San Diego, Calif., based CV Sciences Inc. (CVSI:OTCQB) is a rapidly emerging player and market leader in the cannabis realm—the exploding CBD (non-intoxicant) "cannabidiol" market. CV's early choice to first-focus in non-THC paid handsomely; plus CBD is now sold in nearly 2,000 U.S. retailers nationwide—a penetration level blowing away the cannabis companies. There's no reason CV can't add an intoxicant (THC) line at will, becoming a fully integrated supplier.
- Y/Y sales up 200%; Run rate: $50 million.
- Better numbers. Growth and value: Profitable; no debt.
- CV sells for a fraction of the rest. Better U.S. sales.
- Don't be fooled: Canada and U.S. are completely different markets.
- NASDAQ uplisting imminent.
Investors seeking profit potential should focus on CV:
- Hype regarding fast-fortunes growing cannabis are fading fast—raw marijuana prices crashing; supply well exceeds demand in fully legal states.
- Quirky state and federal laws make U.S. mass cannabis scaling difficult. Probably impossible.
- The whole point to legalize, and bust the murderous cartels, is via lower marijuana prices.
- We believe best profit found in value-added, i.e., oils and edibles—as cannabis prices decline, margins increase. Requires skill.
Dirt cheap relative valuation
"The Coke announcement is about CBD. Not cannabis. Not marijuana. It is a potential blockbuster. For CBD, that is. None of the Canadian cannabis companies have any experience selling CBD, certainly not in the US."
CVSI is the better value. By far. Aphria (APH.TO) lost $5 million on $12 million in sales (5/18) yet trades for CA$4.6 billion. Charlotte's Web (CWEB.CN) is a U.S. CBD seller with slightly larger sales and earnings (and a nice chocolate mint product) but trades over 3.5X higher than CVSI. Cronos (CRON) sells for $2.2 billion with paltry Q2 sales of $3.4 million.
CV Sciences vs. Tilray
Please review the table below—guess which company (Tilray or CVSI) is worth $11.4 billion and which sells for $461 million?
Q2 sales: $12.3 million
Q2 sales: $9.7 million
Y/Y growth rate: 200%
Y/Y growth rate: 95%
Q2 net profit: $3.1 million
Q2 loss ($12.8 million)*
% sales in higher margin oils: 100%
Oils: 45% - dried leaf: 54%
Gross profit: 73%
*includes $5.6 million in stock compensation expenses
Hint: Tilray isn't profitable.
Do you see 25X more value?
"We see a billion-dollar opportunity for CVSI."
Here's the problem: Tilray reported (Q2) an average selling price per gram at $6.38—OK, but now look at Oregon, for example, where cannabis has been legal since 2015. High-quality cannabis prices in Portland are down to $75 an ounce ($2.65 per gram), according to priceofweed.com. Not encouraging; leaf is 54% of Tilray's sales.
More troubling, Tilray's margins are significantly less than CV. One would think being "vertically" integrated would be more profitable. That's the sales pitch, at least. CV's gross profit margin of 73% proves it has got the model right.
Farming is not a high margin business.
If both CV and Tilray were selling at the same valuation, this report would be about favoring CVSI. At 1/25th the value, it's a no-brainer.
The nutrition/vitamin industry is a natural fit
Having grown up in a health industry family, with parents and siblings working both retail and wholesale since the 1970s, this author has followed the industry for 35 years. Hemp-based CBD is the right product at the right time. The nutrition industry has always "ran" on new products. Like all retailers today, under tremendous pressure, the curiosity factor of new "hot" products drives customers into stores. It's their life-blood.
"We expect CV Sciences' Q3 sales and earnings in October will be good."
Nutrition stores are used to selling various plant-based concoctions. CV is already in nearly 2,000 U.S. retail locations nationwide. That is perhaps more (genuinely active) retailers than the entire cannabis industry, combined. We estimate there's another couple thousand independents to add.
Whole Foods has yet to enter the CBD fray; it will, count on it. As an industry leader, CV has great potential for continuing leaps in revenue with deep relationships in the industry. They get it. We can't stress this enough – selling to the nutrition industry is not so easy. Most competitors are pot farmers or wannabe start-ups. One needs a certain "vibe" to deeply connect in that industry. CV has it.
Attractive products. We like the new gummies (Source: CV)
Canada vs. the U.S.
"CBD is now sold in nearly 2,000 U.S. retailers nationwide."
Much investor giddiness over cannabis has been via Canada. Beware: the liquor business in Canada is heavily regulated and "managed." Only Big Liquor makes big profits. We are not aware of any hops or barley farmers flying private jets—how is farming cannabis different?
Tilray sells about nothing in the United States, by far the largest market. While CV is certainly capable to expand internationally, its early mover status capturing U.S. "turf" is a tough catch, like once for Ebay or Amazon. And be careful of over-promotion. Cannabis and hemp are grown all over the world; much of CV's supply is grown in Europe. It has been grown and consumed in India for 4,000 years. There will be no shortage. And no denying the U.S. is the world's primary market.
The slide looks better than reality. Tilray's Q2 global sales are only $345K, 96.5% in Canada. (Source: Tilray)
The Ah Ha Moment?
Full U.S. federal marijuana legalization is years away. CBD is the only possible "play" for U.S. corporations—risk of federal response exists.
….so this is important:
On September 17, Coca-Cola announced it was in "talks" with a Canadian company. Investors immediately bid up shares of several "pot" stocks.
Did anybody read the release?
"Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world," Coke said in its statement on Monday. (Source: Reuters)
The Coke announcement is about CBD. Not cannabis. Not marijuana. It is a potential blockbuster. For CBD, that is. None of the Canadian cannabis companies has any experience selling CBD, certainly not in the U.S.
Coke used the term "functional wellness beverages." Not exactly sexy, but nevertheless encouraging and a validation of a quantum shift in consumer attitude—if Coke, then Pepsi, Starbucks, etc.—helps confirm our thesis that CBD is just beginning.
And CVSI has the core expertise in the CBD oils it will need.
Come-on folks, it's just a plant
Our bull case for CV includes multi-dimensional, rapid expansion. Distribution in the vitamin/nutrition industry has value; CV has years of expertise.
- There's no reason CV cannot enter the cannabis space; it has experience in oils and now gummies. Value-added, not growing cannabis or hemp, is the "sweet spot." CV is killing it in CBD sales; it was the right choice and now ripe for expansion. Multiple channels.
- There are many dozens of plants with known benefits and the CV pipeline can expand beyond hemp, especially as the U.S. matures into a more realistic, practical nation. Millions in South America, for example, still chew the coca leaf, with marvelous, well-known health benefits. Recall it was once the coca in Coca-Cola. In its natural form, it is a safe, enjoyable product. There are many such plants with even better possibilities, several of which this author has personally observed during numerous trips into the Amazon and around the world.
- We see a growing trend toward less invasive, more natural medicine. CBD is just one component. The backlash grows against opioids and over-medication of America's seniors, which should directly benefit both CBD and CVSI.
Sales for Q2 (June 2018) were $12.3 million, up from $4 million in June 2017. Gross profit was an impressive $9 million; margins are excellent, enabling a net profit of $3.1 million.
We believe CV is at a $50 million run rate and we will look to model a 2019 estimate after the Q3 numbers—we see a billion-dollar opportunity for CVSI.
Like most in the cannabis industry, CV Sciences was founded by entrepreneurs. Michael Mona wisely brought in a great team, including Joseph Dowling as CFO in 2014. Mr. Dowling is a former MD at Citigroup; he has brought the company's sales marketing and disclosure to the highest standards. In May, Mr. Dowling assumed the role of CEO. In our meetings we have been favorably impressed with both his professionalism and drive.
Now with 70 employees, the CV "secret weapon" is VP Stuart Tomc, formerly with success story Nordic Naturals. Since 2014, Mr. Tomc has been a tremendous asset in building the +CBD brand; he knows pretty much everybody in the "wellness" industry and has a multi-year lead courting key players.
Attractive, professional San Diego office (Source: CV)
The tweet from hell
In August, a renowned short-seller tweeted about CV, alleging fraud in the non-disclosure of a patent filing rejection. This relates to the company's smokeless tobacco sideline of which it is seeking eventual FDA approval. We are still scratching our head. Hopefully it was something a summer intern did while everyone was on vacation; the tweet makes no sense. It's an early stage drug application, not even started a phase I study, and there's no revenue. What's there to hype?
We believe CVSI shares have shot higher because sales of its CBD products are exploding: 200% year over year sales growth is impressive. Who can deny that? We have never seen the company trying to "hype" this drug application. Even worse, the tweet, either intentionally or erroneously, fails to mention the ongoing patent appeals process, which is anything but final. The tweeter covered their short and promptly lost it in their next "pot" short.
Ok, we know…..
Tilray bulls can argue value in those clean room-like growing factories. We see excessive hype. Do drug users really care? Aspirin comes from a plant as does morphine and hundreds of products we consume every day. Your lettuce was grown outdoors; are you concerned? Do drug users think about production quality while ingesting product packaged in some dirty Colombian shed?
The hyperbole seems overdone. We suspect there's only a minor ultra-premium market willing to pay super-premium prices. The official Ontario Cannabis Store, for example, now has 32 licensed cannabis suppliers (source: The Canadian Press). We expect pricing challenges.
Like in wine, we suspect 90% of cannabis sales at "mainstream" prices. The CVSI business model is in tune with market direction.
Everyone recognizes the need for QC, and the industry has already established standards. We were favorably impressed with CV's lab during our recent visit, and so will the Coca-Colas and Whole Foods.
CV Sciences has state-of-art lab and production facilities (Source: CV)
CBD is a better margin business with happy customers
CBD oils come from lower cost (yet high quality) hemp oil, providing benefits, without the "high": a big market with great margins. The "wellness" market, as Coca-Cola noted. Wellness has a bigger potential than most suspect. We know of vets who swear by it. People use it to quit smoking. Retailers tell us even pet owners are using CBD, with great results, to help aging dogs move and feel better.
CBD is not going away.
Upcoming NASDAQ listing favors current investment in CVSI. We expect significant exposure increase. We personally witnessed U.S. brokerage analysts attending a recent CV presentation and believe CV has the numbers to get top research coverage. This should add a tailwind and bring in institutional investors.
To date, neither Whole Foods, the Vitamin Shoppe, nor any drug store chain has entered the CBD space. They will. Bank on it. CV has been positioning for years to get the orders. See the Farm Bill (below) and the potential floodgate opening.
Hemp is still considered federally illegal; our understanding is the removal of such is baked into the forthcoming 2018 Farm Bill. This should eliminate any remaining stigma. The old farm bill expires September 30. The 2018 Farm Bill passage provides comfort and cover to the Coca-Colas for U.S. CBD buyouts, partnering and products. It should open Whole Foods and drugstores. We urge investors not to miss this point—and bet U.S. CBD producers win the orders.
Although CVSI does not rely on promotional news releases, we expect more news flow and we expect Q3 sales and earnings in October will be good.
Other risk factors
This is a fast moving market subject to quick changes. Stay tuned. Volatility is off-the-chart. Although CV qualifies for a NASDAQ listing, and the cannabis "barrier" has been broken, there is no assurance of ultimate listing.
Like all of the "MJ" industry, there are plenty of competitors entering. Familiar with the health food industry, we point out: getting traction/distribution is not easy. CVSI has an early lead and possesses top talent to maintain competitive advantage. Nevertheless, increased competition is a certainty.
There are numerous state and federal agencies still weighing in on CBD as a food. No assurance can be made that some agency will attempt to deny CBD sales.
We see the biggest near term risk as a pinprick bursting the bubble of the other cannabis stocks. Especially Tilray. We hope for sector consolidation while CV catches up.
We preference CVSI for the relative, dirt-cheap valuation and imminent NASDAQ listing, but primarily because CV has better U.S. sales, nationwide. That's the big dog. We believe the Canadian cannabis sector peaked last January and the recent Tilray U.S. IPO indicates the action has now shifted to the U.S. We suspect the October 17 full Canadian legalization is baked into Canadian share prices, thus investors interested in exposure to hemp/cannabis should favor U.S.-based, high-margin, profitable, CV Sciences.
Frederick Lacy, President of Fincom Investment Partners, began as a Chicago-based commodity broker in 1985 with a division of Noranda Mines. In 1987 he joined Bateman Eichler, Hill Richards in Los Angeles, ultimately "retiring" in 2000 as a licensed Securities Principle and Managing Director of Investment Banking. Mr. Lacy has been involved in numerous successful investments, including raising the institutional start-up capital for what became PetroHawk, subsequently purchased by BHP in 2011 for $15 Billion. Fincom IP was one of the very few correctly calling both sides of oil's 2003-2014 bull market. We also have a long time involvement with technology, including arranging a $13 million VC financing for a "permanent ledger" technology (now commonly known as "blockchain"), lead by California's number one performing venture capital fund, Upfront Ventures. Other investments include 3D holographic display technology, early mobile applications and power conversion. In 1989 Mr. Lacy hosted "the Venture Capitalist" which aired on (now) CNBC; he was invited to Beijing in 2006 to advise Chinese companies on entering the U.S. Financial markets. Fincom IP's long time clients are enormously successful investors; we are not accepting new clients and do not sell any subscription services.[NLINSERT]
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Prices as of close on 9/21/2018. This report is for informational purposes only and is not a solicitation of any security purchase or sale. Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, Fincom Investment Partners cannot guarantee its accuracy. Any opinions or estimates constitute our best judgment as of the date of publication, and are subject to change without notice. We recommend investors conduct thorough investment research of their own, including detailed review of the related Companies' SEC filings, and consult a qualified investment adviser. Fincom Investment Partners and its officers own shares in the securities mentioned in this report and may buy or sell shares at any time without prior notice. Fincom Investment Partners has not been compensated for this report.
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