The COVID-19 epidemic has transformed the global economy benefitting some businesses while devastating others. Optima Process Systems, Inc., has successfully transitioned from eco-compliant fossil fuel refining to hemp processing at the heart of the burgeoning cannabis industry. Optima’s team of engineers and investment bankers look for new low-cost process technologies to deploy in emerging growth markets to create recurring revenue streams.
Optima has targeted THC remediation (removal) which is the highest margin part of the post-hemp-extraction process. By using a proven low-cost form of THC remediation, the company estimates a $700,000 investment could generate $4,000,000 in cash flow (“EBITDA”) in its first 12 months. Optima is trying to fund two THC remediation units and two hemp extraction units for $1,800,000. With that funding, the company forecasts $8-10 million in cash flow in the next 12 months.
The critical flaw with many hemp startups is that they entered the high-growth hemp business without proper risk mitigation. For example, many large CBD companies entered the business but failed to secure buyers of their offtake or end products before investing heavily in capital equipment. Others did not have sufficient financial risk management and took on too much debt.
The 2018 Hemp Farm Bill led to a glut in hemp and a devastating collapse in hemp prices that made the sector extremely challenging. Among the many who suffered include GenCanna Global, Element Health Supply, United Cannabis Corp., and Mile High Labs. Optima is entering the market with a risk mitigated business strategy designed to avoid the fatal flaws of many hemp operators.
• Booked its first revenues and gross profit;
• Began discussions with a distribution channel to 3,000 convenience stores in Georgia and South Carolina and,
• Discussed a branding license with a leading global medical marijuana company.
Three Phase Market Entry Strategy:
Third-Party Processing and Marketing:
By providing third-party chromatography, Optima can generate gross profit to cover initial operating expenses. Optima has two third-party chromatography opportunities that it plans to close in the coming weeks. By marketing white labeling services and offering hemp products with our Denver sister organization, Optima has begun booking revenues and building a client base. Utilizing our connections in Colorado, a far more developed hemp market than in South Carolina, Optima is white labeling gummies, chewable tablets and doggie treats to farmers and other operators looking to get into the hemp business. All of these activities provide an opportunity for Optima to develop a client base and generate revenues without capital expenditures.
THC creates regulatory and legal problems for the hemp and cannabis industry. By focusing on remediation, Optima is focused on the highest margin part of the post-extraction processing business. Until hemp crude oil is remediated, many sector participants are trapped with hot hemp crude oil which is both illegal and difficult to convert or sell. Optima is utilizing low-cost chromatography to remediate hemp crude oil. Optima has a significant cost advantage which will allow the company to generate meaningful cash flow once operating.
While vetting one prospective distillation tower, Optima identified engineering and design flaws which led the Company to start designing and building its own fractional distillation solution. By leveraging its refining engineering experience and track record, Optima BioPharma has entered confidential discussions with one of the largest hemp extractors in the world about jointly developing a solvent-free cost-effective cannabinoid separation strategy. By partnering with a large operator, Optima is leveraging its engineering and development experience with its hemp processing and compliance skill sets. Optima looks to exchange its know-how and experience for the risk capital to develop this potentially disruptive technology.
Next Steps, Execution and the Retail Channel:
This summer Optima retained Harper Howell, a seasoned Denver extractor with pharmaceutical compliance experience, to launch Optima BioPharma, LLC’s South Carolina processing business with Tyson Halsey. Optima will use good manufacturing processes (GMP) and ISO 9001 compliance to produce pharmaceutical and food-grade products – markets where significant growth potential lies.
Optima has begun probing the high margin aspects of retail distribution. One kilogram of THC-Free distillate or broad-spectrum distillate sells for $1,000. One million milligrams of CBD are in one kilogram. Typical 1500mg CBD tinctures sell around $115/unit. Consequently, 667 1500mg CBD tinctures can be manufactured with one kilogram of CBD. 667 tinctures sold at $100 each net approximately $66,000. This $65,000 margin per kilogram in the retail distribution channel is another focus for Optima. Similar economics exist in the low price product category that Optima foresees in its convenience store strategy.
The US CBD market
The US CBD market is estimated to be $4.7 billion in 2020 and expected to grow 38% CAGR to $12.4 billion in 2023 and 25% longer-term. The US Veterinary CBD market grew to over 10 times its 2018 size, in 2019, producing $321 million in sales, and is projected to reach $563 million by the end of 2020, according to Brightfield Group.
This growth is being driven by a combination of an abundance of anecdotal evidence for a range of health benefits and pharmaceutical growth reflected in the Food and Drug Administration (“FDA”) drug approvals.
The FDA approved Epidiolex, its first CBD based pharmaceutical drug, for two forms of epilepsy in 2018 and an additional indication in August 2020. The FDA has approved three synthetic forms of THC for medicinal usage. These FDA approvals demonstrate the medicinal and scientific legitimacy of cannabinoid drug products. Anecdotal evidence supports CBD’s use in treating anxiety, sleep disorders, aches, and pains which are driving robust homeopathic and grassroots demand for CBD products. The National Institute of Health has stated
that endocannabinoid activity “holds therapeutic promise for a broad range of diseases, including neurodegenerative, cardiovascular and inflammatory disorders, obesity/metabolic syndrome, cachexia, chemotherapy-induced nausea and vomiting, tissue injury and pain, among others.”
The “godfather” of medical marijuana and CBD (or cannabinoid) research is Dr. Raphael Mechoulam, who was the first scientist to isolate THC and pioneered research in using THC and CBD for a range of diseases and conditions. The interrelationship of cannabinoids to the endocannabinoid system is central to the mode of action and the treatment of these diseases and conditions.
Below are Some excellent sources:
Cannabinoid research and medicinal development, Dr. Raphael Mechoulam, the regulatory conundrum of cannabinoids and the Drug Enforcement Agency (“DEA”), Tikun Olam, and autism.
A video is worth 10,000 words:
Dr Raphael Mouchalem on Scientific THC research (32 minutes)
Dr. Mouchalem on THC medicinal history and research (1 hour)
The senate subcommittee on Health, Wednesday January 15, 2020. Speakers include the FDA, NIH, and DEA on cannabinoids.
Tikun Olam https://tikunolam.com/home-california/
Tikun Olam’s comment on autism in this Vimeo https://vimeo.com/324758133 is awe inspiring. Their website addresses, among several diseases, the high correlations between epilepsy and autism and is a fascinating read. https://tikunolam.com/autism/
Optima is entering the hemp processing business using a low-risk business model. Famed investor Leon Levy once said that he found starting a business during a down market is the best time to build a strong business. Optima has identified a proven THC remediation technology to deploy in its new South Carolina facility. Optima will leverage the benefits of low-cost hemp crude oil and its low-cost remediation strategy to generate cash flow rapidly. Optima sees great potential in leveraging the retail channel, white labeling, farmer clients, remediation, and potential branding opportunities and is generating its first revenues and finding new clients and top tier businesses to collaborate with.