CV Sciences, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Good afternoon, and welcome CV Sciences Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn this conference over to Ms. . Please go ahead, Ms. Dunn. You may begin.

[Unidentified Company Representative:]

Thank you, and good afternoon, everyone. With us today with prepared remarks are CV Sciences' Chief Executive Officer, Joseph Dowling; and Joerg Grasser, Chief Financial Officer. 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 a forward-looking statement.

[Joseph Dowling:]

Thank you, . Good afternoon, and thank you for joining us for today's conference call. We hope that you and your families are staying safe and healthy in these challenging times. 2020 proved to be a very challenging year for the company and our industry, predominantly due to the impact of COVID-19. The year-long COVID-19 pandemic created significant headwinds for our retail customers, intensified competitive pressures and extended the regulatory uncertainty we have discussed on previous earnings calls. I am proud of how our company responded under such difficult circumstances, adapting quickly and continuing to provide uninterrupted service to our customers. We are privileged to have a committed and dedicated team of employees to deliver daily upon our corporate mission and strategy. Innovation and quality remain our primary areas of focus

[Joerg Grasser:]

Thank you, Joe, and good afternoon, everyone. Our fourth quarter revenue was $5.2 million compared to $9.3 million in the fourth quarter of 2019, and was down sequentially from $5.6 million in the third quarter. On a year-over-year basis, we continue to be impacted by factors related to COVID-19 as well as competitive dynamics related to regulatory uncertainty. The sequential decline from Q3 was concentrated in our retail channel. Our sales and business development teams were pretty busy. We had a significant increase in retail distribution during the fourth quarter, putting our year-end store count at 7,346 retail locations, a 32% increase over the fourth quarter of 2019. The FDM channel accounted for much of the increase as we ended Q4 with 4,332 stores in FDM, up 1,243 stores from the end of the third quarter. Direct-to-consumer revenue represented 34.9% of total revenue in the fourth quarter compared to 24.4% a year earlier and 33.1% in the third quarter of 2020. E-commerce revenue was down 20% on a year-over-year basis in the fourth quarter of 2020, mostly related to price reductions we took earlier in the year. On a sequential basis, our DTC revenue was consistent with Q3. As Joe outlined, we made good improvements to all of our main digital KPIs, including website visitors, which have been training upwards across all of our websites since the start of the pandemic. Gross margin for the fourth quarter of 2020 was 42.7% compared to 44.2% in the third quarter and 44.5% in the fourth quarter of 2019. The decline in gross margin year-over-year is mostly related to our lower volume and also reflects the impact of our price reductions.

[Joseph Dowling:]

Joerg, thank you. We are confident in both our consumer product and drug divisions and that our growth and development aspirations remain a valuable and realistic opportunity for the future. We believe that current headwinds will gradually abate. We believe that regulatory progress can be made, including in the broader cannabis market, which is significant and something we are looking at. We will continue our commitment to safety, quality and science-backed product innovation, all of which we believe is a winning strategy.

[Operator:]

Our first question comes from the line of Mike Grondahl with Northland Securities.

[Mike Grondahl:]

Yes. Could you give us a little bit more update on the new products, and kind of what you've seen kind of in the end markets there? And then secondly, what is sort of a revenue level that is breakeven for you guys kind of on the adjusted EBITDA line?

[Joseph Dowling:]

Mike, good afternoon, and thanks for joining the call. Well, let me take the first question, and then I'll turn it over to Joerg, and he can cover the breakeven question. The 3 new brands that we launched in really the second half and into late 2020 included our immunity line, our pet line and our pro line. And it's really too early to tell as we just recently launched all these new products. The one thing we can tell you is that we've received a lot of enthusiastic feedback, not only from our retailers and distributors, but also from consumers. And we know based on the initial feedback is it that we're confident on future in-store product placement and sell-through, and that's on the B2B side. And the same kind of feedback we're also getting from the DTC side. So we're optimistic about all 3 of those brands and their ability to gain traction. I did not include Happy Lane in that discussion. We think that Happy Lane being targeted specifically for the convenience store channel, is same type of feedback from distributors and retailers as well as initially from consumers. And as you heard from my remarks, we anticipate an announcement soon about distribution gains in the c-store channel with our Happy Lane, New Happy lane brand. So we're very, very optimistic. And what I can also tell you is that our product development team is already working on sort of the next wave of new products, some of which will supplement these new brands as well as our flagship brand PlusCBD. So I guess to kind of summarize, Mike, the feedback so far has been great. So one thing, just a little bit more color would be that typically for -- on the B2B side, there are twice a year product resets where you really cannot get on the shelf with any new products, except on this cycle that happens 2 times a year. That was somewhat disrupted by COVID-19. And so we expect that in 2021, we're going to get back to a more typical twice a year reset cycle with our retailers in the B2B side. So again, we think -- we're very optimistic about all 3 of the new brands that we launched, and are excited about the future potential. And the second question, I'll turn over to Joerg, and he can talk about breakeven revenue.

[Joerg Grasser:]

Yes. Mike, it's Joerg. When we -- in the first quarter of 2020, when we rightsized our business and when we took all the different measures, we modeled it based on a daily revenue run rate of about $120,000. $120,000 on a business day gets you to about $7 million, $7.5 million. So internally, that's our goal where we would like to get to cash flow breakeven.

[Mike Grondahl:]

Got it. And guys, any comment on January, February or March? Any pickup in revenues from kind of the 3Q, 4Q level?

[Joseph Dowling:]

Yes. So guidance is tough. We have a good sense of Q1. We think Q1 will be consistent with Q4. And then we expect to see some growth in Q2. We then think that the second half of 2021 will be better. We look at this, though -- we're in the weeds every single day. And every once in a while, we like to kind of look at macro data. And the macro data that we're all facing is that we're coming off the biggest economic contraction in over 70 years, where U.S. GDP fell by 3.5%. Putting this in spending terms, and I know you guys probably look at the same data, consumer spending by Americans during 2020 was about $12.5 trillion, which was about $0.5 trillion less than 2019 consumer spending. And the economists that we're kind of looking at seems all aligned on 2022 as the year where consumer spending recovers to where it was in 2019. So we think of 2021 as being kind of a reset year, one where we can start to get back to sequential growth, and we're fully expecting to be able to do that, but really positioning for a stronger 2022. And kind of to go back to your question about our brands and how they're doing, we think all that work that we did during 2020, really puts us in a position where we are well positioned from a brand, product and distribution standpoint. We're obviously very heavily focused on our DTC business, and are making good progress to scale our DTC channel. And on the B2B side, we think we're well positioned there as well. Joerg talked about the distribution growth. And during this time, we're looking to grow those relationships as we maintain the shelf space, and obviously, the relationship. So overall, as it relates to 2021 and beyond, we are optimistic. We're working to impact the areas where we can control things. And the areas we can't fully control, we're making sure to be impactful, including with FDA and Congress, and making sure we have a seat at the table, which we do. So yes, it's a tough time, but we're optimistic that we're well positioned to make it to the next level. And as the economy improves and consumer spending improves, we're also going to see improvement with our performance.

[Operator:]

Our next question comes from the line of Scott Fortune with Roth Capital Partners.

[Scott Fortune:]

Just wanted -- you're still -- CBD is in a growing category. So we're seeing it grow year-after-year, quarter-after-quarter. Where -- are you seeing competitive environment coming down from maybe the Canadian LPs as more competition looks to get involved in the CBD space, and that market share, you have a tough time growing there? Or have we not seen enough consolidation? And just kind of help us understand your market positioning versus kind of the competitive landscape that's out there.

[Joseph Dowling:]

Sure. Thanks, Scott. Yes. So we went from -- if you go back several years, there were maybe a handful of brands, half a dozen. And in the space of a couple of years that went to 3,000 plus. And so -- and then now you're seeing some of the Canadian LPs start to more than put their toe in the water and to develop their own CBD brands and multiple CBD brands in some cases. We really haven't seen the impact of the Canadian LPs getting into the market, yet. In some respects, we think it's a positive thing because the bigger players, we think are going to bring credibility to the space. We also think, and we know this because we're at the table with them with the various trade associations as well as with members of Congress as we work together to advance legislation and regulation. So we think, in some ways, it helps. We also think because of that, it's going to help to accelerate contraction and consolidation. So I think that it's too soon to kind of evaluate the market, where it's going. I mean we're looking at the same data that you are, I'm sure. Is this going to be a $10 billion or $15 billion TAM in the U.S. over the next several years? It looks like it will be. And so it's a significant market. One of the things I guess we look at is as consumers kind of settled on a brand yet. And we think the answer to that is no. And one of the things that we look at, and this isn't something that is defined yet. But if you look at one of the key takeaways from 1 of the research groups that really does a deep dive on the CBD industry, one of the key takeaways that they made was brand loyalty is still up for grabs. And I thought that was a very interesting comment. And so yes, there are a lot of brands out there. There are a lot of small brands out there. I think all of us know they're not going to be here after a while. I think there will be further contraction, some consolidation. But I think that the trusted -- the brands that are out there, we're one of them. Are really going to be able to -- as the research says, be able to get a significant amount of that brand loyalty, which is up for grabs. So we're optimistic. I hope that's responsive to your question, Scott.

[Scott Fortune:]

Yes. No, I appreciate that. That's helpful. And then just kind of shifting another way, you mentioned new product innovation, we need to kind of come on board to drive growth. You mentioned, obviously, the immunity side, the professional division, pet products. Kind of just step us through as you look out to 2021 on your new product development ramp and just kind of emphasis in some of those different channels or different product formats moving forward here?

[Joseph Dowling:]

Yes. So it's really hard to break down by product, by channel at this point. I think, as I mentioned on the first question, we're optimistic on all the 3 new brands that we launched during 2020. We think that once we get into a more normalized sort of product reset, on the B2B side. And once we gain more traction on the D2C side that we're going to see all 3 of our new brands start to do quite well. We think the same is true for our brand refresh flagship PlusCBD brand. The Pro channel, we think, is a big opportunity that will be an emphasis for us this year. We think that with the COVID-19 shutdown, many practitioners were affected by that. And we think we're going to be able to penetrate that market effectively. So we're optimistic on all 3 of the new brands that we launched as well as brand refreshed flagship PlusCBD and ProCBD brands that we launched during 2020 as well.

[Operator:]

Our next question comes from the line of Michael Lavery with Piper Sandler.

[Michael Lavery:]

Just would love some color to understand the moving parts. I know you've talked about some of the new brand launches and the expansion in-store count in FDM, especially. But yet, this is -- it's the down quarter quite a bit versus last year and even sequentially, the lowest during COVID. It's all the way back to 2Q '17 before, there was one that was smaller. So where is the offset? What's the right way to understand all the moving parts? I'd assume even if the launches were mid-quarter, so it's not a full quarter of sales, wouldn't there be a benefit from pipeline fill. Can you just help maybe put all the pieces together for us?

[Joseph Dowling:]

Yes. So it's not an easy answer, but there is -- I think one of your questions is there's a bit of a mismatch when you think about store count and revenue. And some of this is answered by the increase in FDM accounts, and we've made good progress with a couple of large FDM accounts during FY '20 and that Joerg talked about in his prepared remarks, but the mismatch between store count increase in revenue is mostly due to the fact that we shipped the products earlier this year to distribution centers, but it takes a while before they get from the D.C. to the shelf. And that was with a nationwide retailer. So that's the kind of sort of behind the scenes detail that you really need to have access to understand some of the ups and downs, quarter-to-quarter. In addition, in one of our regional FDM accounts, we only have a couple of SKUs. And so that had an impact. So all of -- those 2 factors sort of limited reorders with those retailers. But as I mentioned, the product reset cycle because of COVID was just appended. And it was also appended in the natural product retail channel for the same reason. And so our focus -- and going forward, that's part of your question, I think our overarching goal with all B2B retailers is to really to continue to build these relationships and grow them, but also really in some places to maintain shelf space, especially in FDM, with our topical products until FDM retailers are comfortable stocking adjustable products. But it's really -- it's product-by-product. It's channel-by-channel. It's regional, in some cases, Michael. It's -- there's a lot of moving parts, as you can imagine.

[Michael Lavery:]

That's helpful color. Can you give a sense of, if there's the distributor or the wholesale layer of inventory, I imagine you have at least some visibility, even if it's estimates. Do you have a sense of where those levels sit now? And are they due to start replenishing? Are they still sitting on -- if you added x number of more stores, is that still going to be coming out of the wholesale layer? Or would you see that start coming out of your end?

[Joseph Dowling:]

So I think generally, we're -- on the B2B side, we're seeing -- and we saw this throughout 2020. And I think it was really just consumer spending related and store closure related and pandemic lockdown related, but we saw less frequent reorders. And so I think we're going to start to see more frequent reorders as we work our way through 2021. I don't think there's any sort of excess inventory in the -- in our channels, which is a good thing. So we think that the opportunity, as spending picks up, consumer spending picks up as the lockdown starts to loosen up a bit, I would expect that we're going to see more frequent and larger orders coming through.

[Operator:]

Our next question comes from the line of Gerald Pascarelli.

[Gerald Pascarelli:]

My first one is just on, Joe, maybe your high-level thoughts on beverages as a CBD category. And I ask that in the context of kind of how innovative the team has been over the last 12 months and how active the Canadian LPs have been on CBD beverages, in particular, launching in the U.S. with some high-profile sponsorships. Any thoughts you could provide on beverages would be helpful.

[Joseph Dowling:]

Thanks, Gerald. I hope you're well, too. Yes, we have watched some of the bigger Canadian LPs a couple of which, one of which has a significant distribution footprint available to them here in the U.S. and we think some of the products are very innovative. And we think based on some research that beverages could be a very exciting and big category for CBD. The regulatory side is going to be interesting. I don't know if those beverages are going to be considered to be a dietary supplement or if they're going to be considered to be a food. I would presume they're going to try to categorize them as a dietary supplement and -- for all kinds of both regulatory and legal reasons. And so that's sort of an uncertainty when it comes to the beverage market. I think that to get into the beverage space, and we've looked at it. It's important to -- the distribution is the key. And so that has to be in place, I think, for anybody to really be a significant player in that vertical.

[Gerald Pascarelli:]

Got it. That's helpful. My next question is just on pricing. Can you remind us just from a cadence perspective, have you fully cycled your price decrease from earlier in the year? Or is that -- is there still some that is going to show up in 1Q? And then I guess in addition to that, do you think kind of where competition is, new entrants into the category? Where is the potential to take another price decrease next in -- at some point in 2021? Any color there would be helpful.

[Joseph Dowling:]

Yes. We constantly monitor the market to ensure that our product pricing is competitive. It's so sales channel dependent and product line dependent. They're all a little different. I think there are opportunities to have maybe 3 different buckets of products as well as product pricing associated with that and might look something like a value product line, and we sort of think of our Happy Lane brand and product line in that bucket. And then I think there could be a premium bucket with premium pricing, it might be a little smaller in terms of the market size. And then I think there's going to be something in the middle. I don't think it's settled into those buckets yet, but I see that happening over time. And I think that we're sort of looking at the market and making sure that we have products that will be competitive in the channels that we're trying to distribute them in. And pricing is a real key component of any product development we do and how we're going to target those into what distribution channel. I do think there could be further price compression depending on the product category, if it's going to be value, kind of a mid-price or a premium. And then it's channel dependent, too. So I don't think there's a one-size fits-all answer to that question, Gerald. I think it's more complex. And I don't know what the mix of, say, value and a mid-price and a premium product line might look like yet. I think that's still evolving, and it will take a few years for that to be determined.

[Gerald Pascarelli:]

Joe, that's helpful. Just one follow-up on the margin. Are you still -- are you cycling -- have you fully cycled the price decrease from last year? Or is that going to show up in 1Q and then the breakeven come 2Q?

[Joseph Dowling:]

It's been fully cycled.

[Operator:]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to this call back over to Mr. Joseph Dowling for closing remarks.

[Joseph Dowling:]

Well, I want to thank all of you for joining us today. We appreciate your support, and remain confident with our long-term growth opportunity. Please stay safe and healthy during this time. Thank you again.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.