CV Sciences, Inc. (CVSI) Q2 2018 Earnings Call Transcript

Debra Chen - Director of Client Communications, IRTH Communications Joseph Dowling - CEO and CFO

Greetings and welcome to the CV Sciences' 2018 Second 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. As a reminder, 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' second quarter 2018 conference call. With us today is CV Sciences Chief Executive 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 risk 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 risk 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 CV Sciences 10-Q for full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This morning, August 1st, 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 the company provides a summary of the results on this call. I would like to now turn this over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling who will provide an overview of the company's business activities and developments for the second quarter of 2018. We will then open up for Q&A. Joe?

Thank you, Debra. Good afternoon, and thanks everyone for joining our call. Earlier today, we filed our second quarter 10-Q and earnings press release, and we are proud to announce record financial results for Q2 2018. For the second straight quarter, we achieved record revenue, gross profit, cash flow, and adjusted EBITDA resulting in significant net income for shareholders. The momentum from Q1 2018 has continued, and we are off to a great first-half of 2018. Through our dedication and commitment to providing the most trusted and fastest growing brand of hemp CBD products, we have achieved strong momentum in sales and brand recognition of our plus CBD product line. Our strategic priorities for 2018 include strengthening our distribution channel reach, growing our brand relevance and recognition, developing new products, penetrating new vertical sales channels and continuing to expand the market of the fastest growing product category in the nutritional supplement industry. Our drug development segment continues to execute on our plan to develop the only FDA approved drug to treat smokeless tobacco use and addiction. This treatment market has been estimated at greater than $2 billion annually and provides another important growth channel for our company. As Debra mentioned in the introduction, earlier today, we filed our second quarter 10-Q and second quarter earnings press release. Also this morning, we posted our Q2 2018 performance metrics slide deck to the investor relations section of our Web site, which we encourage you to visit for access to all of this company information. Now let's turn to results for our consumer product segment. During the second quarter of 2018, our consumer product operating segment achieved record performance across every financial and operating metric. Our plus CBD brand continues to be the number one selling hemp CBD product line in the natural products retail channel according to the data aggregator spends. In addition, we are now the number two selling brand across product categories not just CBD, for the same natural products retail channel. Sales for the second quarter 2018 totaled $12.3 million an increase of 203% compared to Q2 2017 sales of $4.1 million. And sequential quarterly growth of 53% compared to Q1 2018 sales of $8.1 million. Again, we achieved organic growth in all sales channels, wholesale, direct-to-consumer and natural product retail. GAAP net income for the second quarter 2018 totaled $3.2 million. This is compared to GAAP net loss of $992,000 for Q2 2017. This is the company's second consecutive profitable quarter and represents a $4.1 million improvement compared to Q2 2017. Our gross profit for Q2 2018 was $9.1 million, an increase of 219% compared to Q2 2017. This represents a gross margin of 73% for the second quarter 2018. We continue to demonstrate our ability to maintain strong margins while we expand sales. Other key performance indicators we track to measure our ability to generate cash flow are cash flow from operating activities and adjusted EBITDA, a non-GAAP measure that we believe is a key metric in evaluating our performance. Our cash flow from operating activities was positive $5.4 million for the six months ended June 30, 2018, and we increased our cash position by $3.3 million during Q2 2018. Our adjusted EBITDA for the second quarter 2018 was $3.8 million, an improvement of $4.1 million when compared to Q2 2017. Our distribution footprint continues to expand. We increased our retail channel distribution to 1968 stores as of June 30, 2018. A sequential increase of 11% compared to Q2 2018. The company's operating performance has resulted in a stronger balance sheet. Our cash balance at June 30, 2018 was $7.2 million compared to $3.9 million just one quarter ago at March 31, 2018, which is an increase in our cash position by $3.3 million for Q2 2018. We are using our cash efficiently. During the second quarter 2018, we fully repaid all remaining convertible debt totaling $660,000 and thereby avoided any further shareholder dilution. Our remaining debt balance is an unsecured loan totaling $850,000, which is due in May 2019. this obligation is not convertible debt and we expect to repay this debt from cash flow over the next nine months if not sooner. Going forward, we are very optimistic about the growth potential for the hemp CBD product category. Industry forecasts estimate that the hemp CBD product category will reach nearly $1.6 billion by 2021. While not providing specific guidance, we believe our strong growth will continue, including our ability to generate profitable sales and cash flow. We believe the hemp CBD product category will continue to expand and our ability to grow as the market leader is well-positioned. The first six months of 2018 have been a great start to the year for our company and we are confident in our ability to deliver a strong second-half to 2018 and believe that we can continue this growth momentum in 2019 and beyond. Now, I would like to cover some recent legislative highlights impacting our consumer product segment. The most significant current legislative matter for our industry is the 2018 farm bill which has been passed by both the House and Senate and on July 18, 2018 was sent to conference committee to resolve the differences between the two chambers' bills. This legislation has strong bipartisan support, increasing the likelihood of passing and being signed into law in 2018. The impact of this bill would be significant for the hemp industry, including farmers, processors, and companies like CV Sciences. This legislation would expand and clarify the legal framework for this important crop and its derived ingredients including cannabidiol. We will continue our strong leadership role in this legislative process through our work with the U.S. hemp roundtable and others. We believe this investment will pay significant dividends in the short and long-term for our shareholders. Now a brief update on our drug development operating segment, we continue to make steady progress on our pre-clinical program for our lead drug candidate CVSI-007, a developmental drug product combining cannabidiol and nicotine in treatment of smokeless tobacco use and addiction. CVSI believes strongly in the potential of our drug development program for the massive unmet need of treating nicotine use and addiction a multi-billion dollar market. As we have more data to present over the next several quarters, we expect to have updates on our drug development program and will provide investors with appropriate notice for such updates. Late last month, we announced that we filed our application for uplisting to NASDAQ. Our board of directors approved a reverse stock split for the sole purpose of clearing a pathway for the uplisting as key national exchanges require that a listed stock traded certain levels for acceptance. If this proposal is approved by our stockholders at the annual meeting which is being held this Saturday at our San Diego headquarters, the company will effectuate the reverse split only in connection with our application to uplist and only if necessary. We believe the overall CBD market will increase as Wall Street and investors further understand and participate more fully in this significant market opportunity. Cowen and Company states that there were roughly $6 billion in legal cannabis sales during 2016 and estimates this market will top $50 billion in legal sales by 2026. This exponential growth of the CBD industry is already attracting the attention of big banks and investors. We believe this is an extremely opportune time for our company and we intend to maintain our industry relationship position by increasing our operating scale to meet market demand in the coming years. We believe the combination of our two operating segments, consumer products and drug development have tremendous potential to create value for shareholders. In summary, some of the major positive factors to consider as we look forward to short and longer term goals. Number one, our operating and financial performance has been outstanding. Revenue is increasing, we are profitable, and have strong cash flow. Number two, these operating and financial fundamentals are important in becoming institutionally relevant. Number three, our potential listing on NASDAQ will attract a broader investment community and open capital markets for the company and its shareholders. Number four, the hemp-based CBD market is growing rapidly, and expected to increase to approximately $1.6 billion by 2021. Number five, the company has de-leveraged and fully repaid all outstanding convertible debt that could've caused shareholder dilution. Number six, the 2018 Farm Bill could significantly and positively change the landscape for our industry and company. And number seven, on our drug development segment, FDA's recent approval of Epidiolex is validation of CBD's potential in treating various medical indications which we believe could accelerate research, including for our own drug candidates, CVSI-007. We look forward to sharing more detailed information as we continue to grow our consumer product segment and advance the science in our drug development program. Again, I encourage you to visit the Investor Relations section of our Web site for further information. I would like to thank everyone for joining the call. And we look forward to providing future updates. We will now be taking online questions.

Thank you, Mr. Dowling. At this time we'll be conducting our online question-and-answer session. [Operator Instructions] I will not turn it back to Mr. Dowling to respond to your questions. Thank you.

Thank you, Diego. If you'll be patient with me I'll get to as many questions as I possibly can. And I'm reading them as I go here.

The first question is do you expect your revenue growth to continue?

I'll start with the macro conditions. Bigger investment banks and research organizations are virtually all in agreement about the growth potential of this industry. You just heard me mention Cowen's forecast for 2026 at $50 billion-plus for the entire sort of cannabis sector. And then on a more micro level the $1.6 billion forecast by 2021 for the CBD subsector, which is our market, and growing perhaps 10 times from just a year ago. So yes, we are one of the prominent companies in the CBD subsector for sure. And we believe that we will gain a significant share of this growing market, as forecast by research houses as well as Wall Street investment banks.

You mentioned the 2018 Farm Bill. What impact do you think that will have on your company?

A passage of the Farm Bill will benefit us in many ways, but the impact is really felt everywhere, not just for CV Sciences, including better defining hemp as an agricultural commodity, making sure that farmers will be able to retain water rights when growing this crop, expanding banking to farmers, it will advance research into plant genetics, growing conditions, harvesting and processing techniques, crop insurance for farmers. And this is just to name a few impactful outcomes from this legislation. These benefits, and I seem to be mentioning a lot of benefits that really start with farmers, but it flows all the way to consumers. And clarifying the legal framework by passage of the 2018 Farm Bill is an important step for our industry and certainly for our company. And so I think it will be very impactful and very beneficial to our company and to our shareholders.

So, the next question is toward the end of your prepared remarks you talked about the Epidiolex approval being positive for CV Sciences. Can you explain further?

Well, let me start with some context. Think about this for a minute. In June 2018, the FDA approved cannabidiol, CBD, one of the 80-plus chemical contained in cannabis, or marijuana if you want to think of it that way, as a prescription drug in treatment of a really very serious, very difficult to treat neurological disorder. 10 years ago no one would've said that. So in that context you have to think about the recent approval, about a month ago now, of Epidiolex. FDA commissioner, Gottlieb, on I believe on the day of approval stated very clearly that the agency, the FDA is supportive in the area of cannabis research, exactly what we are doing with our drug program. And again, 10 years ago you might not have heard that either. And now that Epidiolex is approved we're going to see more data, and it should be very soon now that the toxicology data from Epidiolex will soon become public, which will certainly help other research immensely, including ours. And so this approval has many, many beneficial outcomes for the industry, for research, for the advancement of [technical difficulty] science, whether it's safety or efficacy, but it's very, very beneficial. We think it's beneficial to our company as well.

So there's a number of questions about the company's up-list to NASDAQ. And about timing, and about where we are in the process.

And I really don't have anything to add other than what we stated in our press release and related 8-K, that we have begun the process. We have engaged with NASDAQ and we are going through the application process. And as more information is available we will certainly make that information public as appropriate.

So there's again a number of questions about -- I see that you have expanded into a new facility. And the questions, and there are several of them are, will your new facility be able to handle your current growth?

And as I mentioned in my prepared remarks, we are continuing to invest in increasing our scale throughout our organization in every functional area, including sales, marketing, manufacturing, our own internal production, and in every other area of the company as well. We take very seriously this opportunity stated by various research organizations about this growing market, and that, by 2021, we could be a $1.6 billion industry. And we are poised and positioning ourselves by increasing our operating scale to take advantage of that, and make sure that we maintain our leadership position.

A lot of the other questions are very similar to the questions that I just mentioned. There's several questions about our drug development process.

And we're not in a position to provide any further information than what we have done so far. But we are making progress on our preclinical program. And for those that have experience in this area, it is a very thoughtful process. And we are going through that process very carefully. We will provide updates as appropriate. So I would say most of the other questions are very similar to the basic questions that I've just answered. And so I think, to be thoughtful about everyone's time, I will conclude the call with that last response. And again, I want to thank you for participating in our call. Diego?

Thank you, sir. This concludes today's webcast. All parties may disconnect. Have a great day.