CV Sciences, Inc. (CVSI) Q3 2018 Earnings Call Transcript

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

Welcome to the CV Sciences' 2018 Third Quarter Conference Call. [Operator Instructions]. It is now my pleasure to introduce Debra Chen, Director of Client Communications at IRTH Communications. Ms. Chen, you may begin. Debra Chen Good afternoon, everyone. I would like to welcome all of you to CV Sciences' third 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 question and answer 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, believe, expect, potential, will, should, project, and other 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 that 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 certain 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 financial measures to the most comparable GAAP financial measures. This morning, November 7th, the company filed its 10-Q with the SEC and afterwards issued a press release announcing its financial results. So participants in 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 third 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 third quarter 10-Q and earnings press release and we are proud to announce another record financial quarter for the third straight quarter we achieved record revenue, gross profit, cash flow, adjusted EBITDA and net income. The momentum from the first half of 2018 has continued and we anticipate a strong finish for the remainder of the year. Through our dedication and commitment to providing the most trusted 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 channels, growing our brand relevance and recognition, developing new products, penetrating new vertical sales channels and gaining market share in 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 I mentioned earlier today we filed our third quarter 10-Q and third quarter earnings press release. Also this morning we posted our Q3, 2018 performance metrics slide deck to the Investor Relations section of our website which we encourage you to visit for access to all of this company information. Let's now turn to results for our consumer products segment. During the third 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. Sales for third quarter 2018 total $13.6 million, an increase of 143% compared to Q3, 2017 sales of $5.6 million and sequential quarterly growth of 10% compared to Q2, 2018 sales of $12.3 million. Again we achieved organic growth in all sales channels including wholesale, direct to consumer and natural product retail. GAAP net income for third quarter 2018 total $3.3 million, this is compared to GAAP net loss of $590,000 for Q3, 2017. This is the company's third consecutive profitable quarter and represents a $3.9 million improvement compared to Q3, 2017. Our gross profit for Q3, 2018 was $9.9 million, an increase of 149% compared to Q3, 2017. This represents a gross margin of 73% for the third 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, our 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 9.9 million for the nine months ended September 30, 2018 and we increased our cash position by 3.8 million during Q3, 2018. Our adjusted EBITDA for the third quarter 2018 was 4.1 million, an improvement of 3.2 million when compared to Q3, 2017. Our distribution footprint continues to expand. We increased our retail channel distribution to 293 stores as of September 30, 2018, a sequential increase of 6% compared to Q2, 2018. The company's operating performance has resulted in a stronger balance sheet. Our cash balance at September 30, 2018 was 11 million compared to 7.2 million one quarter ago at June 30, 2018 which is an increase in our cash position by 3.8 million for Q3, 2018. We are using cash efficiently. During the third quarter 2018 we fully repaid all remaining debt totaling $850,000 and our balance sheet is now debt free. Also during the third quarter we invested significantly in CBD oil raw material and we expanded our oil processing capacity. Both of these investments are in anticipation and preparing the company for the forecast demand estimated by industry analysts. Also during the third quarter CV Sciences became the first and only company to obtain grass [ph] generally recognized as safe self-affirmation on a hemp extract. We believe this is a milestone for our company and sets us apart when building consumer confidence and trust in the safety and quality of our products. In addition during the third quarter we launched a new category of plus CBD oil products, our plus CBD oil gummies this is an extension of our gold formula line which received grass self-affirmation as I just mentioned. We are very pleased with our third quarter results and believe that we have delivered solid growth in an industry that analysts estimate to be valued in the billions of dollars. We expect to continue our growth trajectory however as with many growth companies this growth will be lumpy in certain quarters due to the regulatory environment including various states that have aligned with the official FDA position on hemp CBD. We believe these regulatory issues will be resolved favourably allowing our company to continue its leadership role in this fast growing new product category. Going forward we are extremely optimistic about the growth potential for the hemp CBD product category. Industry forecasts estimate that the hemp CBD products category will exceed $2 billion in the next several years. To address this opportunity we are focused on two key areas, first we are significantly increasing the operating scale of every functional area of the company. Two, specific areas of increased scale include increased investment in raw material procurement including commitments from the 2018 crop that is currently being processed and increased investment in downstream oil processing. From our perspective this is the high value added part of the supply chain that includes are generally recognized as safe raw material. The ability to control the quality and quantity of raw material procured and processed is critical to competing in this fast growing product category. The second focus area is to increase our brand awareness, the trust and credibility of our flagships plus CBD brand is increasing every day. The credibility from our recent self-affirmed grass status has been well received by industry peers and by our customers from all sales channels. We will continue to expand our marketing, business and corporate development efforts to create even greater awareness for our plus CBD brand as well as other brands that could be developed and introduced in the future. As we look to open new markets and channels we believe that to continue our competitive lead in this product category operating scale and nationally recognized and trusted brands will be critical for success. Now a few comments on the 2018 Farm Bill, the most significant legislative matter for our industry is the 2018 Farm Bill which was passed by both the House and Senate in July 28, 2018. This legislation has strong bipartisan support increasing the likelihood of being signed into law. The impact of this bill would be significant for the hemp industry and for 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 working toward passing this important legislation. We believe this investment will pay significant dividends in the short and long term for our shareholders. 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 used in addiction. CVSI believes strongly in the potential of our drug development program for the massive unmet need of treating nicotine use and addiction a multibillion 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. And now an update on our NASDAQ listing process. We began our listing application process with Nasdaq in late July 28, 2018. As part of the process there is a regular comment and response cycle. We are currently in that cycle and will keep investors updated on any significant new development. We look forward to sharing more detailed information as we continue to grow our consumer products segment and advance the science in our drug development program. Again I encourage you to visit the Investor Relations section of our website 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.

[Operator Instructions]. Please go ahead.

As I'm reviewing the online questions it is clear that there are three main areas of questions including questions regarding the third quarter results, questions about the Farm Bill and there are a number of questions about our Nasdaq listing application. And so I am going to group questions together to be efficient and to make sure to address each of these areas. The first question theme is are you disappointed in your results this quarter in particular the growth number? And there are a number of questions kind of along this theme. I have no disappointment. I believe we had a great quarter. Let's put this in perspective for listeners that we're hoping for more. The last three quarters including this quarter we have been growing at 140%-ish to more than 200% year over year increases and with that growth we have not missed a beat operationally. This requires I think in some ways a more detailed response. So please bear with me and this relates to growth and the future market opportunity. So first, we recognize that in this new and fast growing product category obtaining as much market share as quickly as possible is imperative. As a company I can tell you our number one objective is growth. At the same time well managed profitability and cash flow is certainly a positive and we have achieved all three, growth, profitability and cash flow. I know the strong fundamentals in our industry are mostly absent. We are an exception. And also on this topic of growth I can tell you we regularly sacrifice short term profitability for long term sustainable growth and we plan to continue doing that. We are investing every day to prepare for the multibillion dollar market opportunity that everyone in this industry agrees will be here in the next few years. I mentioned in my prepared remarks that in Q3 we resumed purchasing raw materials from the 2018 hemp crop. We are doing this to support a much higher revenue number, much higher growth that we like many others anticipate in the next few years. I also mentioned in my remarks that we are investing in capital expenditures to expand our downstream oil processing which we think is the high value added part of the supply chain. Let me take a minute to explain what I just said. The supply chain starts with farming which we have no intention of owning. The reason is we believe the CapEx is too high and there is plenty of worldwide capacity that can do this cheaper while maintaining the highest quality. So we are not going to be farmers. The next step in the supply chain is to process harvested materials into hemp oil usually through a CO2 extraction process. Again this step at the necessary scale to meet the forecast demand involves high CapEx and there is currently sufficient worldwide extraction capacity. So we have no intention of investing in the extraction part of the supply chain either. So we are leveraging the existing capacity of the high capital cost steps of the supply chain farming and extraction where we are investing and this is all to support growth and we are accelerating this and we did this during Q3 or began this in Q3 is in the steps that follow farming and extraction in the supply chain which is in downstream specialty processing of hemp oil, that is where we can control the specifications and quality of raw material, the hemp oil, including our generally recognized to save our grass raw material. By the way we are the only company in this space that recognize the importance of investing in science to ensure the safety of this product category which we began with our grass studies over two years ago now, other companies are now following in our footsteps to achieve grass self-affirmation status, they just did not lead the way like we did. So back to the main question. No I'm not disappointed at all with Q3 results at all in fact we had a great quarter. We had very strong growth, we had great profitability and cash flow, we paid down all remaining debt and now have a debt free balance sheet, we invested wisely as I just detailed to achieve the scale that we know will be necessary to be a dominant company in this space as the market is ready to expand. We are growing and we are well positioned operationally to meet the forecast demand for this new product category, again I believe we had a great quarter and we look forward to continuing to lead this industry not only in our operational and financial performance but also in continuing to advance the science and the quality standards that we have led the way on for this industry. The next question or questions center around the 2018 Farm Bill and the impact on our industry but the question, do you have any thoughts on the election results and the impact on the 2018 Farm Bill? I think that democratic takeover of the House will help the 2018 Farm Bill. While there are strong GOP supporters like Congressman, Jamie Comer of Kentucky and Bob Goodlatte of Virginia and most recently Paul Ryan emerging as a strong hemp supporter. There were several in the GOP, the House GOP resisting this legislation. So I think the Democratic takeover of the House is helpful for this legislation and remember back in August, Senator McConnell took the extraordinary step of placing himself on the 2018 Farm Bill Conference Committee and that was to make sure that his Hemp Farming Act part of the bill is retained in the final version. So to summarize with any remaining House GOP resistance now in the minority and with a very strong Senate Majority Leader McConnell leading the conference I am optimistic that this legislation will pass and we will secure the full and permanent legalization of hemp and hemp products. The lame duck session begins next weekend and we are very encouraged. The last theme of questions and I'm going to make this the last question because I think most of the other questions are repetitive relates to the Nasdaq uplist and the question is, can you provide any detail on the Nasdaq uplist? As I mentioned in my prepared remarks we are currently in the comment and response cycle of the application process with Nasdaq and this is moving forward. If we had received a no response from Nasdaq we would have informed the market immediately if and when and we hope we are successful with this uplist we will inform the market immediately with that news as well. We will continue to provide updates on this process as appropriate.

So with that again I want to thank you for taking time for this call today and to our investors we appreciate your continued support. Thank you again and have a great day.

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