Nextleaf Solutions (CSE:OILS) Adds Another Potent Patent

    Equity Research Healthcare – Cannabis | June 26, 2019
    Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
    Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548

    Nextleaf Solutions Ltd. (CSE:OILS) stands to benefit from the commercialization of its IP portfolio by providing processing services to licensed cultivators

    SmallCapPower | June 26, 2019: Nextleaf Solutions Ltd. (CSE:OILS) adds butane hash oil extraction process and formulation to its portfolio. On June 24, 2019, Nextleaf announced that it has entered into an agreement to acquire a U.S. patent pending hydrocarbon extraction process and an award-winning shatter formulation for 444,444 shares at $0.45/share. The new patent brings OILS’ portfolio to three issued and 24 pending patents. With concentrates going through legalization in Canada later this year, Nextleaf stands to benefit from the commercialization of its IP portfolio by providing processing services to licensed cultivators.

    Diversification into butane extraction positions Nextleaf as a stronger industry player once legal edible sales begin in December 2019. In our view, since the barriers to entry are so high in Canada (stringent Health Canada regulations, know-how, approved infrastructure, license requirements, etc.), we expect there to be very limited legal processors to address derivative high-potency products, such as shatter, by year-end. We also highlight that, in general, secondary extraction (distillate and isolates) efforts continue to be in very high demand in Canada compared to the U.S. We note that Nextleaf is not yet equipped to produce butane products, as a Class 1 Division 1 (C1D1) explosion proof room is required. However, management has indicated to us that the Company is currently designing a purpose-built C1D1 butane extraction lab for a potential future expansion site. The Company could also license its patent-pending BHO hydrocarbon extraction process and shatter formulation, as other processors in Canada look to start producing butane products. Currently, no Canadian processors produce butane products.

    One important step closer to obtaining the Standard Processor License from Health Canada. In conjunction with the news release, Nextleaf also announced that the site-evidence package has been filmed at the Company’s built-out extraction and processing facility in Greater Vancouver. Recall, on May 8, 2019, Health Canada updated cannabis licensing requirements, which required new applicants to have a fully-built facility that adheres to all Cannabis Regulations at the time of their application. The recent changes by Health Canada to its licensing process now require a submission of a filmed site evidence package as a final step in the licensing application. Health Canada has indicated that it plans to respond to companies within 60 days from submission of a completed filmed site evidence package. In terms of timing, we continue to expect the facility to be licensed by Q4/19, however, there is reasonable chance that this may occur earlier. For further discussion on new Health Canada rules, refer to our last published note on May 13, 2019 here.

    NEXTLEAF SOLUTIONS LTD. CSE:OILS

    (Currency is CAD$, unless noted otherwise)

    Last Price $0.49

    Target Price$1.65

    Potential Return237%

    Net Asset Value Per Share $2.09

    52 Week Low / High$0.30 / $0.83

    Average Daily Volume (30-Day)345K

    CAPITALIZATION Basic Diluted
    Shares Outstanding (M) 107.0 146.4
    Market Capitalization ($M) $52.4
    Enterprise Value ($M) $43.4
    Cash Balance ($M) $9.0
    Total Debt ($M) $0.0
    OILS OPERATIONS 2019E 2020E 2021E
    Biomass Processing Volume (kg) 1,230 10,030 25,800
    Crude Produced (kg) 170 900 1,890
    Distillate Produced (kg) 0 320 1,080
    Total Revenue ($M) $6.1 $54.2 $125.2
    EBITD A ($M) -$5.2 $9.2 $54.0
    FCF ($M) -$10.5 $3.4 $33.3
    Total CAPEX ($M) $5.0 $3.3 $1.0
    CFPS -$0.09 $0.06 $0.25
    EPS -$0.07 $0.03 $0.23
    Cash At Year End ($M) $1.2 $9.2 $55.4
    Debt At Year End ($M) $0.0 $0.0 $0.0
    Relative Valuation EV/EBITDA EV/SALES
    2020E 2021E 2020E 2021E
    Nextleaf Solutions 4.7x 0.8x 0.8x 0.3x
    Extraction Companies 16.1x 6.8x 5.1x 2.6x
    CAN-Based Major Cultivators 36.9x 16.5x 8.8x 5.3x
    US-Based Operations 9.0x 6.3x 2.6x 1.7x
    MAJOR SHAREHOLDERS
    Management and Insiders (17%)
    Disclosure: 1, 3 (See back page for further details)

    REVENUE & EBITDA FORECAST ($M)

    Nextleaf 3-Month Share Price Performance

    VALUATION

    We are maintaining our BUY rating and our target price of $1.65/share. We believe that the new patent should further diversify Nextleaf’s patent portfolio, which allows a wider range of processing and extraction services to Canadian cultivators. To remain conservative, we have made no changes to our estimates or timelines.

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