Nextleaf Solutions Receives New License From Health Canada

Nextleaf Solutions Ltd. (CSE: OILS), a major cannabis extraction company, announced Thursday that its subsidiary Nextleaf Labs has received a research license from Health Canada and has filed its 12th patent. The research license allows Nextleaf to conduct experiments on humans.

The license is Nextleaf's second license after the standard processing license was granted on September 6, 2019. The research license allows Nextleaf Labs to conduct research and development in the field of analytical testing of cannabis and its derivatives, extraction, refinement and Purification of compounds from cannabis and hemp and the formulation of infused cannabis products as well as performing sensory tests on humans.

Nextleaf receives its 12th patent. The company also announced that it has received a standard patent from the Australian Patent Office for the filtration cell technology it uses to process cannabinoids from cannabis and hemp after extraction. Filtration technology is important because it enables unwanted compounds to be removed from raw cannabis oil extracts in less time, resulting in more efficient throughput rates and a highly desirable, unclean, tasteless, odorless, refined concentrate. We continue to view the macro build for Nextleaf as positive. This is mainly due to two reasons: 1) abundant biomass availability in Canada; 2) Lack of available capital that the breeders can generate themselves. There are abundant amounts of biomass available in Canada.

We highlight two recent harvests: 1) on December 2, 2019, Aleafia announced that it was selling ~ 2,800 kg (its 10,300 kg free range crop) for $ 7.1 million at a price of $ 2.50 per gram to an undisclosed producer that may have been an extractor; 2) In November 2019, WeedMD completed a field crop of more than 20,000 clones on 27 hectares and expects to produce more than eight tons of biomass (8,000 kg) at a cost of ~ $ 0.16 per gram. The total inventory in Canada continues to grow quarter by quarter. To illustrate: In August 2019, inventories increased by 11% to 390,000 kg of unfinished and finished biomass from ~ 350,000 kg in July 2019. The lack of inferior Canadian processing capacity, flawed "vertical integration" and the resulting slow adoption of Cannabis 2.0 could bring the industry short term setbacks.

Recent quarterly announcements from major industry players like Aurora Cannabis and Canopy Growth have suggested major cuts to capital projects. For example, in conjunction with Aurora's FQ1 / 20 results, the company reported two significant capital cuts: 1) to stop construction at its Nordic-2 facility in Denmark to save $ 80 million over the next 12 months, and 2) to decide to "Postpone the majority of final construction and commissioning activities at its Aurora-Sun facility for the foreseeable future" to save ~ $ 110 million in cash. We mainly believe that these cuts are due to poor financial forecasts and strategies. In our opinion, only a small number of licensed growers can fully process their own biomass on a large scale.

As a result, we believe that the execution of Cannabis 2.0 by these big players will be mediocre at best due to the weakness of the cannabis market, lackluster strategy (such as focusing on C02 instead of ethanol-based processing) and shrinking budgets. While this is an overall setback for the industry, we believe these trends could be beneficial for the third party processors who have ramp facilities that can process the biomass on a large scale.

This backs up our thesis that Nextleaf is likely to be on the verge of receiving its first large biomass upgrading and / or whitening labeling contract, provided it can complete its facilities commissioning later this month. Recent weakness not justified We believe that the weakness in Nextleaf's share price over the past few months was due to a wider sector-wide sell correction.

Companies with strong fundamentals were affected, regardless of which segment of the cannabis market they were isolated in. We expect that in the next few months, as retail and consumer interest in Cannabis 2.0 picks up again and negative comments subside, the whole space should benefit. Additionally, extraction-focused companies like MediPharm Labs, Valens and Nextleaf will continue to report strong cash flow quarters and fundamentals will begin to lead the way.