CV Sciences, Inc. (OTCQB:CVSI) Q3 2020 Earnings Conference Call November 5, 2020 4:30 PM ET

Company Participants

Joe Dowling – Chief Executive Officer

Joerg Grasser – Chief Financial Officer

Conference Call Participants

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Gerald Pascarelli – Cowen

Operator

Good afternoon and welcome to the CV Sciences’ Third Quarter 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 the conference over to Elisa Dunn [ph]. Please go ahead, Ms. Dunn.

Unidentified Company Representative

Thank you and good afternoon, everyone. With us today with prepared remarks are CV Sciences’ Chief Executive Officer, Joseph Dowling and Chief Financial Officer, Joerg Grasser. 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 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 afternoon November 5th, 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. Following the prepared remarks, we will open up for Q&A from the analyst community.

I would like to now turn the call over to CV Sciences’ Chief Executive Officer, Mr. Joseph Dowling. Joe.

Joe Dowling

Thank you all for joining us this afternoon. We hope everyone is continuing to stay safe and healthy and our hearts go out to those that have been impacted by this pandemic. Our number one focus here at CV Sciences has been and continues to be keeping our employees safe. We continue to utilize each of our health and safety initiatives and protocols implemented for our employees including. Daily health screening including temperature checks, personal protective equipment use including mandatory face covering, social distancing protocols, enhancing hygiene practices and remote and rotating work schedules where possible.

We remained pleased and confident with the COVID-19 response we have initiated and continue to adapt to the external business challenges inherent in this pandemic. As we have noted, all functional areas of the company continue 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. The challenges impacting our industry this year remain. Including COVID-19 and increase level of competition that exceeds category growth and as well as the ongoing regulatory uncertainty.

Our focus is to deliver industry leading quality and innovation and be well positioned to capitalize on a significant long-term opportunity when it really begins to take off. Our recent innovation including a new CBD brand expansion into the immunity category as well as new product introduction position us for sales and channel expansion. We have the right products, with the right packaging and brand communication and in the right channel.

We will continue to build upon our portfolio to broaden our opportunity and drive revenue growth. Our product launches during Q3 are examples of our ability to innovate and bring products to market. Our distribution assets to-date have been accomplished with a single flagship brand, our Plus CBD brand which has been in the market since 2014 and is aimed at sales channels including natural products, food drug and mass, specialty and ecommerce. While our Plus CBD brand has served us very well. We made the decision to refresh this brand with new packaging, improved branding and enhanced color palette all of which is in conjunction with the launch of 30 new or brand refresh SKUs under our flagship Plus CBD brand.

We understand the value of keeping a brand relevant and fresh and have spent a great deal of time with our new packaging that is well thought out and based on consumer insights. The reaction from distributors, retailers and consumers has been extremely positive. Also during Q3, we launched our first two immunity products; CV Acute and CV Defense. These two products are heavily supported by decades of sciences and clinical trials to support immune health. This is especially important as we head into the upcoming flu season and are facing one of the most challenging times that we have experienced in global public health.

This is a big market. In 2019, immune health supplements represented a $4 billion plus market in North America alone and is expected to grow at double-digit CAGR over the next five years. Our immunity products do not contain any CBD. Which we think is the right formulation for the intended use. However, we believe across merchandising opportunities with our immunity line and our CBD product categories are very promising. Also we can sell our immunity products on Amazon today, which we are doing.

Right now Amazon is not allowing any CBD products to be sold on its platform. Our immunity product line is allowing us to establish an important distribution foothold on the Amazon platform. Early distributor, retail and customer response to our immunity product line is very encouraging. Our recent launch of Happy Lane is progressing as anticipated and we’re in discussions with multiple distributors to penetrate the convenience store channel.

We believe the brand is very well positioned for this channel as Happy Lane delivers a zero THC offering with all SKUs priced under $20. Our initial six SKUs include softgels, tinctures, roll-ons, chews and gummies. With packaging and brand communication targeted to a specific demographic. While we’re specifically targeting the $650 billion convenience store, sales channel, the Happy Lane brand has opportunities across distribution channels.

And last earlier this week, we announced the launch of our new Pet Line, Plus CBD Pet, a full line of hemp extracts formulated exclusively for dogs and cats. These products are produced with the same trusted hemp extract used in our flagship Plus CBD brand and provide us with an exciting opportunity to leverage our brand equity in our existing distribution channels. The Pet CBD category is expected to grow to $1.7 billion by the end of 2025 and we’re excited to begin participating in that growth. As you can see, we have been busy expanding our brand, categories and channel opportunities. We remain highly confident in the long-term industry outlook and believe, we’re exceptionally well positioned for the further acceleration of category growth which we anticipate once a regulatory framework is established.

On the regulatory front, we continue to work with a diverse group of Washington DC stakeholders that are advocating for CBD regulation, oversight and enforcement. We have successfully introduced the CBD Consumer Protection and Market Stabilization Act of 2020. HR 81-97. Which has energized the CBD regulatory conversation in DC and put pressure on FDA to release the highly anticipated CBD Enforcement Policy which will provide retailers and consumers with clarity. It is not a matter of if, but when. Full FDA enforcement of CBD dietary supplements occurs.

We believe this will be a significant growth catalyst across all sales channels, which will lead to distributors and retailers partnering with only the best and most credible CBD companies that have invested in science, quality and regulatory compliance. We are confident that a sensible regulatory framework will be implemented where clarity of high-quality companies and products will be self-evident. We are that company.

Let me now provide a brief update on our B2B and direct-to-consumer channels. During Q3, our store count remained relatively consistent with a second quarter level as we ended the third quarter with 6,227 stores nation-wide. This continues to reflect significant growth on a year-over-year basis. Our strategy remains to position ourselves in the FDM channel. For the post regulatory market expansion and target expansion into the convenience store channel, where we are leading with our Happy Lane brand.

The DTC channel remains a significant area of focus and investment and is a critical component of our overall strategy. We continue to invest and add resources and enhanced capabilities to improve our ecommerce operations. We’ve recently launched an updated CV Sciences’ website, an updated Plus CBD website and are heavily invested in our Amazon distribution capability and support of our immunity product line. We are confident that these long-term investments will achieve sustained growth for all of our brands and products.

Now I’ll move onto our drug development program. As mentioned during the Q2 call. We received Formal Notice of Issuance from the USPTO for our Drug Patent on May 19, 2020 providing validation for our program. We’ve completed our pharmacological and toxicological studies in support of our planned Phase 1 clinical study and continue to work through global operations and logistics impacted by COVID-19. As a result, we do not have a guidance date for commencing a Phase 1 clinical trial. In spite of these challenges, we continue to move this program forward and believe strongly in the potential success of developing an effective therapeutic for the treatment of smokeless tobacco addition.

Before I turn it over to Joerg, I want to reiterate our sustained confidence and a continued development and expansion of the CBD industry. We are confident that the current headwinds including the pandemic, competitive environment and regulatory uncertainty will resolve. As this occurs a more normalized and sustainable, competitive environment will exist in the most trusted and respected companies like CV Sciences’ will thrive and take advantage of this growing market.

Now let me turn it over to Joerg to run through our financials.

Joerg Grasser

Thank you, Joe and good afternoon, everyone. During the third quarter of 2020, we generated $5.6 million of revenue up sequentially from $5.4 million in the second quarter and compared to $12.6 million in the prior year period. The sequential revenue increase reflects improved sales in our natural channel while the year-over-year decline continues to reflect the impact of COVID-19 and increased market competition which is largely due to the uncertain regulatory environment for CBD.

Our year-over-year revenue decline was primarily in the natural product channel as our retail partners continue to see significantly less foot traffic and have limited operations in specific markets as well as the ongoing challenges in the CBD sector. We generated a significant year-over-year increase within the FDM channel reflecting the timing of replenishment orders compared to the prior year period.

Our ecommerce revenue rose to 33.1% of revenue from 21.6% in the prior year. But was lower on a year-over-year basis as a result of lower pricing, as we transition to our new refresh branding. Website visitors increased on a sequential basis. Retail distribution remained relatively constant with second quarter. With Plus CBD branded product sold in more than 6,200 retail stores nation-wide at the end of the third quarter, reflecting growth from over 5,400 stores in the same period of 2019.

Off our total retail stores approximately 3,100 of FDM retailers consistent with the second quarter. Gross margin for the third quarter of 2020 was 44.2% an improvement from 43.0% in the second quarter and compared to 66.9% in the third quarter of 2019. The declining gross margin year-over-year is a result of increased production cost and lower pricing as a result of last quarter’s reduced pricing by approximately 15%.

For the third quarter of 2020, we generated an adjusted EBITDA loss of $2.3 million compared to an adjusted EBITDA loss of $0.9 million in the prior year period. The lower EBITDA is a result of lower gross profit partially offset by reduced SG&A and R&D expenses. On a GAAP basis, we reported a third quarter 2020 net loss of $3.2 million or $0.03 per share compared to a net loss of $1.8 million or $0.02 per share in the same quarter of 2019. Adjusted net loss for the third quarter of 2020 was $2.5 million or $0.03. This compares to adjusted net loss in the prior year period of $1.1 million or $0.01 per share.

Let me now turn to our balance sheet. We continue to manage our cash position very carefully and ended the third quarter of 2020 with $6.1 million of total cash compared to $9.6 million at the end of fiscal 2019. Cash used in operations during the first nine months of 2020 was $5.8 million of which we spend approximately $2.2 million on our drug development efforts. We also invested $0.8 million in capital expenditures mostly for technology to support our ecommerce channels.

Inventory at the end of the third quarter of 2020 amounted to $8.7 million compared to $10 million at the end of fiscal 2019. As we’ve discussed over the last few quarters, we’ve been focusing heavily on controlling cost and have appropriately right-sized the business. We remain on track to achieve our target which we set at the end of Q1 of $10 million of annualized OpEx cash savings. We remain confident in our business model with its minimal need for capital investment allowing us to remain nimble during the current environment. We’re encouraged by the modest sequential revenue improvement particularly in the natural channel.

Now I’ll turn the call over to Joe.

Joe Dowling

Thank you Joerg. Before we open the line to Q&A, a few final comments. We have been very busy during this pandemic. In a 90-day period from August through November 2020 we have or will be launching three new brands and more than 50 new or brand refreshed SKUs. Understanding the customer and where they are, drives our strategy. A successful strategy requires speaking directly to the customer with the right products, in the right sales channels, with the right packaging, the right brand communication and at the right price. We are doing that.

We are confident that our continued commitment to safety, the highest level of quality, product innovation, all of it backed by rigorous science is a winning strategy. With that, we can start the Q&A. Operator.

Question-and-Answer Session

Operator

[Operator Instructions] and our first question comes from the line of Eric Burger [ph], Private Investor. Please begin with your question.

Unidentified Analyst

I wanted to find out, if you can give me any color on a 45,000 square foot facility that was bought aboard in July of 2019. I wanted to see if you can get me any information investment used. Thank you.

Joerg Grasser

Eric, this is Joerg Grasser. I’m the CFO. So the facility [indiscernible] facility we entered into a termination agreement during the third quarter of 2020 of this facility and at this point of time we return the facility back to its landlord.

Unidentified Analyst

Okay, thank you.

Operator

Our next question comes from the line of Scott Fortune with Roth Capital Market. Please proceed with your question.

Unidentified Analyst

This is Nick stepping in for Scott. I’m just looking for some color around your future marketing initiatives as you’ve rolled out several new product lines over the past couple of months. If you can just give me some color on what marketing and shelf support initiatives you guys are pursuing in conjunction with your new product launches that will be great.

Joe Dowling

Yes, thank you Nick. This is Joe. And I think we made it clear that our Plus CBD brand which has been in the market since 2014, we’re really gotten a lot of mileage out of that. But we were looking at getting feedback on it and it was clear that we needed to refresh that brand and while we were refreshing the brand, we also refreshed all of our brand communication in support of the brand as well as all the marketing materials that go with that including those more traditional marketing materials that you might see to support B2B and more importantly at least in today’s environment, are the digital marketing support materials to support direct-to-consumer sales channel. And so it’s a variety of effort and marketing collateral support that really goes for each individual brand as well as products that are quite different from one another. So it’s not anyone thing. But it’s really across all brands and now we have three, our immunity line, our Happy Lane line as well as our Plus CBD line. So it’s a significant effort and very individualized to B2B and B2C.

Unidentified Analyst

Got it, thanks for the color and if I could just squeeze one more in. you guys mentioned selling Happy Lane at a competitive price in the C store channel, that opportunity obviously remains large for you guys. Where does your pricing in this segment compared to competitors on the shelf and on top of that? Do you guys have a strategy to shift those consumers up into your full suite of Plus CBD products?

Joe Dowling

Part of our product innovation process is to really evaluate the market pricing of the channels that we’re expecting to enter and we did the same with Happy Lane. So we surveyed the entire market that was currently penetrated into the C store space and we very much priced our products to be competitive with the existing markets that are there. We also think that not only are we pricing our products competitively. But we’re bringing a trusted brand with all the safety science work that we’ve done as well as the quality that our company brings to each and every product that we put on the market. So we think that it’s a very high value to price offering for consumers. So no, we made sure that it was competitive with the existing products that are out there currently.

So your second question was, do you see Happy Lane customers moving up or transferring to our Plus CBD products? I think that’s absolutely an opportunity and it could possibly go the other way too. Where I think Happy Lane products could have distribution into locations that we can currently sell Plus CBD products. So I think there is a cross-merchandising opportunities for both products and the same is true with our immunity line. So we’re very excited about all these opportunities and new product offerings across multiple sales channels.

Unidentified Analyst

Got it. Thanks for the color.

Operator

Our next question comes from the line of Gerald Pascarelli with Cowen. Please proceed with your question.

Gerald Pascarelli

Hope you’re well. Thanks very much for taking the questions. So my first one is brand refresh for Plus CBD. I think it’s been selling online since early October, so almost a month now. Any early reads on how the brand is performing relative to initial expectations. And then, any color you could offer on e-commerce in particular. Do you see any kind of pick up sequentially relative to where you close the third quarter? Just anything you could offer will be helpful. Thank you.

Joe Dowling

Thank you, Gerald and thank you for the question. I hope you’re well too. We all are a little bit cooped up and I appreciate the comment. You’re right. We did and have been launching all of our brand refresh and new Plus CBD SKUs, really over the last 30 days and it will continue through November. What I can tell you is that, it’s really too early to tell what the impact is. We’re saying that October has sales that are stronger on average than Q3. And so that is encouraging and partly because of the new launch product. So we see that as an immediate impact to our top line revenue. The feedback and this is more important probably because if this weren’t true, we’ll be and little bit nervous. But the feedback from distributors, retailers and consumers not just for our Plus CBD brand refresh but also for our new in line enter the Happy Lane products is overwhelmingly positive. As you may know went from not being in boxes to being in boxes that gave us a lot more real estate to really tell our story and connect with the customer. And as I said the reaction from distributors, retailers and consumers is outstanding and very, very positive. So that gives us a lot of confidence not only about Q4 but also going into the first half of 2021.

Gerald Pascarelli

That’s great, very encouraging. Thanks very much for the color. My next question is just Joe, just your thoughts on the growth prospects in competitive dynamic. So we’ve seen momentum with entry from the Canadian LPs into the US CBD market, right. There’s a quite few from Canopy Growth, Cronos as Happy Dance you know as two examples. So in your opinion does the continued push into the market from the Canadian LPs validate the longer-term growth prospects of US CBD albeit even in a challenged environment? And then, the second part to that question is, what do you think happens to the competitive landscape as a result because on one hand you have a saturated natural products channel which should presumably be weeded out as you get color. But then you have some of these other players coming in here so just like your high levels thoughts on both. Thank you.

Joe Dowling

It’s a challenging question. The elephant in the room for all of this is, what happens from a regulatory standpoint. I think that having strong competitors that know how to function in a regulated environment is positive. And I guess it’s best to may remind all of this, that a regulated environment will be the catalyst to open up all the channels that whether it’s a Canadian LP or whether it’s a big CPG companies that decides to get into the space, is really going to open up significant sales channels including FDM, other retail channels and Amazon for example. So I think it’s okay, I think it’s going to help crowd out some of the bad actors and the fly-by-night companies that will not be able to function in a regulated environment. And so, a few more strong players Gerald. I think is – at least for now while it may increase the competition. It’s probably okay and bring more credibility to our category.

Gerald Pascarelli

Super helpful color. Thanks very much Joe. I’ll hop back into the queue.

Joe Dowling

Thanks Gerald.

Operator

[Operator Instructions] and our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Unidentified Analyst

This is Jeff [indiscernible] for Michael. Thanks for taking the question. So somewhat related to next question earlier. On your entry into the pet space, how do you plan to market and distribute your pet products differently compared to your regular Plus CBD products for humans?

Joe Dowling

Thank you, Jeff. That’s a good question. I’m going to go back to what I said earlier about our product innovation process. Whenever we’re considering new product development, one of the first things that we ask is, can we leverage our existing brand because we believe we have a lot of legacy value in our brand. There’s a lot of consumer trust there, so the answer on our pet line was yes, we absolutely can do this and if you saw the rendering in the press release earlier this week on our packaging for our pet line. You saw that it is a Plus CBD pet line. So we’re definitely leveraging our existing Plus CBD flagship line.

The second question that we asked is, can we slot this into our existing distribution? And if those two questions can be answered, yes. We can leverage our assets that we have been working on for the last six years and we can slot those into existing channels very easily and so that is really something that we intend to do immediately. And so the existing channels certainly are the natural channel which we can certainly launch these products immediately. They cannot go into FDM because they do contain CBD. But because of the relationships that we have and the shelf space that we have, when we do have regulatory clarity. We believe we will be able to launch into FDM and other specialty channels as well. But lastly, we can also leverage this into our DTC channel and so we intend to do that immediately and is part of our launch plan specifically. So we are leveraging existing assets that we have primarily, our brand equity as well as our distribution asset that we think is significant. If we were going to develop other channels, then we intend to for the pet line, it would be specialty pet stores as well as other specialty stores that would be appropriate to accept a pet product line.

Unidentified Analyst

Great, thanks. That’s really helpful. And my other question is, how has your entry into the immunity boosting space compared your expectations? I know it’s early but just especially would love color as it relates to your ability secure distribution and large retailers and the benefit of being on Amazon and how do you expect distribution to evolve? Thank you.

Joe Dowling

So the same comment regarding product innovation that I just mentioned which is can we slot this into our existing distribution channel and for our immunity line? It’s a perfect fit for the natural product retail channel. We have great relationships there. They are anxious to put new products from trusted suppliers like CV Sciences on the shelf especially as we are in a potentially very challenging upcoming flu season, certainly with the pandemic. So they’re looking for strong products, strong companies backed by science. So it’s a great fit for the natural product channel. Same is true for our direct-to-consumer channel. But also, it’s very true for being able to allow us to get on Amazon with a Prime Amazon partner where we can establish that relationship and really establishing a foothold of our brand and our company with the Amazon shopper and we think there’s a lot of opportunity for us to not only establish that mindshare. But also direct those consumers potentially back to our CV Sciences as well as Plus CBD website to potentially cross merchandise CBD products which currently cannot be sold on Amazon. So we think strategically it is a very smart move for us. Early signs are very promising. The feedback is very strong from not only distributors but retailers as well as consumers. So we’re very, very optimistic about the prospects for our immunity line.

Unidentified Analyst

Good. Thanks so much. I’ll pass along.

Operator

That does conclude the conference call for today. I’ll turn the call back to Joseph Dowling. Please go ahead.

Joe Dowling

Thank you for joining us today. We really appreciate your support and remain confident with our long-term growth opportunity. We will continue to focus on broadening our product offerings, expanding our distribution, growing our revenues and providing the much-needed leadership to advance a responsible and sensible regulatory environment to allow our industry to realize its potential. Have a great day. Thank you again.