Can B Corp. (OTCMKTS: CANB) is a diversified vertically integrated seed-to-sale hemp company whose valuation has been completely masked by the pandemic. During the pandemic year over year sales did decline, but only slightly. It needs to be emphasized that this was against a backdrop where CBD isolate prices in its core commodity plummeted from $7500 to $300 per kilo. The slight drop in sales is actually a testament to the core strength of their business. This deflationary spiral in CBD assets created a situation where one man’s trash is another man’s treasure. Can B Corp was able to pick up a number of CBD assets for dimes on the dollar including one million pounds of hemp biomass when processed with the Delta 8 isomer could be worth over $10 million. The current quarter may not reflect revenues of their recent acquisitions, but they could show up in a big way in the next quarter. This undervalued gem could be one of the best ways to participate in the growth of industrial CBD, in the coming years.
- New Delta 8 product levels playing field with cannabis producers
- Hemp division projecting strong revenue growth
- Misunderstood DuraMed business with huge potential
- Strong underlying asset base represents bargain valuation
The Great Hemp Comeback
The pandemic negatively affected many industries and hemp was not immune. Despite the temporary setback, the global cannabidiol market is valued at $2.8 billion and expected to grow annually at 21.2%. The primary growth drivers are health and wellness. The flood of players into hemp increased the competitive pressures to the point that it broke many of the startups. The mass exodus during the pandemic has hardened the existing hemp operators to find their niche products and reduce their costs. One of the largest left standing is Charlotte’s Web Holdings (OTCMKTS: CWBHF) and it is down over 70% from its high in February when the democrats unveiled their ambitious plans for the legalization of cannabis. They are the undisputed leader in hemp in the categories of market share, direct to consumer sales, brand loyalty, household penetration, and awareness. One of their interesting new initiatives is the Delta 8 isomer which allows hemp players to effectively compete with legalized marijuana. This is changing the paradigm in cannabis.
Unlocking Delta 8
Those not in the cannabis business might not be familiar with the term Delta 8 and what it means. Taking a step back, the general public can’t really tell the difference between a cannabis plant and a hemp plant. The leaves look the same, but what legally classifies the two plants is their THC content. Tetrahydrocannabinol (THC) is the psychoactive substance that makes people feel high. Hemp is classified as a plant that does not exceed .3% THC and marijuana has more than .3% THC. What the hemp producers are effectively doing is adding acid and heat to create the Delta 8 THC isomer.
CBD (Left) and THC are isomers – they have the same chemical formula C21H30O2 but different structures and chemical and pharmacological properties. To convert CBD (open form, Left) to THC (closed form) the hydroxyl group (blue arrow) needs to form a bond to carbon #5. This new bond is shown (Right) as a green line. The oxygen atom becomes the sixth member of the new ring. American Council on Science and Health
There is a process in organic chemistry called cyclization and it enables a legal compound like CBD oil to be turned into a controlled substance like THC. It doesn’t stop there however, because with more heat a Delta 9 or a Delta 10 can be manufactured.
Then they can spray the hemp flower with the isomer. The consumer of Delta 8 flower or cannabis flower typically cannot tell the difference between the two. This is what makes Delta 8 such a big value proposition for a segment of the consumers. Hemp producers are essentially leveling the playing field and legally competing with cannabis producers. This Delta 8 has also made its way into the edible market in the form of gummies, chocolates, and tinctures.
The Legal Loophole Driving Industrial Use CBD
With the introduction of Delta-8, has the CBD industry found a legal loophole? The answer quite frankly is, NO there is no loophole. This is 100% legal, and right there in the 2018 Farm Bill. This is why cannabis names like Aurora Cannabis (NASDAQ: ACB), Canopy Growth (NYSE: CGC), Cronos Group Inc. (NASDAQ: CRON) and Tilray (NASDAQ: TLRY) might find themselves behind the eight ball should legalization happen. The only thing they have is their brand names and first market mover advantage and a somewhat protected market. When it comes to cannabis they can’t grow in open air and they have to hand pick their crops. Contrast that to the hemp market where they can retrofit combines and in dryer climates let the plants dry in the field. These enormous cost savings will put huge pressure on cannabis companies that cannot efficiently extract industrial grade Delta-8. The rise of Delta 8 is already having a profound impact on the edibles market because consumers are having a hard time telling the difference between cannabis derived or hemp derived Delta 8.
The Can B Corp Vision
Most companies develop a product and then try to market and sell it. CanBCorp is a completely different animal. What they did was develop the market by targeting the docs in the medical field that believed in the benefits of CBD. After that they made the products and started to sell them. Then they wanted to get better controls on the quality of the product and saw the wisdom in purchasing their own manufacturing. The final piece was growing their own biomass. After 2 years of acquisitions they have complete control over their supply chain and distribution channel. They are also branching out horizontally with medical devices and lifestyle brands.
Their current products include tinctures, salves, topicals, skin care products. Right now these products are sold to consumers via doctors, medical facilities, retailers, online, and direct. These brands include Canbiola, developed for the medical community, Seven Chakras, a spa line, Nu Wellness for independent Pharmacies, and Pure Leaf Oil, their flagship consumer brand. Additionally, a line of nutritional supplements called SuperFoods has been launched nationwide via internet marketing.
Duramed is a horizontal expansion of their health vision that offers an FDA approved ultrasound medical device that alleviates joint, bone, and muscle pain from injuries and surgery. Sold through doctors and the medical community and rented via medical offices in No-Fault insurance states. The concept is to provide proven pain management without using opioids and a critical step in curbing the opioid crisis.
Pure Health Products
Pure Health products is GMP compliant and a soon to be NSF certified production facility located in Lacey Washington. Many people may not realize that almost all foods in the supply chain are NSF certified. This means the production facility maintains the strict standards that ensure food safety. In order to get certified the facility has to submit to extensive product testing, material sampling, and procedural audits in order to qualify. This is a continual process that is monitored by the NSF on a periodic basis to ensure the safety of our food supply. NSF certification will allow Pure Health to sell white labeled products in all the major big-box, pharmaceutical, drug and retail outlets. This makes them a formidable player in the mass markets as CBD products become more commonplace.
Certification is important but Pure Health has certain key assets that make them stand apart from the competition. They have a Class 7 clean room that allows them to make extremely high quality and pure products. The site has its own lab but also has validation testing from third party labs on their complete product line. The facility also has high speed automated production and has the capacity to do up to 100,000 individual products per month and have over 200 SKU’s to choose from. One of their secret weapons is a delivery nanotechnology that is supposed to increase absorption of the CBD molecules by over 450%. Through a process of blasting they turn the isolate into an almost soluble powder that increases the bioavailability. They make topicals, ingestibles, bath products, and pet products.
Hemp Operating Division
This is CANB’s biggest division with 3 operating companies, Botanical Biotech (Miami, FL), LLC, TN Botanicals LLC (McMinnville, TN), and CO Botanicals LLC (Mead & Fort Morgan, CO) which are spread over the United States. The key to their interoperability is that each company feeds the other. For example, the biomass is converted into crude. Then this crude is converted into isolate. From there it is further separated into isomers. Now it’s ready for sale or can be used as feedstock in the PureHealth products division. At the current rate the company should be generating $1.75 mil monthly which works out to $21.0 mil annually. The company said they are doing $400K in Delta 8 sales and “cant even keep the Delta 8 in stock.” If the company continues with its revenue expansion then the company has the ability to scale to $4.8 million monthly without any additional capital investment. At capacity CANB could produce $57.6 million as soon as next year and be half the size of Charlottes Webb.
Ultrasound is a proven class of therapy when it comes to pain management. Many scientific journal articles have been written on the topic. The concept is that the sound wave penetrates the body creating heat and thereby increasing blood flow. This results in a relaxation of the muscles and connective tissues and reduces the pain and muscle spasms that typically happen after surgery. This sort of stimulation is very therapeutic and can greatly reduce the healing time. The challenge was finding the right balance of ultrasound and maintaining it on its target. It needed to be more accessible and portable. Technology and miniaturization has made this a reality.
The primary market that Duramed is targeting is the workers comp and sports medicine market. The company purchases the machine and then rents it out weekly. Typically the patient uses the machine 4 hours a day to control the pain and stimulate the healing. Treatments range from 2 to 6 weeks. The payback on the machines is excellent and typically pays for itself in 4 – 6 weeks. The units run about $2300 to $2400. The best part is the auto insurance coverage. “No Fault” car accidents are driving growth because large carriers like Geico, State Farm, Liberty, All State, and Farmers approve of the therapy for these types of scenarios. The company has a footprint in “no-fault” states like Michigan and New York.
The earnings of this side business are too good to set aside. According to a recent interview the CEO goes into detail that 15 offices are in New York doing at least $595 per week and 25 offices in Michigan doing $1500 per week. Conservatively that is about 10 units per location for a total of 400 units being rented. At 50% utilization this translates into an annualized run rate of $2.34 million for New York and $9.75 million for Michan. In a perfect world the doctors would turn the machines over right away and put it on another patient and have all the training done ahead of time but that just isn’t reality. So adjusting for actual machine usage of 30 out of 52 week yields an adjusted annual run rate of $1.35 for New York and $5.65 million for Michigan for a combined of $7.0 million. They plan on adding an additional 100 units in early 2022.
Regardless of the sales numbers DuraMed has a significant revenue stream and significant growth drivers. Investors should be on the lookout for announcements of more locations to open. When factoring the overhead of staffing the locations to train and onboard the patients it is going to have robust margins similar to the CBD business. This business unit is self-sustaining and can grow organically when the units can pay for themselves in as little as 6 weeks. The units are very reliable and typically have a functional life of 3 years. This business with the right marketing could experience hypergrowth.
The top two names in the company are Marco Alfonsi and Stanley Teeple. These are seasoned experienced public company personalities that have mapped out a clear vision of what they want to do and where they want to go. Their move into Delta 8 just happened over the past couple of months which demonstrates their ability to react to the market quickly. The move to legalize cannabis is going to have a very big impact on the industry as a whole and it’s up to this team to navigate the waters. To their credit they managed the company through a death spiral in CBD pricing and have reinvented themselves. They also have very strong managers with solid industry experience in each of their subsidiaries.
There are 20.8 million shares issued and outstanding as of 9/20/21 which means the company has a market cap of $15.0 million. Management and directors own about 24% of the company. The CEO Marco Alfonsi owns 1.45 million shares CFO Stanley Teeple owns 1.25 million shares which represents about 8% and 7% ownership of the company respectively. This represents a healthy level of insider ownership. They have 9.49 million shares held at DTC which represents the float. Average volume is running at 62,682. They are very thinly traded with only .65% of the float traded daily. For the past two years revenues were running $2.3 million in 2019 and $1.7 million in 2020. At the end of the quarter the company had working capital of $1.04 million. The company also stated they have $12 million in hard assets as compared to the $15 million market cap leaving an enterprise value of $3.0 million. A silly valuation when they are expected to produce that over the course of the next 2 months.
The company does have a strategic investor, Arena Special Opportunities Fund LP, which raised $519 million to invest in asset backed investments in companies disrupted by the COVID-19 pandemic. The fund has a total of $4.025 million of convertible 12% promissory notes due on January 31, 2022. The conversion price is $.39. In June the company took on another $1.35 million to the existing $2.675 to fund additional asset purchases. An active strategic investor like Arena Special Opportunities Fund allows them a great deal of flexibility in acquiring additional assets.
In order to take advantage of the opportunities in CBD the company has been raising money under their A-1 which went effective in September 2020. Their first raise was about $5.0 million at $.50. This was amended in July 2021 to $15 million at $.65. Investors could see an additional 25.4 million of dilution in the coming months. The good news is that the company seems to be putting this money to good use by buying hugely discounted assets and putting them into operation.
- Debt Reduction
- Expansion of the supply chain
- New game changing products infused with Delta 8
- 2 More Acquisitions in the pipeline
- NASDAQ uplisting
CanBCorp is the ideal investment for investors that believe that marijuana will ultimately be legalized. Consumers looking for that legal high cannot tell the difference between the THC in marijuana or the manufactured Delta 8. Hemp has become the new cannabis. This is a gamechanger in the industry that is ripe for exploitation. CanBCorp is the industrial version of Charlotte’s Web without the overhead of slotting fees to keep their retail presence. The structural problem with marijuana is that the crops need greenhouses and they need to be trimmed by hand and cannot ultimately compete with crops grown outside.
The valuation of CANB is trading below the liquidation value of its assets and at a fraction of projected sales making it an ideal value purchase. Within the quarter CANB could be producing revenue over $1.8 million per month. These new revenue milestones could act as significant catalysts for stock appreciation. At max capacity with the existing infrastructure CANB could be selling $4.8 million monthly which is over half the size of Charlotte’s Web’s $100 million trailing 12 months revenues. It even gets better because CANB also has a secret weapon and it’s the NSF food safety approval which would allow private labeling for major retailers. They are positioned to be the lowest cost NSF certified CBD producer in the nation with capacity.
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.