The cannabis space has gone through some exciting twists and turns in the last decade, including the passage of the U.S. Farm Bill that legalized industrial hemp at the start of 2019. The U.S. was the last industrialized nation to finally de-couple hemp from its cousin cannabis, effectively opening up a national highway for interstate commerce of the plant that has been trumpeted for countless uses, including innovative medicines.
While sharing some components called cannabinoids, hemp is clearly differentiated from cannabis because it lacks or only contains trace amounts (<0.3%) of THC (tetrahydrocannabinol), the part of cannabis that produces the psychotropic high synonymous with marijuana.
The Farm Bill set off a whirlwind of business activity, with most companies focused on extracting hemp’s cannabidiol, or CBD, the cannabinoid of cannabis and hemp believed to have a litany of therapeutic qualities. To that end, consumer goods companies are packing CBD in all sorts of products, including water, skin creams, capsules, food and beer to name just a few, leading to forecasts that the surging hemp-derived CBD market will top $22 billion by next year.
It’s Not All About CBD
While there is a growing body of evidence of the health benefits from CBD, there is a less congested industry starting to emerge where savvy companies like Hemptown USA (a private company with plans to go public in the near term) are getting ahead of the curve to produce other cannabinoids from hemp. These lesser known components are referred to as “rare cannabinoids” or “novel cannabinoids” and they include the likes of CBG, CBC and CBDV, amongst others.
Cannabigerol, or CBG, which is less abundant in hemp than CBD, is a non-psychoactive cannabinoid that is actually the precursor to THC and CBD, earning it the nickname ““The Mother of All Cannabinoids.” Through a chemical process and exposure to ultraviolet light or heat, it becomes THC or CBD, which can be controlled through some genetic manipulation.
CBG is known to have robust effects on the human body’s endocannabinoid system, a function that helps maintain homeostasis. CBG is thought to be particularly beneficial for certain indications, like glaucoma, because it is a powerful vasodilator with neuroprotective effects. Other research suggests it can deliver positive therapeutic effects for many diseases and conditions, including psoriasis, eczema, cancer, Huntington’s disease, cachexia, inflammation conditions and inflammatory bowel disease. Further, research suggests it has antibiotic properties that can lead to new medicines for serious infections, such as methicillin-resistant Staphylococcus aureus (MRSA).
CBG King: Hemptown USA
To obtain higher CBG and CBD yields in hemp plants, Hemptown USA utilizes leading feminized genetics and best-in-class farming practices. In 2017, the company began farming hemp in the vaunted Emerald Triangle, a region in southern Oregon/northern California so named because of fertile soil and optimum climates that have made it is the largest cannabis producing area in the U.S. As described in a Hemptown video, the Emerald Triangle is a place “where conditions are damn near perfect for growing the best hemp in the world.”
This is not your grandpa’s type of farming. Hemptown uses premium genetics in its seeds, mechanized farming, proprietary combine harvesting technology and state-of-the-art drying processes that set it apart from any competition. After harvest, Hemptown processes its hemp at its own 40,000 square-foot extraction facility that is built to CGMP/ISO standards.
A secondary centralized extraction facility is currently being developed in Oregon to keep up with expected demand and increased farming operations.
The company has expanded from its 500-acre facility in Oregon to add 500 acres of grow capacity in Colorado and 500 more acres on Kentucky, with plans to add another 100 acres in California next year.
Initial harvests show that Hemptown’s plants yield up to 12%-15% full spectrum CBD and other cannabinoids, a high figure by industry standards that speaks to the quality of the technology underpinning the entire process.
After producing, drying and storing 110,000 pounds of hemp in 2018, Hemptown anticipates 3 million pounds to be dried and stored in 2019 from its 1,500 acres being farmed presently. In 2018, 1,000 kilograms of crude CBD oil was produced. For 2019, the company forecasts 40,000 kilograms of crude CBD oil and 25,000 kilograms of crude CBG oil, which will make the company a leader in the CBG space.
The business model involves partnering with experienced farmers in strategic regions, utilizing only Hemptown hemp seeds and standard operating procedures (quality assurance/control) to ensure consistency across different regions. This model facilities easy and rapid expansion to additional farms with minimal capital outlay. To that point, management says it has the opportunity to double its acreage in 2020 and again in subsequent years.
Hemptown controls the entire process from seed to oil and has a clear path to continue expanding. This entails not only additional farming, extracting and processing, but also investing in a pharmaceutical production facility for consumer packaged goods. Given CBG’s ability to treat atopic dermatitis (eczema) and psoriasis, a topical cream is a likely prime first product candidate. In turn, this opens up new sales channels at the wholesale and retail level, which will facilitate expansion of product formulations and more consumer packaged goods.
With the vertical integration, Hemptown has many competitive edges on top of the simple fact that cost considerations for open-land farming of feminized hemp for CBD and CBG is exponentially less than other procedures.
To lend some color to the capex comparison, consider that Hemptown grows its product at a cost of $5-$10 per pound. Growing outdoor cannabis costs in the range of $200-$500 per pound. Indoor cannabis cultivation has a price tag of a whopping $900-$1,200 per pound.
The metrics on the revenue are particularly compelling across the entire Hemptown product portfolio, consisting of top flow, pre-rolls, CBD biomass, crude oil and isolate and distillate. CBD biomass has the lowest margin, fetching about $40 per pound. However, CBG biomass is sold for $250 per pound, CBD 58% full spectrum and CBD full spectrum isolate get about $1,800 per pound and CBG isolate commands a price tag of $9,000 per pound.
With those economics its starts to become clear what kind of revenue Hemptown could generate in 2019 from 40,000 kilograms of crude CBD oil and 25,000 kilograms of crude CBG oil.
Hemptown management estimates gross margins from CBG distillate and biomass at a stunning 93.6% and 95.9%, respectively. Gross margin from 2018’s harvest was 77% across all products, a figure that the company thinks will be even higher with this year’s crop.
Flush with Cash
Hemptown has not relented on its growth trajectory so far and has big plans moving forward, including building out and acquiring FDA-approved assets to develop pharmaceutical grade products for the health and wellness industry and a R&D plan that will allow farming of more novel cannabinoid strains (CBC, CBDV, CBGV) in large quantities in 2020-2022.
These things take capital and investors have stepped up, with Hemptown recently closing a financing round raising C$23.24 million and now and on Thursday saying that it is raising another C$15.0 million to continue to push the expansion pace. Canaccord Genuity Corp. is leading the brokered portion of the raise (C$7.5 million), while the company goes to investors in non-brokered fashion to raise the other C$7.5 million.
The company is using the cash for multi-state expansion, buying $5.5 million in CBD seeds, construction of the new processing and extraction facilities and research team and initiate planting and harvesting of the 2019 crop of feminized hemp seeds. These financings also position the company to go public, which it plans to do in the near term.
The best way to succinctly summarize all of the operations, the rapid scaling, horizontal and vertical growth and dominant position being established in the field of CBG is simply the company’s name, Hemptown; it says it all.