The legal cannabis space has come a long way in the last decade, with most Americans and all Canadians now having easy access to either recreational or medicinal cannabis. From an emerging market view, the industry has been just like any other insomuch that early elation has been replaced by reality, with good companies blossoming and weak ones disappearing. Still, the market is in its infancy and those that haven’t taken the time to do all the prep work could very well find themselves in trouble as the market continues to mature.
With the end of prohibition, everyone knew that the cannabis industry was going to be big and the race was on. Majors like Canopy Growth (NSYE: CGC)(TSX: WEED), Tilray (NASDAQ: TLRY) and Aurora Cannabis (NYSE: ACB)(TSX: ACB) immediately became household names as producers. Companies put on a blitz to get products into local stores.
Then, in December 2018, President Donald Trump signed the U.S. Farm Bill into law, legalizing hemp, a non-psychoactive cousin of cannabis, and changing the landscape for nationwide commerce of products containing cannabidiol (CBD). CBD, a compound of both cannabis and hemp, has been trumpeted for a litany of potential medical benefits from preventing seizures in rare forms of epilepsy to skincare to helping decrease anxiety. However, because cannabis remains illegal at the federal level, logistical challenges abound. The Farm Bill opened borders for products using hemp-derived CBD.
Get in Front of the FDA
The FDA finally stepped in and threw cold water on the CBD market in 2019, investigating companies, saying manufacturers simply can’t add CBD to products and make unverified claims about the benefits. The regulatory body further said that most CBD products sold in the U.S. are unregulated and untested. Against this backdrop, some pundits see the FDA clamping down further on regulations in the near term, a move to better protect consumers.
“We anticipate that the FDA will soon be issuing guidance that is far more stringent than most companies are prepared for,” commented Jason Mitchell, N.D., Co-Founder and CEO of HempFusion Wellness Inc. (TSX: CBD.U) / (OTC: CBDHF), in a phone conversation with Baystreet.ca. In not so many words, Dr. Mitchell is alluding to the idea that new compliance standards could make it difficult for many products on shelves today to stay there.
If the FDA begins mandating cGMP manufacturing facilities, toxicology studies and other documented laboratory studies to verify safety, purity, effect, ingredients, etc., the barrier to entry just grew considerably higher. Tougher compliance plays right into HempFusion’s hand.
Top Shelf: HempFusion
Dr. Mitchell and his team took the road less traveled when it came to building their business, putting an unwavering emphasis on CBD quality, safety and regulation compliance to strategically build the brand. Rather than rushing into Cannabis 1.0, HempFusion used its resources to align for Cannabis 2.0 and beyond.
The ethos of HempFusion is unique in that it was almost never a company. Dr. Mitchell was initially anti-medicinal cannabis, but an illness resulted in him completing extensive research on the endocannabinoid systems, giving him a complete understanding of the market opportunity for therapeutic uses of CBD.
From there, the company has grown into a venerable team of experts in biotech, consumer packaged goods and capital markets with 46 commercialized CBD products (tinctures, edibles, capsules, topicals) and another 30 in development. The HempFusion Wellness family of brands are sold in over 4,000 retail locations across all 50 states, including popular chains as Vitamin Shoppe, Sprouts and Fresh Thyme Market.
The product portfolio is where HempFusion really starts to differentiate itself from peers. A major difference is the fact that the company has created an innovative Over-The-Counter (OTC) drug-listed topical line for pain, eczema and acne. These products also use “broad spectrum” CBD, an industry term meaning CBD and other hemp cannabinoids are used together to create an entourage effect to deliver the widest set of benefits to the consumer. By using drugs cleared by the FDA for OTC sales, HempFusion is able to make claims related to those drugs, something other CBD companies are restricted from doing.
The implications to the top and bottom line represent a great deal of value to HempFusion. Namely, HempFusion products are recognized as some of the highest quality CBD products on the market. This positions the brand to penetrate the vaunted FDM (Food, Drug, Mass, aka “Big Box”) markets. FDM includes chains like Kroger (NYSE: KR), Target (NYSE: TGT), Walmart (NYSE: WMT), CVS (NYSE: CVS), Albertson’s (NYSE: ACI).
These are retail chains that simply aren’t going to take a risk related to unknown CBD products. They will only work with products they are confident they can sell as safe and effective, which is almost exclusively in HempFusion’s wheelhouse. In addition to the OTC goods, HempFusion is further differentiated by being certified USDA Organic, GRAS (generally recognized as safe), NOAEL (no observed adverse effect level) and other distinctions that give the company a competitive advantage. Furthermore, HempFusion is a sponsor in the largest human observational liver and reproductive toxicology study, which is currently ongoing.
HempFusion uses only DNA verified European Union Registered hemp, which dovetails perfectly with its international expansion plans, beginning in Ireland with immediate plans throughout the E.U., Brazil and China, where the company has the distinction of being one of only a few approved brands.
In order to reach the FDM space, HempFusion brought in John Visser as Chief Revenue Officer, a highly successful veteran of the sales and marketing space whose resume includes ramping sales from $60 million to $128 million in just three years while at Navajo Inc.
He also orchestrated HempFusion’s first major milestone in FDM: inking a deal to sell products in the pharmacy section at the nation’s fourth largest FDM. As is customary, the name has been kept confidential, but the chain has been described as having 1,200+ stores, with HempFusion starting out in 800. Investors would be wise to watch for what other agreements can be forged given the spiking interest in consumer CBD products.
That’s Enough, But It’s Not All
Most companies would be content to only have such an attractive product bag and pipeline. Not HempFusion; management has a multi-prong approach to revenue. The company’s doctor/practitioner revenue channel headed by Nancy Angelini, a licensed practitioner and key opinion leader traveling the country lecturing to some of the country’s largest doctor/practitioner networks. The company recently shipped its first orders into some of the most significant networks in the U.S.
Elsewhere under the HempFusion umbrella are the Probulin, HF Labs and Biome Labs units. All are highly important to the growth model. HF Labs provides access to about 27,000 doctors through three networks. Biome is the inroad to 70,000 chiropractors in the U.S. Probulin is particularly important for a couple reasons, starting with its line of probiotics and digestive enzymes along with its MAKTrek® 3D delivery system and novel cold shipping technology. Probiotics are growing in popularity and forecast to be a $74.3 billion market by 2024.
Probulin will also serve as a gateway to new markets in the future for HempFusion. A Trojan Horse of sorts, the strategy is to distribute Probulin probiotics into retailers that currently don’t transact CBD products. Embedded as a shelf staple and an approved vendor, if the retailer looks to expand into CBD in the future, HempFusion will be there, eager to assist.
Just Scratching the Surface
In 2019, HempFusion generated $4.2 million in revenue selling only ingestible products into about 2,100 Natural Food stores. Looking only at this channel, if HempFusion reaches all 10,532 Natural Food stores in the U.S., revenue would extrapolate 5x to $21 million. Again, that is only ingestible products. The market potential increases exponentially should HempFusion get these retailers to carry their line of OTC-listed drug topical products.
These are catalysts investors will be watching closely. Investors have not been shy in showing their support for HempFusion, which on January 6 completed its Initial Public Offering on the Toronto Stock Exchange under the symbol CBD.U, raising US$17.0 million in the process. This adds to a cash hoard that has HempFusion positioned with one of the largest cash positions in the CBD sector.
Further exposure is coming HempFusion’s way after this week being included in two leading cannabis and hemp-derived CBD focused exchange-traded funds: AdvisorShares Pure US Cannabis ETF (NYSE: MSOS) and AdvisorShares Pure Cannabis ETF (NYSE: YOLO).
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