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TICKERS: CWEB; CWBHF, EXL; ELLXF

Best-of-Breed Hemp/CBD Producers
Contributed Opinion

Source:

Frederick Lacy Fincom Investment Partners surveys the hemp-CBD landscape and discusses two companies it believes are "best of breed."

  • Hemp/CBD heats up. Wall Street catches on.
  • Next wave begins: CVS Pharmacy and Walgreens sell CBD.

The hemp/CBD phenomena grows. Investors appear to be catching on. Our universe of publicly traded CBD "pure-plays" suggests the two "best-of-breed."

Charlotte's Web Holdings Inc. (CWEB:CSE: CWBHF:OTCQX) (CWEB) and Elixinol Global Ltd. (EXL:ASX; ELLXF:OTCQX) are pioneers in hemp/CBD. Both are fast growers. Elixinol, the fastest over the second half of 2018, has new, cutting-edge products and a lower relative valuation. This balances with CWEB's stronger name recognition and larger retail sales base. CWEB's Q4 sales rebounded after a hiccup in Q3 and had solid Q/Q sales growth of 21%. Both companies have positive EBITDA, which must be a shock to cannabis investors, with what we believe is a superior business model to cannabis growers. (Disclosure: A director of Fincom Investment Partners is a long-time CWEB reseller).

Re-iterating our suggested target price: $5.95

We continue to suggest fair valuation for Elixinol remains one-half of CWEB's—discounted 20%. CWEB's sales are more than 2X, which equates to US$5.95.


(Source: Fincom Investment Partners)

  • We visited the Elixinol booth at March's Expo West (Natural Products industry biggest trade show) (our 32nd year) observing a buzz of activity; there was a continual flow of interested buyers, while management kept heading off to private meetings with Big Box retailers. We hope to see positive news flow over coming months.

  • Elixinol is completing its expanded production facility in Colorado, with capacity similar to Charlotte's Web. We believe production capacity and years of actual production experience is the edge for both companies in a sea of competition for "Big Box" attention.


(Source: Elixinol)

Elixinol's 2018 sales were US$26 million, up 121% annually. CWEB's were $69 million, up 74% annually. Much of Elixinol sales are in lower margin private label, which becomes a strategic advantage since neither CWEB nor CV Sciences can boast significant experience with private label, third party or bulk CBD sales. Elixinol, perhaps, has a "leg up" on branded partnerships, building the "powered by Elixinol" brand—the brand behind the brands. We believe this is a stronger competitive "moat" than just selling through fickle retailers.

The Great CBD Boom starts

From our February 4 report: "We believe, however, the CBD boom will continue, after any near-term lag—most likely towards the second half of 2019, as new, larger retailers, such as Whole Foods and the Vitamin Shoppe, and perhaps drugstore chains, etc., begin stocking product."

CVS, the largest U.S. drugstore chain, began selling CBD products on March 20. This date may represent, in the clarity of perfect hindsight, the paradigm shift into the vast reaches of mass market CBD. CVS is taking a cautious approach, starting with topicals (external balms and lotions) to avoid any FDA repercussions.

Following CVS, Walgreens announced March 27 it would start selling CBD products in 1,500 stores. No reports on supplier. We doubt any retailer will sole source, so there is room for several CBD suppliers.

We suggest the CVS news is the spear's tip, and we expect 2019 will continue to be an exciting year for CBD.

We have long argued CBD (the cannabidiols, a non-intoxicant) is a larger market—and a better investment—than cannabis. We believe CBD will become a health standard, available in multiple OTC forms and routinely sold by mass retailers, like aspirin. The OTC market for pain relief, stress and sleeping issues is massive. CBD is a perfect fit.

Wall Street is beginning to catch on:


(Source: Cowen Group)

Yes, the Canadians are coming. But not quite yet.

Many of the large Canadian cannabis companies have announced intentions to enter the U.S. CBD space. These include Canopy Growth (CGC), which has talked up a $150 million investment into U.S. hemp farming and CBD production. It is not afraid to spend money. We suspect Canopy is most likely a CBD-brand buyer once it figures out that farming is not where the big bucks are—the $5 billion cash infusion from Constellation Brands came from selling and branding, not hops and barley farming.

Tilray (TLRY) recently purchased hemp (not CBD) maker Manitoba Harvest, which sells hemp granola, oil, protein powder and milk. Making and selling CBD is an entirely different process from making granola. Nice idea, but still quite a way from CBD. Otherwise, Tilray continues its long slide back to fair value (lower) from our September 2018 call to sell TLRY/buy CBD.

Aurora Cannabis (ACB) has purchased several hemp processors, but has no actual CBD brands in the market. There was considerable chatter about partnering with Coca-Cola to produce CBD-infused drinks, but so far nothing formal. And it still has to solve the CBD-is-oil problem (see below).

Cronos (CRON) has a partnership with Ginkgo Bioworks that may (someday) produce lower-cost custom yeast strains capable of producing cannabinoids. We hope this works out—something better—CRON Q4 cannabis sales of US$4.2 million hardly seem to justify a $3.3 billion valuation. Even if Marlboro invested.

The Canadian cannabis crowd are smart people and surely see the CBD opportunity. It's real. It's happening now and it's happening all across the U.S.

We expect more CBD-related listings in the U.S., but investors can own two quality producers now. We also suggest investors recognize CBD is not software. Planting crops, building production facilities and selling into a pipeline that already has plenty of quality product is not easy. It is going to take at least two years, at the earliest, before a new player can develop into serious competition. 2019 remains opportunistic for existing CBD pure plays. Given the challenges, we think cash and stock–rich cannabis companies would be wiser to try and buy CBD producers...with their inflated stock.

Another reason to sit with CBD shares.


(Source: Fincom Investment Partners)

Stick with the Best-of-Breed

Charlotte's Web was "launched" by a 2013 CNN documentary and has been growing since. Elixinol founder/CEO Paul Benhaim has worked in the hemp industry since 1991. There are now hundreds of wannabe CBD start-ups; we avoid them because we doubt they have staying power or pricing power. Competition will increase. The vitamin and "wellness" industry attracts charlatans like moths to flame, a risky combo when combined with the penny-stock crowd. Be careful.

Other CBD producers include CV Sciences (OTC: CVSI), and we own some shares (from a low 2018 price point) in case something happens. We have been disappointed with management. Retailers complain about poor customer service; investors complain management ignores them. Quarterly sales growth has fallen off a cliff, down to just 4% in Q4. Its NASDAQ application has sat DOA now for nine months, which means there has to be something wrong? Plus, management still bizarrely insists in dividing the company, confusing investors and wasting half the presentation—as a pharmaceutical developer. It has no patent, which the U.S. Patent Office keeps denying. To us, the drug dream is presently "worthless" and only heavily promoted as some sort of ego trip.

CWEB is better known in the U.S. and Canada

Yet Elixinol shares were Exchange-approved and the IPO underwritten by a quality firm (audited by Deloitte). Since over 80% of sales are in the U.S., the company belongs in the U.S. peer group.

CWEB sales are roughly split between e-commerce and independent retailers, while about two-thirds of Elixinol's U.S. sales are in private label and bulk.

Elixinol has about $30 million in cash; CWEB $73million.

Of the pure-play CBD manufacturers, Elixinol has, by far, the largest global exposure; it is expanding operations in Japan, throughout Europe, and, of course, Australia. The company is emphatic its investments are gaining traction and will pay off handsomely. We look forward to upcoming news. It already has a strong reputation for quality in the U.S.; if combined with what could become a true global CBD brand, Elixinol should present a compelling value proposition.

Evidence of aforementioned success could also make Elixinol an irresistible target for numerous global behemoths with fear of missing out on the CBD boom.


(Source: Elixinol)

New, industry-leading products

One reason why investors should consider Elixinol as part of a sector-related portfolio: new, exciting products. Elixinol's line of water-soluble CBD is the fruit of years of research, and leads the industry. Investors may recall the early hype about cannabis/CBD-laced beverages, but soon realized the challenges working with an oil-based product. Parties involved recognize the need to develop a working solution. Water-soluble seems better. Elixinol is already there.

Elixinol has the opportunity to increase market share, both in the saturated independent retail space, plus offers a unique and compelling product for Big Box retailers.

 
(Source: Elixinol)

Health benefits pile up for CBD

Scientific research builds and frequent reports from CBD users maintaining a better quality of life, quality sleep, pain and inflammation relief, etc., abound

The 55+ group is an often overlooked category, with great potential: the baby boomers. Cowen reports only about 4% of seniors have tried CBD; the upside then is enormous as CBD helps wonderfully with the common age-related aches and pains. Reported results are impressive:

51% of Seniors Who Have Tried CBD Report an Improved Quality Of Life 1

"42% of the seniors surveyed said they were taking the CBD to deal with inflammation, and 40.9% to deal with chronic pain. 38.6% said they were giving CBD a try in order to deal with poor sleep quality, and 31.8% used CBD to deal with arthritis pain. And it's working.2" (1,2Source: Forbes.com February 25, 2019)

We think the older done-it-all group has less interest in spending the day "stoned," with better interest in improved health. Tens of thousands take CBD daily, even if they often do not "feel" anything. Slides like those (below) could help CBD to grow into millions of users.

We propose, beyond short-term relief, any a good chance CBD could help prevent serious disease, we'll take it. And we do. Every day. Perhaps not scientific, but suspect plenty of others will. Maybe even you:

The 81-year-old, who hasn't been identified, repeatedly refused chemotherapy and other treatments to prolong his life (pictured a CT scan of the man's tumours in July 2017)Instead, the ex-smoker, believed to be from the Stoke-on-Trent area, opted to take CBD oil for two months to tackle his lung cancer (pictured, a scan of his cancer in November 2017)
Published slides showing an 81 year-old lung cancer patient who declined chemotherapy, instead taking CBD daily for two months. The resulting tumor shrinkage is nothing short of remarkable (Source: Daily Mail 3/5/2019)

Frederick Lacy, President of Fincom Investment Partners, began as a Chicago commodity broker in 1984. In 1987 he joined Bateman Eichler, Hill Richards in Los Angeles, focusing on small to mid-cap equities, ultimately "retiring" in 2000 as a Managing Director of Investment Banking. Mr. Lacy has been involved in numerous investments, from arranging start-up capital for what became Petrohawk, which sold for $15 Billion, to mobile payments in India. Several long-time clients were founding investors of Cheniere Energy. Mr Lacy's decades in California technology includes arranging an early $13 million VC financing for "permanent ledger" software (now commonly known as "blockchain") led by top-tier fund Upfront Ventures. Other investments include 3D holographic display technology, early mobile applications, power conversion, along with multiple consumer health-related products: Canadian Glacier bottled water, Kinetin skin cream, a proprietary oxidative-stress formula, and UV purification systems. In 1989 Mr. Lacy hosted "the Venture Capitalist" which aired on (now) CNBC, and has followed the natural foods industry for 35 years.

Important Disclosure: Fincom Investment Partners and related accounts have purchased, and continue to purchase, Elixinol shares in the open market and also owns shares of Charlotte's Web. In addition, a Director of Fincom Investment Partners has been an executive and business owner in the nutrition industry for over 35 years, developed numerous close relationships in the industry, and has a business relationship with CV Sciences and Charlotte's Web. Fincom Investment Partners has started helping Elixinol, as a consultant. We have introduced distribution relationships, key management personnel and made other suggestions, based on our long and direct experience in the retail and wholesale nutrition industry. For this we are receiving a modest monthly consulting fee. We are not insiders and our investment opinion continues to remain our own.

Fincom Investment Partners Disclaimer
Prices as of 3/28/2019. This report is for informational purposes only and is not a solicitation of any security purchase or sale. We use a 0.71 conversion rate for Australia to USD and 0.75 for Canada. Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, Fincom Investment Partners cannot guarantee its accuracy. Do your own due diligence. Any opinions or estimates constitute our best judgment as of the date of publication, and are subject to change without notice. We recommend investors conduct thorough investment research of their own, including detailed review of the related Companies' filings, and consult a qualified investment adviser. Fincom Investment Partners and its officers and directors own shares in the securities mentioned in this report and may buy or sell shares at any time without prior notice. Fincom Investment Partners has a consulting relationship with Elixinol.

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