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Needing Cash Flow, Cannabis Firms Look to Xtraction Services for Equipment Leasing

Ash Stringer

September 17th, 2019

App, Exclusive, News, Top Story

Cannabis is no longer taboo; it’s a thriving industry underscored by 65% of Americans supporting the legalization of the plant. That type of support in combination with over 40 countries legalizing marijuana in one form or another has resulted in lofty projections about just how big the industry will become. To that point, Jefferies initiated coverage on the industry in February, “conservatively” calling for a $50 billion market by 2029, while analyst Owen Bennett said the upside scenario could see a global market reaching $130 billion in the next ten years.

With that type of growth on the line, companies are moving aggressively to capture share or position themselves as an acquisition target for bigger firms. The problem is that institutional banks remain on the sidelines because cannabis remains federally illegal in the U.S. That makes securing capital to expedite growth a challenge, to say the least.

As a solution, a handful of innovative companies are bringing tried-and-true business models into the legal cannabis/hemp space, effectively freeing up cash flow for companies while building their own revenue streams. De-risked to a certain extent, these ancillary companies – which means they’re not subject to 280E tax or restrictive regulations – have continued to perform in 2019, while growers and others in the industry have been pretty flat.

For instance, while the Horizons Medical Marijuana Life Sciences ETF (TSX: HMMJ) is up about 7% so far in 2019, Innovative Industrial Properties, Inc. (NYSE: IIPR) is up about 100%, taking its market cap to approximately $1 billion. Xtraction Services (CSE:XS), or XS for short, a company that just went public on September 13th, is another creating a market buzz for the value it adds to companies focused on the extraction component of cannabis manufacturing.

Click here to see the company investor presentation

Simple, Yet Brilliant

IIPR is a REIT (real estate investment trust) that owns cultivation facilities where cannabis companies operate. In order to create free cash flow for operators, IIPR has expanded its portfolio by stepping in and buying facilities from cannabis companies, in turn renting the property back to the operator under a long-term lease at a discount to what the note was to buy the property.

This is a win-win scenario where a company like IIPR scales its portfolio while providing the necessary support to the marijuana company to scale its own business more rapidly.

In the same lane, Xtraction Services has emerged on the scene as an equipment leasing company specialized exclusively in cannabinoid extraction processes. The company is technology or equipment extraction agnostic with deep experience in all commercialized technologies, albeit CO2, ethanol or butane methodologies.

Much like the IIPR model, XS also offers a sale-lease-back option to operators. The difference is, rather than buying the building and land, XS acquires all the equipment the company is using and then rents it back to free up cash for the operator.

The Whole Package

The sale-lease-back option is only one portion of Xtraction Services’ model.  In fact, while an equipment leasing company at its core, XS is a consulting/advisory service as well with a team of chemists, engineers and technicians deeply experienced in best practices from pre-processing to post-processing.

In its consulting capacity, XS serves an array of customer variations, including processors, cultivators, testing labs and more at any stage of development from upstart to commercialized.

Click here to see the company investor presentation

Leveraging the team’s experience, XS works with companies to analyze operations from floor plans to operating procedures to testing protocols and back again to determine the most efficient process. Furthermore, the company works with all equipment manufacturers, as well as major OEMs and distributors. These relationships are the key to high margins, allowing Xtraction Services to purchase the equipment outright at a discount from the manufacturer and then lease the machinery to the operator at a profit.

When the lease is up, the lessee has the option to upgrade or buy the equipment at a fair market price.

De-Risked

Every industry has equipment leasing. Xtraction Services is simply bringing it to cannabinoid extraction with some nuances to help companies achieve operational efficiency and generate cash flow. In doing so, XS is using a business model well recognized for its de-risked attributes.

For starters, Xtraction Services owns the equipment, which is typical for the industry. No leasing company wants to be in the business of repossessions, though; they want their lessees to succeed. This is where Xtraction’s advisory services are a true value add to set the operator up for success.

Because the equity market is drying up, there is no lack of companies exploring options for cash. Just like any lender vets a potential loan candidate, Los Angeles-based XS vets its lessees. Management is unwavering in who it will work with insomuch that it only considers:

  • commercialized extraction technologies (no investment in extraction R&D)
  • processors, brands, and lab testing (no cultivators, retailers, etc.)
  • companies with a proven history (minimize operational risk)
  • companies operating in the U.S.

This is more savvy than simply aiming to ensure there is no default. Xtraction Services also employs a royalty model, where it analyzes production costs, establishes a fixed cost and negotiates a royalty where it can realize revenue on future volume too.

Click here to see the company investor presentation

In addition to the secure model, XS is a first mover in the space. There is very limited competition with some companies “picking at the edges,” but none with the comprehensive understanding of extraction technologies or operations like Xtraction Services offers. Against that backdrop, the company has just gone public, giving the investment community an opportunity at a unique company clearly differentiated from others in the burgeoning cannabis space.

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