By Bharat Ayyar
Disclaimer: I am not a financial advisor. Nothing in this publication should be construed as investment advice.
CV Sciences CVSIthe company behind +PlusCBD, had a meteoric rise in 2018.
The US farm bill had just been passed, legalizing the cultivation of hemp nationwide. Research firms projected that the CBD industry would grow to more than $20 billion in annual revenue.
CV Sciences was at the forefront, widely recognized as one of the top two companies in the CBD industry (the other being Charlotte’s Web). At one point in 2019, the company’s market capitalization reached $575 million.
A lot has changed in three years.
The company’s stock price is down more than 99% from its peak in 2019. Its market capitalization is just over $5 million.
Can you say that the gold rush is over?
While the worst might have happened for CV Sciences, the stock could easily hit zero. And that would be a great thing for consumers.
What happened to CV Sciences?
CV Sciences used to be a leading cannabis company. At one point in 2019, they had almost $16 million in cash. Now down to ~$2.5 million. (Last quarter’s highlight was raising $1.4 million from investors through convertible notes.)
A low cash balance alone is not a death sentence. Unfortunately, business isn’t looking good either. Revenues have declined substantially (even before COVID).
To make matters worse, profitability has also declined greatly. (They’re probably discounting heavily to keep revenue afloat.) CVSI used to have gross profit margins above 70%. Last quarter, they were only 26%.
It’s no surprise, then, that CV Sciences has been loss-making for several quarters, including a net loss of $2.2 million in the first quarter of this year. (The loss would have been larger, but the company recognized a $2 million reduction in expenses, courtesy of federal COVID relief.)
To be fair, slow growth is not unique to +PlusCBD.
It’s a problem in the CBD industry and the major players, including Sunsoil (where I work). Overcrowded market. Pandemic decline in retail trade. Uncertain regulatory environment for cannabis. The sector has been hit with a number of obstacles. But at least if the growth isn’t fully controlled, maybe they could improve the bottom line? Unfortunately no. CV Sciences has no leverage to pull, because it outsourced all significant parts of its supply chain.
Growing hemp?
CBD extraction?
Manufacturing products?
Outsourced Outsourced Outsourced
The problem with the CBD industry
For years, CVSI touted its efficient and “light” capital strategy. It was a pure marketing and distribution company, with little extra baggage. In Q4 2019, equity analyst Pablo Zuanic asked the obvious question (edited for clarity):
[W]When you say asset-light, I can interpret it differently. I would say asset light means a lot of third party involvement, less control of your supply chain.
So how does being asset light make you different from other CBD companies out there – there are many that outsource pretty much everything?
CV Science’s core problem is the industry’s core problem. Today, there are thousands of brands selling the same white label CBD oil at prices that 90% of people can’t afford. Simply put, everyone is selling the same expensive crap. There is a total lack of meaningful innovation. When I say innovation, I don’t mean flashy, new products. (I’m pretty sure we’ve already put CBD in everything.) I mean making quality CBD that’s actually affordable. Most CBD companies like to complain that the FDA’s inaction has prevented the market from reaching its potential. Few focus on the biggest problem that actually contains the size of the market: high prices. Taking 40 mg of CBD daily costs $120 per month from the average brand.
Who can afford this?
The way forward
Left with few options, CV Sciences has raised the prices of its products online (in-store prices are likely to follow suit). It’s a dance that won’t last forever. Consumers are smart. They will find alternatives. The company might live to fight another day, but the broader trend is clear. The excesses of the cannabis gold rush are being phased out.
The survivors will be the ones to innovate in a meaningful way: making higher quality products than the mass market can afford. That’s a great thing for consumers, even if it doesn’t bode well for CV Sciences.
The above article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Bharat Ayyar is the COO and VP of Marketing for Sunsoil, a certified organic CBD oil brand from Vermont and one of the lowest cost CBD oil manufacturers in the country.
