The U.S. cannabis industry is expected to reach $13.4 billion in size by 2020, according to IBISWorld, as legalization becomes more prevalent nationwide. While cannabis remains illegal across part of the U.S., hemp-based cannabinoids snuck through a loophole following the HIA v. DEA court decision in February of 2004 and are not necessarily defined as illegal. These actions have paved the way for a number of companies looking to capitalize on non-psychogenic cannabinoid compounds.

While the FDA has butted heads with both the labeling and sale of non-psychogenic cannabinoids, like cannabidiol (“CBD”), the U.S. government itself holds a patent covering the use of cannabinoids as antioxidants and neuro-protectants. A growing body of research suggests that cannabinoids like CBD could prove both safe and efficacious in treating conditions ranging from Alzheimer’s disease to pain management to certain types of cancers.

In this article, we will take a look at why CBD represents a compelling niche within the cannabis industry and how Naturally Splendid Enterprises’ (TSX-V: NSP) (OTC: NSPDF) innovative extraction technology is changing the game. We will also discuss how that same extraction technology could impact the food supplement market.

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Water Dispersibility and Solubility

Most people think of cannabinoids as something that is smoked in the form of medical marijuana, and omega-3s as fish oil pills that are taken once daily. While companies like Nature’s Sunshine Products Inc. (NASDAQ: NATR) manufacture fish oil pills and a growing number of companies produce medical marijuana, these types of delivery mechanisms may be suboptimal and could be cutting out a large part of the population that could benefit from alternatives.

Naturally Splendid started in the hemp-based omega-3 business with products like HempOmega®, Natera™ hemp foods retail line, and Pawsitive FX™ their all natural pet care line. Recently the company licensed a cannabinoid extraction and formulation technology from Full Spectrum Laboratories Limited. Under the agreement, the company gains worldwide access to a number of technologies, including the first USPTO patent for water-soluble cannabinoids.

The water soluble properties of the technology set it apart from many other delivery mechanisms, since it could be incorporated into any number of food products. For instance, customers may one day be able to purchase CBD-infused bottled water. Similarly, CBD could be infused into consumer products like condiments, cosmetics, functional foods, nutraceuticals, energy drinks, energy bars, pet foods, and many other types of products.

 Why Hemp?

Hemp has a number of properties that make it a superfood in the eyes of many wellness experts. For instance, hemp seeds are naturally rich in essential fatty acids like omega-3 and omega 6, as well as proteins necessary to build muscle. In fact, hemp protein contains all essential amino acids making it a complete protein. The plant also contains low sodium, no cholesterol, and is a good source of zinc and other vitamins and minerals.

When it comes to production, hemp has a distinct advantage over marijuana since it is generally grown outside rather than indoors. As a result, hemp doesn’t require electricity or expensive plant food, and the cost of security measures is a fraction of what is associated with marijuana. These cost advantages make cannabinoid extracts from hemp less expensive to produce; yet they have the identical molecular properties of marijuana extracts (minus the THC). This creates a competitive advantage for Naturally Splendid by being able to offer consumers less expensive ingredients and/or products while maintaining the highest quality of product. This combination could result in increased sales and net margins for the company.

Several companies have already started selling CBD-based compounds, including Medical Marijauna Inc.’s (OTC: MJNA) HempMeds® product line for humans and Peak Pharmaceutical Corp.’s (OTC: PKPH) Canna-Pet® product line for pets, which demonstrates just how large the market for hemp-based products has become over the past several years. These markets are likely to continue growing as consumers increasingly embrace the substance.

Vertically Integrated

Naturally Splendid’s acquisition of the POS Bio Processing Centre back in June of this year has created the perfect platform for launching products that leverage the omega extraction and formulation technology. As a fully compliant facility with over 40 years of experience, the firm has gained access to an unparalleled manufacturing footprint that’s capable of targeting human, pets, or animal feed product lines, while generating revenue from an existing clientele.

In order to complete the acquisition, the company raised $1.6 million at $0.50 per share at a 34% premium to its share price at the time. The $1.5 million acquisition would have also taken roughly $30 million to build out from the ground up when looking at the full replacement costs, making it a financially savvy move that preserved substantial shareholder value and could set the stage for increasing levels of production moving forward.

The company also entered into an agreement with Medropharm GmbH, a Swiss biotech firm, in June to market and exclusively distribute an edible, cannabidiol-rich hemp powder in North America, as well as non-exclusively distribute hemp-derived cannabinoid extracts and other formulations around the world. In essence, the agreement provides a supply of hemp materials grown on over 3,500-hectares of industrial farms run under strict E.U. standards.

Significant Potential

Naturally Splendid trades with a market capitalization of just $18 million, which is significantly less than many other companies operating in the plant-based product / ingredient /supplement space. For instance, Burcon NutraScience (TSX-V: BU), a protein extraction company, trades with a market capitalization of $68 million with modest revenue, and Neptune Technologies, an omega extraction company (TSX-V: NTB) with a market capitalization of $136 million with significant losses. Many cannabis stocks trading in the United States, such as CannaVEST Corp. (OTC: CANV), with a $40 million market capitalization and not yet profitable, have also seen high valuations relative to their revenue. This extends to GW Pharma, a cannabinoid extraction and formulation company (NASDAQ: GWPH), with sales in excess of $2 million dollars of their flagship product Sativex® and a market capitalization in excess of $2 billion. As exciting is the recent acquisition of a private company, Vega, for $550 million by White Wave Foods (NYSE: WWAV), a company with an $8 billion dollar market capitalization. Naturally Splendid touches all these categories with their technologies, products and manufacturing facilities and has a much smaller market capitalization.

In terms of market potential, the company’s investor presentation highlights that the global functional food market is worth $240 billion, omega-3 foods were worth $34 billion, and the U.S. cannabis market is worth $10.2 billion. Capturing just a fraction of these markets with its innovative products and new extraction technology could deliver substantial shareholder value given its modest existing market capitalization and enterprise value.

The company has assembled a world class management team and board of directors that includes President David Racz, who has held senior level positions with companies like Pfizer Inc. (NYSE: PFE) and GlaxoSmithKline (NYSE: GSK), as well as Chairman of Boreal Technologies Charles Brink, who had previously founded Mona Vie Inc. – a food and beverage company that achieved annual sales of nearly $1 billion after growing at over 100% quarterly for three years.

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