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Edited Transcript of CVSI earnings conference call or presentation 16-Mar-20 8:30pm GMT

·40 mins read

Q4 2019 CV Sciences Inc Earnings Call LAS VEGAS Jun 1, 2020 (Thomson StreetEvents) -- Edited Transcript of CV Sciences Inc earnings conference call or presentation Monday, March 16, 2020 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Joerg Grasser CV Sciences, Inc. - CFO * Joseph D. Dowling CV Sciences, Inc. - CEO, Secretary & Director ================================================================================ Conference Call Participants ================================================================================ * Gerald John Pascarelli MR Cowen and Company, LLC, Research Division - Associate * Michael Scott Lavery Piper Sandler & Co., Research Division - Director & Senior Research Analyst * Owen Rickert;Northland Securities;Analyst * Pablo Ernesto Zuanic Cantor Fitzgerald & Co., Research Division - Research Analyst * Scott Thomas Fortune Roth Capital Partners, LLC, Research Division - Director & Research Analyst * Scott Van Winkle ICR, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon and welcome to the CV Sciences Full Year 2019 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Scott Van Winkle. Please go ahead, sir. -------------------------------------------------------------------------------- Scott Van Winkle, ICR, LLC - MD [2] -------------------------------------------------------------------------------- Thank you, and good afternoon, everyone. With us today with prepared remarks are CV Sciences' Chief Executive Officer, Joseph Dowling; and Joerg Grasser, chief Financial Officer. I'd like to remind you that during this call, management's prepared remarks may contain forward-looking statements, and management may make additional forward-looking statements during the Q&A session. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, 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 risks and uncertainties that may cause actual results to differ from those anticipated by CV Sciences at this time. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CV Sciences excludes certain expenses from GAAP financial results. Please refer to CV Sciences' press release from earlier today for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This afternoon, the company issued a press release announcing its financial results. Participants on this call who may not have done so already may wish to look at this press release as the company provides a summary of the results on this call. Following the prepared remarks, we will open up for Q&A from the analyst community. I would now like to turn the call over to CV Sciences' Chief Executive Officer, Mr. Joseph Dowling. Joe? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [3] -------------------------------------------------------------------------------- Thank you very much. Good afternoon, everyone, and thank you for joining our call. As Scott noted, I am joined today by Joerg Grasser, our Chief Financial Officer. I will begin with our fiscal 2019 highlights, and then I will let Joerg run through our financials. Finally, I will conclude our prepared remarks with a discussion of our business development activities and plans for 2020 before opening the line for Q&A with the analysts. We had a successful 2019, achieving our highest annual revenue in company history, broadening our retail distribution and building a strong foundation for the long-term opportunity that we have in front of us. Let me touch on our activities over the past year. First, we made significant enhancements to our corporate governance and leadership team. The senior management team was significantly strengthened during 2019. Early in 2019, we named Joerg to the position of Chief Financial Officer. Joerg's prior experience at Ballast Point during its acquisition by Constellation Brands is unique and invaluable to our company. His prior Big Four accounting and other industry experience has been critical from both an operational and financial perspective. In Q1 of 2019, we also added Dr. Duffy MacKay as Senior Vice President of Scientific and Regulatory Affairs. Duffy resides in Washington, D.C. and is on the front line of all regulatory matters for our company and industry and has a clear understanding and insight of FDA's direction and their critical issues. Our new Senior Vice President of Marketing and Communications, Shane Hart, has made an immediate impact by leading the refresh of our flagship brand, PlusCBD Oil, which is rolling out right now as I speak. Shane is also leading our evolving marketing town and messaging across all sales channels. Shane is also leading development of new brands to more effectively penetrate sales channels that are currently underdeveloped. And most recently, in December 2019, we added Dr. Tim Hitchman as Director of Operations. Tim brings more than 2 decades of product innovation, chemistry, manufacturing and quality management experience to our senior team, including with global companies, such as DSM. Also during 2019, on the corporate governance front, we selected Deloitte as our auditor, and we are now completing our first audit cycle with a Big Four firm. During 2019, we added 3 exceptional members to our Board of Directors: Terri Funk Graham, Beth Altman and Dr. Paul Blake, all of whom bring substantial experience and expertise in sales, operations, marketing, accounting, finance, and drug development. The senior management team and Board of Directors that we have assembled are designed to strengthen our corporate foundation to be the leading company in the hemp CBD industry. Second, we achieved a milestone with our first national distribution into the food, drug and mass merchandise, FDM channel, with CVS during Q1 of 2019. During 2019, we continued to expand our national distribution within the FDM channel with retailers such as Kroger, Harris Teeter and Southeastern Grocers. We also expanded distribution with specialty retailers when we established a relationship with The Vitamin Shoppe. In total, during 2019, we expanded our retail distribution by 148% over 2018, ending the year with over 5,500 retail stores carrying our flagship brand of PlusCBD Oil products. Third, we were active throughout the year working with the FDA to support the evolving regulatory landscape for the hemp-derived CBD market, including a presentation by Dr. Duffy MacKay at the FDA hearing last May. We continue to have meetings with FDA officials and scientists and believe that progress has and is being made. Finally, we stepped up our marketing and brand activities during 2019. We added exceptional marketing talent, as I've discussed, expanded our efforts across all platforms, and we were selected as the first ever CBD sponsor of major -- of a major PGA TOUR event, the Farmers Insurance Open at Torrey Pines, which took place in January 2020, providing significant brand exposure for the company. Throughout 2019, we worked on revamping our website for a better user experience and to support our committed expansion into the direct-to-consumer sales channel. These efforts culminated in the launch of our new and improved e-commerce site at pluscbd.com (sic) [pluscbdoil.com], which significantly improves the user experience and is intended to grow our e-commerce sales channel, which is a key business strategy for the company. As you can see, we made significant enhancements to our business during 2019. These investments and business development activities were key to our record revenue in 2019 and will be important assets in the future as this industry expands and further mainstreams. We continue to believe that the long-term winners in this industry will be the high-quality and respected leaders such as CV Sciences. We will be leading the way for this new industry as we create long-term value for our shareholders. However, 2019 was not without its challenges. The absence of an interim or final regulatory framework from the FDA has been a significant challenge industry-wide. This has perpetuated a very low barrier to entry into the CBD product category. This has led to significantly increased competition, especially in the natural product retail channel. These pressures increased as the year progressed and continue to be a significant headwind today. We have worked closely with the FDA throughout the year, and we'll continue to collaborate with and to support the FDA's efforts to establish a regulatory framework. Once established, this regulatory framework will serve us very well as one of the highest quality and most respected companies in our space. In late 2019, some cautionary comments about the CBD category from the FDA gathered widespread media attention as the FDA pressed for more research into the safety of hemp-derived CBD products. The cautionary comments and the resulting media attention had a negative impact on the industry, impacting both retailer and consumer demand. However, just last week on March 3, 2020, the FDA's report to Congress pressed for more research, the very type of research that CV Sciences completed several years ago in support of our GRAS self-affirmation. We are very encouraged by FDA's report to Congress as it appears to validate our business model with a focus on dietary supplements. We believe the FDA clearly signaled a regulatory pathway for dietary supplements, which is fully aligned with our business model and strategy. We are also encouraged by the FDA's use of the phrase in the coming months when they refer to evaluating the issuance of a risk-based enforcement policy. Let me now provide an updated -- an update on our 3 primary sales channels: the natural product retail channel, the FDM channel and the direct-to-consumer/e-commerce channel. The natural product retail channel remains our largest channel in terms of sales. As many of you know, we pioneered this channel and remain the leading brand in this channel today. The current environment remains one of heavy competition as new entrants have driven incremental shelf space with aggressive promotion and continue to aggressively promote today. The category is simply overbranded today. While we continue to believe that shelf space will be rationalized and only the highest quality brands and trusted companies will remain, we expect to see continued pressure on our sales in the near term. These pressures include not only the increased competition and competitor promotion, but during the fourth quarter, 2 leading regional chains, Earth Fare and Lucky's, each announced they were closing the majority of their stores and bankruptcy filings. Both of these retailers were material customers in our natural product retail channel. The FDM sales channel continues to be much more selective with the brands itself, which has resulted in a limited number of brands on store shelves. This has been beneficial for CV Sciences, and we continue to be well positioned for additional product distribution once retailers expand offerings. These national retailers remain cautious and are currently focused only on topical products. While our store count is high, we offer only a limited number of SKUs per FDM store location, given the topical-only approach by FDM retailers. The absence of FDA regulations remains a major catalyst for expansion of the FDM opportunity. We believe that once FDA regulations are established, FDM retailers will expand their offering of CBD products to include a variety of ingestible products. In addition to our work with the FDA to promote a regulatory framework, we will continue to add new stores and build long-term relationships in the FDM channel to be well positioned for when the broader CBD opportunity in FDM materializes. Our third channel is the direct-to-consumer or e-commerce sales channel. During 2019, we made significant investments to expand our e-commerce sales and achieve strong growth. We increased e-commerce to 19% of total sales during 2019, up from 14% in 2018, and we believe we have significant runway for further growth. In Q1 of 2020, we launched our updated and enhanced e-commerce site, which is designed to support future growth. As you can see, there are several near-term pressures affecting our sales in the CBD category overall. However, we are adapting and aggressively managing our business to reflect these near-term challenges. We are closely evaluating all spending across the organization, including exiting planned capacity additions. Also, we have decided to temporarily slow down our drug development efforts while we wait for certainty in terms of the breadth and scope of the patent protection we expect to obtain. We still continue to prosecute our patent. We are confident that we can reduce near-term costs to reflect an anticipated lower level of revenue as we navigate the near-term industry headwinds. Before I turn it over to Joerg, I want to stress that while there are near-term pressures, we remain confident and excited for the continued development of the CBD industry. We are eager to see sensible, quality-focused regulation unfold. We believe that retailers and consumers will migrate to quality products and trusted companies just as they have in all major consumer product categories. As this occurs, the number of companies, brands and products in this category will significantly 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. All of us at CV Sciences pride ourselves in producing the highest quality and safest CBD products and in leading by example with our adherence to compliant marketing and honest labeling policies. We are industry pioneers with an early mover advantage. We are more experienced in our competition in terms of science, regulatory affairs, quality and product development. We have a recognized and respected flagship brand. We have manufacturing and distribution scale, and we have a flexible and asset-light business model. These are sustainable advantages and position CV Sciences well for the future. Now let me turn it over to Joerg to run through our financials. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Joe, and good afternoon, everyone. During fiscal 2019, we generated $53.7 million of revenue compared to $48.2 million in fiscal 2018. Revenue increased 11% year-over-year, reflecting strong growth in e-commerce revenue and new distribution in the FDM channel, partially offset by a modest decline in the natural product retail channel. For the fourth quarter, revenue decreased 34% year-over-year to $9.4 million, reflecting the increased competition in the natural product channel as well as ongoing challenges of the regulatory environment, as Joe discussed. The fourth quarter decline was almost entirely in the natural product retail channel as sales in FDM and e-commerce were relatively constant during the fourth quarter. Additionally, we continue to increase the retail distribution during the fourth quarter. We ended the year with PlusCBD Oil branded products sold in 5,567 retail stores nationwide up from 5,435 stores at the end of the third quarter and up from 2,238 retail stores at the end of fiscal 2018. Of our total retail stores, approximately 2,300 are FDM retailers. Gross margin for the year was 65.3% compared to 70.2% in the prior year. The decline in gross margin reflected sales mix, promotion and increased overhead to support future growth. For the year, we generated adjusted EBITDA of $0.2 million compared to $14 million of adjusted EBITDA in the prior year. The lower EBITDA reflects a lower gross margin as well as increased SG&A and R&D expenses. For our Consumer Products Division, we recognized adjusted EBITDA of $3.8 million during fiscal 2019. We ended fiscal 2019 with $9.1 million of total cash compared to $12.7 million at the end of fiscal 2018. Cash used in operations during fiscal 2019 was approximately $2.1 million. Important thing to note is that we spent approximately $3.8 million on our drug development efforts in fiscal '19. In addition, we invested $1.2 million in capital expenditures. Inventory at the end of fiscal 2019 amounted to $10 million compared to $8.6 million at the end of fiscal 2018. Inventory increased for finished goods to support our growth. Earlier today, we filed an extension with the SEC via Form 12b-25 to provide us 15 additional days to file our 2019 Form 10-K. We are working with our external tax advisers on some complicated tax matters related to our 2018 tax provision. As such, the provided numbers in our press release from earlier today are unaudited. Let me reiterate Joe's confidence in our long-term business outlook and opportunity. We remain confident in our long-term opportunity and are working diligently to reduce cost in the near term. As Joe mentioned, we are looking at spending across the organization with the goal of lowering costs during the period where we anticipate pressure on our sales. We have the benefit of a very attractive business model with minimal need for capital investment. This allows us to be flexible with our spending to manage our cash position. While we do anticipate some modest negative operating cash flow in the near term, we believe our flexible business model and debt-free balance sheet allow us to manage effectively through this difficult period. Before I turn the call back to Joe, let me touch on our first quarter revenue guidance. Today, we are initiating revenue guidance for the first quarter of 2020. We expect first quarter revenue to be between $6 million and $8 million. The duration of near-term pressures facing our business are difficult to predict. And as a result, we will be managing our business conservatively and not predicting when sales may reaccelerate. Just a couple of weeks ago, concerns over the coronavirus outbreak caused the cancelation of the Natural Products Expo West Trade Show in Southern California. This was an important event for both the natural product industry and CV Sciences with nearly 100,000 attendees annually. The spread of the coronavirus has caused sporting events, concerts, business conferences, schools and other public events to be called-off or postponed. While it is difficult to measure the impact of this outbreak, we, as well as every other company, are impacted by these ongoing challenges from this unfortunate global health situation. Now I will turn the call back over to Joe to discuss ongoing business development and our 2020 plans. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [5] -------------------------------------------------------------------------------- Thank you, Joerg. We expect and strive to be a market-leading brand in every sales channel. As we manage the current business environment, we will continue to focus on expanding distribution, broadening our product offering and working to build sales across each channel. We have great relationships with multiple national retailers, and we are poised to leverage these relationships as the category matures. During 2020, we expect to see additional distribution wins. We have numerous new products slated for launch, and we plan to enter additional new vertical categories, including an entry into the pet channel. We see good opportunity in the pet CBD market and intend to launch our first offering in the second half of 2020. On the international front, we were particularly encouraged by the recent statement from the U.K. Food Standards Agency, FSA, regarding submission of novel food authorization applications for the CBD category. We believe that our existing toxicology studies will allow us to meet the novel food authorization requirements before the March 2021 deadline imposed by the U.K. FSA. As a result, we are evaluating international sales opportunities. While we do not expect any material impact from these international opportunities during 2020, our first international goal is to develop distribution relationships beginning with Europe. With distribution scale in place, product innovation is a major focus and will be a differentiating factor moving forward. Our innovation and product development strategy is driven by science and informed by consumers' health and wellness needs. We believe there are significant unexplored opportunities within the existing market and regulatory environment for novel CBD-based products that meet consumer demand. We are investing in a pipeline of high-quality CBD products that are supported by science and safety data and that provide a clear benefit to the consumer. These innovative products will include minor cannabinoids and other ingredients, where safety data, regulations and science support their introduction. For 2020, you can expect to see the following from CV Sciences, further enhancement of our flagship brand PlusCBD Oil, you will see us develop new brands and product offerings targeted to specific sales channels. We believe that consumers in the CBD product category are sales channel-specific and require brands and products that meet their needs and product quality, merchandising and pricing. Finally, turning to our drug development operating segment. As I noted, we have decided to temporarily slow down our drug development efforts. Although we continue to prosecute our patent due to uncertainties related to the level of IP protection we may reasonably expect to obtain, we believe the prudent course is to wait until that is determined before we continue with our drug development program. We continue to work with counsel and the U.S. Patent and Trademark office in prosecuting our patent application, and we remain confident that we will obtain patent protection, although the breadth and scope of that protection currently is uncertain. We believe that our lead drug candidate, combining CBD and nicotine, in treatment of smokeless tobacco use and addiction is a very promising drug candidate. Before we conclude, let me provide an update on our efforts for a NASDAQ uplisting. We remain committed to achieving an uplisting for CV Sciences. While we continue to believe that we have largely completed all of NASDAQ's requests and requirements from providing supporting information to corporate governance request, we currently do not meet the minimum listing price requirement and we'll continue to evaluate our options to obtain listing. To close, let me reiterate that we are focused on actively managing through the near-term industry pressures and are working diligently to rightsize our spending to reflect the current environment. While today's environment reflects the ongoing regulatory ambiguity, a proliferation of new market entrants and external forces, which now include potential COVID-19 impact, the industry is developing and maturing. As the industry develops and a regulatory framework is established, we expect there will be an industry-wide shakeout of market participants and a flight to quality to trusted companies, such as CV Sciences, who will lead the way in the growth of our industry. With that, I would like to turn the call over to the operator for questions from the analysts. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Mike Grondahl with Northland Securities. -------------------------------------------------------------------------------- Owen Rickert;Northland Securities;Analyst, [2] -------------------------------------------------------------------------------- This is Owen Rickert in for Mike. I just had a question about the new distribution partner with Southeastern Grocers back in early November. I was just wondering if there's any color on how this has been going and if you guys have met or exceeded expectations. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [3] -------------------------------------------------------------------------------- Yes. Owen, thank you. It's really too early for us to tell and provide any further guidance on that new -- our new relationship with Southeastern Grocers. As we have more information on that in quarters coming up, certainly, we'll consider providing that. -------------------------------------------------------------------------------- Owen Rickert;Northland Securities;Analyst, [4] -------------------------------------------------------------------------------- Got you. And then one more quick. I was just wondering if any of the products that stood out recently, like the topicals or soft gels, gummies aren't even outperforming any of the others significantly. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [5] -------------------------------------------------------------------------------- Well, I think, the easiest thing to comment on is that the FDM channel with its topical-only strategy right now has led to a significant increase in the number of new products just in the topical space. So I think you've seen most of the product innovation in topicals over the last 6 to 9 months. I don't think it will stay that way forever, especially as the FDA comes forward with the regulatory framework. I think you could see a little bit of a shift to rationalize the number of SKUs in the topical space. On the adjustable side, I think the products that have stood out continue to be our softgels pretty much across all sales channels. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Scott Fortune with Roth Capital Partners. -------------------------------------------------------------------------------- Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [7] -------------------------------------------------------------------------------- Want to focus, obviously, a little bit on COVID-19 and potential outlook for the business, obviously, remain unknown as far as consumer demand. But I want to dig into your $6 million to $8 million first quarter kind of guidance, is that taking into account some COVID here? Or is that taking account mostly kind of the business as it was and the softness that's happening there? -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [8] -------------------------------------------------------------------------------- Scott, this is Joerg. Yes. So we have taken the impact of COVID into consideration when we provided our guidance. -------------------------------------------------------------------------------- Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [9] -------------------------------------------------------------------------------- Okay. That's more recent. And then can you provide a little more detail with, say, COVID -- everyone's expecting second quarter, probably continuing in the third quarter to be weak. But can you provide more details to aggressively adapt to this business environment? And kind of manage the cost potential, where else can you guys see some savings or efficiencies from that standpoint in this environment? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [10] -------------------------------------------------------------------------------- Yes. Scott, this is Joe. I think it's too early for us to tell. Obviously, we monitor sales by channel on a daily basis. So we have a pretty good sense of what's happening, but it's still too early to tell what the short, mid- or long-term trends are from the COVID impact. It -- I think everything that we're kind of hearing, I'm sure all of us are listening into the same information or looking at the same information. If you happen to listen to the Goldman Sachs conference call over the weekend, their view was that the second half of 2020 was going to pick up, and they thought there would be a good market recovery during the second half as well. It's hard for us to make those kind of statements as it might impact our sales, but we're obviously looking at it every single day. And as we can provide feedback, we will do that. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [11] -------------------------------------------------------------------------------- And maybe if I can add. So definitely, we are looking at cost savings opportunities. So one big topic on cost is essentially where we need to make sure that we are having our vendors provide us services with the right amount of cost, looking at opportunities on the costing side because one of our large challenges is going to be a volume deleverage on the costing side. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [12] -------------------------------------------------------------------------------- And then throughout the organization, Scott, we are looking to make sure that we are rightsized for the current market environment. And we're doing that aggressively, and we're adapting to that. And we're doing that quickly, and we're able to do that quickly because of our business model being so asset light. We're just not as dependent as some on heavy infrastructure, and so we're making those changes as we speak. -------------------------------------------------------------------------------- Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [13] -------------------------------------------------------------------------------- And then just a last question follow-up. I think the FDA comments were very positive going down the swim lanes, but I won't go there. But do we have a harvest update? Obviously, your first harvest out of the U.S., you're asset-light. But anything to update us from that standpoint from the inventory levels moving forward and the harvest that is coming out of the U.S. for -- from 2019? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [14] -------------------------------------------------------------------------------- Yes. The supply chain for the raw material is changing so quickly, Scott, as you're aware, and it's becoming much more sophisticated. The quality is improving. The variety of raw material is changing and improving, both on quality and quantity, every single day. So for us, it kind of confirms and validates our business model to not focus on that part of the supply chain, the farming part of the supply chain. Because very, very sophisticated and talented farming operations are stepping into the space. And while there's some difficulty right now, I think the really strong, smart farmers that are in the space that we're talking to are going to fill the void for all the supply that's going to be needed going forward and, I think they'll be able to expand quite easily as the market expands. So to get to your question, I don't think what we do on a farming basis, even though our crop for 2019 did fine, we're so -- we're much less dependent on that than ever before because I think that the supply chain has emerged very, very quickly. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from the line of Michael Lavery with Piper Jaffray. -------------------------------------------------------------------------------- Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [16] -------------------------------------------------------------------------------- You've grown your distribution point, and you've called out the distribution momentum that you have. But then obviously, you've got the sequential and year-over-year sales decline. Can you just give a sense obviously, on a total company basis, that slower velocity, how does that look by channel? -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [17] -------------------------------------------------------------------------------- Yes. Mike, thank you for the question. We haven't historically really disclosed our revenue by retail channel. But what I can say, in general, our FDM sales channel covers only topical product and topical product has typically had much lower velocity than ingestibles, which are mostly being carried in the natural product retail channel. -------------------------------------------------------------------------------- Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [18] -------------------------------------------------------------------------------- So I guess what I want to understand is, if the velocity slowdown is primarily the natural channel and where you've called out a competitive pressure, do you have a sense of how your products compare to competitors' products? And if the velocities are declining enough, is there any risk of losing distribution going forward? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [19] -------------------------------------------------------------------------------- The -- I don't think we're going to lose distribution in terms of the store count, Michael. I think the increased competition has maybe changed the way the pie is distributed. I think that will change over time as the number of brands shrink and as the market grows. But I don't think the distribution point count is going to change. It's just how that pie has kind of expanded and contracted a little bit as well as the number of participants that are vying for that pie. -------------------------------------------------------------------------------- Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [20] -------------------------------------------------------------------------------- And then you touched on the minor cannabinoid opportunity. Obviously, some of those don't have the issue, CBD does, of being a non-FDA-approved pharmaceutical. Can you give a sense of how quickly you might be able to move on some of that? And how big that opportunity might be? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [21] -------------------------------------------------------------------------------- We think it's a 2020 opportunity, for sure. And we don't have estimates on how big that opportunity is. We do think it has very interesting applications without going into a lot of detail and sort of disclosing our strategy in terms of new product innovation, but it's not just a single minor cannabinoid that we're considering. And as I mentioned in my remarks, we're really only looking at anything that we can rationalize from both a science and safety standpoint. And we have real good insight from FDA on what might be sort of acceptable and not. -------------------------------------------------------------------------------- Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [22] -------------------------------------------------------------------------------- Okay. That's helpful. And then just lastly, on the FDA, they certainly sounded encouraging in that they want -- they seemed to make this work in their most recent update. However, they also seemed to imply a very methodical and perhaps painstakingly slow process. Can you just give any sense from your perspective how you think the timing might unfold with all that? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [23] -------------------------------------------------------------------------------- We're hopeful it's soon. We were encouraged by what happened in the U.K. with the Food Standards Agency. We think that was a big step forward. And I don't think that what happens there is ignored here. They have access to the same data and they can survey the literature in a similar way. So I think that the possibility of interim rule and interim guidelines, similar to what has happened in the U.K., is possible. Some of the most respected industry trade associations too are lining up with kind of the same serving sizes that appear to be comfortable and to be at very safe levels and without concern. And so we see that as a very positive factor as well. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from the line of Gerald Pascarelli with Cowen. -------------------------------------------------------------------------------- Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [25] -------------------------------------------------------------------------------- So Joe, just to stick on the topic of COVID-19, specifically as it relates to the natural products channel, obviously, a very important channel for you guys, very fluid situation. But in your conversations with these retailers, have you heard of or are you expecting the potential for some of these natural product stores to shutter on a temporary basis going forward? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [26] -------------------------------------------------------------------------------- The -- our discussion -- I guess a couple of responses, Gerald. I think we mentioned last quarter that our discussions with our natural product retailers indicated even last quarter that having 30 brands on the shelf wasn't making sense, and we could expect to see some rationalization of that. And I think we're starting to see that. I think what we're hearing from natural product retail stores is that they are seeing their customers coming in really in tune with making sure that they're staying healthy. And so it's hard to say what that means and whether that will trend up, neutral or down. I don't think we have any insight to that yet. And it's so fluid, and it happened so quickly, we don't have sort of daily trends that are going to allow us to comment much further, but I don't -- we haven't heard of stores shuttering. In fact, it's just kind of a survey locally, I think it's the opposite, that it's an important time with all the right precautions for them to stay open. -------------------------------------------------------------------------------- Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [27] -------------------------------------------------------------------------------- Okay. That's helpful. Just moving on to FDM. In the retailers that are currently carrying your products, presumably topicals only, is there a white space in your conversations with these FDM retailers? Is that white space for the ones that are carrying your products to expand geographically? And is that kind of embedded into any of your internal expectations over the course of 2020? -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [28] -------------------------------------------------------------------------------- I think there is -- I think there are plans to expand geographically and increase the stores. The -- it's hard to say what the impact of COVID will be on those plans. It's too early for us to... -------------------------------------------------------------------------------- Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [29] -------------------------------------------------------------------------------- No. I meant outside of COVID just in terms of a general distribution gain opportunity with like CVS or some of the other retailers that are currently carrying your products. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [30] -------------------------------------------------------------------------------- Yes. This is Joerg. So with our existing FDM retailers, we are definitely -- we are talking in regards to expanding the store count as they're carrying our products, but we also talk with them in order to expand our SKU count. So those large nationwide retailers, they -- typically, they have an annual reset, and those resets are coming up and definitely in discussions with them of expanded SKU. -------------------------------------------------------------------------------- Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [31] -------------------------------------------------------------------------------- Last one for me. This is just on e-commerce. I know you just did the website refresh. I know it -- and I know it's still early days, but are you seeing any increases in consumer traffic to your website? And any kind of KPIs that you could point us to in terms of how the rollout has been relative to internal expectations, I think, would be helpful. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [32] -------------------------------------------------------------------------------- Yes. So we like the trends, which we are currently seeing, but it's really -- it's too early to tell what the exact impact is. We just rolled out our new website beginning of 2020, but the trends are promising. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Just 2 questions, actually, housekeeping. Can you talk about cash burn? I mean, obviously, cash, you have about $9.6 million this quarter. I think cash burn was about $5.0 million. How should we think and project that? It could become an issue, I suppose, over the next 2 quarters. And the second question, we are already in the middle of March. Your guidance for the quarter is quite wide, $6 million to $8 million. On COVID-19, just on that, we probably assume that the next 2 weeks won't be so strong with less traffic even if the natural stores remain open. So it sounds like it should be more towards the lower end of that guidance. It seems very broad to be so late in the quarter, given the type of range, but thanks. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [35] -------------------------------------------------------------------------------- Sure. Thank you, Pablo. So let me -- I'll talk about the cash question. So as of the end of the year, we had $9.6 million of cash on hand. And some of the cash used in Q4 and in 2019 related to drug development activities. And as both Joerg and I mentioned on our prepared remarks, we are slowing down our drug development activities immediately, and so that will definitely help with use of cash. And we are aggressively adapting our business to the current market environment. And as we've mentioned, we're able to do that quickly and efficiently because of our asset-light business model. We don't own farms or extraction facilities or manufacturing facilities, so we're not tasked with making sure that those are producing and operating 24 hours a day. So we can fluctuate our cost structure to the changing business environment. It allows us to be capital efficient, even during difficult times, and we are doing that now. We've mentioned earlier that we're looking at SG&A and even recent capacity expansions for potential cost savings, and we believe that we're going to be able to do that. And so -- for right now, we're keeping a very close eye on cash. And we're -- obviously, it's a big area of focus for us to make sure that we have adequate resources to operate throughout the year. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [36] -------------------------------------------------------------------------------- And Pablo, let me add to your question in regards to our revenue guidance. So when we provided our revenue guidance, the $6 million to $8 million, we are taking our quarter-to-date sales into consideration in order to determine for this range -- in order to determine this range. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [37] -------------------------------------------------------------------------------- Right. Okay. And just a couple of follow-ups. But so when I try to explain to investors the strength of your company compared to other CBD operators, so you yourselves in the conference calls, right, make it sound like once we have FDA guidelines, you will be in a better place with a lot of fly-by-night operators. Maybe just go through again. And I know you mentioned in the call at the beginning, in the prepared remarks, but -- what makes you different from other companies? Because when you say asset-light, I can interpret that in a different way, and I would say asset-light means a lot of third-party involvement, less control or view of the supply chain. So how being asset-light makes you different from other CBD companies out there? There's a lot of them that outsource pretty much everything. And related to that, yes, there's a brand refresh, but the market remains very fragmented. So what metrics can you share with us -- for us to say despite the drop down -- the drop in sales, this is still a very strong brand. If you can just give some color there just to support the idea of a strong differentiated franchise here. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [38] -------------------------------------------------------------------------------- Sure. So -- yes. The -- if you had distribution into one location and we're asset-light, being asset-light wouldn't be much of an advantage. So when you have the scale that we have, which, as Joerg mentioned, is over 5,500 stores that we're distributing to, plus wholesale accounts, plus our e-commerce, that is the kind of scale that other companies that are asset-light do not possess. We have -- on the sort of infrastructure side in terms of what we do not operate in, Pablo, along the supply chain, we have long-standing relationships in place with farmers, with extractors, with manufacturers, multiple as many as more than a dozen manufacturers, which really expand our scale and enable our scale to be able to really leverage that with our strong brand. So we have not only scale, but we have a strong brand that has had presence in that distribution for going on 6 years now. And so all those things in combination, we think, are a very compelling story. And so if it were just one of those things without the distribution, then I could understand why someone might want clarification on that. But all those things in combination, I think, really tell the story. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [39] -------------------------------------------------------------------------------- Okay. Maybe -- it's very helpful. And just to maybe shell that argument. You've been very clear in the natural channel, what's happening, right? The brand gets diluted, there's maybe more space, but it's -- but brands get diluted. But -- and again, if one is trying to explain the story here. In the FDM channel, when I go to a CVS store, I know it's not in every state that your brand would be available. But just give us -- share some color with us in terms of your presence in the FDM channel in terms of a number of SKUs in the store. I mean what percentage of the shelf do you have in those stores where they have CBD? You have 1 SKU, 2 SKUS, how does that compare with other brands? I mean any color you can give in that regard would be helpful. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [40] -------------------------------------------------------------------------------- So obviously, we have are multiple different nationwide FDM retailers. So on average, we have about -- we have 3 SKUs in the FDM channel, but we are actively working on increasing the SKU count. And so SKU count, like we talked about, are exclusively topical at this point of time. So our SKUs, which we have on shelf is our raw balm, and we have our different strengths, and we have our 2 different concentrations of our roll-on. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [41] -------------------------------------------------------------------------------- Right. But on that point, I mean, I know it's tough to talk in terms of averages. But if you have 3 SKUs, how many SKUs would your typical FDM store that carries CBD have? 9, 10, 100, just roughly? -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [42] -------------------------------------------------------------------------------- A typical store in the natural product retail channel? -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [43] -------------------------------------------------------------------------------- No, no, in the FDM channel, in the FDM. I'm trying to ascertain your strength in the FDM channel, right? You have 3 SKUs, that's great. If those FDM stores only have 3 SKUs, you have 100% of the space, right? I'm just trying to ascertain your brand strength in the FDM channel. So you have 3 SKUs, what would be the total SKU count in a typical FDM store that carries CBD, roughly? -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [44] -------------------------------------------------------------------------------- Within the CBD category, we -- for the... -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [45] -------------------------------------------------------------------------------- In FDM. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [46] -------------------------------------------------------------------------------- Or -- within the CBD category within FDM, we are -- we have an appropriate share within the total SKU count. So the -- so it's not that we are only carrying 1 or 2 at Kroger and other large retailers have more than our SKUs on the shelf. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [47] -------------------------------------------------------------------------------- Yes. So if -- for example, if -- pick any FDM retailer, they might have 6 brands that they're carrying on shelf. And they -- the number of SKUs that each brand is getting shelf placement with, it varies. It may be as low as 3, but it's not many more than, say, 5. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Okay. You've been very patient, and I'll ask just one last question, if I can squeeze in one here. So in terms of e-commerce business based on the math you've given us, 19% versus 14% the year before, that means that your fourth quarter e-commerce sales were down about 9%, 10%. And in the previous quarters, you gave us the number, so we can all do the math. I'm surprised at your e-commerce business, given that it's underdeveloped, would be down 10% sequentially in the December quarter. Can you give some color on that? And that's all. -------------------------------------------------------------------------------- Joerg Grasser, CV Sciences, Inc. - CFO [49] -------------------------------------------------------------------------------- It's -- so each sales channel is facing the increased competition as we discussed this one. And so increased competition was predominantly on the natural product retail channel and as well in other channels where there is a relatively low barrier of entry. And we were able to increase our overall market share on the e-commerce side. But we are -- on a sequential basis, we are slightly down on a sequential basis. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- There are no further questions in queue. I'd like to hand the call back to management for closing remarks. -------------------------------------------------------------------------------- Joseph D. Dowling, CV Sciences, Inc. - CEO, Secretary & Director [51] -------------------------------------------------------------------------------- This is Joseph Dowling. I want to thank you for joining us today on the call. We remain confident with our long-term growth opportunity, and we'll continue to focus on building the business to capitalize on our opportunities. Have a great day. Thank you very much. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.