Medical Marijuana Inc (MJNA)

[tetractys42]

CBD oil value

I'm writing this in response to a few posts I saw earlier today.

"Believers" will argue that since Phytosphere sold its ~500 kg of oil for $35 M, and now MJNA claims that it is producing 6x that amount, we can expect revenues of ~ $210 M.

"Skeptics" will argue that the sale had an inflated price conveniently "chosen" at approximately the market cap of CANV (formerly FCLS) at the time of sale. They will attempt to argue that since hempseed oil retails for a very low price, it must be that the CBD oil inventory is worthless.

I will first make the argument of the skeptic and I will then proceed to explain why I think this argument is flawed.

(Disclosure: I am long MJNA)

Nutiva sells retail hempseed oil for ~ $29.5 / kg.
Density (~0.93 cm^3/g): http://www.tis-gdv.de/tis_e/ware/oele/hanf/hanf.htm
Price ($14.99 for 473 mL): https://store.nutiva.com/cold-pressed-hemp-oil

You can also purchase hempseed oil wholesale for around $10 to $20 per kg:
http://www.alibaba.com/trade/search?SearchText=hemp+oil

If this were the value of the oil in question then the $35 M inventory sold to CannaVest would actually be worth between $5,000 and $10,000 wholesale (but with a retail price of a whopping $15,000 !) If that were indeed the case then the sale would probably be an attempt at defrauding investors.

There is a serious flaw in the prior argument: MJNA doesn't use or sell regular hempseed oil as far as I can tell.

Hempseed oil contains CBD, but at very low concentrations. The concentration of CBD in hempseed oil is roughly 10 mg/kg (http://www.accessdata.fda.gov/scripts/fcn/gras_notices/grn_35.pdf), which is about enough to have a beneficial effect if you drink 1 cup per day. The problem with doing so is that:
1) No one would be willing to drink/eat 1 cup of hempseed oil per day.
2) It would contain 2000 -roughly an entire day's worth- of calories (http://nutiva.com/wp-content/uploads/2012/12/OILNutritionPanel.png)

It's fairly reasonable to say then that no market exists for CBD therapy using hempseed oil.

What about other hemp oils that have higher CBD content?

It just so happens that hemp oil can contain 45-50% CBD (http://www.unodc.org/unodc/en/data-and-analysis/bulletin/bulletin_1962-01-01_3_page005.html) . It's possible that newer strains have a higher concentration (the paper is from several decades ago.) MJNA claims that they can produce 20-80% CBD oil (http://www.prnewswire.com/news-releases/medical-marijuana-inc-corporate-update--significant-revenue-and-net-income-growth-1st-quarter--division-and-corporate-holdings-update-201421221.html) Typical industrial hemp contains 1-5% CBD (http://en.wikipedia.org/wiki/Hemp ; citation needed)

How much would oil of this kind be worth? As we stated, the market for CBD oil is new, and is incomparable to the market for hempseed oil. We can try working backwards from the retail price for CBD containing products. The following calculations will be approximate, but we should be in the ballpark.

Dixie Botanicals sells CBD oil as an additive in a retail product at a price of $160 / 500 mg (the 2 fl oz bottles - http://dixiebotanicals.com/products/dew-drops-hemp-oil-supplement/) This is a price of $320,000 / kg of pure CBD. Dixie claims its products are tested "multiple times during the manufacturing process, using both traditional ISO 17 025 chemical testing facilities" (http://dixiebotanicals.com/frequently-asked-questions/)

As a comparison, CBD Cheeba Chews (a competitor brand for one Dixie product line) retail around $12 / 70 mg (https://legalmarijuanadispensary.com/dispensaries/colorado/colorado-springs/white-mountain). This is a price of $170,000 / kg of pure CBD. Cheeba Chews appear to also be tested (http://www.cheebachews.com/products.html)

Let's use Dixie's retail price for our calculations given that we're talking about the Dixie/MJNA valuations.

Assuming a markup of around 100% (based on our example with hempseed oil) the wholesale price would be about $160,000 / kg of pure CBD.

However, the oil that Phytosphere makes is between 20-80% CBD. Lets assume that Phytosphere sold 45% CBD oil to CannaVest (based on our 1962 UN document above.) 500 kg of 45% CBD oil will contain 225 kg of CBD with a wholesale price of $36 M and a retail price of $72 M. The wholesale price I stated is similar to the $35 M sale value of Phytosphere inventory/licensing to CannaVest. I guesstimate that the sale was actually at a discount (and contained a higher concentration than 45%.)

(If we repeat the same calculations above starting with the Cheeba Chews price, but assuming 80% oil, we get $34 M wholesale and $68 M retail for the inventory sold to CannaVest.)

Assuming MJNA follows through on their 6x prediction (and we have a full inventory turnover) CBD oil should make ~ $216 M of revenue. I doubt that they'll sell all of it this year, though. MJNA predicts $47 M this year and $155 M next year (http://www.reuters.com/finance/stocks/MJNA.PK/key-developments/article/2695840) for a total of $202 M revenue for this and next year.

I've used some measure of approximation, but I hope this is sufficient to show that MJNA's numbers are at least feasible.