Getting Over the Hemp Hump

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As we suggested in our Sunday newsletter last weekend, “7 Key Questions for Cannabis Companies During Earnings Season“, we expect to learn a great deal from publicly traded cannabis companies this earnings season, and we were a bit surprised this week to see the update from CV Sciences depict the CBD market in such disarray. The company reported a 25% decline year-over-year in sales. This follows weak results from competitor Elixinol Global for the quarter as well.

While we have been cautious on the CBD space, as shared privately three months ago to subscribers of 420 Investor, the situation is apparently worse than we had expected. CV Sciences CEO Joe Dowling explained on the conference call that competition has intensified greatly in the natural product space, with more than 1000 new brands competing for shelf space. He pointed to low quality products with misleading marketing efforts and labeling crowding the shelves and creating customer confusion.

Readers are likely familiar with the moves made by many food, drug and mass market retailers to enter the space, but most of these stores are focused solely on topical products due to FDA regulatory concern. These products don’t have the same consumer usage intensity as the more traditional ingestible products and aren’t yet contributing significantly to top-line growth.

We continue to see the media regularly reporting the disappointment of farmers growing hemp. They are finding it difficult to find buyers and face lower prices than they expected. Litigation abounds, as well, with several cases of rampant fraud, including some companies that have allegedly sold bad seeds. One major processor has been sued by contractors for failure to make payments on construction. For much of the supply chain, reality isn’t living up to the hemp hype.

While Congress legalized hemp more than a year ago, the regulatory environment is quite uncertain. At the federal level, progress has been made, with the USDA recently establishing the U.S Domestic Hemp Production Program, but the FDA hasn’t yet finalized its regulatory oversight over CBD products. We think that once the FDA has done so, the industry is likely to move forward swiftly. The new retailers of CBD products, initially focused on just topical products, will be able to add ingestible products most likely, working with a limited number of high quality producers. Additionally, FDA accountability is likely to kill off the fly-by-night operators who have entered the space. In addition to complying with the federal regulatory landscape, CBD manufacturers will need to comply with separate state-level regulations, many of which haven’t yet been finalized. In our view, the market will improve dramatically once there is regulatory clarity.

This week will see even more cannabis companies reporting, including Charlotte’s Web, the leader in the CBD space, so we look forward to hearing how it has been faring in the “Wild West” that has developed since the Farm Act became law. Several analysts cut their estimates for the company following the CV Sciences earnings release, but none expect sales to decline, as they did for CV Sciences and Elixinol, from the $25 million reported in Q3.

As a reminder, we provide our readers with a comprehensive Cannabis Earnings Conference Call Calendar of all of the companies hosting conference calls, as well as what has become an industry benchmark for investors, the professionally managed Public Cannabis Company Revenue & Income Tracker.

Aurora Cannabis, one of the largest operators already within 25 global countries and across five continents, continues to track towards positive EBITDA. The company has shifted gears after closing 17 strategic acquisitions to a greater focus on profitability. Benefiting from economies of scale, Aurora’s vision is to define the future of cannabis globally, and it’s executing that by developing new products to market such as soft-gel capsules, sprays, hemp oil tinctures, pre-rolls and more. With the advent of new cannabis formats, the Aurora of today is quite different from the one a year or two ago. As we approach the company’s earnings report, be sure to stay tuned for Aurora’s conference call on 11/14 at 6 PM ET.

Get up to speed by visiting the Aurora Cannabis Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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