CV Sciences, Inc. (OTCQB:CVSI) Q2 2023 Earnings Conference Call August 14, 2023 10:00 AM ET
Company Participants
Brendan Hawkins – IR
Joseph Dowling – CEO
Joerg Grasser – CFO
Conference Call Participants
Operator
Hello, and welcome to the CV Sciences, Inc. Second Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It’s now my pleasure to turn the call over to your host, Brendan Hawkins. Please go ahead.
Brendan Hawkins
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 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 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
Thank you, Brendan. Good morning, everyone. Thank you for joining our call.
This morning, we issued a press release reporting results for our second quarter ended June 30, 2023. We are pleased with our continued progress as we move closer to profitability and generating free cash flow on a sustained basis.
Significant highlights during Q2 included: we generated revenue of $4 million for the second quarter 2023 compared to $4.1 million for the same period in the prior year. We recognized gross margin of 43.3% in the second quarter 2023, a sequential increase from 43% when compared to Q1 2023, and a significant improvement when compared to a gross margin of 30.7% from Q2 2022.
For the first six months of 2023, we generated cash flow from operations of $2.4 million compared to cash used in operations of $1.5 million for the first six months of 2022. We continue to maintain our number one position in the natural products retail channel, and we continue to increase our market share in this important retail channel. We are managing our working capital through diligent collection of our receivables, monetizing our inventory, especially our investment in raw materials, and we continuously scrutinize all vendor relationships.
All of these efforts contributed to a sequential increase in our cash balance at the end of Q2. Our cost efficiency efforts continue to result in a lower overall company cost structure with efficiency gains and cash savings in several areas including SG&A. Joerg will provide details on each of these areas during his remarks.
Our Q2 results give us optimism that we will remain a competitive force in our industry in spite of the continuing challenges we have faced since early 2020, including brand saturation and inaction by FDA and Congress to provide a regulatory framework for our industry. We continue to believe that our asset-light business model is well positioned to take advantage of an industry that is contracting and maturing.
Q2 was a continuation of the diligent work of our team as we continue to see the positive financial impact of several years of hard work and properly scaling the company, putting us in a position to leverage the strength of our assets, including our strong PlusCBD brand and our B2B and B2C distribution channels. On the revenue side, our short-term goal remains to get the company back to a $5 million plus per quarter revenue run rate and higher.
During Q2, we continued to make progress in overcoming the supply chain issues we experienced during 2022. Brand contraction in all B2B channels is continuing as retailers are working through old inventory and removing slow-moving brands. As I already mentioned, we are the number one selling brand in the natural product retail channel, and we continue to see market share concentration of the top three brands in the 50% range.
Customers are loyal to brands they trust, and we continue to see consumers moving to brands that they know are trustworthy and we continue to be at the top of the list in the important natural product retail channel.
Our B2C sales channel continues to improve. Our B2C infrastructure is scalable and can support nearly unlimited traffic and activity. On a daily basis, our team works to optimize our merchandising and marketing efforts to optimize our ROI to ensure that we are achieving our return on ad spend targets. We are seeing results in all critical B2C KPIs, including new visitors and most notably during Q2, an increase of 8% in subscription revenue.
Brand contraction, increased education and consumer trust will all help grow the B2C channel, and we are prepared to grow the channel and take market share as the category contracts and evolves. We believe our B2B and B2C channels work closely together as our customers often learn about or even try our products from a B2B retailer and then over time, transition to a B2C customer. Product development will continue to be important for our growth strategy.
More and more, we know that consumers are looking for high-quality brands like our PlusCBD products, but they increasingly want multi-active ingredient products that carry a structure function claims that can be trusted. We continue to address this trend and plan to launch new products similar to our wellness line, including our sleep, calm and relief products and our over-the-counter topical line.
Earlier this year, we launched our innovative reserve line to extremely favorable customer reviews and demand. We will continue to innovate and launch new products that are responsive to our customers and their specific need states including for anxiety, pain and sleep disorders. We strongly believe that our science supports our product claims and will win the trust and loyalty of our existing and new customers.
On regulatory matters, we are extremely active with The U.S. Hemp Roundtable and other advocacy groups to provide Congress and the FDA with data and the information needed to advance sensible legislation for the hemp industry.
A recent subcommittee hearing of the House Oversight Committee included strong testimony regarding CBD safety. During the same hearing, industry experts provided clear regulatory recommendations to FDA and Congress to regulate CBD as a dietary supplement and food and beverage additives.
We strongly agree with this recommendation and believe that current regulations governing dietary supplements are the starting point to establish a regulatory framework for the CBD industry. After the subcommittee hearing, a request for information and RFI was announced. The response date for the RFI is actually later this week on August 18.
We are taking a leadership role in working with The U.S. Hemp Roundtable on their response to this important RFI. We are also working with other advocacy groups on their RFI response and what will hopefully be a unified response to Congress and the FDA to quickly establish a legal framework for our industry. The absence of federal regulation has led to a very messy disjointed patchwork of state regulations that are extremely challenging and costly for companies to comply with. This has led to confusion by both retailers and consumers.
Inaction by FDA and Congress is frustrating but we will continue to be actively involved at both the federal and state level and will remain persistent in pushing Congress and FDA to make progress. We all know that a sensible regulatory framework will significantly benefit our industry and consumers and will create an environment where quality companies and products can be trusted to grow the category responsibly.
The challenges in our industry continue, but we are well positioned with an efficient business model and operating structure. We continue to streamline operations, increase cost efficiency and are positioned to leverage our company’s assets and strengths, which includes our employees, the quality of our products, the trust in our brands and our distribution footprint. We will be able to achieve profitability and cash flow positive in the near term because of the tough decisions that we have made over the last several years.
Let me pause now and I will turn the call over to Joerg.
Joerg Grasser
Thank you, Joe, and also good morning to everyone.
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 revenue.
Our second quarter revenue was $4.0 million, slightly down compared to $4.1 million in the second quarter of 2022 and the first quarter of 2023. 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 42.3% of total revenue in the second quarter compared to 44.6% a year earlier and 41.2% in the first quarter of 2023.
We made solid improvements to our main digital KPIs. We were able 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 Q1 2023.
And as Joe mentioned, we also made good improvements during the quarter with our subscription and loyalty programs. Gross margin for the second quarter of 2023 was 43.3% compared to 30.7% in the second quarter of 2022 and 43.0% in the first quarter of 2023. The improvement in the gross margin compared to the prior year is mostly due to reduced shipping and fulfillment costs as well as higher average sales prices, partially offset by lower volumes.
We are working on further cost efficiencies in order to continue to improve our gross margin. SG&A expense for the second quarter was $2.8 million, significantly down from $3.5 million a year ago.
These improvements are the direct result of our ongoing efforts to reduce our overall cost structure. We have taken costs out from all areas of our business and continue to do so in order to generate positive cash flow. For the second quarter 2023, we generated an operating loss of $1.1 million compared to an operating loss of $2.3 million a year ago.
Our adjusted EBITDA loss for the second quarter was $1 million compared to $1.8 million in the second quarter of 2022. The improved operating performance and adjusted EBITDA loss as a 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 second quarter 2023 loss of $1.3 million or $0.01 per share compared to a net loss of $2.7 million or $0.03 per share in the second quarter of 2022. Now let me turn to our balance sheet. We continue to manage our cash position very carefully and ended the second quarter of 2023 with $1.7 million of cash compared to $0.6 million at the end of fiscal 2022.
Cash generated by operations during the first six months of 2023 was $2.4 million, a significant improvement from the same period a year ago, which had cash usage of $1.5 million. The improvement in our operating cash are mostly due to the receipt of our ERC funds of $2.5 million and lower cost of operations.
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 $5.8 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. Our raw materials mostly consist of hemp oil, which we previously purchased and continue to convert into finished products. Our raw material balance has decreased from $3.6 million at year-end to $3.2 million as of June 30, 2023.
Also in April 2023, we extinguished our note payables level and are now essentially debt-free. In addition, we have working capital of $2.8 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
Thank you, Joerg.
As Joerg and I have discussed this morning, we continue to position the company to achieve profitability and free cash flow in the near term. Our Q2 results show continued progress in achieving profitability and free cash flow.
The contraction and consolidation of our industry is also a positive trend 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 are continuing to evaluate both inbound and outbound M&A opportunities and have seen a significant increase in acquisition opportunities.
We will be selective, but adding revenue by acquisition is a viable strategy for us. We are also looking at other new domestic opportunities and selected international opportunities that will allow us to leverage our brand, infrastructure, trust in our company and the strength of our employees.
As I mentioned in my earlier remarks, we are doing everything possible to advance sensible regulations at both the state and federal level. We are working closely with our industry peers to bring a unified voice to Congress and FDA. 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, retail partners, new product development and market development as we continue to position the company for long-term success.
Thank you very much for listening this morning. I will now turn the call back over to the operator for any calls from the analyst community.
Question-and-Answer Session
Operator
Joseph Dowling
Thank you, Kevin. I would like to thank everyone this morning for being a supporter of CV Sciences and our great products. We look forward to speaking again soon. Thank you.
Operator
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
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