The passage of the 2018 Farm Bill, formally known as the Agriculture Improvement Act of 2018, last week has inspired investors at a time of a decidedly non-inspiring stock market. Even though stocks are sliding at a rate not seen since the Great Depression, people are still looking for ways to play the new legalization of hemp.
Some market watchers actually question whether President Trump realized he legalized hemp when he signed the Farm Bill, but whether he knew or not isn't relevant. Hemp and hemp-derived CBD (cannabidiol) are now legal. This discussion now is what this means for CBD products. If hemp is legal and the product is made from hemp then the logical conclusion is that that product is also legal. The Food & Drug Administration (FDA) wants everyone to slow their roll.
The FDA immediately issued a statement saying, "We treat products containing cannabis or cannabis-derived compounds as we do any other FDA-regulated products -- meaning they're subject to the same authorities and requirements as FDA-regulated products containing any other substance." The FDA went on to state, "It's unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations before they were marketed as foods or dietary supplements."
Since there are already numerous CBD products on the market, the statement leads to more consumer confusion. CBD products are sold in states where cannabis has been made legal and the FDA has shown little desire to enforce their position. The Drug Enforcement Administration (DEA) also claimed for many years that hemp-derived CBD was illegal, but it lost a court case regarding that stance and as such kept hemp-derived CBD in a grey zone of legality. The DEA and FDA say it's illegal, but then allow numerous companies to sell the products.
The market seems to be ignoring both of these agencies and will soon be flooded with claims of CBD being included in just about every kind of product imaginable and the FDA will have its hands full trying to regulate this onslaught of marketing.
Understandably, the FDA wants to make sure that the public is safe and isn't ingesting products that claim to contain a product that is unregulated or tested. It is comfortable with drugs like GW Pharmaceuticals (GWPH) clinically tested Epidiolex.
The FDA also said it is OK with hulled hemp seeds, hemp seed protein and hemp seed oil. It is also preparing to undertake approval of cannabis-related products saying, "Pathways remain available for the FDA to consider whether there are circumstances in which certain cannabis-derived compounds might be permitted in a food or dietary supplement."
Here are two companies poised to benefit from this new legislation.
Charlotte's Web Holdings
Charlotte's Web Holdings (CSE: CWEB) (OTC: (CWBHF) ) is the best positioned stock to benefit from this new legislation. The company has already dealt with the FDA and moved past the agency's guidance.
Charlotte's Web, which was once known as Stanley Brothers, received a warning letter from the FDA about making certain claims, which the company addressed. Since then it hasn't had any problems with the FDA and so it shouldn't have any issues going forward.
Last month the company reported financial results for its third quarter ending Sept. 30, 2018. Organic revenue grew 57% to $17.7 million versus $11.3 million for the year-earlier period. Net income fell to $1.8 million from last year's $2 million for the same time period. Gross profits increased 54% to $13.8 million from $9 million in the year-ago period.
"The Farm Bill provides the added legal clarity necessary to expand our distribution reach," said Hess Moallem, President and CEO of Charlotte's Web. "Hemp's removal from the CSA has been a core legal requirement for many national retailers wanting to carry whole-plant hemp extracts. Removing the social stigma linked with being a "controlled substance" and having the ability to attain organic certification under the USDA will help to grow consumer acceptance. Further, Charlotte's Web can now pursue relationships with federally regulated institutions such as banks, credit card companies, e-commerce marketplaces and advertising platforms in ways not previously accessible."
Curaleaf Holdings Inc. (CURA.CN) (OTC: (CURLF) )just launched its CBD brand called Curaleaf Hemp. CEO Joe Lusardi said, "This is really going to open up opportunities for hemp farmers and CBD processors all over the country, and will help to streamline access for people who need CBD for a whole host of ailments."
Last month the company reported its third-quarter 2018 results and delivered total revenue of $21.4 million, an increase of 289% versus $5.5 million for the same time period in 2017. Total revenue increased 47% sequentially, compared to $14.6 million in the second quarter of 2018.
The company recorded a gross profit of $13.8 million, excluding the impact of biological assets, an increase of 360%, compared to $3.0 million in the third quarter of 2017. The net loss was $33.7 million for the 2018 third quarter, including a $25 million one-time, non-cash, accounting entry as part of the RTO transaction and investments in new store openings and facilities, compared to net income of $0.5 million in the year-ago period. Gross profit margins, excluding the impact of biological assets, were 64%, compared to 55% in the 2017 third quarter.
For the full year 2019, Curaleaf said that it estimates it will post revenue of $400 million including revenue generated by the non-profits, and free cash flow of $100 million. That doesn't even address its potential from Curaleaf Hemp.