CV Sciences, Inc. (CVSI) Q3 2017 Earnings Call Transcript

Debra Chen – Director-Client Communications-IRTH Communications Joseph Dowling – Chief Financial Officer

Greetings and welcome to CV Sciences’ 2017 Third Quarter Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Remind you that this conference is being recorded. It is now my pleasure to introduce Debra Chen, Director of Client Communications at IRTH Communications. Ms. Chen you may begin.

Good afternoon everyone. I would like to welcome all of you to CV Sciences’ third quarter 2017 conference call. With us today is CV Sciences Chief Financial Officer, Joseph Dowling. Before I turn the call over to management, I would like to remind you that in this call management’s prepared remarks contain forward-looking statements which are subject to risk and uncertainties. And management may make additional forward-looking statements during the Q&A Session. These forward-looking statements are subject to risks and uncertainties, and actual results might differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to CV Sciences, are, as such, a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by CV Sciences at this time. In addition, other risks are more fully described in CV Sciences public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov. 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 Social Reality's 2017 10-Q for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This morning, the company filed its 10-Q with the SEC and afterwards issued a press release announcing its financial results. So participants on this call, who may not have already done so, may wish to look at those documents as we provide a summary of the results on the call. I would like to now turn this over to CV Sciences’ CFO, Chief Financial Officer, Joseph Dowling who will give you an overview of the Company's business activities and developments for the third quarter of 2017. We will then open up for Q&A. Joseph?

Thank you, Deborah. And good afternoon and thanks everyone for joining us. I will make some opening remarks and then I'll talk more specifically about each of our operating segments. Today we are proud to announce a very strong financial result for our fiscal third quarter, with record revenue, gross profit and cash flow. Our primary metrics for evaluating our operating performance. This quarter we saw the beginning stage and realization of several years of investment in supply chain, product development, systems, marketing, education, sales, distribution, fulfillment, investment in research and development, but mostly investment in our customers and our employees. As a company we have developed and pioneered a new product category of hemp-based nutritional products that we believe have significant potential, certainly here in the United States, but also worldwide. We are first and foremost a life science company dedicated to the advancement of science, health and wellbeing, and education, and safety for our customers and [indiscernible] in both our consumer product and drug development operating segments. Next I would like to focus on consumer product operating segment. Our consumer product operating segment achieved record operating performance in every metric for our fiscal third quarter of 2017. Starting with sales for the third quarter of nearly $5.6 million, an increase of 90% compared to the third quarter of 2016, and a 37% increase over the second quarter of 2017, just one quarter ago. We achieve growth in all sales channels, including our wholesale, direct to consumer and natural product retail channels. Our distribution in the natural product retail channel now includes more than 1,400 locations nationwide. We track our revenue progress using several data sources, including information from SPINS® Scan data, which is the leading provider of data analytics reporting for the natural, organic and specialty products industry. The data from SPINS® is collected directly from retailer cash registers and is reported every four weeks. During the most recent reporting period, CV Sciences’ branded products are the number one selling hemp CBD products in the natural products industry by a wide margin. Our gross profit for the third quarter was nearly $4 million, an increase of 112%, compared to the third quarter of 2016 and a 41% increase compared to the second quarter of 2017. This represents a gross margin of 71.5% for the quarter, demonstrating our ability to expand sales, while maintaining strong margins. Adjusted EBITDA of $875,000 for the third quarter in 2017 was also a record for the company. The company has generated cash from operating activities in every quarter during 2017 for the nine months ended September 30, 2017; we generated cash of approximately $647,000 from operating activities. Our positive adjusted EBITDA and cash generated from operating activities indicate that we are effectively leveraging our several years’ investment in supply chain and company infrastructure. Going forward, we believe that all sales channels have the potential to increase significantly. We are in process of developing new sales channels that we believe provide significant revenue opportunity for the company. In summary, we are very optimistic about the potential of our consumer product operating segment and are confident that our best days are ahead. Now I'd like to turn to our drug development operating segment. We continue to make steady progress on our preclinical program for our late drug candidate, CVSI-007 a developmental drug product combining cannabidiol, CBD and nicotine in treatment of smokeless tobacco use and addiction. We have previously reported a development timeline that includes completion of our pre-clinical work in the first half of 2018. And we are on schedule with that timeline. We also expect to file an IND investigational new drug application sometime in early Q3 of 2018. There are currently no FDA-approved drugs indicated for treatment of smokeless tobacco use and addiction. We believe this huge unmet need represents a multi-billion dollar market and could bring much needed patient care to millions. We believe the combination of our two operating segments, consumer products and drug development, have tremendous potential to create value for shareholders. And we look forward to sharing more detailed information as we continue to grow and advance our science. I will now present a few slides. First Safe Harbor and Disclaimer and non-GAAP financial measures. First I’ll speak to our consumer products division. I mentioned in my remarks that as of the end of Q3 2017 our distribution in the natural product retail channel now includes more than 1,400 locations nationwide as shown in the chart on the screen. We fully expect the trend line to continue as we expand the natural product retail channel. We are also pursuing other retail channels, providing significant opportunity for future growth. The next slide presents comparative summary operating results for Q3 2017 compared to the same quarter for the prior year. Sales in gross margin of approximately $5.6 million and $4 million respectively achieved 90% and a 112% increases when compared to the same period in 2016. In my remarks I also mentioned that Q3 2017 sales in gross margin when compared with Q3 2017 just one quarter ago increased by 37%, and 41% respectively. Our gross margin for Q3 2017 at 71.5% is a significant increase over the 64.3% gross margin for Q3 2016. The next slide is the same presentation as the last slide except for now we are presenting for the nine months ended September 30, 2017 and 2016. Again we see the significant increases from 2017 when compared to 2016 with a 71% increase in sales and a 79% increase in gross margin, comparing year-over-year. On this slide we chart our revenue by quarter from the beginning of 2016. As reported today you can see the significant increase in Q3 2017, compared to the trend in prior quarters. We are optimistic about our ability to continue this trend line. Similarly, on the next slide we chart gross margin by quarter from the beginning of 2016. Again you can see the huge increase in Q3 2017 as reported today. On the next slide we chart cash provided by operating activities, which is a GAAP measure and can be found on our statement of cash flows. Again we present information from the beginning of 2016. You can see that 2016 was a year where our investment in operating infrastructure and working capital actually used cash represented by the red bars. However, as mentioned in my remarks, we have generated cash from operating activities in every quarter during 2017, as indicated on this chart in the green bars. We see this as the company affectively leveraging our several years’ investment which is now resulting in positive cash flow. SPINS® is the leading provider of analytics reporting for the natural, organic and specialty products industry. This slide shows what I mentioned earlier regarding our company's ranking by SPINS®. According to SPINS®, we are the number one selling hemp CBD product. And if you look at the entire food supplement category in the natural products sales channel, we are the number five company overall according to SPINS® data. Obviously we are very proud of this achievement having been instrumental in creating this new product category. Just a couple more slides and then we'll have Q&A. A few brief comments on our drug development operating segment. This slide provides a bullet point summary of our drug development program for CVSI-007, our lead drug candidate. Our development program is a combination therapy utilizing cannabidiol and nicotine for the medical indication of treating smokeless tobacco use and addition. We have patent pending technology and we fully expect this will be developed under 505(b)(2) and accelerated approval pathway under the Federal Food, Drug, and Cosmetic Act. The next slide speaks of the current treatment market for smokeless tobacco use and addiction. There is currently no FDA approved drug to treat this indication. There are two drugs, Chantix and Zyban, to treat smoking addiction which could theoretically be prescribe off label for smokeless tobacco use and addiction. Both of these drugs until recently have black box warnings, the strictest packaging requirement by the FDA when the product poses serious or a life-threatening health risks. This highlights the huge unmet need to help patients that are seeking de-addiction from smokeless tobacco use. This is a multibillion dollar treatment market as the chart on the right side of the slide indicates. On this last slide, we provide a summary of our upcoming drug development milestones over the next several quarters. We expect to complete preclinical studies in the first half of 2018. We anticipate filing an IND investigational new drug application sometime in Q3 2018 and we anticipate commencing human trials in late 2018. We expect to provide updates as they are available over the next several quarters on our drug development program. That concludes the slide presentation. And I will review the question and see if I can respond. A - Joseph Dowling: So I'm going to I'm going to try to read the question and paraphrase it so that it makes sense.

The first question is, where is your projection for CVSI stock in the next two years?

And I can't respond to that only – but I can only say that we are extremely optimistic about both of our operating segments, the consumer products segment and the drug development operating segment. We think both of those segments offer tremendous value creation potential for shareholders of the company. Internally we have just a lot of optimism about where we are going with both segments. There's several questions about it appears as though our stock is quite cheap, relative to the value, the underlying value that appears to be created by both of our operating segments. And I would agree. And what I can say is that at the company level, we are focused on day to day operations. Obviously we're out telling the story. We believe in our story and in our ability to execute on both the consumer side, as well as the drug development side and we're confident that by continuing to focus on day to day operations and the science related to our drug development program that eventually the market will catch up to where we should be and the value that we believe that we're creating.

There's questions about third quarter revenue and other financial metrics. And do I believe that is sustainable and that trend lines will continue?

And my response is similar to what I said during the presentation, which is we are extremely darned optimistic about our ability to expand revenues on the consumer product side. And on the drug development side we are incredibly enthused about the potential for our drug candidate as we described in the presentation.

There's really no other question that is a duplicate of what I've just gone over. And so that I believe concludes the questions for the Q&A. And so I will turn the call over to the moderator. Please.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.