Exactus seeking prime position in hemp cannabinoids

Exactus seeking prime position in hemp cannabinoids

Following enactment of ‘the Farm Bill’ in the US in January 2019, legalising hemp cultivation and opening the door to potential huge market growth for hemp-derived CBD (cannabidiol), CBD sales in the US are projected to increase from US$291mln in 2017 to US$5.7bn by 2019, based on a myriad of well-being and health applications. Exactus (EXDI) intends to carve out a leading position in the burgeoning CBD market by establishing control over the entire chain of custody for CBD production ‘from seed to consumer’ to provide full traceability and quality assurance on its products.

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An early mover into the hemp-derived cannabinoids market

Transition to the hemp sector in 2019. EXDI executed a supply agreement with Ceed2Med (C2M) accessing the latter's expertise spanning hemp and hemp derivatives from sourcing to commercialisation. C2M - a major shareholder as a result of the deal - appointed its co-founder Emiliano Aloi as president & chief executive officer (CEO) and Kenneth Puzder as chief financial officer (CFO) and board member of EXDI, a major step toward building an experienced management team. The agreement forms the basis of a multi-factorial agreement that feeds into each stage of the production and commercial process.

EXDI acquires a majority interest in Exactus One World farming assets. the deal (closed in March) provides non-GMO (non-genetically modified organism) material to launch an extended range of products in the fourth quarter of 2019. Exactus One World consists of two 100-acre, cultivation capacity tracts of prime industrial hemp farmland in Southwest Oregon.

Targeting high growth segments. EXDI is preparing to launch a range of branded products by means of its scalable cultivation and production platforms including CBD-infused tinctures, soft gel capsules, topical cosmetics and body care products; this is a market segment that is expected to grow from US$1.3bn in 2019 at a compound annualised growth rate (CAGR) of 169% through 2018-22. The company took another step towards scaling up through its October acquisition of luxury CBD wellness and beauty brand Le Vor Collection. EXDI aims for a leading position differentiated by traceability and quality across all brands.

Positive underlying trends. Enactment of ‘the Farm Bill’ has opened the door to the potential for huge market growth in hemp-derived CBD. EXDI is evaluating a very comprehensive range of distribution channels necessary to make a meaningful entry into these large but competitive markets and recently launched its e-commerce platform. The mainstream US retail chains have already moved in, signalling the potential for retail sales to match projected growth.

Near-term growth in tangible revenue streams is in sight. The indicative market value of the 2019 harvest of premium ornamental top flower alone using conservative pricing is about US$4mln for EXDI’s 50.1% stake. Second-quarter 2019 (Q219) product revenues rose more than eightfold quarter-on-quarter to US$139,693 from US$15,980, indicating a very strong trend. Additional branded product launches are targeted for Q419.

High-value harvest. Early indications are that the September 2019 harvest is on track with the company’s targets and in all eventuality, EXDIs share of crop harvest will be used to produce a range of consumer products that could if converted be sold at multiples of the value of the dried biomass revenues. Successful processing would provide the option to sell valuable cannabinoid isolate or distillate into the lucrative wholesale markets at market prices currently ranging from US$2,500 up to US$4,000 / kg (kilogram).

Moving into high growth markets

US Congress legalised cultivation of hemp and hemp-derivatives, including CBD, via enactment of the US Agriculture Improvement Act of 2018, known as ‘the Farm Bill’, in January 2019 after more than 40 years of prohibition, removing restrictions on the use of hemp-derived CBD complying with THC limits (below 0.3% in US and 0.2% in Europe).

Exactus (EXDI) is rapidly advancing its strategy to become a vertically integrated company operating in the burgeoning sector of hemp-derived wellbeing, lifestyle and health products. Estimates suggest that US CBD sales will increase from US$291mln in 2017 to become a US$5.7bn market by 2019, rising to US$22bn by 2022[1].

Traceability is of paramount importance for product and brand differentiation, the ability to provide source data for product labelling, and to help accomplish Exactus's goal of becoming a premium brand. Ownership over the supply chain provides the company with a guaranteed source of high-quality raw material and potentially enables it to maximise margins. EXDI is already well on the way to realising its goal of launching a comprehensive range of brands into wholesale and retail markets, initially including topical products such as cosmetics and body creams, tinctures and oil extracts for products developed for human and veterinary consumption.

It has accomplished this by partnering and acquiring new businesses and has already started to develop and commercialise its product range, moving toward its near-term goal of rapidly scaling up revenues. It is on track with internal targets for its EOW harvest.

[1] Brightfield Group

Strategy and goals

EXDI has already achieved a great deal in a short time including the implementation of an expert management team. Its headline goals are to;

1. Build up a quality branded range of hemp-derived products for the health and wellbeing markets, initially in the US retail and wholesale markets.

2. To grow organically by increasing its output and efficiency, extending its infrastructure and the product range.

3. To grow by forming new industry partnerships or through acquisitions and by expanding its acreage under cultivation.

EXDI is establishing itself as a quality operation from start to finish

EXDI is establishing itself as a quality operation from start to finish by using certified genetics, organic farming methods, and gold-standard current good manufacturing practice (cGMP) certified manufacturing facilities. This level of accountability and accreditation is essential to ensure that the cannabinoids produced comply with the highest standards required by global food & beverage and cosmetics and pharma regulators. While US Food and Drug Administration (FDA) guidelines are still in flux governing CBD regulation as regards the inclusion in foods for example, ultimately cGMP compliance ensures that consumers receive a safe end-product that is free from contamination and that has well-documented manufacturing processes.

Traceability from cultivation to consumer

Source: Company presentation

EXDI has executed two major deals

In summary, EXDI has executed two major deals to advance toward scaling up to a fully integrated hemp company offering ‘seed to consumer’ traceability on its hemp-derived CBD products. It has put in place nearly all of the components needed to complete the picture through its supply agreement with C2M and by establishing EOW as its majority-owned subsidiary. The only operation currently not covered in house is extraction. The company intends to accomplish this by acquisition or partnering.

Key partnerships set to facilitate strategic aims

EXDI acquired a 50.1% majority interest in the assets of Oregon-based Exactus One World (EOW) in March 2019 to provide a sufficient quantity of raw hemp and the expertise needed to launch an extended range of products in Q419. EOW consists of two 100-acre industrial hemp farms in Southwest Oregon, which is the third-largest hemp cultivating State in the US.

Seeds used at EOW are sourced from Oregon CBD, a federally-legal cannabis research & development company, operating in compliance with the 2018 Farm Bill. Oregon CBD was founded by Seth and Eric Crawford, who are running world-class breeding, research and production facilities for hemp seed, using fully non-GMO methods and with a strong track record of pre-harvest compliance with THC limits.

Top flower is set to provide an immediate tangible revenue stream

The EOW deal gives EXDI access to prime hemp farmland and quality assured seed genetics. EOW is farming 200 acres of hemp for harvest in 2019. In August, the crop passed the Oregon Department of Agriculture's compliance testing showing that THC limits fell well below the 0.3% specified by the ‘Farm Bill’ - testing at 0.1% - clearing the way for the harvest of the top flowers.

EXDI is harvesting top flower for subsequent commercial launch directly from the farm for the lucrative boutique and ornamental smokable markets. Since the harvest is ongoing the final weight has not been confirmed but the company states that the farm is on track to harvest at least 30,000 pounds (lbs) of top flower. The current wholesale price per pound of dried flower currently ranges from US$100 to US$650[1] – so using a conservative pricing of say US$200 per lb our estimate of the indicative market value range of the top flower alone - estimating a final crop of between 30,000 to 40,000 lbs - is US$6mln to US$8mln (or US$3mln to US$4mln for EXDI’s 50.1% stake).

The top flower is set to provide an immediate tangible revenue stream for the company. Following on from this, it is preparing to complete the harvest of the remaining flower and biomass as a raw material source for its own brands as well as for wholesale markets in distillate and isolate form that can, if converted and commercialised, provide significant upside to revenues based only on dried biomass.[2] We illustrate this using a range of metrics later in this report.

[1] Hemp Benchmarks, New Leaf Data, September 2019

[2] Per valuation report using company forecasts – Fairness Opinion by Scalar on EOW acquisition

Deal terms

In sum, EXDI acquired a 50.1% share of EOW, which qualifies as a majority-owned subsidiary, for an aggregate consideration of around US$8.3mln, comprising a rights purchase consideration of US$2.6mln, a subscription consideration of US$2.7mln, and a secondary purchase consideration of an estimated US$3.0mln.

C2M is a specialist in the production and extraction of cannabinoids

Ceed2Med transition to market

C2M took a majority shareholding in EXDI in January enabling the latter to make the transition to the hemp production sector.

C2M is a hemp and hemp-derivative supply sourcing, production, distribution and development company and serves as an experienced industry advisor to EXDI. Emiliano Aloi, a co-founder of C2M, has been appointed president of EXDI and as its interim CEO. C2M was established in 2018 to focus on hemp cannabinoid extraction and processing. Aloi has a wealth of experience in farming and cultivating hemp as well as in cultivating and launching other novel crops.

EXDI entered into a master product development and supply agreement with C2M that has ISO-accredited facilities and access to cGMP facilities, which means that EXDI can include pharma-grade CBD in its product range. C2M is a specialist in the production and extraction of cannabinoids.

Under the agreement EXDI:

• Was allocated 50-300 kg of ingredients per month, guaranteeing up to 2,500 kg per annum, of active phyto-cannabinoid (CBD) rich ingredients for resale;
• Placed a US$1mln purchase order with C2M to produce popular and high-margin products including tinctures, gel capsules and topical lotions, to provide a short-term source of revenue before the 2019 EOW harvest and build-out of the proprietary brands;
• Can access C2M’s expertise, resources, skills and experience for the dedicated supply of CBD rich ingredients including isolates, distillates, water-soluble, and proprietary formulations for manufacture into a finished product by its contract manufacturers.

C2M deal forms the basis of a multifactorial relationship

Exactus entered into a Management and Services Agreement with C2M

In July the company entered into a management and services agreement with C2M to access a wide range of skills, resources and business opportunities including project management, resources, services, opportunities and know-how including:

• Right of participation in additional business development and investment opportunities in hemp-derived CBD;
• Introductions in specialised human capital, product, vendor sourcing as well as farming and financing;
• Drawings, designs and specifications for extraction, production and manufacturing facilities and resources;
• Brand development and support services.

Hence, EXDI is positioned to access significant services and know-how; its deal with C2M forms the basis of a multi-factorial relationship that feeds into each stage of the production and commercial process.

In the deal consideration, EXDI issued 67mln shares to C2M, which at that time gave C2M roughly a 51% stake in EXDI; the proportion subsequently sits at around 22%, although C2M remains a major shareholder in EXDI.

CBD has garnered popularity in consumer wellness markets

Harnessing the potential of CBD

Cannabidiol (CBD) is a compound extracted from hemp or marijuana. Hemp contains only trace levels of tetrahydrocannabinol (THC), the intoxicating compound in marijuana.

US Congress legalised the cultivation of hemp and hemp-derivatives, including CBD, via enactment of the US Agriculture Improvement Act of 2018, known as ‘the Farm Bill’ in January 2019, after more than 40 years of prohibition, removing restrictions on the use of hemp-derived CBD provided these comply with THC limit (below 0.3% in the US and 0.2% in Europe) as well as safety and labelling standards.

CBD has garnered popularity in consumer wellness markets to alleviate the symptoms of a growing range of conditions including epilepsy and anxiety, and for sedation and pain relief; however, no unsubstantiated medical claims may be made when marketing and labelling CBD. The only FDA approved prescription drug is Epidiolex, a purified form of CBD for treating rare forms of childhood epilepsy.

• In pivotal studies - patients taking Epidiolex in a dosage of 20 milligrams (mg) per kg of body weight per day achieved a median reduction in monthly drop seizures of 42% vs a reduction of 17% in patients taking a placebo.
• Patients taking Epidiolex 10mg/kg/day achieved a median reduction in monthly drop seizures of 37% compared with a reduction of 17% in patients taking a placebo.

Epidiolex provides life-changing outcomes for patients and their families

There remains a great deal of knowledge to be uncovered as research has been greatly hindered by prohibition. Cannabinoids interact with the human immune and nervous system through the endocannabinoid system (ECS). The ECS has a key role in maintaining multiple endocrine, brain and immune functions.

The most well-researched elements of the ECS include the endocannabinoid receptors that are located throughout the body but primarily in the central nervous system, including in the brain and the cells of the immune system.

CBD and its effect on human biological functions

Source: CBD Centro

For this reason, they are implicated in many biological functions. Endocannabinoids found naturally in the human body are similar in structure to the plant cannabinoids and fulfil the same function. For example, there is promising evidence of the important role of endocannabinoids in regulating the neurological functions involved in stroke and Alzheimer’s disease.[1]

[1] ‘Endocannabinoid signalling as a synaptic circuit breaker in neurological disease’: Nature Medicine; Katona, Freund.

Regulation in data and evidence driven markets

The Farm Bill removed federal restrictions on hemp cultivation; however, product regulation is still in flux and particularly regarding novel foods (defined below). CBD remains firmly subject to FDA oversight and no unsubstantiated medical claims can be made for CBD products. For CBD products to be marketed with medical or therapeutic purposes for human use, it must be classed as a drug and has to go through clinical trials.

Hemp prohibition has led to a huge void of scientific knowledge and so evidence of the medical benefits of cannabinoids is largely anecdotal. This leaves open a huge opportunity for researching the very broad properties and therapeutic potential of hemp-derived cannabinoids, as well as in improving education for consumers and producers alike.

EXDI is setting out to inform and educate consumers and medical and healthcare professionals about its products and to comply with strict regulations set out by the US Department of Agriculture (USDA) and FDA. This can mean clinically testing its products for bioavailability, dosing and safety.

Quick facts: hemp derivatives in novel foods

CBD in food and food supplements containing CBD derived from industrial hemp: This is legal in most European nations and in the US, provided they comply with THC limits and novel food regulations.

Novel foods: these are defined as those where a significant history (at least 25 years) of consumption has not been demonstrated.

EXDI is focused on developing products with lower regulatory hurdles

The subject of novel food regulation is still being hotly debated as arguably there is a significant history of using hemp and its derivatives in foods with no reported safety events.

However, in the first instance, EXDI is focused on developing products with lower regulatory hurdles, in the following order:

• Topical products and cosmetics including creams, sprays
• Ingestible products such as extracts and tinctures, edibles
• Vaping products including oils and extracts.

It is laying the foundations to enable it to address all three segments by setting high standards of compliance with all of the consumer segments and the pharma market.

Focused on meeting high regulatory standards

EXDI is positioned to meet the stringent standards of the pharma industry by accessing cGMP facilities and to conduct research & development (R&D) for health and food research and to grow its own knowledge given the long history of crop prohibition.

Hemp is a broad-based plant containing more than 100 cannabinoids and so the potential permutations are practically endless. Studying its properties and formulations offer scope for new applications in health, wellness and consumer markets.

As we have said, this can also help EXDI to develop a strong brand by setting high standards of quality and transparency and thus earn a position as one of the most trusted names in the hemp-derived CBD market.

EXDI is an early mover into the market following the legalisation of US hemp production and it is setting out to differentiate itself from the myriad of companies in the sector and to carve out a leading position.

Targeting rapid expansion using sustainable and responsible methods

It is targeting rapid expansion and it aims to achieve this using sustainable and responsible methods and by upholding rigorous safety protocols. Other essential factors for achieving brand recognition start right from seed selection. EXDI has already established very strong partners starting with the One World farmers and through its relationship with C2M.

Other factors that can help differentiate it are:

• It has established rigorous protocols and data management procedures, always using accredited facilities to ensure compliance with the most stringent safety and quality standards - from extraction methods to finished goods.
• Ensuring that all products are laboratory tested and provide full traceability from cultivation to end consumer product with a full history of ingredients and farming methods that comply strictly with the existing (USDA) protocols.
• Developing and implementing labelling and manufacturing standards specific to hemp-derived CBD, including product certification, standard operating procedures, and recordkeeping consistent with cGMP.

EXDI seeks to meet the highest quality standards

The FDA continues to scrutinise CBD producing companies, clamping down on products with unsubstantiated medical claims. There has also been wide publicity on the outcomes of studies testing CBD levels on products revealing the presence of contaminants or of levels of CBD that differ with those shown on the label.

For example, a study by researchers at the University of Pennsylvania found that nearly 70% of online CBD products tested contained CBD levels that were either lower or higher than indicated on the label. Tests also indicate that some CBD products contain harmful contaminants. This provides a clear opportunity to set higher quality standards.

EXDI seeks to meet the highest quality standards and to comply fully with FDA regulations. This also lays the ground for fully exploring the full potential of hemp-derived products, including developing more highly regulated but potentially high-growth products such as dietary supplements, and in future the potential to sponsor clinical studies.

Addressable market and commercial potential

The enactment of ‘the Farm Bill’ in January 2019 has opened the door to potential huge market growth for hemp-derived CBD (cannabidiol) to become a mainstream market. Estimates suggest that CBD sales will increase from US$291mln in 2017 to become a US$5.7bn market by 2019 and hit US$22bn by 2022[1].

One of the most established methods of CBD consumption is by way of oil tincture usually administered under the tongue; however, this is only the tip of the iceberg - the proliferation of brands and products means that CBD is being used for a seemingly boundless range of uses as an ingredient in health and protein drinks, mineral water and alcoholic beverages, tea coffee and cocoa and in moisturisers and shampoos.

[1] Brightfield Group

Estimated market segmentation hemp derived products 2018 as % of gross sales

Source: Brightfield Group

One of the largest and fastest-growing segments is personal care products including CBD-infused topical cosmetics and body care products, which are expected to grow from US$1.3bn in 2019 at a CAGR of 169% to 2018-22. Vaping is also an increasingly popular means of consumption, usually as oil extracts or in dried flower form. In fact, some estimate[1] that up to 10% of adults will use CBD in some form by 2025.

So even though US hemp cultivation acreage is reportedly rising fast to meet demand, led by Montana, Colorado and Oregon, there remains a shortfall in supply and estimated huge pent up market demand.

US mainstream retailers have seized upon the legalisation of the US CBD market including recently the large chains CVS and Walgreens, which is a testament to the size of the market opportunity; other specialist channels are due to participate in the expanding market.

[1] Cowen & Co

US Hemp Production 2018 vs 2017

Source: Vote Hemp/MJ Business Daily

Market landscape and trends

The top 10 hemp product companies in US market are shown in the following chart. Charlotte’s Web (CWB) has a track record as a market leader and focuses on the production and distribution of hemp-based CBD wellness products via its vertically integrated model.

2018 top 10 US hemp CBD companies by market share

Source: Brightfield Group/Analyst

CWB grew its area under cultivation to around 860 acres of hemp in 2019 vs 300 acres in 2018. It produced 675,000 lbs of hemp in 2018, growing total sales by 73% year-on-year to US$69.5mln. CWB built the brand on the publicity and success it gained by famously helping treat one of the first child sufferers of paediatric epilepsy.

The product range now encompasses over 60 stock keeping units (SKUs) including CBD oil, edibles for human and pet consumption, oil capsules as well as topical salves, lotions and isolate. Its recent appointment of ex-Kelloggs foods Deanie Elsner as CEO, an expert in food packaging and marketing, signals potential further expansion into the food and beverage sector and potentially to help navigate through novel food regulations.

Popular hemp-derived products

Source: Analyst

EXDI will launch a comprehensive range of products in the most popular high-growth segments

Other key industry trends include strategic partnerships with medical professionals – such as those developed by Australia-based Elixinol (EXL), which leverages strategic partnerships with medical professionals, to expand CBD education and brand name recognition. CV Sciences is moving towards a clinical trial start for CBD in smoking cessation in 2019.

Mary’s Nutritionals recently partnered with a leading vaporiser products company Greenlane (GNLN) to participate in the explosive growth in popularity for this delivery choice. EXDI is seeking to launch initially into the US market, although the popularity of hemp-derived CBD is being mirrored in Europe where CBD markets are burgeoning providing scope for geographic diversification. Europe’s CBD market was estimated at US$318mln in 2018[1] and is tipped to rise to nearly US$1.7bn by 2023. On our calculations, this presents a CAGR of over 40% or an absolute rise of more than 400%.

EXDI indicates that it will launch a comprehensive range of products in the most popular high-growth segments and is already advancing its scale-up strategy by means of acquisitions as we will describe in more detail.

[1] Brightfield, European CBD & Cannabis Market 2019 Report

Establishing a range of premium branded products

The company is initially targeting the US hemp-derived CBD market by developing new brands and through acquisitions. EXDI is going to roll out a broad range of more than 60 SKU’s and these will be based on whole plant extracts that include distillates and isolates. Finished consumer products are valuable for the wholesale market – at up to US$4,000 per kg, according to Kush Marketplace.

Hemp quick facts

CBD distillate components of hemp oil can be separated from the raw CBD oil, cooled to obtain CBD distillate. This CBD distillate may contain many other cannabinoids, terpenes, and plant extracts and contains around 65% CBD.

CBD isolate is a pure, crystalline powder that contains 99% pure CBD extracted from the leaves and flowers of the hemp plant. Isolate is sold as a powder in slab form and also is commonly used as an ingredient in a wide variety of products including topical creams, vape oils and tinctures added to a carrier oil. It is oil soluble and therefore suitable for inclusion in edibles for human and pet consumption.

Source: kush.com

EXDI will focus on the most popular most high growth categories

Full-spectrum isolates and extracts offer the potential for further research into the so-called entourage effect – or the potential synergies between individual cannabinoids. EXDI will focus on the most popular most high-growth categories including tinctures, topicals, soft gels, vape oils and edibles as well as in high-growth, high-margin categories such as cosmetics and body products. The US CBD topicals and cosmetics market is already approaching US$1bn in value and set to grow at a CAGR of 169% to 2018-22.

EXDI intends to process this year’s harvest of dried flower biomass into isolate and distillate-based ingredients to be manufactured into the final product range for potential roll-out from Q419 for retail and wholesale markets.

In August, EXDI acquired Green Goddess Extracts, a highly regarded Florida contract manufacturer and formulator of hemp and vape products.

Green Goddess Extracts

Green Goddess manufactures and distributes a premium line of high-quality hemp products sold through distributors and online. The product line was launched onto EXDI’s own e-commerce site launched in October. Alex De La Espriella, founder and CEO of Green Goddess, has joined the company as vice-president of product development, providing another very significant addition to the EXDI management team.

Green Goddess was established in 2017 to target CBD products through mass-market distribution channels including convenience stores, vape shops, and tobacco retail stores.

The terms of the acquisition included 250,000 shares, US$250,000 in cash plus a US$250,000 earn-out based on the sales performance of the brand range.

The deal will likely provide EXDI control over manufacturing, and the ability to rapidly roll out its own high margin brands as well as selling Green Goddess flavoured products.

Green Goddess CBD e-liquid and tinctures - pricing per dose

Source: https://exactushemp.com

The acquisition also provides EXDI with a full range of local manufacturing and production capabilities including proprietary formulations and flavours; a clean room; warehousing; distribution and online sales capacity, all of which will be used by the company to expand its own existing and forthcoming product lines.

The premium quality range includes pre-rolled hemp flower, topicals, tinctures, and concentrates as well as isolate and distillate. It also includes topical CBD infused balms for muscle or pain relief priced at US$40 for 2-4 ounce (oz) unit size containing 250 mg of CBD. The entire range will be pulled into EXDI’s supply chain.

The topicals and cosmetics market is worth over US$1bn and set to grow at a CAGR of 169% to 2018-22.

Extending into the fast-growing body care and beauty market

As mentioned, the CBD products market is exploding and perhaps the lowest hanging fruit is in the topicals and cosmetics market which is worth more than US$1bn and set to grow at a CAGR of 169% to 2018-22.

EXDI acquired Florida-based luxury skincare and wellness brand Le Vor in October to scale up its product portfolio as well as maximising its distribution capabilities. The pre-revenue company has developed a range of cannabinoid-based beauty and wellness products based on natural ingredients, free from additives such as formaldehyde, petroleum and paragon, produced in cGMP facilities.

The acquisition provides EXDI with a ready-made product range to leverage raw hemp biomass from its supply chain enabling it to rapidly scale up its product offering. Le Vor is a virtual company which uses real-time inventory management (RTI), a system that is already plugged into a range of online distribution channels and should enable effective and rapid roll-out. Pricing ranges from US$49.99 for CBD + Vitamin C serum (20 ml of CBD) up to US$67.99 for a topical analgesic, containing 50ml of CBD blended with menthol in a 30 ml unit size. The terms of the acquisition have not been disclosed.

EXDI is also gearing up to launch its Paradise CBD skincare and sun protection range targeted at outdoor and fitness markets. It is also actively working on product development for its Exactus branded range, which will include tinctures, topicals and edibles in the first instance, with a view to market launch in Q419, based on the company’s statement of the early indications of a successful and high yielding harvest that started in mid-September. This line will include a premium range intended for the spa, department store and pharmacy segments. Following, we note some of the typical market metrics for leading high-quality brands in the product categories likely to feature in the first wave of products.

Popular product ranges

Source: Charlotte’s Web/CWB/Medical Marijuana Inc/MJNA

Exactus aims to maximise its resources and capabilities and to monetise any spare capacity

While this is not an exhaustive list, it indicates that the retail price for a premium CBD infused sun cream can reach up to US$22 per 100 mg of CBD, and at the smaller unit size, CWB oils can reach a similar price for an equivalent dose, e.g. US$39.99 for 210 mg of CBD.

EXDI has the option to use any biomass above its proprietary product requirements, allowing it to manufacture products for third parties as well as to supply high-quality distillate and isolate to wholesalers. This will enable it to maximise its resources and capabilities and to make money from any spare capacity. Its strategy is to focus its resources on branded products and evaluate white label and wholesale orders on a case-by-case basis.

Routes to market: going mainstream

Historically, online sales have been the primary distribution channel for the CBD markets and have been higher margin than physical retail outlets; the company recently launched its own e-commerce site. In fact, nearly two-thirds of CBD sales were online in 2017. Today, however, market growth prospects and legalisation have also attracted the large retail chains so that EXDI has the option to establish a physical market presence - vital for brand recognition and expansion.

Exactus's comprehensive commercial outreach plans

Source: Company presentation

Large pharmacy chains, including household names such as CVS and Walgreens, as well as other retail, and grocery chains are entering the market signalling a rise from a largely e-commerce market to a physical mainstream presence. Given their reach, scalability and mainstream familiarity, those in this distribution channel are expected to garner 57% of market revenues in 2019.

Over time, some estimate that markets will evolve towards more specialised channels including natural and speciality retail including gyms and pet stores.

Evaluating a comprehensive range of distribution channels

A focus on transparency

The company launched its e-Commerce portal in October, initially for commercialising the Green Goddess brands to retail and wholesale consumers, and it will subsequently expand the range of products. As we have already said, EXDI is focusing on building a reputation for quality and transparency. In fact, in parallel EXDI launched a buy-back programme offering to credit the full cost of non-traceable CBD products against purchases from its own site. This incentive signifies EXDI’s confidence in its product range and is significant given negative publicity surrounding the low quality, lack of consistency and potential harms of non-traceable CBD products.

EXDI leverages industry expertise from its executive team, from its newly acquired partners and advisors including knowledge of luxury brand concepts, as well as via third party market and consumer information.

We note that the company is already advancing its strategy by showcasing its brands at expos and conferences. A sales manager has been recruited to drive sales growth from Q3. Further news on brand development and routes to market are likely to be clarified. Overall, EXDI is evaluating a very comprehensive range of distribution channels necessary to make a meaningful entry into these large but competitive markets.

Consumer products could, if converted and commercialised, be sold at multiples of value of the dried biomass

Production output value

The company reports that it is starting to harvest its hemp crop at EOW. With 200 acres under cultivation, the harvest comprises a bulk of biomass and dried flower for processing into a finished product for retail and wholesale markets.

Also, EOW has estimated a minimum total harvest of 30,000 lbs of premium top flower for the ornamental flower hemp smokable markets. This is potentially an immediate consumer product to generate revenue directly from the farm. Hemp flower is an attractive product that is highly popular, particularly in states where cannabis smoking is not yet established/legal.

The company has previously disclosed that it is progressing well towards meeting targets

By way of reminder, Scalar LLC conducted an independent fairness opinion[1] relating to EXDI’s acquisition of EOW using various valuation methods based on company forecasts of revenues and net profits from sales of unfinished biomass 2019-23, to estimate the fair value of 100% of EOW. According to the fairness opinion report, the free cash flow forecast methods used indicated a median enterprise value range of US$62-$85mln for 100% of EOW compared to an implied valuation by EXDI’s purchase consideration of US$16,570,000 for 100% of EOW (or US$8.3mln for its 50.1% share).

The report is based on 100% of EOW revenue in 2019 of US$32.6mln or US$16mln for EXDI’s share, with a 2019-23 revenue growth CAGR of 45%, based on acreage expansion. The fair valuation, therefore, benchmarks a valuation of 100% of EOW based on dried biomass sales to third parties rather than finished products. Forecasts are based on a 16.5% CBD yield per pound at US$3.5 per % of CBD. The harvest is still underway, and the final breakdown on yield and pricing is not yet known, although the company has previously disclosed that it is progressing well towards meeting the targets set out in the Scalar report.

[1] Fairness Opinion, Scalar LLC, 1 May 2019

There are initial indications for a minimum of 30,000 lbs of ornamental top flower disclosed by the company and so using conservative pricing we estimate the value of 100% of the top flower.

E.g. 30 – 40k lbs of top flower at US$200 per lb implies US$6-8mln of revenue or US$3-4mln for EXDI’s 50.1% share

We stress that these are our estimates, which provide a benchmark for the potential value. Clearly top flower can if processed provide a more immediate revenue stream to EXDI than products requiring extraction and further processing.

Conversion to finished product implies significant revenue upside

The finished retail product can be valued at multiples of the unfinished dried biomass, if successfully processed and commercialised, providing upside to the revenue streams provided in the Scalar report. We make the following estimates using some industry metrics:

Price per lb dried biomass @ 16.5% yield and US$3.5 per % CBD of US$58

Low/mid yield per acre of 1,500 lbs[1] implies US$86,000 revenue / acre for biomass

If we assume a yield of 20-30 million mg (20-30 kg) of cannabinoids per acre on 1,500 lbs and given that the retail price of finished products - typically creams and tinctures - is US$100-200 per 1000 mg[2] (smaller units at higher cost per concentration) this implies a minimum US$2mln per acre if all biomass is converted and commercialised.

[1] Global Hemp Group Inc

[2] Averages from EXDI, CWB and MJNA product ranges

These calculations serve to illustrate the upside in future

Clearly, such estimates only provide a very broad indication of the differential and would need to be adjusted for several real-world factors including:

• bulk discount rates,
• current pricing and product mix,
• output capacity,
• the proportion of inventory retained for use in future years,
• the ability to commercialise the products.

It is not our intention to provide revenue forecasts at this stage – EXDI is still building its infrastructure and these calculations serve to illustrate the upside in future if EXDI can commercialise finished products as opposed to unfinished biomass.

On a wholesale basis, the value of isolate priced at up to US$4,000[1] per kg provides EXDI with an option to commercialise a portion of its output in the lucrative wholesale market.

We are not predicting an annual revenue trajectory or finished production output capacity; our calculations serve to benchmark the future commercial value of the finished product/wholesale extract compared to the revenues from the dried biomass.

[1] Kush Marketplace

Financial snapshot

The company reported an increase in Q219 revenues which rose eightfold Q-o-Q to US$139,693 from US$15,980 in Q119, and from zero in Q218, as sales of its finished products manufactured through C2M began to gather momentum. Gross margin at 26% included the cost of goods to cover the purchase of CBD products from C2M during the transition period to full scale-up and proprietary manufacturing.

P&L summary Q2 financials $

Source: Company filing

Six month cash flow to end June 2019

• Net cash used in operations was US$3,484,328.
• Cash increased US$662,685, including 19,271,223 shares sold in private placement, raising US$5,478,838.
• Cash and equivalents stood at US$664,645, with short term convertible debt of US$100,000.

The total number of fully diluted shares currently stands at 54.9mln.

Main sensitivities

• Operational success depends on growing the infrastructure at a rate to facilitate growth that might in future include identifying new partners or acquisition targets as well as investing in existing operations.
• Commercial execution depends on expanding the sales and marketing effort to develop a market and brand presence and bearing in mind established players and other market entrants may have deeper resources.
• Regulatory issues include maintaining licences and compliance with USDA and FDA oversight, maintaining quality and safety standards as well as THC limits. For example, if the crop in any one year exceeds the THC threshold of 0.3% the entire crop must be destroyed.
• The rate of executing the commercial strategy, for example in commercialising premium dry flower bud and other products for short term revenue, will govern cash flow. The ability to raise new funds will be determined by access to capital through debt or equity markets.
• Demand and supply economics; hemp is currently a high-value crop with high-margin products and a shortfall in supply. The Farm Bill might attract significant competition including overseas participants.
• Agricultural production is highly dependent on environmental and climate-related factors, although Oregon has a history of favourable farming conditions.

Partnerships provide most of the expertise and resources needed to execute the growth strategy

Conclusions

EXDI is targeting a leading position in the hemp-derived CBD and cannabinoids markets by differentiating itself on quality and traceability. It has rapidly scaled up and evolved into a very high-growth industry and its partnerships provide most of the expertise and resources needed to execute its strategy.

With the 2019 harvest well underway this indicates that a successful ongoing production and commercial outreach strategy can provide a very significant commercial opportunity for EXDI on converting biomass to finished product or high-quality wholesale extracts. In the meantime, sales of dried premium flower and acquired brands provide short term revenue generation potential.

The current market cap of EXDI is circa US$24mln having fallen back from the 52-week highs and is lower than the minimum valuation range for EOW provided in the Scalar report – which suggests a minimum valuation of EXDI’s share of EOW of US$31mln.

Therefore, in our view, there is upside potential to the valuation if the harvest is on track or ahead and can be monetised, plus there is the prospect of revenue from current or soon to be launched products.

In future, there might be upside to the revenue forecasts in the Scalar report given the potential valuation uplift between raw material and finished products, as EXDI executes its expansion strategy for its range of premium products.

Biographies

President and interim CEO: Emiliano Aloi

• Co-founded Ceed2Med, LLC in 2018 as a global sourcing and distribution platform for industrial hemp and industrial hemp-derived products.
• Considerable agro-industrial and market development expertise including as vice-president and director of strategic development for GenCanna Global, Inc.
• Co-sponsored research programmes for Stevia and Aloe Vera extraction methods.
• Helped establish Chia as a novel crop in Paraguay in a programme later merged into Cargill.
• Co-developed the agricultural solid biofuels programme for Brazilian conglomerate, Camargo Correas Cement Company.

Chief financial officer (CFO) and director: Kenneth Puzder

• Appointed to the board of directors in January 2019 and wass made CFO in July 2019. Former CFO of Ceed2Med with a strong background in the hemp industry.
• Accomplished leader in finance and accounting across a variety of industries and companies ranging in size from start-up to Fortune 500.
• Former vice-president of accounting and finance for Arby’s, Inc and CFO of AFA Service Corporation
• Former corporate controller for Panera Bread Company, president and board member of Panera Enterprises.
• Specialist in high growth business models, mergers & acquisitions, restructuring and turnaround and start-ups (public and private).
• Former audit manager at KPMG.

Interim chairman: Bobby Yampolsky

• Yampolsky is a co-founder and CEO of Ceed2Med.
• Founded a luxury jewellery brand ‘East Coast Jewelry’ on Worth Avenue in West Palm Beach US that evolved into a luxury shopping destination ‘ECJ Luxe’ encompassing a diverse range of products from yachts to cars.
• Built an international property portfolio including the purchase of a three-story building that is a staple and an icon in the city of Delray Beach, Florida.

Chief strategy officer (CSO): Andrew Johnson

• Appointed as CSO to the company having served as its investor relations consultant since January 2019.
• Eight years of experience in working with management on investor strategy and corporate messaging, including five years at a nutraceutical company bringing new innovative products to market.
• Director of investor relations at Chromadex Corp. (NASDAQ: CDXC), an integrated, global nutraceutical company. Director of outreach at Alliance Advisors, a third-party investor relations consulting firm. Sidoti & Company, an institutional equity research firm providing investors corporate access to an array of small to mid-cap companies.

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