CV Sciences, Inc. (CVSI) Q1 2019 Earnings Call Transcript

Greetings and welcome to the CV Sciences' First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode and this conference is being recorded. With us today with prepared remarks is CV Sciences' Chief Executive Officer, Joseph Dowling; and Joerg Grasser, Chief Financial Officer. Following the formal presentation, management will take questions from the analyst community. Before I turn the call over to management, I would like to remind you that during this call management's prepared remarks may 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 may 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 such forward-looking statements. Investors are cautioned that all forward-looking statements involve risk and uncertainties that may cause actual results to differ materially 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, on this call today management will refer to non-GAAP financial measures which CV Sciences’ excludes certain expenses from its GAAP financial results. Please refer to CV Sciences’ press release and 10-Q from earlier today for a full reconciliation of non-GAAP performance measures to the most comparable GAAP financial measures. This afternoon, May 8, the Company filed its 10-Q with the SEC and issued a press release announcing its financial results. 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 now like to turn the conference over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling, who will provide an overview of the Company's business activities and the developments and then run through the financials for the first quarter of 2019. Following these remarks, we will open up for questions and answers at the end of the conference. Thank you. You may begin.

Thank you very much. Good afternoon, everyone, and thank you for joining our call today. It is my pleasure to have Joerg Grasser, our recently appointed Chief Financial Officer with me today. Joerg joined the Company in December, 2018 as our Chief Accounting Officer coming from a background of more than 20 years of experience and an extensive background in accounting, finance, financial reporting and operations. Prior to joining CV Sciences, he most recently served as Controller of Ballast Point Brewing, a subsidiary of Constellation Brands. During the last few months, he's been an invaluable member of our team and was the clear choice to fill this role. With that, let me take a minute to run through highlights of the quarter and then I will let Joerg run through our financials. I will finish off our prepared remarks with comments on our business developments before opening the line for Q&A. The first quarter was a milestone for CV Sciences as we shipped our first order to the national drug retailer, CVS, marking the beginning of what we believe will be broad expansion of CBD products across national food, drug and mass merchandiser accounts. We initially did not disclose the name of this large new account under agreement with the customer, but have since been given permission to discuss publicly. Currently, our PlusCBD Balm is available in stores across about a half a dozen states. In total, we added over 1,000 new retail doors during the first quarter alone and generated 85% revenue growth to a record $14.9 million with good gross margin performance and positive cash flow. Our PlusCBD brand continues to be the number one selling hemp-based CBD product line in the natural products retail channel according to the data aggregator SPINS. In addition, we are currently conducting pilot programs with several other large FDM retailers and look forward to providing an update on these partnerships at an appropriate time. The first quarter growth both year-over-year and sequentially was achieved despite the anticipated short-term disruption in three or four states that we discussed last quarter. On our 2018 earnings call, we communicated on pressure placed on retailers from state level public health departments who have issued cautionary comments or policy statements on hemp-based CBD accessibility. The state-by-state differences are the result of being in a period of state level oversight with differing CBD regulations as the industry awaits the regulatory process to play out at the FDA. California has been a particularly difficult state due to aggressive action by the Department of Public Health. However, there are some very positive state legislative efforts including in California that will be extremely beneficial and provide clarity to the hemp industry. An example of this is Assembly Bill 228 in California. This legislation has passed through two legislative committees with unanimous support and is widely expected to pass as early as July 1. The bill would allow the inclusion of industrial hemp or cannabinoids extracts and derivatives in food, beverages or cosmetics. California is an extremely important market with a population of 40 million people and this legislation is timely and critical as we expand our industry and this product category. We know that Governor Newsom is a true forward thinker who champion cannabis legislation in California and we look forward to working with his administration just as we have done in other states to allow the hemp industry and hemp-based CBD products to continue to prosper. Now, let me turn it over to Joerg to run through our financials.

Thank you, Joe, and good afternoon everyone. I'm honored to speak with you today. I'm very excited about my new role and look forward to starting a dialogue with all of you in the future. During the first quarter, we generated 85% revenue growth to $14.9 million compared to $8.1 million in Q1 2018. This growth was driven by rising consumer interest in and demand for hemp-based CBD, new product launches, and further expansion of our retail distribution footprint. We ended the first quarter with PlusCBD Oil branded products sold in 3,308 retail stores nationwide, a 45% increase from the end of the fourth quarter of 2018. Rising consumer demand and growth across each of our distribution channels contributed to our strong revenue growth during the first quarter. However, please note that initial shipments to our largest new account came near the end of the quarter and did not contribute significantly to our first quarter net revenue. Our strong year-over-year revenue growth translated into a 90% increase in gross profit and 190 basis point increase in gross margin to 70.8% of net revenue in Q1 2019 compared to 68.9% in Q1 2018. In the first quarter, we generated adjusted EBITDA of $1.7 million compared to $1.8 million in the first quarter of 2018. The modest decline reflects the investments we have made an additional management resources and business systems to support our continued growth. On a GAAP basis, for the first quarter of 2019, we reported a net loss of $9.4 million or $0.10 per share compared to net income of $0.6 million or $0.01 per fully diluted share in the first quarter of 2018. So net loss in the current period included $7.9 million of non-cash stock compensation expense and $0.9 million of payroll expense both associated with the retirement of our Founder as well as $2.1 million of additional non-cash stock compensation expense. Adjusted net income for the first quarter of 2019 excluded these expenses I mentioned was $1.5 million or $0.01 per fully diluted share. This compares to adjusted net income in the prior period of $1.7 million or $0.02 per fully diluted share. Our operations and organic growth have continued to strengthen our balance sheet as we ended the first quarter of 2019 with $13.6 million of cash. We generated $0.8 million of cash from operations during the first quarter of 2019 and increased our cash balance by $1 million. Inventory at the end of the first quarter amounted to $8.7 million slightly up from $8.6 million at year-end. Inventories are continuing to be scaled up to meet market demand. Now I'll turn the call back over to Joe to discuss business development.

Thank you, Joerg. Our business development activities remain robust. As we noted last quarter, the passage of the 2018 Farm Bill has significantly expanded retailer interest across new channels of distribution, which materialized into new distribution in the first quarter. We are currently in conversations with multiple additional national retailers and in some cases in pilot programs with retailers. We expect to see additional new distribution wins over the coming months. Our history in the category, our production capabilities, product quality and science are resonating with retailers. We are also developing new products to support our retail growth including additional topical as we have seen the greatest near-term retailer acceptance of topical products. Our Balm is already our second bestselling skew and we see opportunities to expand this area of our portfolio. For example, we are currently testing a Roll On product and it has received favorable response from retailers. To support our growth, we are making progress on our 2019 initiatives including the implementation and deployment of efficiency and automation resources including salesforce to enhance all of our sales and marketing initiatives and support our e-commerce expansion. In addition, we are also well into the planning phase for an expansion of our manufacturing and fulfillment capabilities to support our growth needs beyond 2019. With the passage of the 2018 Farm Bill, we have also worked diligently to secure domestic sources for 100% of our raw material needs. This transition from European to domestic sources is in support of planned growth in 2019 and beyond. Our goal is to position the company to be the industry leader and these investments are in support of opening new, larger retail markets. Let me also note that we are proud and committed to providing our PlusCBD products to researchers for use in clinical studies. One recent small study published in the Journal of Alternative and complimentary medicine in April; examine the clinical benefit of CBD for patients with post traumatic stress disorder. With the evolving regulatory environment for hemp-based CBD, we believe additional research is an invaluable component of long-term market growth. Now a brief update on our drug development operating segment. Our preclinical program for our lead drug candidates, CVSI-007 combining cannabidiol and nicotine in treatment of smokeless tobacco use in addiction continues to make progress. We believe strongly and the potential of our drug development program and the multibillion dollar opportunity of addressing the huge unmet need of treating smokeless tobacco use and addiction. We anticipate that we will be presenting in Q3 and Q4 of 2019 both initial results from our preclinical studies and discussion on our clinical strategy. We will keep you posted on the timing of those announcements. Finally, I want to provide a brief update on our efforts for NASDAQ uplisting. We initially announced our application for uplisting in July, 2018 and I know this continues to be a focus of investors. We have supplied all the necessary documentation and answers to NASDAQ asked of us to-date and will continue to respond to any additional questions as the review process continues. We recently met with NASDAQ representatives and remain positive on the outlook. We look forward to updating you further in the future. To close, let me reiterate our confidence in our business, our optimism about the current environment and demand for hemp-based CBD products and our commitment to driving growth, maintaining high standards and shareholder value. With that, I would like to turn the call over to the operator for questions from the analysts. Operator?

Great. Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is Mike Grondahl from Northland Capital Markets. Please go ahead.

Yes. Thanks guys. Congratulations on the progress. You talked and mentioned that you're in discussions with multiple retailers and you also said that you're currently in a number of pilots. Could you kind of give us the sense is that a couple, is it several, just maybe a range for each one of how many exactly?

Hi, Mike. Thank you for the question. This is Joe. And Joerg and I are pleased to be on the call with everyone. Thank you for joining. I think we've mentioned in the past that you can assume that we're talking to nearly every major FDM retailer. And I know that that sounds broad and comprehensive, but with CVS getting in so quickly, those that may not have been as active became much more active as a result of CVS being the first mover. It's hard to provide exact numbers either on the number of pilot studies that we're doing or how many stores for each of those that might be involved. I think what I've said is that you can assume that we're talking to everybody and what we're comfortable saying now rather than providing specific guidance Mike is that, we do have several pilot programs that are underway. And in my prepared remarks, I indicated that we expect to have more significant wins even during the second quarter that we're hopefully going to be able to report on shortly. And so I'm not dodging the question, but I want to be careful about not misleading anybody. But I can say generally that we're making a lot of progress on a lot of fronts.

Great. Well it definitely sounds like more than a couple for the number of retailers you're talking to and the number of pilots. So that’s good. Is the convenience store channel, is that a end market you're talking to?

Yes, it is. We think it's a significant opportunity and we're pursuing it aggressively. It’s depending on how you think about that total addressable market and the number of stores in that channel. It could be as high as a couple hundred thousand depending on how you count the number of stores. So it is a very significant market. The merchandising and the price points are a little bit different than they are for FDM or the natural products retail channel, but it's still a very significant market and we're excited about that as an opportunity.

Great. And then you do say in the release too, you're making some investments across the organization. What two areas are you maybe spending the most on to kind of support future growth?

So the two easiest ones and the two most significant ones I think will make sense to everybody. We've significantly increased our headcount from one-year ago today. At the end of the first quarter in 2018, we had 54 full-time equivalent employees. Today, we have 108 at the end of March 31, 2019. So that is a 100% increase. Some of that is just staying up to pace with the revenue growth, but a lot of it is investment, especially in some senior management positions, including Joerg Grasser to really position the company for future growth. So I would say, personnel is one big area, Mike, and the other big area is that we are making a significant investment in marketing across all types of marketing, whether it's social media, SEO, more conventional print advertising and so on. One other area besides marketing and headcount would be R&D. We are again making investments in R&D, in product development, process development as well as in our pharmaceutical side that again, we believe positions the company for strong future growth. And so those would be the major areas of investment today that we expect to get very good returns on down the road.

Got it. I'll jump back in the queue. Thank you, guys.

Okay.

Our next question here is from Scott Fortune from ROTH Capital Partners. Please go ahead.

Good afternoon. Thank you. Good quarter guys. Real quick on the retail distribution, over 3,000 stores, how many of that is coming now that you mentioned CVS and how do you expect kind of the rollout from CVS side of things from a regional to a national level to continue throughout the rest of the year here?

So CVS is approximately 800 stores and we're part of the discussion on their rollout strategy, but they don't share the entire strategy, Scott. We're working with them very closely, I can say that. I think there is a desire to expand it beyond the initial launch. And I think there's a desire to expand it beyond the initial vertical product types that they're including in the initial offering. So we're excited about that relationship. We think it's only going to increase and be a good thing not only for the industry, but for our company.

So real quick for clarification, 800 stores is included into that 3,308 stores at the end of the quarter?

Yes.

Okay. And then as far as the product, what number of SKUs and products, you said balms on the topical side are you looking at, and what are kind of the retailers would you have in pilot programs focused on from a product standpoint? Seems like the topicals have a lot of strength and we're waiting for, and we'll get into the FDA clarity to move forward with the other product offerings. Can you step through kind of the products right now on the retail side?

Sure. Yes. That's a great question. You're absolutely right. I think that a large food, drug and mass merchandise retailers are starting with topicals. To my knowledge, I haven't seen any large retailer that has included other than topicals in the initial launch. And so I think you're going to continue to see that. So from our standpoint, we've included two SKUs and sort of an Extra Strength and a Regular Strength Balm in the CVS initial launch. As I mentioned in my prepared remarks, we have under development and ready for launch a new role on topical product, which we've had very favorable retailer response to and we're hoping that we can get great shelf placement with that product whether it's at CVS or other FDM retailers as those are launched.

Okay. One more follow-up on the retail side. What are you hearing when you're talking to these large accounts? Is it the critical points or issues that separate you guys, whether it's supply, whether it's GRAS or toxicology statements as far as due diligence, what are they really looking for and how are you guys positioned to kind of meet their needs versus competitors?

So I think it's all the things that you mentioned, Scott, from the retailer standpoint that they are very interested in. Clearly, there's a lot of trust in our brand since we really, sort of started the retail side of this product category. The fact that we are the only company and having initiated the safety studies, and achieve GRAS status, and had the foresight and the experience to do that resonates very well with these big retailers. They understand that issue very well, especially the drug retailers that are, remember, running a pharmacy on top of a retail store. So they understand the importance of the safety data related to our product, perhaps better than some of the other retailers. So those things are resonating very, very well. And brand awareness, I think that consumers and just kind of moving from the retailer to the consumer side, a lot of the same qualities are important to consumers as they start to better understand product differentiation, the companies behind the products and the quality behind the products as well.

Okay. Then moving on to the FDA, you mentioned in your comments, you think a lot of retailers they're holding off to a little more FDA clear clarity. What are you hearing from them? I know you've guys have talked about kind of the genetics of the seeds of the origin, pure food, fiber, genetic strain. What's your sense as the FDA as a carve out this, pathway for CBD, the retail side in the food and beverage dietary supplement and does, and I'll follow-up on that as California's laws, Trump the federal laws as far as paying CBD into food and beverages going forward?

We’re going – several questions there. Let me let me try to take them in some order. First, we're very excited about the public hearings on May 31 that the FDA is holding. And in fact we have a presentation and speaking slot that will be covered by our Dr. Duffy MacKay our Senior Vice President of Scientific and Regulatory Affairs. And we have had a fair amount of interaction with FDA and with USDA. And kind of to your observation or comment, we do think that there will be swim lanes that will be established. And right now we're kind of in a period where those swim lanes are blurred, where the only guidance is from the Farm Bill. I think that will change significantly and I think it will start and as you mentioned with some guidance from not guidance, but a regulatory framework that we'll start with USDA and the genetic, seed certification that we think is likely to be put in place. I think there's President for that in Canada as well as Europe. And I don't think USDA will try to break new ground. I think they'll look elsewhere where there have been very similar programs in place for quite a while. As far as California, I would say it's the other way around that California Department of Public Health, primarily looks to the Fed to try to understand, how to proceed. And as with a lot of other states, there's been some confusion and ambiguity and there's some incredible irony. California was the first State to legalize Medical Marijuana, yet there's confusion within the California Department of Public Health in terms of the enforcement of CBD products, so that is kind an interesting irony of consumer products that are available. I think that will get ironed out quickly in the State of California with Assembly Bill 228, which as I mentioned in my prepared remarks, has already gone through two legislative committees with unanimous support. And there's some discussion that it has a possibility of being enacted as early as July 1. So I think that would harmonize California law with – I think a lot of the discussion at the federal level in terms of the swim lanes that we think are going to be establish to really allow this product category to be realized.

Okay. Thank you. And last question, just kind of a quarter-over-quarter growth is can be an averaging 5%, obviously added the second quarter last year. Is there some seasonality to this kind of how do you look at the year going forward, obviously with large accounts coming on board that will potentially change it. But what's your sense of the 5% quarter-over-quarter growth in the last couple of quarters here?

Yes, so we pretty consistently said that – and this is in response to – are you planning to provide guidance that it's very hard to do that because we expect the future quarters to be very choppy and choppy upward. We fully expect that we're going to be able to continue to achieve sequential quarterly growth. I can tell you that sort of internally our goal and this isn't guidance, but internally our goal is to get to a quarterly run rate kind of – on an annualized basis of $100 million as quickly as we can and we're positioning the company for that and beyond as we speak. And so we think that with the expected wins as I mentioned in the prepared remarks that we fully expect to be coming over the next several quarters that we're going to have that kind of growth and we're very excited about that prospect.

Okay. Thank you. I appreciate and I'll jump back in the queue.

Our next question is from Mike Grondahl from Northland Capital Markets. Please go ahead.

Yes, Joe. So the two skews you have at CVS and extra strength and a regular strength topical, any sense – if you placed some stuff there at the end of March, any sense on reorders or sell through or is it just too early?

I think it's too early. I would expect that we will have a one to two quarter lag before we have a good understanding and an ability to respond to that question a more accurately.

Got it. In the Roll On, that's a couple favorable pilots, a couple smaller retailers, so just where you're testing if the reception has been good. Is that the takeaway?

The takeaway is that it's the reception has been good across the Board. I don't think there is one FDM retailer that we're speaking with that has only – they've only praised and then very excited about the opportunity for placement of this product on a shelf.

And with that Roll On, if you got a big order for it, is that something you can deliver? Is production in places? Is everything kind of good to go?

Yes.

Great. Well, that’s it for me. Thanks a lot.

This concludes the question-and-answer session. I would like to turn the floor back over to management now for any closing comments.

Well I want to thank everyone for joining us today. We are pleased with the progress we made in the first quarter of 2019 and look forward to the opportunities that lie ahead for the rest of the year and we look forward to updating you on our next call and please have a great day. Thank you very much.

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