CV Sciences Inc (CVSI)

[jefra1965]

The big chain stores aren't going to buy from a garage operation but it sounds like the topicals don't have the sales velocity of ingestibles, which makes sense, you rub a cream on when you need it, you take a supplement pill everyday. So if mass market gets on board with full line we've still got explosive growth opportunities, but that requires FDA, and the longer they wait the more of our life cycle is gone.

After a couple days to absorb the Q report I think CVSI is doing the right thing and if the regulations come around they're well positioned.

Q3 revs $12.60 Q2 $16.85 Drop = 25.2%

E-Commerce $2.72M (21.6%), Q2 $2.19M(13%sales), QoQ +24.25%

GMttm = 70.1%, GMQ3 66.9%, a 3.2 full points drop (Not much) from ttm average. Q4 last year had a lower (65.5%) and it was a sales record Q.

CFO JG:

We enjoy an attractive financial model of strong margins, good cash flow and the ability to scale efficiently.
Our financial position is equally strong with surplus cash and no debt Additionally, we have made significant enhancements to our organization and business system. As we enter 2020, we are well-positioned to drive sales and profit.

I agree
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First, the absence of an interim or final regulatory framework from the FDA, which has led to a very low barrier for entry of new companies into the CBD product category, which in turn has led to significantly increased competition especially in the natural product retail channel. Continued regulatory ambiguity has also created state by state uncertainty affecting many of our retail partners. As a result, we reported a 7% revenue decline year-over-year, which we expect to be short term in impact, and that we have been and will continue to counteract.
Next, let me provide more detail on the current market conditions and performance of each of our three primary sales channels, the natural product retail channel, the food, drug and mass channel, or FDM and the direct-to-consumer e-commerce channel.
The natural product retail channel was the early and first adopter of CBD products. We started this category nearly five years ago, and we are still the leading brand in this channel. Over the last nine months, the natural product space has been flooded with perhaps more than 1000 new brands,
competing for shelf space in every state. Many companies are giving product away to obtain shelf space, which is simply unsustainable.

9 months ago the change in sales trend was noticed.
May 31, the FDA hearing. FDA CBD (Isolate/Not clarified to the public) liver toxicity begins.
June 30 Q2 ends
Aug 6 CVSI Q2 was reported. May, June and July trends were known.
Aug 7-12 CVSI drops $1.01 from $4.09.

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We do not believe the majority of these companies will survive the quality and safety requirements that federal regulations will mandate. More and more retailers are beginning to realize that having 30 brands on the shelf, typically leads to lower overall sales due to customer confusion.
We are already in discussion with our retail partners in this channel about scaling back the number of brands on shelf and focusing only on the highest quality and most trusted products and companies such as CV Sciences.

The USDA recently announced Hemp regs will put a constraints in the raw material supply next year. The small and garage operations will suffer.
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In October 2019, CV Sciences met in Maryland with FDA scientists to discuss the safety of hemp derived CBD and the impact of current and possible new regulation on FDA scientific review of hemp derived ingredients. The dialogue during this meeting reinforce to CB sciences senior management that we and FDA have a shared goal of ensuring consumer access to safe and regulated natural products.
The addition of Dr. Duffy MacKay as Head of Scientific Regulatory Affairs, at CV Sciences has been invaluable in our efforts to engage and partner with FDA, as the regulatory framework is established to support a responsible hemp derived CBD consumer product industry.

Bold and positive 100%
Has any other big CBD name done this? Be on the table or be on the plate. Example USDA hemp regs.
A NO-QUESTIONS letter could be coming out soon. Speculation

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The FDM channel is different, and the absence of FDA regulations has resulted in this channel, taking an approach that currently only includes topical products. In spite of this cautious approach, the barrier-to-entry for this channel is rigorous, which explains why there are few brands and products on-shelves across major retailers in this channel.
The FDM retailers entered the CBD categories this year, and apply their high quality sourcing and due diligence standards to choosing brand partners such as CV Sciences, companies that wants to compete in the FDM channel must have quality products, a good brand, operating scale and support and the ability to function in a regulated environment.
CV Sciences leads the shortlist of companies who meet the requirements of large retailers in the CBD category. We believe the FDM channel provides significant long-term opportunity. We anticipate that once FDA regulations are established, these large retailers will expand their offering to include a variety of adjustable CBD products.

Our current focus in this channel is to continue to build relationships, open new stores, obtain shelf space, establish our credibility, and demonstrate our ability to perform. This will allow us to leverage these relationships store openings and shelf space when the market is fully opened, once an FDA regulatory framework is in place.
CV Sciences is extremely well positioned for our product and brand to be a sustainable market leader in the FDM retail channel.

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We believe that retailers and consumers will migrate to quality products and trusted companies just as they have in all major consumer product category.
As this occurs, the number of companies brands and products in this category will eventually shrink, creating a more normalized environment that is sustainable and respected, which is another reason we are bullish on the long-term future of CV Sciences.

I believe that this will happen. There is a lot of ignorance and bad practices out there. I went through these phase myself and took me a year to end up buying PlusCBD ONLY.
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We expect our full year revenue to be between $55 million and $57 million, compared to approximately $48 million in 2018.

I think that this number is honest (from trends) but it could be bigger given the upcoming holiday season.
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Conclusion (mine):
Time has been wasted between last Dec 20 and today by the FDA. CVSI has prepared to meet fast expansion in the coming years, but until the FDA issues the interim news, the CBD market race has NOT begun YET.
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From the ongoing business section, JD:

We continue discussions with the FDA and believe that the agency will eventually enforce all the legal and regulatory requirements on the books that currently exist for other new ingredients. CV Sciences is in a much stronger position than any other company in our industry to partner with FDA in demonstrating safety for hemp based ingredients, including CBD. Once we have clarity at the federal level, this will flow down to and resolve state level regulatory uncertainty. The CV Sciences team will continue to take leadership role with the FDA and other federal agencies, as regulations are developed and put into place.

Over the next year, we are planning a significant number of additional new product introductions, including into new vertical channels.

We are on track and preparing to commence a Phase 1 clinical study, which will likely be conducted in Europe during the first half of 2020. We are making progress on the chemistry, manufacturing and quality controls for our clinical trial materials in support of our Phase 1 clinical study. We are hugely optimistic in the potential of our drug development program, and the multi-billion dollar opportunity of addressing the unmet need of treating smokeless tobacco use in addiction.
Also, I'm very pleased to announce the publication of a scientific poster on a study that CV Sciences sponsored with the Scripps Research Institute, and the University of California at San Diego. The study results showed that CBD alleviated signs of nicotine withdrawal and wrath during acute nicotine abstinence.
These data provides further scientific support for our drug development program that targets treatment of smokeless tobacco using CBD.

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Interesting Q&A:

Are you seeing any shake out of that competition yet, or you kind of thing you need the FDA framework first?
Joseph Dowling
Well, Mike, the easiest way to answer the question is that we are seeing some data on velocity in our channels. And it's clear that we see the sciences are still the leader in the natural products retail channel and we do have some insight into the food drug and math retail channel as well. And we know that we're very competitive in that market. And so we do see that it is not so easy to get into this space and to move product off shelf. So we're starting to see the velocity, the slower velocity at of the newer market participants.

From a regulatory standpoint, do you guys have any thoughts or comments around the USDA interim proposal and its recommendation? And also from a timing standpoint regarding the FDA potentially moving forward, do you guys -- have you seen any color there? Thanks.
Joseph Dowling
Thank you, Nick, for the question. We're very happy to see the USDA guidelines come out. We think that significantly helps the industry and avoid guesswork on that part of the supply chain. So we're in favor of that. I think it's going to take a little bit of time for everyone to better understand what those regulations mean. But generally, I think it's a great Step forward.

......on the FDA side, I mentioned in the prepared remarks that from the FDAs perspective, that the frontline scientists at FDA, they view this category as any other ingredient, subject to the same rigorous safety and quality test that they would apply to anything else.
And so that's the initial feedback, which is not surprising that we've received from the FDA. I don't think they're going to either favor or discriminate against any hemp based or derived ingredients, or combination ingredients that they're going to see through their front door or make its way into a product that is either going to go into the food supply or into a topical product.
So we see -- and the feedback from them is they have a lot of the regulations already on the book. That would apply to this ingredient or any other ingredients. It's a matter of companies in this industry, including us. And of course, we've done a lot of this work, to go through the front door of the FDA, and lay all that effort out in order to convince them of the safety and quality of the products that will eventually make their way onto the market. So I think there's a lot of the regulation in place, it's a matter of the FDA coming forward and articulating that.

Waiting for FDA

Long CVSI