CBD marketers faced financial challenges in 2019

U.S.-based marketers of CBD reported challenges in the fourth quarter of 2019 amid heightened competition and lingering uncertainty over federal regulations.

Charlotte’s Web Holdings Inc. (TSX:CWEB; OTCQX:CWBHF), a market leader based on sales, reported fourth-quarter revenues of US$22.8 million, an increase of 6% over the prior-year period. Its results, however, fell short of analysts’ consensus of $28 million, noted Pablo Zuanic, a research analyst with Cantor Fitzgerald, in a March 24 equity research note.

“The company explained it remains optimistic about its direct to consumer business, but regulatory uncertainty and concerns from COVID-19 temper their retail growth expectations,” Zuanic wrote.

For the year 2019, Charlotte’s Web reported a net loss of $15.6 million on revenues of $94.6 million. Its annual results compared to a 2018 profit of $11.8 million on revenues of $69.5 million.

For 2020, Charlotte’s Web anticipates 10% to 20% growth. That equates to $104 million to $114 million in revenues, versus the consensus of $134 million to $146 million, Zuanic of Cantor Fitzgerald, a global financial services firm, said in his research note.

A pending acquisition will strengthen Charlotte’s Web’s position in the over-the-counter (OTC) market. It recently entered an agreement to acquire Abacus Health, a provider of OTC topical products for pain relief and skin care, in an all-stock deal valued at US$69.5 million. Charlotte’s Web expects the deal to close in the second quarter of 2020, subject to approval of Abacus Health’s shareholders and customary closing conditions.

Charlotte’s Web announced its earnings about a week after CV Sciences Inc. (OTCQB:CVSI) reported annual sales of $53.7 million, an 11% increase over the prior year. But fourth-quarter sales plunged 34% to $9.4 million versus $14.2 million in the prior year.

“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,” CV Sciences stated in its earnings release.

The company recognized an operating loss of $17.2 million in 2019, compared to operating income of $10.2 million in the prior year. CV Sciences attributed the decline in operating income principally to additional stock-based compensation and payroll expense of $11.1 million tied to the separation of its founders, and additional investment in sales, marketing, and research and development activities.

In the U.S., where the largest business of Elixinol Global Limited (ASX: EXL; OTC:ELLXF) operates, “a lack of clarity from the Food and Drug Administration (FDA) combined with the introduction of competitors in a crowded and unregulated market made for difficult trading conditions as FY2019 progressed,” Andrew Duff, non-executive chairman of Elixinol’s board of directors, wrote in a letter to shareholders in an annual report.

In late 2019, Elixinol Global Limited decided to focus its resources on its largest business unit, Elixinol, and divest the Hemp Foods Australia business and other assets. And in Asia, Duff said the company determined its unit in Japan was selling “non-compliant hemp-derived CBD products.”

“As part of the investigation, Elixinol Global assessed if there were any viable commercial alternatives for its Japanese business and ultimately decided there was not and to sell the company’s 50.5% interest in Elixinol Japan,” he advised Elixinol’s shareholders.

Likely adding to the challenges of public companies marketing CBD: a global pandemic that has pummeled stock prices. As of 10:01 EDT today, shares of Charlotte’s Web were up 9.3% to $6.32 on the Toronto Stock Exchange. Nearly a year ago, on April 4, 2019, its shares were trading at a 52-week high of $33.78.

Regulatory uncertainty

Charlotte’s Web and others selling ingestible CBD products in the U.S. are counting on FDA to establish a clear regulatory path that would allow CBD to be marketed in dietary supplements and perhaps even conventional food and beverages. The agency has yet to commit to a rulemaking and has reiterated its view that CBD is unlawful to be marketed in food and supplements because the compound was first studied as a drug by London-based GW Pharmaceuticals plc.

“The delay has stalled broader adoption of CBD dietary supplements within the” food, drug and mass retail segment, Charlotte’s Web stated in its earnings release.

However, Charlotte’s Web was encouraged by a recent FDA report to Congress on its efforts to regulate the CBD market.

“In our opinion, the remarks from the FDA were much more constructive, and it is positive from what we’ve heard in the past,” said Deanie Elsner, CEO of Charlotte’s Web, in a conference call with analysts, according to a transcript of the call published by The Motley Fool.

“We heard three new themes emerged,” Elsner said. “First, there is a path to set a regulatory guidance for CBD dietary supplements. Second, the dietary supplement category is viewed differently than the food and beverage categories. And third, full-spectrum CBD is different from CBD to isolate and may need to be addressed separately.”

Michael Lavery, a senior research analyst with Piper Sandler, an investment banking and asset management firm, said he anticipates “expanded distribution, product innovation and higher e-commerce sales” will drive 2020 growth at Charlotte’s Web. While Piper Sandler estimated 11% revenue growth in 2020, the firm lowered its 2020 sales estimate from $155 million to $105 million and its 2021 estimate from $310 million to $160 million.

“FDA regulation of CBD products is still evolving, adding uncertainty now, and limiting the scope of federally legal products,” Lavery stated in a March 24 note, “but clarity on FDA regulation for other products could be a positive catalyst and could drive upside to our estimates if it comes before mid-2021.”