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Hemp Companies Take Root in the Region

A so-called green rush in San Diego has centered on marijuana. But a crop of companies are capitalizing on a lesser-known part of the cannabis industry: hemp.

“We feel we’re at the forefront of mainstreaming this, of legitimizing it, of doing it in a professional manner,” said Joseph Dowling, CFO of CV Sciences, a public company.

CV Sciences has two distinct divisions, both focused on hemp. It produces CBD — cannabidiol — hemp oils found at more than 1,500 natural food stores, including Sprouts Farmers Market, and the company is in preclinical development with CBD-based drugs to treat addiction.

Its products brought in third quarter 2017 revenue of $5.59 million, a 90 percent year-over-year increase, with full-year results due in March. The company has 52 employees.

Due to scarce land and high water costs, farmers regard the region as ill-suited to growing hemp. But San Diego entrepreneurs in recent years have cashed in on supplements, powders and oils from hemp-derived CBD. They anticipate a spike in business with consumers increasingly turning to pain alternatives, and the rising awareness of hemp, a byproduct of recreational marijuana’s legalization.

Marijuana and Hemp

Education sits atop a list of industry hurdles. Hemp is often lumped in with marijuana. The two come from the same plant species, with a big distinction. Marijuana can get people stoned because of potent amounts of THC, while hemp has trace levels — less than 0.3 percent of the psychoactive property.

Dowling said once investors and retailers learn the difference, they’re much more receptive.

To further blunt skepticism, he takes them on tours of CV Sciences’ office, with chemistry, office and manufacturing functions under a 35,000-square-foot roof in Sorrento Mesa. The structure boasts gleaming floors, stark concrete walls and a plethora of lab coats. The not-so-subtle message: This isn’t some back-alley, black-market operation.

Beyond consumer goods, the company’s preclinical synthetic-based CBD aims to fight addiction to chewing tobacco and other smokeless products, with the goal of getting Federal Drug Administration approval. The company estimates the market at $2 billion, and foresees little competition given that the FDA hasn’t approved a treatment specifically for smokeless tobacco.

Alan Brochstein, an investment analyst covering the marijuana industry, said CV Sciences has a pretty solid balance sheet. He added the company’s detailed accounting separates it from a sea of bad actors in the CBD oil market.

“It’s like night and day,” Brochstein said.

Despite its name, Medical Marijuana Inc. is in the business of hemp-related products. Founded in 2009, the Poway company claims it was the first in the industry to sell CBD goods online and ship worldwide. It reported revenue of $8 million in 2016, compared with $9.2 million in 2015.

CEO Stuart Titus said hemp reentered the national consciousness several years ago with TV segments showing its use as a treatment for juvenile epilepsy. He noted it was a common crop, even in San Diego, in the early 1900s.

From a federal stance it’s legally risky to grow hemp, so San Diego companies source it from Europe.

Global Interest

He said the company has caught on not just nationally, but globally, especially in parts of South America.

“Around the globe awareness is slowly starting to press forward.”

But Brochstein said Medical Marijuana Inc. has a history of over-projecting financial results, has burned cash and broke an earlier promise by not filing statements with the U.S. Securities and Exchange Commission, a basic tenet of company transparency.

The company in a statement said SEC filings aren’t a requirement.

“Medical Marijuana Inc.’s business strategy is to focus on developing and implementing strategies and actions that create growth, increased profitability, and value creation over the long term. The company’s securities trade on OTC Markets where the company is required to, and does, publish its GAAP prepared financial statements and quarterly and annual disclosure statements.”

Hemp-based CBD is projected to be a billion-dollar market in three years, according to a 2017 report from Brightfield Group, a cannabis market research firm.

A slew of smaller players have entered the space, including G. Randall & Sons Inc., which sells Randy’s Remedy, a line of lotions and other goods. Linda Strause said the company was formed in memory of her late husband, Randy, who was diagnosed with an incurable brain cancer.

“These are the products we wish he had when he was diagnosed,” said Strause, who partnered with her sons, Tyler and Brendon, on the venture.

Investors, she said, have taken notice of her 30 years of experience in global clinical operations and development. She’s cognizant not to, for instance, make unsubstantiated health claims online. The FDA has flagged such mistakes among other hemp-based CBD companies.

In some areas of the country there has been much talk over allowing hemp farming. Not so much in others.

Eric Larson, executive director of the San Diego County Farm Bureau, hasn’t heard much interest in growing hemp. It takes large, flat tracts of land, not often found San Diego.

Legally, hemp exists in a gray area.

Under California law, the regulation of hemp manufacturing, processing and sales is left up to local jurisdictions, which haven’t addressed the matter in San Diego. But the California Department of Food and Agriculture’s industrial arm is working on rules.

Legal Battle

On the federal level, the U.S. Drug Enforcement Administration in 2016 announced all cannabinoids — including hemp-derived CBD — would be considered Schedule 1 drugs, rendering them illegal. The hemp industry sued, arguing the DEA failed to follow necessary classification steps, and that the action is inconsistent with the 2014 Farm Bill.

Arguments are slated to be heard in mid-February in the 9th Circuit Court of Appeals in San Francisco.

“This could not be more gray. The federal government says one thing, but the state says another thing, but the Farm Bill says another thing,” said Kimberley Simms, a San Diego attorney specializing in the marijuana industry and has advised companies that carry hemp.

She likened hemp to marijuana several years ago, given the lack of legal precedent.

But Dowling, CFO of CV Sciences, isn’t fazed. He said the federal government will come around given that hemp contains very little THC. Dowling also cited the growing popularity of hemp products.

“The cow has left the barn,” he said.

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