Cannabis Stock Reset Favors Companies Like Xtraction Services
Ash Stringer
November 14th, 2019
App, Exclusive, News, Top News
2019 will go down as the year of the cannabis pullback. When many expected positive developments, such as continued market expansion and Cannabis 2.0, to serve as the next wave of catalysts, stock valuations have been chopped in half and shorters have increased positions, putting further pressure on stocks. Judging by some analyst opinions, though, the future is much brighter than one first might think.
For instance, Ladenburg Thalmann analyst Glenn Mattson put “buy” ratings on Canopy Growth (NYSE: CGC)(TSX: WEED) and Aurora Cannabis (NYSE: ACB)(TSX: ACB) this summer, telling clients, “In the U.S. we look for companies that are building a presence in states with large populations but a limited licensing outlook.” Most recently, Cantor Fitzgerald analyst Pablo Zuanic called for a bottom in the embattled Canadian markets, writing this week in a letter to clients, “Valuations are at two-year lows, and we deem them attractive based on the long-term opportunity.”
Furthermore, some companies can actually benefit by market compression and expansion. Consider Xtraction Services Holding Corp. (CSE:XS), which provides equipment leasing solutions to owner/operators of cannabis and hemp businesses in the U.S. The Los Angeles-based company has effectively brought equipment leasing to a cannabis industry that desperately needs it.
Click here to see the company investor presentation
Investors Demanding Profitability
Reasons abound as to why cannabis stocks have been clobbered in the past year. Missed revenue targets, compliance mishaps and incessant losses are amongst the top of the list of culprits. Another certainly is large investments failing to deliver big returns as quickly as promised. Bruce Linton, the former Canopy Growth CEO was let go in July in part because of Constellation Brands’ dissatisfaction with earnings (or lack of) after pouring C$5 billion into Canopy.
These capital situations are what makes Xtraction Services particularly attractive. As investors clamor for profitability, companies have to clamp down on spending and Xtraction has flexible leasing options that gives owner/operators in the cannabis/hemp space access to the equipment and financing they need while spreading payments out over time. As well, trade-in programs allow for customers to keep up with new technologies.
Click here to see the company investor presentation
Xtraction Services’ extensive reach and network of equipment manufacturers means it can service a wide array of the industry, including oil extraction facilities, product testing companies, brands and formulated product makers. The company’s seasoned team also offers consulting services to help companies implement best practices in setting up their equipment to maximize efficiency and meet their specific needs.
There is a common thread here: improving cash flow and profits, things every company strives for. As it happens, the future of many cannabis companies is hinging on finding a way to reach profitability.
A flagship offering of Xtraction Services, its sale-leaseback program, which is designed to allow companies to improve their balance sheets by unlocking invested capital. The program is genius in its simplicity, whereby Xtraction Services purchases the owner/operators’ equipment and then leases it back to them. By doing so, the operator gets access to capital, in a tax efficient manner, that can be used for accretive opportunities, keeps the equipment without disrupting operations and doesn’t incur any debt or have to give up any equity like it would in conventional financings.
In fairness, Xtraction Services didn’t create the business model; it has underscored success in countless other industries for decades. It did, however, bring this proven business model to cannabis and hemp operations.
Measurable Impact
Working with Xtraction Services is a win-win, with the Company generating revenue through its programs and the operator realizing quantifiable improvements in the business.
Case in point: a recently amended agreement between Xtraction Services and Puritix, a Kentucky-based processor of hemp biomass to produce various forms of CBD oil. The agreement between the two resulted in Puritix maintaining yield projections, but with less upfront capital requirements and reduced installation expense. For its part, equipment being available sooner than expected allowed Xtraction Services to begin invoicing ahead of schedule.
Click here to see the company investor presentation
Complimenting Xtraction Services for its support and saying his company can now better serve its customers, Puritix CEO Christopher Stock sees the ripple down effects to the local community. “We will be working closely with the Xtraction Services team going forward and expect to be ramping up our production, moving from our current one shift per day on a four-day schedule, to a 24/7 schedule by the end of November,” commented Stock in a news release.
Skin in the Game
There is no greater sign of confidence for investors than seeing insiders putting their own money into the company. This was on full display at the end of October with Xtraction Services. Through Archytas Ventures, an investment company controlled by XS CEO David Kivitz and XS CMO Antony Radbod, the two executives bolstered their positions in the company via open market purchases of XS stock.
Through October 23, Archytas purchased a total of 274,500 subordinate voting shares at an average price of C$0.2068. Assuming all outstanding proportionate voting shares are converted into subordinate voting shares, Archytas’ total ownership in Xtraction Services would be 11,434,075 subordinate shares, or approximately 24%.
Click here to see the company investor presentation
Commenting on the timing of the investment, Kivitz was very matter-of-a-fact, saying, “We strongly believe in the value of the business and see tremendous growth potential ahead. Our current market capitalization does not appropriately reflect the true value of XS, nor does it take into consideration our future earning potential.”
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