Why investing in Nextleaf Solutions’ (OTCQB: OILFF, CSE: OILS) patent-protected cannabis extraction technology could be your next portfolio win.
“In markets like technology, intellectual property (IP) is pretty well understood. Create a unique invention, patent it, and then enforce it against anyone who tries to copy you. In the nascent cannabis industry, IP is critical for creating true differentiation between companies.” – Kevin Murphy, CEO of Acreage Holdings
In the burgeoning multi-billion dollar cannabis industry, companies with intellectual property have been at the center of M&A activity as large, multinational companies break into the space.
Big Tobacco and Big Alcohol are pouring Big Money into the Canadian cannabis industry, focusing on licensed producers, brands and intellectual property.
International alcohol giant, Constellation Brands (NYSE: STZ), invested $4 billion USD in Canadian cannabis producer, Canopy Growth (TSX: WEED, NYSE: CGC).
U.S. tobacco giant, Altria Group (NYSE: MO), invested $1.8 billion USD in Canadian cannabis producer, Cronos Group (NASDAQ: CRON, TSX: CRON).
UK tobacco giant, Imperial Brands (LON: IMB), invested $93 million USD in Canadian cannabis company, Auxley Cannabis Group (TSX.V: XLY, OTCQX: CBWTF).
As cannabis becomes commoditized, multinational companies will continue to enter the industry hoping to dominate the global cannabis market with THC and CBD infused products.
With this movement, expert analysts believe it will be the companies with patented intellectual property that come out on top. This is why – until cannabis is no longer listed as a Schedule I drug on the Controlled Substance Act across the U.S. – these conglomerates will continue to invest in Canadian companies where cannabis is federally legal. In these jurisdictions, patent rights can be both enforced and leveraged as a competitive edge in the industry.
These patents boast a substantial shelf life of 20 years, showing promise that one day these Canadian companies could benefit from their rights south of the border.
First mover advantage
“Despite marijuana’s illegal status in most countries, the patent arms race for cannabis has already begun. Seven of Canada’s top ten cannabis-patent holders are multi-national pharmaceutical companies, including Ciba-Geigy, Pfizer, GW Pharmaceuticals, and Merck.” – Sterne, Kessler, Goldstein & Fox
The landgrab to secure cannabis patents has already started. Companies will be able to leverage the technologies developed as business tools with direct and indirect benefits; this includes putting competitors on notice and generating revenue through licensing that IP.
With this foresight, Canadian extraction company, Nextleaf Solutions (OTCQB: OILFF, CSE: OILS) set out three years ago to secure intellectual property for what industry authorities are claiming could be the most efficient methods for transforming dried cannabis biomass into distilled THC and CBD oils.
The resulting oil is tasteless, odourless and ready to formulate into THC and CBD products, like edibles, vape carts, and beverages.
In 2019 Nextleaf became the first publicly traded company to be issued multiple U.S. patents for industrial scale extraction and distillation of cannabinoids.
Throughout 2019 and 2020, Nextleaf showed a 100% success rate in turning pending patents into issued patents. With that, the company’s intellectual property portfolio ballooned to 21 issued patents in the United States, Canada, Europe, Australia, New Zealand and Columbia covering one of the most efficient methods for producing high-purity CBD and THC distillate.
The company has over 50 patents pending for ethanol and butane hash oil (BHO) extraction, distillation and formulation of cannabinoids. In the race for IP development and patent issuances, this places Nextleaf ahead of some of the industry’s leading cultivators.
Nextleaf Solutions vs. Vertically Integrated Producers
|U.S. Ticker Symbol||OTCQB: OILFF||NYSE: CGC||NASDAQ: CRON||NYSE: ACB|
|Licensed Since||Sep. 2019||Nov. 2013||Oct. 2013||Feb. 2015|
|Commercial Scale Extraction Techniques||Ethanol and distillation||Co2, and Outsourced to 3rd party||Outsourced to 3rd party||Co2, and Outsourced to 3rd party|
|Market Cap, (in $ thousands, as of April 14, 2020)||$17,810||$5,326,000||$2,080,000||$865,000|
M&A Appetite for IP-Rich Companies is likely to Increase Going Forward.
We expect the industry will close more M&A transactions involving IP-rich companies in the near-term; technology that can be commercialized will be crucial. Take Canopy Growth – the world’s largest cannabis company – and their acquisition of a small Colorado-based hemp research company, Ebbu LLC., as one example.
Ebbu’s intellectual property was touted as the primary reason for the $330 million USD stock and cash deal. However, one year later, the company is struggling to turn that intellectual property into issued patents.
“The difficulties Ebbu has faced in securing patents point to a broader issue in the pot sector, where many companies tout their intellectual property, but few have successfully obtained exclusive rights to their inventions.” – Financial Post
Nextleaf Solutions (OTCQB: OILFF, CSE: OILS) has positioned itself to be appealing to suitors by focusing on IP that can be, or already is, commercialized. It has also proactively adopted a shareholder rights plan, otherwise known as a “poison pill”, intended to ward off hostile take-over bids, in order to maximize shareholder value if a take-over bid is made.
“Major alcohol and tobacco companies have made significant investments into Canada’s federal legal cannabis industry, and we expect to see pharmaceutical companies continue to aggressively secure patents involving CBD and THC,” said Paul Pedersen, CEO of Nextleaf. “With these large conglomerates entering the cannabis industry, Nextleaf’s intellectual property portfolio could make it a target of a takeover.”
Due diligence with a shareholder rights plan, promising signs of continued legalization, and Nextleaf’s favorable success rate in turning pending patents into issued patents, has the company well positioned to both enforce and monetize their intellectual property as the industry evolves.
The company has already announced a deal to license a selection of non-core patents to a company selling products globally.
This deal alone is expected to bring in $3 million CAD in the next year.
Outside of generating revenue from licensing IP, Nextleaf has signed extraction deals with large cannabis producers for Nextleaf to process 25 metric tons of cannabis biomass into THC and CBD distilled oils, which has the potential to generate up to $25MM CAD in gross revenue for Nextleaf over the next 12 months and represents only a portion of the Canadian extractor’s processing capacity.
Nextleaf Solutions (OTCQB: OILFF, CSE: OILS) is playing a leading role in revolutionizing extraction and purification throughput, yield, and purity to enhance cannabis oil economics across the globe.
Currently, most cannabis oils used to infuse edibles, beverages, topicals and other non-smokable forms of cannabis is extracted using off the shelf, small-scale Co2 extraction equipment.
The two primary problems for cannabis and hemp processors that rely on Co2 extraction are:
1. The process stops at a less refined crude oil causing undesirable flavor and smells due to the chlorophyll, fats and waxes that’s in the crude cannabis oil.
2. There is no ability to efficiently scale production, leading to a significantly higher cost of CBD and THC oils produced using Co2 extraction.
Nextleaf’s proprietary frozen ethanol system is 10 times as efficient as most traditional Co2 extractors.
Nextleaf’s patented technology and economies of scale enables the production of a truly premium extract at a fraction of the cost of other extractors, making the company an attractive partner for consumer brands looking to select a third-party processor for cannabis oils.
Nextleaf’s patented chilled ethanol extraction system goes beyond crude extraction to an advanced molecular distillation plant where low-grade – or even failed crops – of cannabis or hemp biomass can be transformed into a highly refined oil that is tasteless and odorless.
Nextleaf Labs is focused on being Canada’s most efficient cannabis refinery, producing CBD and THC oils through the Company’s patented extraction and purification process.
Shifting consumer preferences, an abundant supply of lower grade hemp and cannabis biomass, and a short shelf life of only six months for that dried flower – has created a powerful trifecta for cannabis extractors to benefit from.
Though the industry is seeing more and more cannabis companies construct their own extraction facilities, industry observers believe these infrastructures simply won’t suffice to meet future demand for cannabis byproducts.
That’s why pureplay companies like Nextleaf Solutions (OTCQB: OILFF, CSE: OILS) stand out.
A focus on one part of the supply chain, backed by their proprietary system to turn even failed crops of cannabis or hemp into a standardized molecule, manufactured in a way that each product is dosed in a repeatable fashion, is what has landed the company on several lists of extraction companies to watch.
From their Health Canada licensed extraction plant, the proprietary system is designed to process upwards of 190,000 kg of dried cannabis biomass per year, into distilled CBD, THC oils.
Protecting the process of producing a high-purity, cannabinoid-rich distillate is the first step, but developing and protecting formulations for CBD and THC products is just as important.
“Growing in a greenhouse to sell a beautiful dried flower is great. Dried flower sales will always be a core part of any market. But efficient patented extraction technology and put into IP-protected delivery formats like beverages or vape products is even better.” – Mark Zekulin, (Former) CEO, Canopy Growth
Cannabis edibles and beverages found on shelves today have issues with bad taste and slow onset time. In some cases, feeling the effects of these products can take up to two hours.
A prime example of the difficulties found in properly standardizing, dosing and formulating infused products was found by industry front-runners, Constellation Brands and Canopy Growth.
“On the beverage side, we’ve had a lot of help from our partners at Constellation Brands. We’ve spent three years on the intellectual property behind the formulation to ensure that it has a great flavour and the onset is akin to alcohol.” – Rade Kovacevi, President, Canopy Growth
To combat one of the industry’s toughest challenges, Nextleaf acquired a water-soluble cannabinoid formulation which reduces onset time to 10 minutes.
This patent pending technology is based around a Nano and Micro Emulsification process, utilizing food grade emulsifiers already approved by Health Canada.
This revolutionary technology is catching the attention of cannabis infused beverage companies, with Nextleaf having already inked a deal to supply an infused bottler with water-soluble cannabinoids.
Developing the industry’s most disruptive intellectual property and product formulations, with their continuous focus on R&D advancements, further supports the company’s vision to set the global standard for the development of novel extraction, providing solutions to power the next generation of CBD and THC products.
Why Canadian extractors are the best cannabis stocks.
“Canadian extractors Valens Company (TSXV: VLNS) and MediPharm Labs Corp. (TSX: LABS) were two of the top three cannabis stocks in 2019 with gains of 127 percent and 122 percent respectively. The BI Global Cannabis index that tracks over 100 companies, by comparison, fell 50 percent over the same period.” – BNN Bloomberg
While oversupply has weighed on the valuations of cannabis cultivators and large cap vertically integrated producers, Canadian extraction companies have largely outperformed.
Sentiment around the extraction and private label segment of the Canadian cannabis industry remains quite robust due to its exposure to high-growth, high-margin derivative products, limited exposure to declining commodity prices and Canada’s federal legalization bringing in big pharma, big alcohol and big tobacco.
The Valens Company and MediPharm Labs are the world’s two largest legal cannabis extraction companies. Nextleaf Solutions has outperformed both companies when it comes to developing issued patents and intellectual property, a key driver of market cap in the next oil boom!
|Nextleaf vs. Industry Extraction Comps|
|U.S. Ticker Symbol||OTCQX: VLNCF||OTCQX: MEDIF||OTCQB: OILFF|
|Commercial Scale Extraction Method||Off the shelf|
Co2 and Ethanol
|Off the shelf|
|Custom Ethanol and Distillation|
|Licensed Since||October 2018||March 2018||Sep. 2019|
|Market Cap, (in $ thousands, as of April 14, 2020)||$224,550||$159,450||$17,810|
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