Demand for cannabis oils, especially high cannabidiol (CBD) oil, has increased significantly and this is a trend we expect to continue as researchers learn more about the therapeutic benefit cannabinoids provide. During the last year, we have noticed a significant increase in the number of companies that are focused on the cannabis oil opportunity. Although many of these businesses have grandiose plans as it relates to the cannabis oil market, an overwhelming majority of these companies do not have the capital that is needed to construct a state-of-the-art extraction facility. Xtraction Services represents a differentiated opportunity when it comes to cannabis concentrates and we are favorable on the approach the team has taken to this burgeoning vertical of the cannabis industry.
Xtraction Services has built a business model that is centered around helping extraction companies and by providing equipment leasing solutions for up to 100% of the new or used equipment that is required by each respective client. The company’s mission is to support their clients throughout the entire installation and extraction process.
Today, Xtraction Services (CSE:XS) completed a go-public transaction on the Canadian Stock Exchange (CSE) and commenced trading on September 13 under the symbol, XS. The company represents a differentiated growth opportunity that is levered to one of the most exciting verticals of the cannabis industry.
When you look at the Xtraction Services website (https://www.xtractnow.com), you will notice that the company has received raving reviews from several leading US cannabis concentrate companies. In a world where quality customer service is difficult to find, we are favorable on this approach due to the relationship that the company fosters with each client.
A High-Margin Growth Story to be Watching
Xtraction Services has a high-margin business model where customers receive processing equipment following a down payment and where the company is compensated through lease and royalty/service payments. The management team has a proven track record of success and relationships with key equipment manufacturers, which provides Xtraction Services with an important competitive advantage.
During the last year, Xtraction Services has seen a significant increase in the number of customers as well as the size of the transactions being closed. The company currently has a backlog of projects and we are bullish on the growth prospects associated with this pipeline of new business. Xtraction Services has an established client base and is already generating significant revenues.
So far, the company has established the following relationships:
- Oregon – Completed the sale of CBD manufacturer post-processing equipment
- California – Completed the sale of THC manufacturer post-processing equipment
- Kentucky – Signed a 30 month lease (royalty) hemp manufacturer (2) production lines
- Kentucky – Signed a 24 month lease (royalty) hemp manufacturer full production line
- South Carolina – signed a 12 month and a 14 month hemp manufacturer extraction equipment lease
When it comes to the current pipeline, Xtraction Services has more opportunities than it can service. These represent a robust emerging opportunity and we are bullish on the growth prospects associated with the pipeline. Additionally, due to the nature of the business XS is able to operate across the U.S. giving them a massive total addressable market serving both THC and CBD customers as well as start-ups to more mature businesses. Over the next year, we anticipate that the company will close several new deals and expect for this to be a catalyst for continued growth.
In the Early Innings of a Major Growth Cycle
Over the next year, we expect to see Xtraction Services report strong growth as it continues to deliver state-of-the-art processing equipment to its roster of clients. The company offers a wide variety of products to satisfy consumer demand and we are favorable on this aspect of the story. During the last year, we have seen a significant increase in these types of cannabis concentrate products and this is a trend that will benefit companies like Xtraction Services. By offering a robust product pipeline, the company will appeal to a wide variety of clients who are trying to produce these premium cannabis concentrates at scale.
Xtraction Services offers leasing options that provide short payback periods and high initial rates of return (IRR). Through leasing or sale-leasebacks, the company is able to generate an IRR that is greater than 50% and we find this to be significant. The length of these contracts varies between 1 and 3 years and we are favorable on this structure.
The current pipeline includes a combination of lease and lease/royalty hybrid structures and we are favorable on the flexibility that is provided by the company. Lease financing provides a fixed payment to the company while a royalty payment allows the company to benefit from the additional upside of what is produced by clients.
Through a sale-leaseback transaction, customers who already own their equipment can benefit by working with Xtraction Services. With this transaction, the customer continues to use the equipment and pays a fixed monthly lease payment to Xtraction Services. At maturity, the company has the option to re-sell the equipment to the customer and we are favorable on this.
When it comes to determining what purchasing solution to offer each potential client, the relationship that the company has with the prospect plays an important role in the process. We believe that the management team has done a great job when it comes to identifying strategic partners and has secured royalty deals with the right types of clients.
An Emerging Opportunity to be Watching
When looking at Xtraction Services, we see a differentiated opportunity that has significant growth prospects. We are favorable on the vertical that the business is focused on and will monitor how the management team continues to drive the story forward. With the markets that Xtraction Services is levered to and focused on, we find the risk-reward scenario to be attractive and this is an opportunity to be watching.
Going forward, we expect to see Xtraction Services gain significant awareness following the completion of a go-public transaction. The company can use its stock as a currency when it comes to the expansion opportunity and we find this to be significant. We believe that Xtraction Services is an attractive growth story that is in the early innings of a major growth cycle.
Although the last few months have been rough on the cannabis sector, we believe that the sector has been trending higher and coming off its recent lows. Xtraction Services could be well positioned to benefit from a timing standpoint, and we are going to closely follow this new listing.
To learn more about Xtraction Services, please reach out to Support@technical420.com to be added to our distribution list.
Pursuant to an agreement between StoneBridge Partners LLC and Xtraction Services (XS) we have been hired for a period of 180 days beginning September 11, 2019 and ending March 11, 2020 to publicly disseminate information about (XS) including on the Website and other media including Facebook and Twitter. We are being paid $0 per month (XS) for or were paid “92,045” shares of restricted common shares. We own zero shares of (XS), which we purchased in the open market. We plan to sell the “ZERO” shares of (XS) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (XS) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.