the credit for 2020 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 our 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 breakeven. As stated earlier, we generated an operating loss of $0.9 million during the third quarter of 2022 compared to an operating loss of $3 million a year ago.
Our adjusted EBITDA loss for the third quarter was $1.2 million compared to $1.8 million in the second quarter of 2022 and $2.7 million in the third quarter of 2021. The improved operating performance and adjusted EBITDA loss as a result of our continued cost savings to minimize our cash outflow.
On a GAAP basis, we reported a third quarter 2022 net loss attributable to common stockholders of $1 million or $0.01 per share compared to a net loss of $40,000 or $0.00 per share in the third quarter of 2021.
Now let me turn to our balance sheet. We continue to manage our cash position very carefully and at end of the third quarter of 2022 with $1.1 million compared to the same amount at the end of the second quarter of 2022 and $1.4 million at the end of fiscal 2021.
Cash used in operations during the first 9 months of 2022 were $2.1 million, a significant improvement from the prior year period of $6.3 million. Cash used in operations for the quarter is down to $0.6 million. During the first 9 months of 2022, 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. We continue to adjust our cost structure to be in line with our expected revenue with the overarching goal to achieve cash flow breakeven in the first half of 2023.
Our inventory was $7.2 million at the end of the third quarter compared to $8.6 million at year-end, as we continue to focus on efficient cash management and convert our raw materials into cash. Also, during the third quarter of 2022, we extinguished our convertible note, which strengthened our balance sheet and helps us with our long-term strategic initiatives.
Now I’ll turn the call back over to Joe.
Joseph Dowling
Joerg, thank you. As Joerg and I have discussed this morning, we have repositioned our company to align our cost structure with the scale of our company and the industry. We are within sight of profitability and cash flow positive. Achieving positive fundamentals — financial fundamentals will separate us from the industry and enable us to more actively participate in the contraction and consolidation of both the cannabis and hemp industries, which we continue to do with our advisers.
We believe legislative momentum and momentum from large industry participants like Canopy Growth to open U.S. exchanges and capital markets to our industry, will benefit both big and smaller companies like us and our continued participation for inbound and outbound M&A opportunities. We are optimistic about the long-term opportunity for our company and industry. We have made difficult decisions to ensure that we are scaled properly, operating efficiently, and are focused on adding long-term shareholder value.
We know that our customers and retail partners not only love our products, but they trust who we are. And who are we? We are a company of determined employees that produces safe and high-quality products, that meet the needs of our customers at value.
Now I will turn the call back over to the operator for any calls from the analyst’s community.
Question-and-Answer Session
Operator
Joseph Dowling
Thank you. I would like to thank everyone for your time this morning. We look forward to speaking again soon. Have a great day. Thank you.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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