CV Sciences, Inc.
Q1 2023 Earnings Call Transcript

Published: 15 May 2023

[Operator:]

Greetings. And welcome to the CV Sciences, Inc. First Quarter 2023 Conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the floor over to CV Sciences.

[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 on today's call, management's prepared remarks may contain forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from those anticipated by CV Sciences at this time. When used in this call, the words anticipate, should, could, estimate, intend, expect, believe, potential, will, 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 www.cvsciences.com. I would like to now turn the call over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling. Joe?

[Joseph Dowling:]

Good morning, everyone. Thank you for joining our call. This morning, we issued a press release reporting results for our first quarter ended March 31, 2023. We are pleased with our continued progress as we move closer to profitability and generating free cash flow on a sustained basis. Significant financial highlights during Q1 included

[Joerg Grasser:]

Thank you, Joe, and also good morning to everyone. Q1 was, from a financial perspective, a very unusual quarter. We generated net income of $5.7 million and EPS of $0.04 compared to quarterly losses and negative EPS since the beginning of 2019. The main reason for our net income is the reversal of our previously recorded contingent liability for payroll taxes associated with the RSU release to our founder in 2019 of $6.2 million. We have disclosed the transaction in all of our previous quarterly and annual SEC filings since 2019. We recorded this accrual as we could have been secondary liable to the IRS and the California EDD for payroll taxes versus RSU release. At this point, the statute of limitation expires and the respective taxing authorities cannot assess CV Sciences for these payroll taxes anymore. As such, we reversed the previously accrued amount as of March 31, 2023. From a business perspective, we continue to see a positive financial impact of our cost efficiency measures across all functional areas of the company. Over the last several years, we have significantly reduced our cost structure without significant productivity losses, and we are well positioned for operating leverage as we increase revenues. Our first quarter revenue was $4.1 million compared to $4.4 million in the first quarter of 2022, and up from $3.9 million in the fourth quarter of 2022, representing the second quarter in a row of sequential revenue growth. The sequential increase was from additional B2B sales in Q1 2023 in the natural retail channel as we continue to expand our leadership position in this channel. The year-over-year decline is mostly due to lower sales volume, partially offset by higher sales prices per unit. The overall CBD market continues to be fragmented and very competitive but we see further consolidation and contraction. Our direct-to-consumer business continues to perform well, with modest digital marketing spend and associated sales represented 41.2% of total revenue in the first quarter compared to 42.5% a year earlier and 46.2% and in the fourth quarter of 2022. 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 and AOV declined slightly compared to Q4 2022. We also made good improvements during the quarter for our subscriptions and loyalty programs. Gross margin for the first quarter of 2023 was 43% compared to 26% in the first quarter of 2022 and 40.4% in the fourth quarter of 2022. The improvement in gross margin compared to prior year is mostly due to reduced shipping and fulfillment costs, as well as higher average sales prices, partially offset by lower volume. We work on further cost efficiencies in order to continue to improve our growth margins. SG&A expense for the first quarter was $2.1 million, significantly down from $2.6 million a year ago and $3.6 million sequentially. SG&A expense included a noncash impairment charge of $1.2 million in the fourth quarter of '22, and the benefit of ERC credit of $2 million in the first quarter of 2022. Excluding these noncash impairment charges and ERC benefits, our SG&A expense for the first quarter 2023 still decreased significantly on a year-over-year and sequential basis. These improvements are the direct 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 generate positive cash flows. For the first quarter 2023, we generated an operating income of $5.8 million compared to an operating loss of $1.5 million a year ago. Our adjusted EBITDA loss for the first quarter was $0.2 million compared to $0.7 million in the fourth quarter of 2022 and $2.5 million in the first quarter of 2022. The improved operating performance and adjusted EBITDA loss are the result of our asset-light business model, which allowed us to implement cost savings throughout the organization to minimize our cash outflow. On a GAAP basis, we reported a first quarter 2023 net income of $5.7 million or $0.04 per share compared to a net loss of $2.2 million or $0.02 per share in the first quarter of 2022. Now let me turn to our balance sheet. We continue to manage our cash position very carefully and ended the first quarter of 2023 with $0.7 million of cash compared to $0.6 million at the end of fiscal 2022. Cash generated by operations during the first quarter of 2023 was $1 million, a significant improvement from the same quarter a year ago, which had cash usage of $0.4 million. The improvement in our operating cash were mostly due to the receipt of ERC funds of EUR 1.1 million during the first quarter of 2023 and lower overhead costs. We continue to aggressively manage our overall cash position with improved cash collections on our outstanding AR and daily management of our inventory and vendor payables. We continue to adjust our cost structure to be in line with our expected revenue, with the overarching goal to generate positive operating cash on a continuous basis. Our inventory was $6.5 million at the end of the quarter compared to $6.6 million at year-end as we continue to focus on efficient cash management and convert our raw materials into cash. Also, in April 2023, we extinguished our note payable with Streeterville and are now essentially debt-free. In addition, we have working capital of $3.8 million. With our improved balance sheet and our reduced cost structure in place, 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.

[Joseph Dowling:]

Joerg, thank you. As Joerg and I have discussed this morning, we continue to realign our company to the scale of the industry to achieve profitability and free cash flow in the near term. Our Q1 results clearly show great progress in achieving such fundamentals as profitability and free cash flow, and we are close to achieving both in the near term. The contraction and consolidation of our industry is also having a positive impact as the number of brands and products on shelf and online are both declining significantly, allowing us to increase market share in both B2B and B2C channels. We continue to work with our advisers in evaluating both inbound and outbound M&A opportunities. We have seen a significant increase in inbound acquisition opportunities that we believe is directly related to the need and, in many cases, urgency for our industry to consolidate. We plan to be selective, but adding revenue by acquisition is a viable strategy for us. We will continue to look for opportunities to leverage the solid business model platform that we have built. We are also pursuing other new domestic opportunities and selective international opportunities that will allow us to leverage our brand, our infrastructure and the trust in our company. We remain optimistic about the short and long-term opportunity for our company and industry. We are making continuous improvement to ensure that we are scaled properly, operating efficiently and are focused on adding long-term shareholder value. We will continue to focus on our customers and retail partners who trust and love our products. I will now turn the call back over to the operator for any calls from the analyst community.

[Operator:]

[Operator instructions] There are no questions from the analyst community. I would like to turn the floor back over to Joseph Dowling, CEO, for closing comments.

[Joseph Dowling:]

Thank you. I would like to thank everyone for being a supporter of CV Sciences and our flagship brand PlusCBD. We look forward to speaking with you again soon. Thank you, and have a great day.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

[Operator:]

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