Although the cannabis sector has not yet lived up to the expectations that the market had for 2020, there have been a few bright spots in the sector. Due to the way the cannabis sector has expanded over the last few years, investors must be more selective than ever and target companies that have substantial long-term growth prospects and are actually executing on previously announced initiatives.
Xtraction Services Holding Corp. (XS.CN) (XSHLF: OTCQB) is a company that meets this criteria and we are impressed with how the story has evolved so far this year. In late 2019, we met with Xtraction Services CEO David Kivitz and left the meeting feeling impressed with how he has been able to drive the business forward.
We expect 2020 to be a period of incremental growth for Xtraction Services and this is an opportunity that we are closely following. At current levels, we find the valuation to be compelling, especially when compared to its peers, and believe that the business has an attractive growth profile.
Better Positioned to Capitalize on the California Market
Earlier this week, Xtraction Services reported to have acquired a California Finance Lenders (CFL) license through the purchase of a local entity. We believe that the acquisition will prove to be a substantial growth driver for the business as it will allow Xtraction Services to significantly expand its lending and financing capabilities in California.
California is the world’s largest cannabis market and we are favorable on the leverage that Xtraction Services has to it. Going forward, the company expects the license to play a crucial role in growth given the steady increase in inbound requests from customers with business operations in California.
One of the reasons we are excited about Xtraction Services is due to its diversified business model and the specialty finance solutions that it is able to offer. If you were to look at the scope of the public and private cannabis market, you will notice that Xtraction Services holds a leading position in the specialty finance market for cannabis businesses and we expect this to play an important role in the success of the business over the long-term.
Signs a Major Agreement with a Cannabis Beverage Company
A few weeks ago, Xtraction Services announced a lease agreement with Lehua Group USA, a multi-state cannabis processor that specializes in the production of tetrahydrocannabinol (THC) infused beverages. The company will be working with Lehua to provide leasing solutions to allow them to build out their manufacturing division in California. The formation of the relationship with Lehua is a testament to the continued advancement of the Xtraction Services story and we will monitor how it adds value to the entire operation on a going forward basis.
Lehua has been approved for an equipment lease of up to $575,000 for strategic equipment that will expedite its growth plans. Lehua recently acquired Nebula Management LLC, a licensed cannabis processor and distributor in California that produces vape cartridges under the Herbology brand. Lehua has developed a unique and patented extraction and emulsion process to deliver leading products in beverages and vape pens. They have the number one beverage brand in Washington State (Olala) as well as an award-winning CO2 Live Resin vape oil (Haku).
Going forward, Lehua plans to replicate its production line and introduce its portfolio of leading THC-infused beverages into the California market through the acquisition. Through Xtraction Services’ leasing solutions, Lehua will be able to build out its manufacturing division and we believe that the relationship represents a significant opportunity for the company. We would not be surprised if the initial lease was just beginning and this is something that we will continue to follow.
The lease will be deployed in tranches on a pro-rata basis and has a 36-month term. The initial tranche was immediately drawn to acquire $140,000 of equipment for pre and post processing of extracts from Across International (USA), an industry leader in manufacturing of heat treatment, laboratory and material processing equipment (New Jersey).
Across International is one of Xtraction Services’ preferred vendors and we are favorable on the existing relationship between the businesses. From an execution and company involvement standpoint, we expect the existing relationship to make it a more seamless process and we are favorable on this aspect of the story.
A Growth Story that is Starting to Gain Substantial Traction
During the last year, Xtraction Services has significantly increased the number of partners and preferred vendors that fall under its umbrella and we believe that this further improves the company’s platform. Just last week Xtraction Services and KushCo Holdings Inc. (OTCQX: KSHB) announced a partnership agreement with KuschCo taking a 19.9% ownership position in Xtraction Services as their gateway into equipment leasing solutions. Through the partnership Xtraction Services will have the right of first refusal to provide leasing solutions to any and all of KushCo’s current and future customers, and KushCo will be given right of first refusal to provide its products to any and all of XS’s current and future customers. This agreement significantly opens up the potential sales pipeline for Xtraction Services. We look forward to seeing how this strategic partnership continues to grow.
Xtraction Services has significant potential catalysts for growth and the market has responded favorably to the recent developments. Last year, the company went public during a tough time period for the cannabis sector and we believe that the stock was impacted by this. During the last month, the trend seems to have reversed and momentum has been pulling to the upside. We believe that Xtraction Services is in the early stages of a major growth cycle and has an attractive risk-reward profile.
2020 is expected to be a banner year for the business and we believe that Xtraction Services is an opportunity that our readers need to be aware of. Although the recent rally has been substantial, we believe that Xtraction Services is flying under the radar and has significant upside potential over the long-term.
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.