The year 2019 will forever be remembered as the year that launched America’s CBD craze. That’s according to Patrick McCarthy, the CEO and co-founder of ValidCare, a provider of market intelligence and research for the hemp industry.
“With the passage of the Farm Bill this time last year, hemp was de-scheduled and legalized federally as an agricultural crop. Since then, the consumers and commercial interest in hemp-derived CBD has only intensified, spurring a flood of new CPG businesses and product — from tinctures and edibles to beauty products and pet food.”
One sure way to measure the intensity of the consumer and commercial interest in CBD is to follow the money. As CBD companies release their financial results for 2019, all eyes are on the numbers, a good indication of the wider CBD supplements space.
This week CV Sciences, a hemp cannabidiol (CBD) product supplier and manufacturer, announced its financial results for the year ending on December 31, 2019.
During an earnings call on Monday, the company said the industry is developing and maturing, while acknowledging several challenges, including regulatory ambiguity, a proliferation of new market entrants and external forces, including the likely impact of COVID-19.
Highlights
Joseph Dowling, chief executive officer of CV Sciences, commented that 2019 was a “year of significant business development, including distribution and product offering expansions, our first entry into the national food, drug and mass channel and establishing the foundation and infrastructure in anticipation of long-term growth of the hemp-derived CBD market.”
Some of those product expansions include the launch of 18 new products during fiscal 2019 as well as the debut of an updated +PlusCBD Oil website in January 2020 aimed to enhance customer experience and drive increased e-commerce sales.
During the company’s earnings call, Dowling said CV Sciences expanded distribution by establishing 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.”
Sales for 2019 were $53.7 million, an increase of 11% from $48.2 million in 2018. The growth reflected the company's continued organic expansion into all sales channels, including food drug and mass, natural product retail, specialty retail and direct-to-consumer channels. The second half of 2019 was impacted by increased market competition across all sales channels and the continued impact on retail customers as a result of the uncertain regulatory environment for CBD. The company's retail store count increased to 5,567 stores nationwide as of December 31, 2019, up from 2,238 stores as of December 31, 2018.
CV Sciences did recognize an operating loss of $17.2 million in 2019, compared to an operating income of $10.2 million in the prior year. The company attributed the decline to additional stock-based compensation and payroll expenses of $11.1 million associated with the separation of the company's founders, and additional investment in sales, marketing and R&D activities.
Joerg Grasser, chief financial officer, elaborated on some of those operating costs: “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 spend approximately $3.8 million on our drug development efforts in fiscal 2019. 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.”
Regulatory framework
The company said it spent much of the year working with the FDA to support the evolving regulatory landscape for the hemp-derived CBD market. They said they continue to make progress by having meetings with FDA officials and scientists to establish a regulatory framework.
“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,” said Dowling.
Dowling added that at the end of 2019, the FDA made some cautionary comments about the safety of hemp-derived CBD products. The comments garnered attention, causing a chilling effect to ensue, impacting both retailer and consumer demand.
However, Dowling noted, earlier this month the FDA’s report to congress pressed for more research. “We are very encouraged by FDA’s report to Congress, as it appears to validate our business model with a focus on dietary supplements.”
Dowling added that he believes the FDA has “clearly signaled a regulatory pathway for dietary supplements, which is fully aligned with our business model and strategy.”
COVID-19
Grasser noted that the company expects first quarter revenue to be between $6 million and $8 million.
When asked if those numbers take into account COVID-19, Grasser said yes.
Dowling added that it is to early to have any solid predictions however. “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. “
On Expo West
Dowling continued, “Just a couple of weeks ago, concerns over the coronavirus outbreak caused the cancellation 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."
“So, 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.”
Indeed, industries can only speculate how the virus will impact the industry, a topic that will likely dominate earnings calls for the foreseeable future.
