Nextleaf Solutions is Well Positioned for Cannabis 2.0

Equity Research Healthcare – Cannabis | October 30, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548

Its acquisition of a water-soluble technology could allow Nextleaf Solutions Ltd. (CSE:OILS) to solve a substantial issue with cannabis-based beverages

SmallCapPower | October 30, 2019: Nextleaf Solutions Ltd. (CSE:OILS), over the course of a month, has made progress against its strategic initiatives with: 1) the establishment of an exclusive beverage partner agreement with BevCanna Enterprises; 2) the acquisition of water-soluble cannabis technology; and 3) the issuance of several patents. Across the same timeframe, the Company added to the foundation of its operation with the consolidation of Nextleaf Labs Ltd., and strengthened its team with the addition of Tom Ulanowski, President of Nextleaf Labs, and Board of Directors with the addition of Dr. Sherry Boodram. As Legalization 2.0 commences, the Company is setting itself up to become a force in the industry, as it ramps production and closes on commercial contracts.

Acquisition of water-soluble technology puts Nextleaf in a solid position for Legalization 2.0. On September 23, 2019, Nextleaf announced the acquisition of intellectual property (IP) pertaining to water-soluble cannabinoid formulations. The IP is based around the nano and micro-emulsification process, which utilizes food-grade emulsifiers already approved by Health Canada. The power of the nano-emulsification technology is that it produces: 1) water-soluble cannabinoids; 2) shelf stable products for at least 6 months; and 3) increased onset & offset times. This solves a substantial issue with cannabis-based beverages, as most do not mimic more desirable onset timings, such as smoking cannabis or drinking alcohol (shortens the onset time to between approx. 5-20 minutes). We note that consistency is essential for mass market acceptance of THC and CBD-infused drinks, as the market matures and consumers demand further standardization. For the acquisition, Nextleaf paid $100K in cash and $100K in Nextleaf stock issued at $0.51 a share. The deal includes an additional $65K in cash and $300K in stock if certain key milestones are hit. This follows the Sept. 16, 2019, announcement discussing an exclusive supply agreement with BevCanna Enterprises Inc. (BevCanna) (CSE:BEV), which is detailed below.

Exclusive supply agreement inked with BevCanna. On Sept. 16, 2019, Nextleaf discussed its exclusive supply agreement with BevCanna, a cannabinoid-infused beverage developer and manufacturer. BevCanna has built out a 40,000 sq. ft. bottling facility in Osoyoos, BC, with an annual production capacity of 72M bottles. Importantly, BevCanna also has a 315 acre aquifer of Canadian alkaline spring water on site. Details of the agreement are as follows: 1) BevCanna has been granted exclusive licensing rights to Nextleaf’s IP that is related to water-soluble cannabinoids. The IP is to be used in product development, manufacturing and sales, and will include use in BevCanna’s house brands (including the recently-announced Anarchist Mountain Beverages and Gruv), and white-label products; 2) The initial term of the agreement is 3 years after the legalization of infused products (Legalization 2.0 in Canada), with a subsequent 5-year renewal period; 3) Performance milestones include commercialization within 12 months of the legalization of infused products and edibles in Canada. The supply agreement is the first secured by Nextleaf.

NEXTLEAF SOLUTIONS LTD. CSE:OILS

(Currency is CAD$, unless noted otherwise) (Fiscal year-end is as of Sept. 30)

Last Price $0.36

Target Price$1.75

Potential Return386%

Net Asset Value Per Share $2.37

52 Week Low / High$0.30 / $0.83

Average Daily Volume (30-Day)326K

CAPITALIZATION Basic Diluted
Shares Outstanding (M) 107.8 147.3
Market Capitalization ($M) $38.8
Enterprise Value ($M) $33.3
Last Reported Cash ($M) $5.5
Last Reported Debt Balance ($M) $0.0
OILS OPERATIONS F2020E F2021E F2022E
Biomass Processing Volume (kg) 6,720 24,900 52,600
Crude Produced (kg) 560 1,890 3,420
Distillate Produced (kg) 240 1,000 2,520
Total Revenue ($M) $35.8 $119.4 $232.1
EBITDA ($M) $1.5 $49.4 $134.9
FCF ($M) -$6.0 $28.6 $86.4
Total CAPEX ($M) $6.0 $4.0 $3.0
CFPS $0.00 $0.23 $0.57
EPS -$0.02 $0.20 $0.56
Cash At Year End ($M) $2.7 $51.5 $137.9
Debt At Year End ($M) $0.0 $0.0 $0.0
Relative Valuation EV/EBITDA EV/SALES
2020E 2021E 2020E 2021E
Nextleaf Solutions 21.7x 0.7x 0.9x 0.3x
Extraction Companies 14.5x 5.2x 4.0x 2.0x
CAN-Based Major Cultivators 12.8x 17.2x 6.0x 3.3x
US-Based Operations 8.9x 5.0x 2.4x 1.6x
MAJOR SHAREHOLDERS
Management and Insiders (17%)
Disclosure: 1, 3 (See back page for further details)

REVENUE & EBITDA FORECAST ($M)

Nextleaf 6-Month Share Price Performance

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