CV Sciences, Inc. (PNK:CVSI) Q1 2025 Earnings Call Transcript

CV Sciences, Inc. (PNK:CVSI) Q1 2025 Earnings Call Transcript May 14, 2025

Operator: Greetings, and welcome to CV Sciences’ First Quarter 2025 Earnings Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brendan Hawkins. Thank you. You may begin.

Brendan Hawkins: 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. After prepared remarks, we will take questions from the analyst community. 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 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 just a few minutes ago for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This afternoon, 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, Brendan. Good afternoon, everyone. Thank you for joining our call. This afternoon, we issued a press release reporting results for our first quarter ended March 31, 2025. We are pleased with our progress as we move closer to profitability and positive cash flow. Significant highlights during Q1 included, we generated revenue of $3.6 million slightly down from $3.9 million for the fourth quarter 2024. Our Q1 gross margin of 46% represents our continued ability to achieve a healthy gross margin. We continue to maintain our number one position in the natural product retail channel, and we have also increased our market share in this important sales channel as well. During Q1, we began to more fully adapt our product innovation efforts to include more non-cannabinoid products to more fully diversify our product offering.

Q&A Session

We also continue to execute on our M&A strategy and are beginning to realize some of the initial benefit from our acquisition of Elevated Softgels, especially with the in-source manufacturing of many of our products previously produced by contract manufacturers. I would like to start with a few comments on the goals, execution and implementation of our M&A strategy. We have several goals with our M&A strategy, primarily to increase our scale with greater revenue, but also to increase our cost efficiency. We are looking for opportunities to increase revenue profitably with transactions that can leverage our assets, including our brands, people, process and our distribution. We are also looking at transactions that can increase our cost efficiency, including assets that allow us to further in-source manufacturing, even though we have historically outsourced the majority of our manufacturing.

We believe the timing is right for us to have more control over the manufacturing side of the supply chain. Our most recent transaction of Elevated Softgels provides us with an immediate opportunity to in-source manufacturing of a significant number of our products. We expect to see improved cost efficiency and gross margin in the second half of 2025, directly from the integration of Elevated Softgels. We are also expanding the contract manufacturing capability of the Elevated facility and are investing in equipment and people to achieve this goal. Our investment in cultured foods achieved an exciting milestone during Q1 with the U.S. launch of Lunar Fox, an all-new line of plant-based foods offering sustainable, vegetarian-friendly nutrition alternatives for our customers.

Lunar Fox products are 100% natural, gluten-free and respond to growing demand for vegan products, a fast-growing category driven by consumers seeking alternative healthy conscious products. Lunar Fox products are now available at select retailers and from the company’s new website at lunarfoxfoods.com. Next, on product development. We are adapting our innovation and new product development in several ways. First, we will continue to develop new cannabinoid products that adapt to the changing regulatory environment, but then also consider exciting new formats and formulations. A recent example is the recent launch of our new fizz effervescent tablets launched in Q1 under our Aura Collection. This exciting new fizz tablet format can be added to water or seltzer, consumers to enjoy the benefits of an uplifting fizz with a zesty lemon flavor.

We are excited to have our new fizz tablet join the Aura Collection, which also includes our Illuminate and Serene gummy products. Alongside our legacy and new cannabinoid products, we will be emphasizing and developing new non-cannabinoid products that will be positioned under our Plus Health brand. We believe there are numerous innovative formats and formulations to develop for both human and pet consumption and are hopeful to launch several new products during the balance of 2025. We are adapting to a more diversified product offering, which will include both cannabinoid and non-cannabinoid products. We will continue to innovate and launch new products that are responsive to our customers and their specific needs states, including for anxiety, pain, sleep and other disorders.

We will continue to develop products with strong science that support our product claims, always keeping in mind the trust and loyalty of our customers. We believe that adapting our product innovation and development will not only meet consumer demand, but will also mitigate some of the regulatory challenges to the hemp industry. However, let me be clear, we remain bullish on the U.S. hemp and CBD category. The U.S. CBD market is still a huge market segment. According to the Brightfield Group, the leading CBD market research firm, the CBD market alone in 2024 generated $4.4 billion in sales. Brightfield estimates that the top 20 CBD companies represent approximately 20% of the total market in 2024. In addition, Brightfield estimates that approximately 1,500 CBD companies share approximately $2 billion of the total market.

Just a few years ago, Brightfield estimated that more than 3,000 CBD companies were operating in the United States. That number has been cut in half in just a few years. We believe that further market contraction represents an opportunity for CV Sciences to take market share from smaller CBD companies as the market shrinks the number of competing brands. Now moving on, other operational objectives achieved during Q1 included. Our cost efficiency efforts continued to result in a lower overall company cost structure with efficiency gains and cash savings in numerous areas, including SG&A. Our steady and healthy gross margin of 46% in Q1 demonstrates our commitment to continuous improvement in operating a cost-efficient company. On the revenue side, our goal is to increase the scale of our company through organic growth and through our M&A strategy, as I previously discussed.

Brand contraction continues to help us take market share in B2B channels as retailers continue to remove slow moving brands. In the natural product retail channel, we are still the number one selling brand and continue to see market share concentration of the top four brands in the 60% range. Customers are sticking with or changing to brands that they know and trust, and we continue to be at the top of the list in the natural product retail channel. Our B2C sales channel continues with steady improvement. We are seeing good results in all critical B2C KPIs, including a focus on the recurring revenue from increased subscription orders. We believe that further brand contraction, increased education and consumer trust in our company and strong brand will all help grow the B2C channel.

On regulatory matters, we recognize that numerous states have passed legislation that are unfavorable to the CBD category. We will continue to be involved in lobbying efforts to advocate for hemp-based products, including to push Congress and state governments to make progress on sensible regulations. At the federal level, we would like to see rescheduling of cannabis to Schedule III status and would also like to see banking reform. Both of these reforms would help the hemp industry. At the state level, we will continue to fight for a sensible and consistent framework in as many states as possible. A sensible framework will help advance our industry and would create an environment where quality companies and products are trusted politically and by consumers to produce safe and quality products in a responsible way.

But we are not standing still. We recognize the regulatory challenge and are adapting to this reality. We are positioning ourselves to compete in the current environment in spite of these regulatory challenges. We are doing this in numerous ways, including by streamlining our operations and increasing our cost efficiency to align the company for growth and profitability. We have made great progress in structuring a lean, cost-efficient organization that is positioned to leverage our company’s strengths and assets. We will continue to use our strong operating platform to utilize an M&A strategy to acquire assets that add revenue, increase our scale and provide operating leverage and efficiency. We will continue to evaluate inbound and outbound M&A opportunities that support our strategic plan of achieving these goals.

We are making good progress. Let me pause now and I will turn the call over to Joerg.

Joerg Grasser: Thank you, Joe. During the first quarter of 2025, we made solid improvements on our cost savings initiatives. We generated EBITDA of $131,000 and an adjusted EBITDA loss of $311,000. We maintained strong gross margins of 46% and continued to reduce our operating expenses. Over the last several quarters, we have rightsized our cost structure without significant productivity losses, and we are well positioned for operating leverage as we continue to increase revenues and add additional businesses to our platform, all with the main goal of creating shareholder value. Our first quarter revenue came in at $3.6 million compared to $3.9 million in the fourth quarter of 2024 and compared to $4 million in the first quarter of 2024.

The sequential revenue decline is mostly due to lower unit sales by 8% in the first quarter of 2025 compared to the fourth quarter of 2024. Our lower unit sales are mostly driven by increased state regulations and the out of stock impact of certain of our key products. We were temporarily out of stock with certain of our products because of manufacturing delays from two of our CMOs. We have mostly worked through these challenges with our manufacturing partners at this point. However, this further supports our strategy to further in-source manufacturing of our products. Our new product development continued to be successful and our team is doing an effective job on executing on our go-to-market strategy. New products introduced since the beginning of 2023 represented 35% of our revenue for the first quarter 2025, which shows the importance of new product innovation.

The overall CBD market continues to be very fragmented and competitive. We don’t see this changing anytime soon, but we see further brand consolidation and brand contraction, which are opportunities to further increase our market share and revenue base. Our direct-to-consumer business continues to perform well and associated sales represented 44.8% of total revenue in the first quarter 2025 compared to 44.2% a year earlier and 45.7% in the fourth quarter of 2024. On a sequential basis, our B2C revenue declined by 9%, mostly due to seasonality around the holiday season for this channel. Gross margin for the first quarter of 2025 was 46%, a nice increase from our gross margin of 43.2% in the fourth quarter of 2024 and compared to 46.3% for the first quarter of 2024.

Our sequential improvement in gross margin in the first quarter of 2025 compared to the fourth quarter of 2024 is mostly due to additional cost savings, changes in our product mix and margin improvement of our recent acquisitions. We are also working on further cost efficiencies, especially on in-sourcing some of our key products. As Joe mentioned, we made very good progress on the insourcing of our Softgel and things like SKUs during 2025. We expect that we will recognize associated cost savings in our P&L in the second half of 2025 when we begin selling our in-house manufactured products. SG&A expense for the first quarter was $2.1 million, down from $2.4 million a year ago, representing a decrease of 12%. SG&A expense also decreased on a sequential basis by 7% from $2.3 million in the fourth quarter of 2024.

The decrease in SG&A expense is mostly due to lower digital marketing expense and lower professional and legal fees. For the first quarter 2024, we generated an operating income of $11,000 compared to an operating loss of $0.6 million for the first quarter and the fourth quarter of 2024. The improvement was mostly due to the benefit of the reversal of accrued payroll taxes of $0.5 million associated with the RSU release to our founder in 2019 and other cost savings initiatives. Our adjusted EBITDA loss for the first quarter was $0.3 million improved from $0.4 million in the fourth quarter of 2024. On a GAAP basis, we reported a first quarter 2025 net loss of $0.1 million compared to a net loss of $0.7 million in the fourth quarter of 2024. Now, let me turn to our balance sheet.

We ended the first quarter of 2025 with $0.8 million of cash compared to $0.5 million at the end of fiscal 2024. In February 2025, we entered into a financing agreement with an institutional investor and brought in $1.2 million of additional cash to help us with our growth strategy. We also repaid our prior note payable of Streeterville and recognized a gain on early debt extinguishment of $37,500 During the first quarter 2025, we were close to our goal of generating positive operating cash and used cash from operations of $0.1 million improved from a cash usage of $0.2 million in the fourth quarter of 2024 and $0.5 million in the first quarter of 2024. We continue to 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 of generating positive operating cash on a continuous basis. We anticipate some modest cash usage in the very near future until we recognize the synergies of our acquisitions and generate positive cash flow in the second half of 2025. Our inventory was 4.4 million at the end of the first quarter of 2025 compared to 4.9 million at year end, as we continue to focus on efficient cash management and converting our raw materials into cash. Our raw materials mostly consist of hemp oil, which we previously purchased and continue to convert into finished products. We have fully consolidated the results of Cultured Foods and Elevated Softgels into our financials, and we anticipate realizing associated synergies of these two acquisitions in the second half of 2025.

With our improved balance sheet and our reduced cost structure in place, we have the financial flexibility to continue executing our growth plan and look forward to improving trends going forward. Now I’ll turn the call back over to Joe.

Joseph Dowling: Joerg, thank you. We are working diligently to align our company to the scale of the CBD industry and we are actively adapting our business model in several ways. First, to increase revenue through non-cannabinoid innovation that will diversify our product offering and allow for new revenue and increased distribution. Second, as I discussed earlier, we have begun the process of in-sourcing manufacturing of many of our products. During the second half of 2025, we expect to increase our gross margin through our in-source manufacturing strategy, which will lead to greater cost efficiency and profitability. And third, our M&A strategy that is focused on both large and small complementary consumer product companies that will add revenue and allow for operating synergy to increase sales and profitability.

We also continue to look at opportunities to further in source manufacturing to achieve greater cost efficiency and gross margin. We believe that CV Sciences is a strong consumer product platform, and we know that we have significant room to increase our operating leverage through greater scale, leading to a company that can achieve strong profitability and shareholder value. We are optimistic about the long term opportunity for our company to remain a competitive force in the health and wellness industry. We continue to make tough decisions to ensure that we are focused on adding long term shareholder value. We are an experienced, dedicated group of employees that are focused on making the best innovative products that meet the needs of our customers add value.

Now, I will turn the call back over to the operator for any calls from the analyst community.

Operator: Thank you. At this time, we’ll be conducting a question and answer session. [Operator Instructions]. There are no questions from the analyst community at this time. I’d like to turn the call back over to Joseph Dowling for closing comments. Thank you.

Joseph Dowling: I would like to thank everyone for being a supporter of CV Sciences and our great products. We look forward to speaking again soon. Thank you for your time this afternoon.

Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.