Canada’s most innovative extraction company, Nextleaf Solutions (CSE: OILS | OTCQB: OILFF | FSE: L0MA) is developing technology for distilling THC and CBD oils used to formulate popular 2.0 products including vape pens, edibles and beverages.
The company has a patent portfolio of over 40 issued patents and 60 pending patents protecting what industry experts believe could be the most efficient methods of transforming dried cannabis and hemp biomass into high-purity distilled oils at scale within a highly regulated environment.
“As a company we’re focused on developing the most innovative and efficient methods of producing highly refined oils and commercializing through toll processing and supplying bulk THC and CBD distillate to companies looking for cannabinoids ready for infusion in finished products.”
— Paul Pedersen, CEO, Nextleaf Solutions Ltd.
This compares to Nextleaf’s primary extraction competitors who, as reported as of May 8th, had two pending patent applications, and zero issued patents across the three companies. To Nextleaf’s knowledge, Canopy Growth is one of the only major industry players that has amassed a substantial portfolio of patents (~130 as of February 2020).
Pure play cannabis extractors in focus; Nextleaf has capacity and a war chest of technology
It is no secret that the Canadian cannabis industry has an oversupply of dried cannabis. As of April 2020, over 620,000 kg of dried cannabis, reaching shelf life, was sitting in inventories across Canada.
Despite Cannabis 2.0, which expanded the assortment of concentrate product capable of being sold to consumers and attracted interest from big pharma, tobacco, and alcohol, increases in production driven by growth in outdoor cultivation (21 million sq. ft. licensed after only one year), lagging processing capacities and capabilities, and slow-to-market concentrate product penetration, have all contributed to the oversupply of biomass.
Though continued increases in demand will eventually help correct the imbalance, it is the ability to efficiently produce larger amounts of concentrate that could solve the problem immediately.
The concentrate from these products is either produced in-house or by third-party processing companies. Third-party, pure play extractors are more likely to solve the problems of the industry by scaling solutions and developing technologies more quickly, ultimately finding ways to transform unsellable biomass into a more profitable and prolonged product.
Nextleaf is entering the market with 600 kg daily of processing capacity, which it expects to run efficiently and at scale, and a war chest of proprietary technology. Among its competitors, Nextleaf Solutions has positioned itself as the leader in the development of issued patents and intellectual property.
By closing two extraction contracts and launching their Commercial Partners Program as a solution for Canadian cannabis farmers requiring economical process services, Nextleaf is delivering on ramping its operations and commercializing their technology.
“As a company we’re focused on developing the most innovative and efficient methods of producing highly refined oils and commercializing through toll processing and supplying bulk THC and CBD distillate to companies looking for cannabinoids ready for infusion in finished products,” says Paul Pedersen, CEO of Nextleaf.
“But we really believe building and monetizing our patent portfolio is how we create a billion-dollar business.”
Rooted in innovation and technology, patent development is driving Nextleaf’s early success
In an environment where Life Science patent applications have a pending to issuance success rate of less than 50 per cent, Nextleaf’s 100 per cent success rate in turning pending patents into issued patents is significant and unparalleled, but not unintended.
Further re-enforcing Nextleaf’s IP strategy and focus is the current cannabis patent landscape. Right now, seven of Canada’s top ten cannabis-patent holders are multinational pharmaceutical companies, including Ciba-Geigy, Pfizer and Merck.
Big pharma will continue to enter the cannabis industry in a big way with eyes set on IP surrounding repeatable processes and formulations. Until the U.S and other jurisdictions follow Canada’s lead and legalize cannabis on a federal level, Nextleaf is poised to capitalize on their head start in the landgrab to secure patents around the efficient, industrial scale processes these companies will seek.
“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,” notes Pedersen.
“Nextleaf’s intellectual property portfolio could make it an attractive business partner, or target of a takeover.”
The current market opportunity for cannabis extractors is unprecedented
As the industry evolves and cannabis continues to commoditize, true scalability and efficiency, along with who can provide the highest quality product for the lowest cost, will remain essential. Nextleaf is playing a leading role in revolutionizing extraction and purification throughput, yield, and purity to enhance cannabis oil economics across the globe.
Current extraction methods for most oils is through off the shelf, small-scale Co2 extraction equipment. The problem for those that rely on this approach, however, is twofold: The inability to efficiently scale production, leading to significantly higher cost of oils; and undesirable flavor and smells from the chlorophyll, fats, and waxes due to lack of further refinement steps.
Setting Nextleaf apart is their proprietary cryo-ethanol system that is 8-10 times as efficient as most traditional Co2 extractors. The company’s patented technology and economies of scale enable 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.
“Looking ahead to the future, we expect there will be a lot of large CPG companies that want to bring CBD and THC-based products to the market, and they’re going to want consumers to feel the effects of their edibles or beverages quickly and reliably,” explains Pedersen.
“That’s how we provide value to our commodity which is CBD and THC molecules.”
For example, Nextleaf has found a way to combat one of the industry’s toughest challenges by acquiring a water-soluble cannabinoid formulation which reduces onset time to 10 minutes. This patent pending technology utilizes food-grade emulsifiers already approved by Health Canada and is catching the attention of cannabis infused beverage companies, with Nextleaf having already inked a deal to supply an infused bottler with the water-soluble cannabinoids.
Nextleaf is delivering on its commercialization strategy
While Nextleaf remains laser focused on technology development, the company also understands that monetization is crucial.
B2B commercial toll processing will be Nextleaf’s clearest near-term opportunity, aided by the oversupply issue in play. Nextleaf recently executed two B2B commercial processing contracts. Across both deals, the company has the potential to generate up to $25 million in gross revenue over the next 12 months. This represents up to 15 per cent of the company’s 190,000 kg processing capacity, indicating that they are capable of signing and fulfilling on more contracts in the future.
Nextleaf announced its first B2B contract in July when they disclosed an agreement to supply THC distillate to a multi-site, B.C. based, licensed producer. The company expects additional growth from its wholesale business, which will include contract sales of Nextleaf’s distillate to companies developing concentrate products like gummies, vape pens, beverages, etc., and will continue to look for ways to monetize its patent portfolio.
The company is also generating revenue from a previously announced deal to licence a selection of non-core patents to a company selling equipment globally. This deal alone is expected to bring in $1 million in 2020.
What investors can look forward to
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 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.
With Nextleaf’s focused approach to one part of the supply chain, backed by their proprietary system to turn even failed crops of cannabis or hemp into a standardized, dosed molecule, it’s evident that Nextleaf’s trajectory to become a leading powerhouse is on the horizon.
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