Although 2020 was expected to be a bounce back year for the cannabis sector, the coronavirus has significantly stifled growth and has put additional pressure on the sector. Going forward, we expect to see additional restrictions put on some of the world’s largest economies as governments work to stem the spread of the virus.
Recent reports have indicated that there is strong demand for recreational and medical cannabis and this theme is playing out across several markets. Earlier this week, we visited a few dispensaries in Colorado and were told that store traffic has been at its highest level in several years. We also called dispensary operators in California and Nevada and heard similar stories in regard to traffic.
In regard to how the dispensary set up has changed, the stores are limiting the number of customers that come in at a time. This is very similar to the way the stores previously operated and we find this to be significant. After the recent decline, cannabis stocks are starting to look compelling from a valuation standpoint and believe that the decline has created a great opportunity for investors.
During the last month, we have been closely following the cannabis sector and have been working to identify companies that are continuing to execute on previously announced initiatives and that have been under pressure. Xtraction Services Holding Corp. (XS.CN) is a company that caught our attention after it announced a transformational agreement with a leading ancillary cannabis company in the US.
Although Xtraction Services has been able to significantly advance its fundamental story, the stock has traded lower with the rest of the market and we believe that it is an opportunity to be aware of. Today, we want to provide an update on the opportunity and cover some of the recent announcements by the company.
An Execution Story in the Making
Xtraction provides equipment leasing solutions to cannabis and hemp operators in the US. The company offers equipment leasing services to cannabis businesses and has seen strong demand for its offerings. Xtraction Services is offering capital solutions to an industry that is strapped for cash and; from a growth standpoint, we believe that this situation creates a great tailwind for the business.
Xtraction Services offers companies a number of flexible leasing options that gives the operator access to the equipment they need. Another aspect of the business that we are favorable on are the trade-in programs that allow for customers to upgrade their equipment. We are favorable on the variety of structures that are offered by the business and believe that Xtraction Services represents a differentiated opportunity.
One of the offerings from Xtraction Services that we are most excited about is the sale-leaseback program. The program is designed to allow companies to strengthen their balance sheets by Xtraction Services purchasing the equipment and leasing it back to them. Through the program, the operator is able to get access to capital that can be used to help advance the business and we believe that it creates a win-win situation for Xtraction Services and the operator. The company has seen strong demand for this program, and this is a trend that we expect to continue.
Forms Strategic Relationship with KushCo Holdings
In late January, Xtraction Services reported a major milestone and signed a strategic partnership and cooperation agreement with KushCo Holdings (KSHB). The agreement represents a substantial development for the business and will result in KushCo owning 20% of the operation. Under the agreement, the companies will work to establish a long term and stable relationship that involves the sharing of opportunities.
We are favorable on what each company brings to the partnership from an expertise and relationship standpoint. Xtraction Services has created strong relationships with its vendor partners to create diverse and scalable equipment offerings and its sale-leaseback product provides it with the ability to create new vendor partnerships, while allowing existing customers to unlock invested capital with no disruption to their business.
KushCo is recognized as an industry leader that has a global footprint. The partnership provides direct access to 1,000s of potential customers for Xtraction Services and we find this to be significant. KushCo’s sales and marketing team will provide greater visibility for the company and we are favorable on the amount of value that can be created through this team.
Xtraction Services has relationships with 70+ original equipment manufacturers (OEMs) and distributors across several key industries. The company represents a strategic partner for KushCo which will be able to offer its customers equipment financing solutions and directly facilitate the delivery of the hemp biomass that will be used in the extraction process as well as the delivery of the offtake products to its brand network.
We have been surprised by the lack of a response from the market and this is a relationship that we are excited about. Over the next year, we expect the integration of the companies as it relates to these initiatives to play an important role in the success of the business. We believe that the market is missing out on something significant and believe that our readers need to be aware of this.
Led by a Management Team that has Skin in the Game
When we started to analyze Xtraction Services, we became favorable on the business due to the strength of the management team. The company is led by a team that has a firm understanding of the industry and this has played a key role in the success of it. The management team also has significant skin in the game, and we find this to be of importance.
Through Archytas Ventures, an investment company that is controlled by Xtraction Services CEO David Kivitz and CMO Antony Radbod, the two executives purchased more stock in the company, and this is activity that we want to see. As many company executives are selling stock, Xtraction Services is doing the opposite and we are favorable on how this looks for the business.
In the cannabis industry, we see a lot of management teams that do not quite meet our standards. Xtraction Services is in a league of its own when it comes to the strength of the management team and we find this to be one of the most important aspects of the story. Going forward, we expect to see the company benefit from this as it should play an important role in the success off the business.
We believe that Xtraction Services represents a multi-faceted growth story and is an opportunity to be watching. We believe that the company has a favorable risk-reward profile and find the valuation to be compelling. We believe that the company is in the early stages of a major growth cycle and expect the relationship with KushCo to play a key role in the way the business is able to expand.
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