The hemp market was projected to be bigger than the recreational cannabis market by many in the cannabis industry and it certainly seemed to be headed in that direction. However, several setbacks have punished the hemp industry causing bankruptcies and declines in revenues for brands who had big investments in hemp.
This week the market leader Charlotte's Web (CWBHF) reported that its revenue fell from revenue $25 million in the 2019 second quarter to $21.6 million for the second quarter ending June 30, 2020. This is the second quarter in a row that the company was unable to beat its sales in 2019. While there was a sequential increase from the first quarter of revenue of $21.5 million, it wasn't by much. The company missed the average estimate for revenues, which was $25.9 million, according to Yahoo Finance. The company also missed the earnings estimate of -$0.04 with a reported earnings of -$0.13. The company also delivered a net loss of $14 million for the quarter versus last year's net income of $2.2 million for the same time period.
To be fair, much of the challenge for Charlotte's Web was related to pandemic lockdowns of retail. The company said, "Covid-19 has impacted the company's retail and health practitioner channels due to lower foot traffic and temporary location closures under the pandemic." On a positive note, Charlotte's Web did report that strong DTC (direct to consumer) sales largely offset a 54.5% decrease in B2B retail sales which accounted for 28.2% of total revenue in the quarter. DTC net sales grew by 33.6% year-over-year as online traffic and high conversion rates increased through ongoing marketing and social media programs.
Russ Hammer, Chief Financial Officer said, "We are seeing improvements and a stronger back half in our DTC channel, but without a meaningful opening up of the economy and health practitioner channel we expect only flat to modest consolidated net revenue growth for 2020. Our long view market opportunity remains intact and we continue to add new customers, doors, and products. Our Q3 revenues are trending ahead of Q2 sales levels and we anticipate reopening of retail locations in the U.S. will support a positive growth trend. As we see resolutions in Covid-19 and hemp CBD regulations or legislation we can see the category build towards its full potential."
There are huge problems now plaguing the industry which was just beginning to recover from last year's oversupply issues that caused a plunge in raw prices. Weather problems ranging from fires to droughts are affecting crops. Also, the ending of the 2018 Farm Bill pilot programs. If that wasn't bad enough, the Drug Enforcement Agency (DEA) decided to propose regulations that would essentially kill the market by making the production of hemp-derived CBD illegal.
The DEA has been somewhat quiet as the Food & Drug Administration (FDA) and Department of Agricultural have both made progress with regards to their approach on cannabis. Now, it has chosen to flex its power by issuing an interim rule on hemp that basically makes processing hemp illegal because during the process, the THC count could exceed 0.3%. Cannabis legal firm Harris Bricken wrote said on its website, "In order to extract cannabinoids from hemp, hemp plant material must go through an extraction process. This extraction process almost certainly results in a temporary increase in Delta-9 THC. As cannabinoids are isolated it is nearly impossible to control the levels of delta-9 THC from increasing through that process. This means that under the DEA's interim rule, the processor would be in possession of a schedule I substance, even if the processor dilutes the end product down to the requisite level of 0.3% delta-9 THC or destroys any delta-9 THC by product."
In March of this year, the FDA accepted for filing with Priority Review GW Pharmaceuticals' (GWPH) supplemental New Drug Application (sNDA) for the use of EPIDIOLEX (cannabidiol) CV to treat seizures associated with Tuberous Sclerosis Complex (TSC). EPIDIOLEX is already approved for the treatment of seizures associated with Lennox-Gastaut syndrome (LGS) or Dravet syndrome, two rare and difficult to treat conditions of childhood-onset epilepsy. While Epidiolex is a prescription drug, it is still a CBD product. Could this DEA ruling hurt prescription drug companies that specialize in CBD? Previously, it only considered the end product and not the product as it goes through the processing cycle.
Hemp Benchmarks wrote in its August report that "Certain parts of the proposed regulations, however, consist of DEA interpretations of gray areas of the Farm Bill, and have the potential to significantly disrupt, or even render unworkable, the hemp-cannabinoid industry as it exists today". Public comments will be accepted by the DEA through October 20, but the industry is admittedly on pins and needles over this and investors should be as well.
Prior to the fires out West, Oregon was on track to have a bumper crop of hemp while other states were fighting high heat and drought. Hemp Benchmarks wrote that as of September 11 there were 4,840 hemp grow sites statewide, encompassing 26,365 outdoor acres and over 9.9 million square feet (228 acres) of greenhouse or indoor space. Grow Sites within Level 2 Evacuation Zones (Be Set - Prepare to Leave at a Moment's Notice) were 576 sites (12%). The report also noted that in past seasons, hemp and cannabis growers in Western states have described plants' photo periods being thrown out of whack by heavy smoke blotting out the sun, which can negatively impact flower development. They said: "Given that the season is nearing its end and harvesting is already beginning for numerous farmers, though, that may not be as big of an issue this year."
The report went on to say, "The Pacific Northwest and Midwest are not the only regions experiencing a hot, dry summer. The University of Nebraska at Lincoln's Drought Monitor shows such conditions impacting the High Plains, the Southwest, and most Western states, as well as New England. Drought, coupled with high temperatures, is creating challenges for hemp farmers in those regions." Hemp Benchmarks said it still expects that 2020's production of CBD and other cannabinoid-rich biomass will be down from last year, possibly significantly so.
Hemp Benchmarks pointed out that half of the states currently growing hemp are cultivating the plant via pilot programs established under the 2014 Farm Bill, including some of those that had plans approved by USDA this year. "Those pilots are scheduled to expire at the end of October. After that, states must have a USDA-approved hemp production plan in place or growers must follow the IFR and apply directly to USDA for a license. However, several hemp organizations, lawmakers, and state officials are asking the federal government for extra time."
Senate Minority Leader Chuck Schumer (D-NY) said in a press release, "I'm urging USDA to delay their issuance of a final rule until 2022 so the hemp industry across the country and in Upstate New York has a chance to grow and create good-paying jobs at a time when jobs are needed the most. Delaying new regulations will help pull New York along in the recovery process as the nation deals with the impacts of the pandemic."
Allan Gandelman, president of the New York Cannabis Growers and Processors Association said, "There are over 700 registered hemp farmers across New York who would be negatively affected by the USDA's Interim Final Rule on hemp. The costs and bureaucracy of implementing the new rules as written create unnecessary financial burdens on farmers and our state agencies. The existing hemp pilot program has been sufficient in making sure farmers are complaint with all testing and public safety protocols. We would like to see the pilot program extended until 2022 and the USDA modify the program to let hemp become a widespread agricultural commodity like Congress intended by the passage of the 2018 Farm Bill."
It may be that investors have already begun to exit the hemp play. Viridian Capital Advisors noted in its first half 2020 cannabis investor report that there were significant declines in activity
That occurred in Hemp, and Infused Products and Extracts. Only $102 million of capital was raised in the first six months of 2020 in the hemp sector versus $301 million in the first six months of 2019. The report went on to say, "Several large hemp processors have filed for Chapter 11 and others are also experiencing distress. A significant increase in restructuring activity is expected in this sector in the second half of 2020."
One positive event on the horizon could be the Collective Growth Corp SPAC which raised $150 million. Collective Growth is the first SPAC specifically targeted towards the U.S. Hemp sector and will presumably need to put that money to work.