CV Sciences achieves first positive adjusted EBITDA since 2019, driven by cost efficiency and product diversification as it navigates regulatory challenges.

OPERATOR - (00:01:09)

Greetings and welcome to the CV Sciences second quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press Star0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brendan Hawkins. You may begin.

Brendan Hawkins - Moderator - (00:01:41)

Thank you and good afternoon everyone. With us today with prepared remarks are CV Sciences Chief Executive Officer Joseph Dowling and CV Sciences Chief Financial Officer Jorg Grasser. After the 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, 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 in 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 this afternoon for a full reconciliation of its non GAAP performance measures to the most comparable GAAP financial measures. As I just mentioned, 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 - Chief Executive Officer - (00:03:26)

Good afternoon everyone. Thank you for joining our call. This afternoon we issued a press release reporting results for our second quarter ended June 30, 2025. We are pleased with our progress as our cost efficiency efforts continue to move us closer to profitability and positive cash flow. Significant financial highlights during Q2 included we generated revenue of 3.6 million, which is consistent with our Q1 2025 revenue of the same amount. Our Q2 gross margin of 50.9% is a significant improvement when compared to our Q1 2025 gross margin of 46%. Our Q2 gross margin is our highest since 2019. 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 Q2, we continued our efforts to grow our revenue base through a more fully diversified product offering which will include more non cannabinoid products. We are launching several new non cannabinoid products in late 2025. We are also looking for revenue growth through our M&A strategy and are beginning to realize some of the early benefit from our acquisition of elevated softgels, especially with in source manufacturing of many of our products previously produced by contract manufacturers. Next, I want to reemphasize the goals of our M and A strategy which are primarily to increase our scale leading to greater revenue, but also to increase our cost efficiency. We are looking for opportunities to increase revenue profitably with transactions that can leverage our operating platform, brands and distribution. We are also looking at transactions that can increase our cost efficiency, including assets that allow us to further insource 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 our supply chain. Our most recent transaction of elevated softgels provides us with an immediate opportunity to insource manufacturing of a significant number of our products. We are already realizing efficiency gains and expect to see even greater cost efficiency and gross margin improvement in the second half of 2025 directly from the integration of elevated softgels. We are also expanding the 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 the first half of 2025 with the US launch of Lunar Fox, an all new line of plant based foods offering 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 health conscious products. Lunar Fox products are now available at select retailers and from the company's new website@lunarfoxfoods.com Next on New Product Development we are adapting our innovation and new product development in several ways. First, we will continue to develop new cannabinoid products under the changing regulatory environment, but new cannabinoid products will include exciting new formats and formulations. A recent example is the launch of our new effervescent tablet format launched in the first half of 2025 under our Aura collection. This exciting new fizz tablet format can be added to water or seltzer, allowing 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 planning 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 need states. We will work 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 customer demand, but will also mitigate some of the regulatory challenges to the hemp industry. We remain optimistic on the US Hemp and CBD category and believe that the US CBD market is still a large market segment that will benefit from further contraction and consolidation. The Brightfield Group updated estimates for the CBD market in 2024 which was approximately 3 billion in sales with the potential to grow to approximately 4 billion by 2030. So it's still a very significant category. Just a few years ago Brightfield estimated that more than 3,000 CBD companies were operating in the US and today that number has been cut in half in just a few years. We believe that further market contraction represents an opportunity for CB Sciences to take market share from smaller CBD companies as the market shrinks the number of competing brands now moving on. Other Objectives achieved during Q2 and the first half of 2025 include our efficiency efforts have reduced our overall company cost structure with efficiency gains and cash savings. Numerous areas including SG&A. Our much improved gross margin of 50.9% in Q2 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 and 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 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 they know and Trust. Our B2C sales channel continues with steady improvement with modest advertising spend. We are seeing good results in all critical B2C KPIs and believe that with increased ad spend in the future we can begin to further leverage our operating platform to increase our B2C revenue. 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, Numerous states have passed legislation that are challenging to the CBD category. We will continue 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 3, which recently has new momentum and could be consequential. There are numerous benefits that could be realized from rescheduling, including less stigma which is a big deal. Also, rescheduling could be a catalyst to facilitate change and more sensible legislation at the state level and rescheduling could be the push that Congress needs to pass other much needed legislation including safe banking. All 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. However, we recognize the regulatory challenge and we 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 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 and a strategy to acquire assets that add revenue, increase our scale and provide operational leverage and efficiency. We will continue to evaluate inbound and outbound M and A opportunities that support our strategic plan of achieving these goals. We are making good progress as shown by our Q2 2025 results. Let me pause now and I will turn the call over to Jorg.

Jorg Grasser - (00:15:49)

Thank you Joe. During the second quarter 2025, we continued to make solid improvements on our cost savings initiatives. As Joe mentioned earlier, we generated positive adjusted EBITDA of US$59,000. This was our first positive adjusted EBITDA since the second quarter of 2019. In addition, we recorded our best gross margin of 50.9% since the third quarter of 2019. Over the last several quarters we have right sized 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 second quarter revenue came in at $3.6 million, a slight increase on a sequential basis and compared to 4.0 million in the second quarter of 2024. The year over year revenue decline is mostly due to lower unit sales by 7% in the second quarter of 2025 compared to the second quarter of 2024. Our lower unit sales are mostly driven by increased state regulations. Our new product development continues 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 39% of our revenue for the second quarter 2025 which shows the importance of new product innovation. The overall CBD market continues to be fragmented and very 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 and revenue base. Our direct to consumer business continues to perform well and Associated sales represented 41.6% of total revenue in the second quarter 2025 compared to 44% a year earlier and 44.8% in the first quarter of 2025. On a sequential basis. Our B2C revenues declined by 7% mostly due to reduced traffic to our site. Gross margin for the second quarter of 2025 was 50.9%, a nice increase from our gross margin of 46% in the first quarter of 2025 and compared to 47% for the second quarter of 2024. Our sequential improvement in gross margin in the second quarter of 2025 compared to the first quarter of 2025 is mostly due to reduced inventory losses, additional cost savings and changes in our product mix. We are also working on further cost efficiencies, especially on insourcing some of our key products. As Joe mentioned, we made very good progress on the insourcing of our softgel and tincture 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. SGA expense for the second quarter was 1.9 million down from 2.4 million a year ago representing a decrease of 20%. SGA expense also decreased on a sequential basis by 10% from 2.1 million in the first quarter of 2025. The decrease in SGA expense is mostly due to lower professional and legal FEES. For the second quarter 2025 we generated an operating loss of 0.1 million compared to an operating loss of 0.6 million compared to for the second quarter of 2024 and an operating income of 11,000 in the first quarter of 2025. The improvement on a year over year basis was mostly due to lower professional and legal fees. The changes on a sequential basis was mostly impacted by the benefit of the reversal of accrued payroll taxes for a previous RSU release of 0.5 million in the first quarter of 2025. Our positive adjusted EBITDA for the second quarter was $59,000, significantly improved from an adjusted EBITDA loss of 0.3 million in the first quarter of 2025 and an adjusted EBITDA loss of $6,000 in the second quarter of 2024. On a GAAP basis, we reported a second quarter 2025 net loss of 0.3 million compared to a net loss of 0.6 million in the second quarter of 2024 and 0.1 million in the first quarter of 2025. Now let me turn to our balance sheet. We ended the second quarter of 2025 with 0.9 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 with Streeterville and recognized the gain on early debt extinguishment of $37,500. During the second quarter 2025, we generated positive cash from operating activities of $0.3 million, significantly improved from cash used in operations of 0.1 million in the second quarter of 2024 and the first quarter of 2025. 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 4.2 million at the end of the second quarter of 2025 compared to 4.9 million at the 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 in a finished product. We have fully consolidated the results of cultured foods and elevated soft shells into our financials and we anticipate realizing associated synergies of these 2 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 will turn the call back over to Joe.

Joseph Dowling - Chief Executive Officer - (00:24:17)

Jorg. Thank you. We continue to be in a difficult regulatory environment. However, as shown by our Q2 financial performance, we are making progress to adapt our business model to the scale of the CBD industry and we are taking active steps to position the company for profitable growth. We will continue our aggressive product development to increase revenue through both cannabinoid and non cannabinoid products that will diversify our product offering and allow for new revenue and increase distribution. Also, we are continuing the process of insource manufacturing of many of our products. Even with the strong Gross margin during Q2, we are looking for additional improvement during the second half of 2025 through further insource manufacturing. This will lead to even greater cost efficiency and profitability. Our M&A strategy will continue and 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 M and A opportunities to further insource 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 a 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 are making good progress. Our team of employees are focused on making innovative products that meet the needs of our customers at good value. Now I will turn the call back over to the operator for any calls from the analyst community.

OPERATOR - (00:26:44)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two 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 while we poll for questions. There are no additional questions at this time. This now concludes our question and answer session. I would now like to turn the floor back over to management for closing comments.

Joseph Dowling - Chief Executive Officer - (00:27:24)

Thank you. 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. Have a great day.

OPERATOR - (00:27:45)

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.