World Class Extractions Inc (CNSX:PUMP) is a US-based industrial scale hemp and cannabis extractor. Founder Anthony Durkacz provides an overview of the company and shares his thoughts on the rapidly scaling US hemp space. Durkacz discusses why so many farmers are making the switch to growing hemp and why the switch is not without risk. World Class has built two alpha systems that will be operational at the company’s facilities in North Carolina in May. World Class will both be creating its own branded products as well as employing a toll model. Durkacz highlights the advantages of the toll model and notes Valens GroWorks Corp (CNSX:VGW) (OTCMKTS:VGWCF) (FRA:7LV) has used this royalty-generating method to great effect. Durkacz is not worried about the price of extracted material in the short term, as there is not sufficient capacity to meet demands currently. However, he stresses that product manufacturers and distributors will ultimately generate the most revenue.
James West: And I’m joined now by the founder of Worldwide Extracts, Anthony Durkacz. Anthony, welcome back.
Anthony Durkacz: Thank you. It’s World Class Extracts.
James West: World Class – See, you’d think I’d know, being a shareholder, duh! But I actually haven’t even really been watching. How’s it been going since it went public?
Anthony Durkacz: We’ve seen a pretty good churn, I think, on the stock. The range is pretty much where our last financing was.
James West: So all those deadbeat weak-ass sisters are getting out and taking their, licking their wounds and getting out of here.
Anthony Durkacz: You know, you have to shake the weak hands out to be successful in the long run, so…
James West: That’s right, that’s right. Okay, so let’s, since this is essentially officially the first time for World Class Extracts, what is the business model?
Anthony Durkacz: Business model is focused solely on industrial-scale extraction of hemp and cannabis. Specifically, the target is going to be hemp in the United States.
James West: Oh?
Anthony Durkacz: And so the whole theory has been that, because this is an agriculture commodity, and since they have legalized it in the US in December, you have a Federal mandate. So you don’t have any of the issues, you know – the cannabis industry in America is going to be amazing and booming, but right now it’s Federally illegal. So even though it’s legal in the state or the municipalities, there’s all sorts of challenges. You don’t have a banking system that you can rely on, currently, in the States, but hemp is totally legal. And what’s going to happen is, you’re going to have a bunch of farmers that are going to begin to probably grow hemp instead of other –
James West: Canola.
Anthony Durkacz: Yeah.
James West: At $35 an acre, versus hemp at $2.5 million an acre.
Anthony Durkacz: Exactly. Yeah, or corn, or whatever isn’t working for them, those commodities, of course, they tend to look at changing. And so hemp has, you know, there’s this buzzword around hemp, and specifically CBD. So what happens is, if you have your average farmer who has 100 or 200 acres of hemp growing? That is an astronomical amount of plant produce that we have never seen before, because the, you know, the industries have been typically black market or very, you know, segregated or specific that a state would allow some, but it wasn’t Federally legal.
Now that it’s Federally legal, you’re going to have a lot of farmers or farming going into the hemp industry, and what are you going to do with all that hemp? Current extraction technologies that are used in the cannabis industry today weren’t meant to handle, you know, tons of output per day, period.
James West: Right. Okay, so do you have machinery and extraction gear all set up for this already, is that what’s under construction right now? Or what point will you be ready to process hemp?
Anthony Durkacz: Sure. So we had built two alpha systems, you know, to test out this theory on a smaller scale. Our first large-scale system, we expect to go into North Carolina in may, and that’ll be the first of three that are going to be sort of month-to-month. The second will also probably go into North Carolina. The third, we’re looking for the home; currently it’s a deal that we have in the works, but we haven’t figured it out, and there will be a fourth in the summertime that will be in Canada.
James West: Okay, and so, is the model that you’re going to toll process hemp on behalf of farmers, giving them back an extract, or are you going to buy hemp and process it and create your own products in partnership with somebody?
Anthony Durkacz: It’ll be a combination of both, because you don’t have a guarantee that that business plan is going to work perfectly; and the tolling, there are going to be certain farmers, certain situations, where they don’t have the end user or the end buyer, so what good is a bunch of CBD oil going to do for them?
James West: Right.
Anthony Durkacz: You know, that’ll probably open up a bunch of opportunities. But nonetheless, you know, tolling royalties is a great business. You know, you see it in Valens and MediPharms today that are using those systems, and you’re looking at, you know, excellent stock charts, and you know, their revenues are ramping up dramatically, and that’s a great business model.
James West: Cool. So then, the idea of taking all this hemp and processing it and using whatever sort of works to get it out – what kind of size of the market are we talking about in the whole United States?
Anthony Durkacz: Sure. So nobody knows the market for sure. What we do know is that, you know, because hemp – the CBD derived by hemp will have no psychoactive properties, so you don’t get high by taking it. Really what’ll end up happening is, you know, that market though is with, I think most people today believe that there’s some medicinal property to cannabis/hemp, and that CBD is one of those key molecules, which it is for sure, and that there’s a movement for people that would want to supplement with that as a health supplement, but they don’t want to get high.
And so that market, ultimately, is probably multiples of times bigger than the market that, you know, wants the psychoactive effect.
James West: Sure. Thematic today is this Economist article suggesting that China currently produces half of the world’s legal hemp, which to me was a revelation, because I was like, China? Because, you know, if somebody called me up and said hey, I heard China is about to start issuing licenses, well, guess where every promoter in the continental North America would be in two days? They’d be in China, trying to get those licenses. But if it’s already been legal there and they’ve been producing it to the point that they’re actually the largest supplier of hemp in the world, single-country supplier, you’ve got to wonder – what is it that they’re producing all that hemp for?
Anthony Durkacz: So I have a little bit of knowledge in terms of China, and we’ve been – there’s only a couple of states where it’s legal, where they’re looking at the use of CBD as the output. Otherwise, you know, hemp is great for producing materials and ropes, and sort of in the pulp and paper industries. You know, it’s got so many different uses, but not on the medicinal or narcotic basis. There, it’s still strictly very, very illegal, but they are, from what one of my colleagues went and saw, you know, they do have very large farms; it’s not looking at extracting, you know, for CBD.
So eventually that’s bound to come, like anything, and I think the world – but China hasn’t awoken yet to, you know, to legalization of hemp for that purpose, or cannabis, as of yet, in a federal way, where the Federal government is backing that.
James West: Sure.
Anthony Durkacz: So there’s still, you know, there’s still maybes and if, but if you went and planted hemp for the purpose of extracting CBD in China today, you know, you could get yourself into trouble.
James West: Sure. What does the footprint of an extraction operation look like in North Carolina, for example?
Anthony Durkacz: So our footprint that we’ll – you know, one of the interesting aspects of our technology is that we can process wet or dry plant, which is unique in the extraction world for cannabis or hemp. The footprint is about the size, really, it perfectly fits into two containers that you could put on a ship or onto an 18-wheeler, so you can transport it. It was designed to be a mobile application. Mobile in theory sounds great; the reality is, because of licensing, at first it’s going to be done probably in specific addresses that an extraction license is tied to. It’s still a few years away, I think, for the mobile aspect to be able to take effect where you could actually drive up to a farm and literally start to take the hemp down and process it right away, where you don’t have to dry it or cure it.
James West: Sure. So do you have relationships with farmers growing hemp in North Carolina now, who are going to –
Anthony Durkacz: We do, yeah.
James West: Okay.
Anthony Durkacz: So the first news release that was put out is regarding that first relationship, which we believe will be the first of many.
James West: Wow, cool. Where is the most hemp produced right now in the US that is actually –
Anthony Durkacz: Kentucky.
James West: Kentucky, okay. Is Kentucky a market that allows for extraction and production of CBD?
Anthony Durkacz: Yes. It does now, because it’s Federally legal. So there’s, and there’s a lot moving. You’re going to see other states that are going to get, you know, very active. The State of California for sure will be very active. But you know, one thing that, and I would say which you want to keep in mind when you’re looking at it – if one of them was growing corn this year and is going to grow hemp next year, there’s a lot of factors. Number one, if they’re not using the right hemp strain, because your CBD percentage is going to be absolutely critical, and if you don’t have the right percentage to begin with, you can extract as much as you want; it’s going to be at risk for being economic. And so you don’t want that to happen.
The other thing you don’t want to have happen is because it’s an amazing plant – hemp and cannabis are just in general these fascinating plants – you can have a farmer that sprayed a crop with a legal pesticide a decade ago, and it was totally legal, and now of course they found something that was, you know, wrong in that pesticide, and so today it’s illegal. If the plant draws that chemical out of the soil from 10 years ago, you could have a, you know, a failed crop. So there are a lot of risks, so I would caution to say that, you know, our plan is also to work directly with the farmers to make sure that number one, they have the right strains that are going to give them the best chance of success, and number two, to make sure that, you know, their environments are analyzed properly before they or us waste our time.
James West: Right. I’ve got to think that the farmers in North Carolina who are now growing corn and soybeans and canola are looking at what you’re doing there and getting very excited about the prospect of transforming the yield per acre into something so much higher-value.
Anthony Durkacz: So North Carolina is also a very historically big tobacco state, so there are generations of farmers that were growing tobacco. Some of them have switched over, but there is a fairly large contingent already that’s begun to grow hemp. But again, you know, I think the key here is going to be making sure that your source of supply has the right supply.
James West: Yeah, you bet.
Anthony Durkacz: The second that you have, you know, it could look like a great hemp crop, but if the percentage of CBD is not high enough, you’re going to have efficiency issues.
James West: Sure. And all this hemp is grown outdoors, it’s not grown in greenhouses, correct?
Anthony Durkacz: So there are greenhouses that do grow hemp, but the majority of hemp is grown outdoors, and that’s where you get these, you know, these thousand-acre farms and these, you know, 100 to 1000 hectare farms.
James West: Right. How soon do you think, then, until the excessive supply of CBD from hemp absolutely chokes the market and drives the price down to such a level where the farmers are thinking, okay, that was great, plant corn next spring? So is it like, have we got one year where it’s like, suddenly all these farmers are going to grow hemp, and the price of CBD is going to down below the cost of production because there’s just so much of it?
Anthony Durkacz: That’s a very, very good question, and I was having this discussion with an investment banker about the whole thing, and we were talking about, you know, how long do you think, you know…like today, the oil market in Canada, for example, is extremely high. Is it sustainable at these price points? Probably not. The question is, you know, when will it start going down? It could start going down today, but it could start going down in 18 months or 24 months. So the argument has been that there’s still not enough infrastructure to make that type of a dent where people believe the demand in the market is going to come from. And the fact that, you know, I think it was CVS in the USA that announced that they were going to distribute CBD in 1,500 stores across America is like the tip of the iceberg.
So the demand for CBD generally, which is not going to be psychoactive, is expected to grow dramatically. So you know, the question is, when will that balance ever happen? Is, you know, if I knew that crystal ball, I would probably, you know, be on the world’s biggest yacht right now, not in this interview.
James West: Right. Okay, well that’s interesting. Now, I wonder if, you know, so there’s no denying that at some point we’re going to have an excess of supply. Fine. But the guest after guest who comes on my platform says yeah, but that’s fine, because the value and the margin is in the value-add products, the consumer packaged goods that have hemp-derived CBD as an ingredient.
Anthony Durkacz: 100 percent.
James West: And in that realm, it’s not so much the cost of the input commodity, is not really the key factor; it’s competition on a different level for mind share and market share based on marketing and market penetration. So my question for you is, how much of that figures into World Class Extracts’ strategy versus how much of it is, you just want to be strictly an industrial business-to-business provider, and how much are you gearing up for a consumer packaged goods war on the next level?
Anthony Durkacz: Sure. So it’s a great question. One aspect that you brought up which is interesting – cost is always going to play a role, right? So anyone that tells you that cost is not, that’s not true. Coca-Cola makes Coke; their cost of sugar is a very, very important aspect of their business and their product. So cost is going to be king in the end, and having that sort of cost-quality relationship is what every single manufacturer of every good is going to look for.
The value add chain for sure is where the margins ultimately will end up, because as we all know, farmers don’t make all of the money; it’s, you know, the Heinz brands that, you know, sell the ketchup. The tomato farm doesn’t really make the money, but the Heinz brand does because they sell the ketchup and they have the distribution. So ultimately it will go into that realm. I think we’re unique in the sense that, you know, it’s going to be a high-margin business no matter what, here, for the foreseeable future, but after that, the question is, if we can develop distribution relationships and/or own them, you know, then you’re going, I guess, theoretically, not from seed to sale if you’re buying the seed.
James West: Right, right. All right, well, that’s great! I’m a shareholder, so I’m looking forward to the story developing.
Anthony Durkacz: Thank you.
James West: We’ll have you back soon for an update. Thanks very much for joining me, Anthony.
Anthony Durkacz: Thank you.
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