Here you go SL :CV Sciences, Inc. (OTCQB:CVSI) Q2 2021 Results Conference Call August 12, 2021 4:30 PM ET
Company Participants
Joseph Dowling - Chief Executive Officer
Joerg Grasser - Chief Financial Officer
Conference Call Participants
Owen Rickert - Northland Securities
Scott Fortune - ROTH Capital Partners
Harrison Vivas - Cowen & Co.
Operator
Greetings, and welcome to the CV Sciences Second Quarter 2021 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.
Unidentified Company Representative
Thank you, and good afternoon, everyone. With us today with prepared remarks are CV Sciences' Chief Executive Officer, Joseph Dowling; Joerg Grasser, Chief Financial Officer.
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 a forward-looking statement.
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, August 12th, 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 this press release as the company provides a summary of the results on this call. The press release may be found at www.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?
Joseph Dowling
Thank you, Alyssa. Good afternoon, and thank you for joining us for today's conference call. I'd like to start by outlining the key themes that framed our second quarter results.
First, our focus on select product and channel strategies for incremental growth is showing progress with revenues stabilizing on a year-over-year basis, and rising sequentially. Second, initiatives to achieve even more cost efficiency and drive toward profitability continue to produce results as evidenced by the increase in gross margin, as well as an improvement in our adjusted EBITDA loss versus one year ago. Finally, recent product launches, other business highlights and announcements around our drug development efforts provide further evidence of our unique position in the market and growth potential.
Now, I'll provide a brief overview of second quarter results, which met our expectations.
We saw a leveling of year-over-year decline with revenues of $5.1 million, compared to $5.4 million in Q2 of 2020. On a sequential basis, we had our first increase in 2 quarters as revenues grew 6% compared to the first quarter, reflecting internal initiatives around new products and distribution along with some gradual signs of recovery in retail channels.
Gross margin improved by 170 basis points, and we reduced operating expenses by 17% compared to 1 year ago levels. This resulted in a $1.2 million improvement in our adjusted EBITDA loss to $2.4 million. From a channel perspective, the gradual reopening of the economy has led to an increased level of activity in retail, something we started seeing near the end of Q1 of 2021. During the second quarter, the best evidence of this trend was provided by our natural products retail channel, where revenues increased 2% versus a year ago and were up 9% sequentially.
In e-commerce, we continue to focus on leveraging our digital platform investment to drive sales and improve margins. We have seen the benefit of our investment and focus in the digital channel with sequential growth over the last 4 quarters. During Q2 of 2021, e-commerce revenues continued to increase slightly. In addition, our key financial and operating digital metrics are improving each quarter. Our key metrics of site visitors, conversion rate, number of orders, e-mail subscribers and auto ship revenue are all increasing on a quarterly basis.
We will continue to invest further and continuously improve our digital platform to optimize performance and increase revenue in this important sales channel. We are also very pleased with new products launched in May of Q2, our PlusCBD Calm and Sleep gummies, which have both received strong consumer and retailer response. Both of these products are aimed at meeting the primary needs of our target customers, which is to help them sleep and manage the stress and challenges of day-to-day life. We are also confident that our ongoing product development pipeline with numerous product launches set for the second half of 2021 will generate incremental revenue across several channels.
There were also several business highlights during Q2. I'll mention a couple. First, we recently received the NutraIngredients-USA 2021 Product of the Year for our Immune Support product for our new and highly innovative CV Defense product. The potential for immunity products during these uncertain times is strong. And clearly, this award recognizes the quality and relevance of this unique product. Second, our PlusCBD hemp oil was used as the reference standard to develop the Cannabis Quality Assurance Program Exercise 1, which was recently published by the National Institute for Standards and Technology.
It is important for our industry to develop standardized testing methods that consumers, retailers and regulators can trust. It is not surprising that we were chosen to partner with the National Institute for Standards and Technology on this project as we continue to be the industry leader for science, technology and regulatory compliance. These efforts will create lab standards that can eliminate policymakers' concerns regarding unreliable CBD test methods.
On the regulatory front, we remain committed to working with government and industry association stakeholders to fill scientific and regulatory gaps needed for full regulation of CBD as a dietary supplement and topical ingredient. FDA regulation will create the structure needed to foster a mature and sustainable CBD marketplace. However, this pathway is unpredictable and has taken several unexpected turns since 2014. Only committed and focused hemp companies are positioned to succeed in the future regulated market, and we are optimistic that CV Sciences is situated to deliver long-term value for our shareholders in a regulated market. We are actively advancing key scientific and regulatory initiatives that are necessary for success.
In July, the U.S. House of Representatives passed an amendment to a must-pass Appropriations Bill that instructs FDA to proceed with CBD rulemaking within 180 days after enactment. This sends a strong message to FDA, which is to regulate CBD now. If FDA fails to act, we have been working with our allies in Congress on gaining bipartisan momentum for H.R.841, the bill known as the Hemp and Hemp-Derived CBD Consumer Protection and Market Stabilization Act of 2021. This CBD legislation provides a clear set of regulations for a mature and regulated CBD industry and would accelerate brand contraction by eliminating noncompliant bad actors.
To get the word out, our industry partners have collaborated on a consumer-facing campaign, which can be accessed at the website, regulatecbdnow.com, to amplify the message that Congress needs to act now on CBD regulation. While we are confident that our sustained scientific, regulatory and political efforts, will create a regulated CBD market, we also recognize the need to maintain growth and innovation in a crowded marketplace with unscrupulous bad actors. Nobody can predict how long before FDA fully regulates CBD. So we will continue to build brand loyalty based on quality, transparency, innovation, scientific integrity and regulatory compliance.
On our drug development program, we recently announced the results of a critical study that strongly supports our efforts to develop and commercialize a CBD-based pharmaceutical product to treat nicotine addiction. In July, the University of California at San Diego published results of a preclinical study demonstrating the efficacy of chronic CBD treatment in reducing nicotine dependence using measures of withdrawal symptoms.
In this collaborative study, CBD treatment prevented withdrawal symptoms related to nicotine addiction including increased pain sensitivity and weight gain during short- and long-term nicotine restriction. This research supports our continued efforts to develop a treatment for smokeless tobacco addiction, which affects millions of people and represents a worldwide treatment market estimated at over $2 billion. We believe that CBD has a significant role in both consumer and pharmaceutical products. Along with our nicotine cessation program, we are pursuing additional medical indications for possible drug development with active intellectual property and proof-of-concept efforts in progress.
As we have mentioned previously, we expect to partner our drug program sometime in the future. In summary, we are optimistic about economic trends that will help normalize factors impacting the overall economy and our category. We have a strong product development pipeline that we believe will help drive future incremental growth. As I just mentioned, our drug development program has always been an undervalued asset, and we are now getting some visibility on the potential value of that program.
Our asset-light business model allows us to operate cost effectively and achieve operating scale at the same time, allowing us to lower operating costs and improve our margins as we grow.
Now, let me turn it over to Joerg to run through our financials.
Joerg Grasser
Thank you, Joe, and good afternoon, everyone. Our second quarter revenue was $5.1 million compared to $5.4 million in the second quarter of 2020 and up sequentially from $4.8 million in the first quarter of 2021. The year-over-year decline is largely due to lower retail sales in the FDM channel stemming from ongoing competitive dynamics related to regulatory uncertainty. The sequential increase from Q1 mostly reflected gains in the natural product channel.
Our retail store count was more than 7,800 stores as of June 30, 2021, up 23% versus a year ago and slightly up from our Q1 level with the FDM channel, our primary focus, accounting for about 4,900 stores or 63% of our total stores. E-commerce revenue was down 6% on a year-over-year basis, mostly related to price reductions we took earlier last year. Trends continue to gradually improve on a sequential basis reflecting ongoing efforts to drive our digital KPIs.
As a percentage of our overall business, e-commerce represented 36.9% of total revenue in the second quarter compared to 37.8% a year earlier and 38.6% in the first quarter. Gross margin for the second quarter of 2021 was 44.7% compared to 43% a year earlier. The 170 basis point improvement in gross margin versus last year was mostly related to favorable sales mix. Second quarter operating expenses were down $1.2 million or 17% from the year earlier period, reflecting significant progress on our cost efficiency initiatives.
R&D spending was $0.2 million in the second quarter of 2021 compared to $0.7 million a year ago. SG&A expense for the second quarter was $5.6 million versus $6.2 million in last year's second quarter. The year-over-year decline reflects decreased payroll and outside services. Adjusted EBITDA loss for the second quarter was $2.4 million compared to $3.2 million in the second quarter of 2020 and flat on a sequential basis. The year-over-year improvement in adjusted EBITDA was due to reduced operating expense spend.
On a GAAP basis, we reported a second quarter 2021 net loss of $3.5 million or $0.03 per share compared to a net loss of $4.7 million or $0.05 per share in the second quarter of 2020.
Let me now turn to our balance sheet, which we continue to manage conservatively. We ended the second quarter of 2021 with $3 million of total cash compared to $4.5 million at the end of fiscal 2020. Cash used in operations during the first 6 months of 2021 was $4.7 million compared to $4.1 million of cash used in operations during the first 6 months of 2020. During the first 6 months of 2021, we received $4.5 million in proceeds from the sale of common shares under the agreement we announced in December that allow us to sell up to $10 million worth of our shares through the end of 2021.
Our asset-light business model allows us to focus on top line revenue growth and profitability. With exciting new products such as our recently launched Sleep and Calm gummies and more products scheduled to be released soon, we continue to build solid recognition for our core brand, PlusCBD. Also, we are shifting our focus across the organization more towards the needs and demands of our customers. Increased customer focus coupled with continued investment in cost efficiencies to fully leverage our business model is our path to get to cash flow breakeven. We look forward to improve our trends as the year unfolds.
Now, I'll turn the call back over to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from Mike Grondahl with Northland Securities, Inc.
Owen Rickert
This is Owen on for Mike. Is there anything you call out on new products, including the Pet line, Immunity line, Pro line? Or any other color on like the recent Calm and Sleep gummies in terms of customer traction?
Joseph Dowling
Yes. Good afternoon. Thanks for joining the call. Great question. The -- I think to start, new and innovative product development is really critical to our strategy in the fast-evolving industry that we're in. And if you just look at Q2 -- and we don't provide detail on this, but our revenues for Q2, 39% of total revenue came from new products launched in the last 12 months. And so that clearly highlights the importance of developing and launching new products, which we will continue to do.
And as you know, over the last 12 months, we've launched several new products and brands, and you mentioned, obviously, the Pet line and the Sleep and Calm gummies. And the Sleep and Calm gummies just launched in really late May of 2021. So we are seeing, on the Sleep and Calm gummies specifically really great response from both retailers and consumers. And we're very, very pleased with the launch of that product and the revenues to date and expect that to continue.
In terms of some of the details or specifics on other newly launched products over the last 12 months. We're pleased with overall generally with the launches of the new products that we've introduced over the last 12 months. At the same time, we're always evaluating our product mix and our product offering to make sure that we have the right products for the channels at the right price with the right packaging and marketing and messaging.
And so we continue to do that. But we are overall very pleased with how we've done over the last 12 months with our new product launch and how they're performing so far.
Owen Rickert
Great. And then if I can do one more. Going into July and August, has the retail vertical kind of stayed steady? Or has there been any changes based off of pandemic-related updates?
Joseph Dowling
So I think we saw, really at the end of Q1 2021, an improvement in B2B overall. And so that's the FDM, national product retail, specialty retail. And we've seen that continue really in spite of the headwinds that we are all well aware of, including the COVID-19 impact and competition and obviously, lack of regulatory clarity. But with that, as we have seen the economy open, we've, I think, seen good foot traffic, much better foot traffic in B2B retailers. And I think that bodes well for the future. So we're seeing that continue into July and certainly the first part of August.
Operator
Our next question comes from Scott Fortune with ROTH Capital Partners.
Scott Fortune
Just want to follow up a little bit on the new product innovation. Your gummies are obviously driving a lot of top line strength, and kind of what's the margin structure for the gummies versus other formats? And as you look into new product extensions into CBD or going into kind of the Defense, additional alternatives, supplementary dietary categories, kind of what's your pipeline for new products as you launch some of these in the second half? A little bit of color there would be great.
Joseph Dowling
Sure. Maybe I'll answer -- Scott, thank you for joining, by the way. I'll answer the question generally, and then I'll let Joerg speak to the margin component on the gummy form factor. So the focus for us for the second half of 2021 from a product development standpoint will be focused on cannabinoids. We're not intending to do anything outside of that ingredient class. It doesn't rule out doing something outside of cannabidiol or other cannabinoids as an ingredient for future product development.
And so we're always looking and sort of have our eyes and ears to the ground on what consumers are looking for, what they want and making sure that we're actively meeting those needs. And we know that for Sleep and Calm we are meeting the very, very immediate direct needs of our target customers as they're managing through a very challenging time, especially with issues like sleep and staying calm in their daily life.
I'll let Joerg talk to the gross margin question.
Joerg Grasser
Yes. Thank you, Joe. So Scott, for the last several quarters, our gross margin has been really trending in the mid-40s. And so in general, our new product launches, which we recently launched and are going -- and are planning to launch, we are -- typically, we are pricing some to be as well in the mid-40s. So that's just from a product mix perspective. Overall margin is also impacted by our sales mix and the sales mix is mostly B2B versus B2C. And as we continue to focus our efforts on the B2C channel, this obviously has a favorable impact overall on gross margins.
Scott Fortune
And then one kind of big picture question for you, Joe. Some competitors have received information back from the FDA as far as not enough safety data or such to kind of really move forward. It seems like FDA continues to drag at speed and the quickest path now to move forward is more a Congress kind of coming on board potentially to rule as a dietary supplement. Can I -- just talk us through on kind of your thoughts around what's really going to make Congress move here towards that? And any other additional color from the FDA as far as their position on -- you're lumping in THC potentially for their oversight. So it's getting a little more convoluted as far as the ruling on the CBD side, just your thoughts overall from the regulatory standpoint.
Joseph Dowling
Yes, Scott, it's a great question. And yes, we saw the FDA posted responses from yesterday to the 2 new dietary ingredient notifications that were filed by some of the other participants in our industry. Unfortunately, FDA continues to take the position that CBD found in a full spectrum hemp extract is the same article or ingredient as high dose CBD isolate found in the drug, Epidiolex. And despite evidence that they are very different substances being offered to consumers at much lower doses, this is still a very big sticking point. It's kind of the IND preclusion issue that I'm sure you're well aware of. So FDA's response is really disappointing, but we think it was very predictable. So I think you're aware that what we documented for safety of our hemp extracts was through a self-affirmed grass process, but we did not submit the data with the FDA because we just felt the current conditions were not right for a successful NDI filing. And this is because while Congress has made it clear it wants FDA to regulate CBD as a supplement, FDA has consistently responded.
And I think the rejection letters from yesterday are sort of a continuation of that. But FDA has just consistently responded by asking for help from Congress, really in the form of new authority and resources to manage CBD. When we met with FDA last year to discuss filing NDI, it was clear to us that FDA would be dragging its feet until Congress -- as you kind of focus on your question, Scott, until Congress addresses the FDA's request and the conflict with the drug version of CBD.
So it's a very complicated issue. It's not something that anybody can just snap their finger and say, hey, either Congress do something or FDA do something, there are some impediments. The challenge is that consumers will really only have sort of reliable access to safe and effective CBD when the regulatory landscape for our industry is fully resolved. And right now, it's just simply not and the regulatory pathway is really unpredictable, unfortunately.
And so while the regulatory landscape settles, it's really going to be up to companies like us and a few others that are going to advance the science to develop a mature and sustainable CBD market, and it's going to require that we invest in science, which is what the 2 companies did that submitted the NDINs. But it's an investment in science and safety testing standards, GMP compliance, not only at the federal level, but also at the state level. And so when FDA is in a position to regulate CBD, that's going to be the time when they will be ready for a successful NDIN filing.
And that's how we've always looked at it. We haven't changed our mind. Yesterday kind of confirmed that. But when they're ready, we're going to be ready to file our NDIN when it happens. And so I guess to kind of follow-on because there's a lot of related things going on in Washington, and one of them is H.R.841. And it's kind of maybe to your question, again, Scott, if FDA fails to act, what happens and we, along with some of our peers, have been working with our allies in Congress on gaining bipartisan momentum for H.R.841.
And while we're optimistic, we're not holding our breath on the success of 841. The last year has taught us to be very resilient and kind of planned for rapid change or no change maybe. So with or without FDA clarity, we're going to focus on the same things, investing in science, producing the highest quality products that consumers are looking for. But at the same time, we're going to work with other credible industry participants, and there's a handful of us to continue to put pressure on Congress and FDA, but in the meanwhile, really just focus on maintaining our lead as the science and regulatory leader in our space.
Unfortunately, it's at that point where a few of us have to continue to invest pretty heavy to advance the credibility and integrity of this category. It's a complex issue, Scott. I hope that helps.
Operator
[Operator Instructions]. Our next question comes from Gerald Pascarelli with Cowen & Company.
Harrison Vivas
This is Harrison Vivas on for Gerald today. So I guess just starting off with the obligatory new product innovation question. So I guess, can you talk a little bit about the Happy Lane launch, which is of a particular interest given its prospects to compete in the C-store channel, which has far less competition. So interested to hear some color on your discussions with retailers as well as big distributors and how that launch has been progressing?
Joseph Dowling
Yes. So I think that to start sort of the 10,000-foot sort of overview is that overall, we are seeing improvement in all B2B retail channels, including C-store. And so as it relates to Happy Lane, and I think I mentioned before on the product development question earlier that generally, we're happy with the product launches that we have put out into the market over the last 12 months. And it's so critical because, as I mentioned, 39% of our revenue in Q2 came from new products that were launched in the last 12 months, including Happy Lane.
And so what I can tell you about C-store distribution and where we stand with Happy Lane is that we have had some recent wins in the C-store channel distribution. We just have not announced it yet. One of them is with a significant C-store retailer in the Northeast. And again, we just have not announced that for a variety of reasons. We continue to develop this channel with our distributors, brokers and retailers. And we continue to be optimistic that we will have more distribution gains over the next couple of quarters to talk about. But right now, we -- that's the extent of what we've put out publicly.
Harrison Vivas
Understood. That's helpful and good to hear. So I guess kind of changing gears then, can you talk a little bit about how PlusCBD is performing relative to your internal expectations? And I know Joerg you mentioned a little bit about some initiatives being undertaken to improve consumer -- to build some brand recognition for the flagship brand. So -- just can you maybe add some -- give some more color on what's being done for PlusCBD specifically?
Joseph Dowling
So PlusCBD is clearly our flagship brand. It's been in the market since 2014. And it's widely respected, and we think one of the leading brands in the market. Creating brand awareness is always something that's top of mind for us. And it has been challenging, certainly during the pandemic lockdown to initiate and activate some of the marketing plans that we had to continue advancing brand awareness. But with that, given the resources that we're working with, we believe we've done a very good job of creating brand awareness. And it continues to be a high priority for us. We look at it by channel. And broadly, it's kind of B2B and D2C. And it's a little bit different in terms of how we approach creating and increasing brand awareness for each of those channels, but we're actually very pleased with the progress that we're making, and we're clearly one of the top brands and one of the most widely known brands in the category, and we want to improve on that.
Harrison Vivas
Okay. And if I could just slip one more in there. Can you talk a little bit about the pricing environment as you see it today? Just do you see the pricing environment as being pretty rational recently? And how are you managing your price gaps relative to the category and maybe your biggest competitors? Just any color you can provide there would be great.
Joseph Dowling
Yes. Great question. Thank you for that. We constantly monitor the market to ensure that our product pricing is competitive. Each sales channel and product line are a little different. Our focus is to make sure that our customers are getting a very good price to quality product value. For our PlusCBD product line, we reduced our retail pricing by approximately 15% one year ago during Q2 of 2020. Joerg mentioned that on his remarks. Making sure that we have the right products and the right channel for the right price is an ongoing effort.
So we think that pricing, as it relates to our product right now, is good. Is there further price compression? It's hard to say. One thing, though, is that we do see some significant discounting in the market. But we think that is really due more to numerous CBD companies trying to sell excess and possibly short-dated inventory that they just can't either sell online or get on shelf.
And so we think that's really part of the process of working through company and brand contraction and excess market inventory. And I think we're working through this. And it really is going to come back to the same thing. Quality companies like us are going to be there when these kind of market forces normalize.
Operator
Thank you. There are no further questions at this time. I'd like to turn the floor back over to Joseph Dowling for any closing remarks.
Joseph Dowling
Well, thank you, everyone, for taking the time this afternoon to join our call. We look forward to speaking again soon. Have a great day.
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