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spk01: Greetings and welcome to the CV Sciences second quarter 2022 conference call. At this time, all participants are in a listen-only mode and this conference is being recorded. Following the formal presentation, management will take questions from the analyst community. I would now like to turn the call over to CV Sciences for an introduction. Please go ahead.
spk02: Thank you and good morning, everyone. With us today with prepared remarks, are CV Sciences Chief Executive Officer Joseph Dowling and Jorg Grosser, Chief Financial Officer. After the prepared remarks, we will take questions from the analyst community. I would like to remind you that during this call, management's prepared remarks may contain forward-looking statements. These forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those anticipated by CB 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 CB Sciences are as such forward-looking statements. 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 cvsciences.com. I would like to now turn the call over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling. Joe? Thank you. Good morning, everyone. The challenging external environment on our industry and company has continued. We all know that. However, we see positive trends from real data that we believe will help stabilize our industry as we grind through brand contraction, industry consolidation, and evolving regulation. I'll share two data points that we believe are strong indications that brand contraction is occurring and that a strong regulatory environment will help our industry and improve product quality. While the FDA and Congress have been very slow to act, many individual states have enacted regulations that require compliance in order for companies to legally sell their products in their respective states. We have long believed that strong regulations will help declutter the industry by reducing the number of brands and bad actors that have no intention of complying with regulations. We are seeing this happen in real time in the state of Utah, which recently enacted strong regulations for our industry that require companies to register every product they intend to sell, which must comply with the new Utah regulations. The impact in Utah in the most recent year-over-year period is that 54% fewer companies registered to sell their products in Utah and 46% fewer products were registered for sale in Utah. Competition is fine, but a level playing field where everyone is required to follow rules if they want to do business in that state is very positive for our industry. but also for consumers who can expect higher quality products from companies willing to follow rules. This is one state and one example, but absent FDA action, similar legislation is in progress at many other states throughout the country. We expect to see a similar decline in companies and products sold as new state legislation is enacted across the country. The second data point I will share are the most recent SPINS data reports. SPINS is the leading provider of syndicated data and insights for the natural, organic, and specialty products industry. SPINS publishes sales data every four weeks and includes detail down to the individual SKU level. This provides us with insight into what products are selling, not only by us, but also our competitors. The recent SPNS data shows that our PlusCBD branded products have regained the number one spot of all brands in the category for the current four-week, 12-week, and 26-week reporting periods in the natural specialty sales channel. Obviously, we are very proud to be the number one selling brand in this sales channel, and we have done this with far fewer resources than our primary competitors in this channel. The SPINS data also reports some interesting market share information. This sales channel is dominated by three companies, including CB Sciences. CB, along with two other companies, held about a 45% market share in this sales channel just one year ago. The recent SPINS data indicates that the top three companies, including CV Sciences in the number one spot, now have nearly a 51% combined market share in this sales channel, a significant market share increase in just one year. This data provides further evidence that brand contraction is occurring in B2B channels, which we assumed based on conversations with hundreds of retailers, but this data now confirms a strong brand contraction trend in our industry. Brand contraction, industry consolidation, and evolving regulation will continue to help. Another area I would like to cover this morning is evidence-based science. Every ingredient in the natural product space that has achieved and sustained a significant and sustainable addressable market has done so with evidence-based science that is credible and that can win the public's trust. Products need to be safe and they need to work for the intended use or customers will eventually not support the product. We have always embraced this approach that science has to lead the way. We believe we are at the very beginning of understanding the potential benefits of hemp extracts. Over the next decade, as the regulatory environment evolves and investment returns to the category, we believe that evidence-based science will emerge to support an industry that is several multiples of where we are today. Science will eventually support structure function claims of individual hemp extracts and combinations of hemp extracts and other proven science-backed ingredients. We started this process long ago with a focus on science and continue today. A couple examples of what we're currently doing is that we are working with three of the most studied cannabinoids, DBDA, CBD, and THC. We are working with two amino acids, L-theanine and 5-HTP. We are working with one hormone, melatonin, and we are working with a fatty acid, endocannabinoid-like molecule called PEA. All these ingredients are supported by strong science and have allowable structure function claims. We are confident that a strong commitment to science is a winning strategy in the long term. With our new product development efforts focused on evidence-based, science-backed ingredients, Our second quarter revenue was nearly flat with Q1, which we expected, in a very tough environment across B2B and B2C sales channels, except for some inventory returns from FDM accounts. On the expense side, we continue to make tough decisions to scale our business to the new economic reality and operate as efficiently as possible. This is an ongoing, constant effort. We continue to evaluate every expense and have made tough decisions to become more cost efficient. Yorg will discuss more specifically some of the initiatives that have and will realize significant cost savings, including the near-term activation of an East Coast warehouse that will reduce shipping costs and improve delivery times. We are managing our working capital very closely, including the acceleration of AR collections and actively converting our strong level of saleable inventory to cash timely and profitably. We also continue to play a leadership role at both the state and federal level to achieve sensible regulations that will allow our industry to realize its potential. Of course, Federal inaction has hurt our industry, created uncertainty for consumers looking for regulatory clarity, and has hurt investment. However, we see state and federal progress and will continue as a respected leader in the space to achieve regulatory clarity. In many ways, our market is at the very beginning. Regulation is moving slowly but is picking up momentum. The basic science for our industry is still very underdeveloped. Two of the biggest growth drivers will be regulation and evidence-based science to better understand and explain the benefits of hemp extracts. Knowing this, we remain optimistic about our future growth prospects. Our industry continues to undergo a repositioning and we expect to benefit from the evolving regulatory framework as well as further brand contraction and consolidation. Given the current market dynamics, we remain focused on driving cost efficiency, achieving cash flow positive in the near term, while also continuing to advance our brand awareness and innovation initiatives. Despite near-term challenges and uncertainties, we have positioned our company to participate in the consolidation and brand contraction of the hemp extract market by continuing to execute on our key strategic initiatives and leveraging core competitive advantages to drive long-term growth and shareholder value. Let me pause now and I will turn the call over to York.
spk00: Thank you, Joe, and also good morning to everyone. Our second quarter revenue was 4.1 million compared to 5.1 million in the second quarter of 2021 and 4.4 million in the first quarter of 2022. The decline is mostly due to lower sales in our B2B channel. Our number of units sold during the second quarter decreased by 5% compared to the second quarter of 2021. In addition, higher discounts for new product placements and changes in our sales mix were the other reasons for the decline. On a sequential basis, our revenue were impacted by product returns from FDM accounts. The overall market continues to be fragmented and highly competitive, which we believe is largely due to the lack of a clear regulatory framework. Direct-to-consumer revenue represented 44.6% of total revenue in the second quarter compared to 36.9% a year earlier and 32.5% in the first quarter of 2022. E-commerce continues to become a larger part of our business. Our online revenue remains flat on a year-over-year basis, mostly related to our continued focus on this channel. We continue to make solid improvements to our main digital KPIs, focusing on increasing our subscriptions. Also, our brand loyalty with our flagship brand plus CBD continues to improve as our revenue with returning customers continues to increase. Growth margin for the second quarter of 2022 was 30.7% compared to 26% in the first quarter of 2022 and 44.7% in the second quarter of 2021. The improvement in growth margin on a sequential basis is mostly due to lower discounts and reduced shipping and fulfillment costs. We continue to work on cost efficiencies in order to get our margins back in line. We are planning to add a second distribution center on the East Coast to reach more of our customers with next-day delivery and reduced shipping costs. SG&A expense for the second quarter was $3.5 million, significantly down from $5.8 million a year ago. Our SG&A expense, excluding any unusual items, continued to decrease on a year-over-year and sequentially basis as a 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 get to cash flow break-even. We also made improvements to our adjusted EBITDA Adjusted EBITDA loss for the second quarter was $1.8 million compared to $2.5 million in the first quarter and $2.4 million in the second quarter of 2021. The improved adjusted EBITDA loss is a result of our continued cost-saving efforts to minimize our cash outflow. On a gap basis, we reported a second quarter of 2022 net loss attributable to common stockholders of $3.6 million or $0.03 per share compared to a net loss of $3.5 million or $0.03 per share in the second quarter of 2021. Now let me turn to our balance sheet. We continue to manage our cash position very carefully and ended the second quarter of 2022 with $1.1 million of total cash compared to $1.4 million at the end of fiscal 21. Cash used in operations during the first six months of 2022 was $1.5 million, a significant improvement from the prior year period of $4.8 million. During the first half of 2022, we have more aggressively managed our overall cash position with improved cash collections on our outstanding AR and daily management of our inventory and vendor payables. We continue to work on reducing our cash position in 2022, but anticipates that we will be dependent in the near future on additional capital to fund our growth initiatives. We continue to adjust our cost structure to be in line with our expected revenue, with the overarching goal to achieve cash flow break-even in the second half of 2022. In June, we move to our new facility in San Diego, which is more efficient, cost-effective, and appropriate for our employees to support a hybrid work environment. Our inventory was $7.4 million at the end of the second quarter, compared to $8.6 million at year end, as we continue to focus on efficient cash management and convert our raw materials into cash. Now, I will turn the call back over to Joe.
spk02: Jörg, thank you. As Jorg and I have discussed this morning, we continue to take steps to align our cost structure with the scale of our company and the industry. Our goal of achieving cash flow positive by the end of 2022 is very doable. Achieving cash flow positive will help us to actively participate in the contraction and consolidation of the hemp extract industry, which we continue to do with our advisors. We continue to evaluate all strategies, including inbound and outbound merger, sale, acquisition, or other options for the company as a whole or for any business segment. Our drug development program continues to be a significant undervalued company asset. We continue to move slowly on this effort as we seek to partner the program. As mentioned, product development will be a key focus for us. Today is an exciting product development day for us as we are launching a new reserve soft gel product. Check out our website for details. We are very excited about the potential for this new product. We are optimistic about the long-term opportunity for our company and industry. We have taken the necessary action to ensure that we are scaled properly, operating efficiently, and are focused on adding long-term products. shareholder value. Now, I will turn the call back over to the operator for any calls from the analyst community.
spk01: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. There are no questions at this time. I would like to turn the call back over to CV Sciences for any closing comments. Thank you.
spk02: In closing, I would like to thank everyone for your time this morning. We look forward to speaking again soon. Thank you and have a great day.
spk01: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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