How are experienced financial and equity experts navigating today’s cannabis market?
That was the focus at the recent Gravitas Growth Conference in downtown Vancouver, hosted by investment bank
Gravitas Securities Inc. Panels and discussions throughout the day highlighted that, despite the down market, certain operators and financiers have been able to find success, growth, and stability.
To figure out what seasoned equity players see that cannabis investors might be missing, Stockhouse Editorial was on-hand throughout the day and caught up with finance experts in attendance. The biggest takeaway: proper assessment and due diligence of the market and potential investments goes a long way.
Despite the public struggles of cannabis operators that have grown too big before becoming profitable, the overall market direction is still pointing towards growth, especially in the US and internationally. On the flip side, the equity rush from the “hype” days of the cannabis market has ebbed and made way for the calculated debt side of the equation to prosper, a golden opportunity for finance companies.
One of the experts in attendance was David Kivitz, a private equity veteran and CEO of specialty finance company
Xtraction Services Holdings Corp.(
CSE:XS,
OTC: XSHLF,
Forum). Fresh from the Company’s
landmark partnership with
KushCo Holdings Inc. (
OTC:KSHB) and entry into the enormous California cannabis financing market, Kivitz and his team has seen their network massively expand.
Now, Xtraction has been able to apply its successful equity-leveraging business model on companies that are both already in cannabis and looking to get into the market. As the demand for alternative lending has increased, Kivitz has been able to see firsthand the financing difficulties faced by the cannabis market today, and the opportunity on hand.
Omri Wallach of Stockhouse Editorial caught up with Xtraction’s CEO on the floor of the Gravitas Growth Conference to see what he and his team of experts was seeing in the market, and where the Company (and the market) were headed.
OW: Thanks for taking the time to speak with us, David. What’s changed for Xtraction Services since your partnership with KushCo a few weeks ago?
DK: We knew the transaction would make our company stronger, but one of the biggest benefits so far is in our credibility. KushCo is a huge company with a couple hundred-million-dollar market cap. They also have a senior lender who had to sign off on the transaction and who vetted the deal. They put us through formal underwriting, so we gave them an entire data room’s worth of information: Every customer, every lease, every corporate document we have. Having that level of due diligence with a positive outcome is a tremendous vote of confidence about the future of the Company.
DK: What we are now seeing is an increase in outreach from some of the bigger names that helped take KushCo public. So, US investment banks where we would’ve fallen below their radar because of size, all of a sudden are going, ‘Who did KushCo just do a deal with?’ Then, you have the people focused on specialty finance in the US, and not cannabis, who saw the transaction and called us.
DK: Now I have traditional leasing companies calling us asking, ‘Hey, we have customers, but we can't finance them. Can we send them to you?’ They have customers looking into expanding into cannabis, and they can't help them, but they're really good companies. What's great about that is that we get to underwrite companies that are non-cannabis, and we can use the core businesses that have been around for a very long time to credit enhance the deals for expansion into cannabis.
OW: Are you looking into financing more non-plant-touching companies, then?
DK: We're trying to find more credit that's not plant-touching but still can't get access to traditional bank financing, because that's the perfect storm. If you can find a company that's been operating that long, with a profitable parent company, and now they want to go to expand in the cannabis? That's great for us.
DK: That doesn't mean we won't do plant-touching companies as well, instead that we're working very hard to make sure that we only take good credit risk in those. Since we completed our RTO we've done two leases: Both were to plant-touching cannabis companies, and both of which are current on their payments. The data is not robust enough, but so far, so good.
OW: Can you illustrate or give an example as to the capital constraint cannabis companies are facing?
DK: One way to think about the difference is, if you look at
Viridian Capital Advisors cannabis deal tracker, you’ll see that 2019 was
nowhere near what had been funded the year before. 2018 was US $14.1 billion and last year was $11.3 billion. Three billion dollars in financing up and vanished, that's staggering. So that void needs to be filled.
DK: The other nuanced point to that is equity versus debt. Last year had more equity and less debt financing. This year we’re starting to see a lot more debt, but still far less total investment. Now, the benefit for us is that companies have already raised significant equity, and then went and used it. That gives us something to lever. Companies have to raise the equity first, because we don't provide leasing to start-ups. We need them to go out and prove their business concept and raise that equity, so there is a balance sheet that we can put leverage on. Companies have already gone and bought a bunch of equipment and now we can lever the equipment. So having that cushion beneath us is very important.
OW: That's a good point. Have you heard directly from companies or people in the cannabis industry that have told you how difficult it is right now?
DK: Oh yes, because you have to understand, all we do all day long is meet with companies on one side of the fence or the other and underwrite cannabis companies. Every one of them, save for the top one percent of the largest companies, is capital constrained in some capacity. Either that means they're fine with the money they have but they put all of their expansion plans on hold, or it means they're literally starving for capital, or it means there's somewhere in between. But everyone has had to readjust their business model, everyone.
OW: And like you said, you’re not targeting start-ups here. It seems like more of a quality versus quantity approach.
DK: If we make one bad deal, it's overly onerous and impactful to the portfolio versus doing three good ones. And I’ve been doing this for a long time. Quality is definitely the key.
FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.