GLDFF: Golden Leaf Holdings (CNSX:GLH) Analysis and Research Report

2017-12-29 - by Asif

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The business of the Company is cannabis wholesale, retail and manufacturing business with operations in Nevada and Oregon, with an acquired Canadian subsidiary, which acquisition has closed as of the date of this report. In Oregon, the Company is a leading cannabis oil products company providing medical and adult users with a superior value experience. The Company also owns five retail dispensaries in Oregon. Golden Leaf leverages a strong management team with cannabis and consumer packaged goods experience. The Company is focused on developing the lowest cost production of highest quality oils through its competitive advantage rooted in economies of scale and intellectual property. Golden Leaf is dedicated to partnering with industries, communities and regulators.

The Company’s branded products are sold in over half of the dispensaries in Oregon. As the adultuse market grows, the Company expects market share to increase with the growing preference for oils and edibles. The company is one of the largest cannabis brand companies in North America with over $2.1M USD in sales per quarter. The company is one of the market leaders based on sales revenue with penetration in over 260 Oregon dispensaries.

Recent History

JuJu Joints

On March 16, 2017, the Company announced it had signed a binding Letter of Intent (LOI) to acquire the assets and business of JuJu Joints (the "JuJu Transaction"). JuJu Joints is a leading disposable cannabis oil vape e-joint product that utilizes proprietary vape technology and has stablished strong brand equity and market penetration in Washington State, Oregon, Nevada, alifornia and Canada. Pursuant to the JuJu Transaction, JJ 206, LLC ("JuJu Co") will receive cash consideration of CDN $3.0 (US$2.25) million and, subject to adjustment in certain circumstances, an aggregate of CDN $3.0 (US$2.25) million of common shares of GLH on the closing date of the Transaction.

The Company’s Directors officially resolved not to purchase JuJu joints as on November 14, 2017.

Aurora property

The Company put its Aurora property for sale in Q1 2017 and received and accepted an offer of $2.2M. An impairment of $1.6M has been recorded in the financial statements. On September 25, 2017 the Company closed on the sale of its property in Aurora for a total sale price of $2.2M. To incent the holders of these debentures secured by this property to convert to shares these debentures were converted at $.1822 after valuing the outstanding principal and interest at 102% for an issuance of 9,250,052 shares after settlement of remaining cash proceeds of $488,771.

Eugene facility

In February 2017, the Company entered into a lease for 23,000 sf in Eugene, Oregon for 3 years at $1.10 per sf. The facility was expected to become the primary production facility for GPO. The facility in Portland would be kept and used primarily for distribution. In June 2017 the Company opted to break this lease in favor of consolidating all processing and distribution operations in Portland. The abandonment of these assets resulted in a loss on disposal of $294,200 recorded in profit and loss.

Private Placement

On June 2, 2017 the Company closed on its recently announced C$35M financing transaction. The Company satisfied all outstanding conditions for release of escrow funds of the transaction on July 12th, 2017 and converted 125,892,857 subscription receipts into 125,892,857 units, each unit composed of one common share and one-half purchase warrant. The Company also issued 83,418,687 shares to the vendors of Chalice Farms.

Acquisition of NevWa, LLC

On June 6th, 2017 the Company closed on C$2.5M of the previously announced C$5.25M subscription receipts, the proceeds of which were used primarily to fund the acquisition of the assets of NevWa, LLC. The Company owes an additional $200,000 of penalty consideration for this acquisition as well as $100,000 to Peter Saladino which was an escrow deposit made on behalf of the Company.

During the third quarter and subsequent to the balance sheet date the Company received cultivations and processing licenses for its Sparks facility as well as jurisdictional distribution licenses for all significant markets within Nevada.

MMGC Acquisition

On June 27, 2017 the Company signed a definitive agreement to consummate the previously announced acquisition of all of the issued and outstanding shares of Medical Marihuana Group Corporation ("MMGC") and Medical Marihuana Group Consulting Ltd. ("MMCC"). MMGC has filed an application with Health Canada for a cultivation license. MMGC does not currently have any substantial operations and it will not be able to engage in the production of marijuana until it receives the cultivation license.

In connection with the Acquisition, (i) GLH will acquire all of the outstanding shares of MMGC for consideration of C$10,000,000, which will be satisfied through the issuance of 35,714,286 common shares of the Company ("Common Shares") at a price of C$0.28 per share; and (ii) GLH will indirectly acquire all of the outstanding shares of MMCC for consideration of up to C$5,000,000 (the "Contingent Consideration"), which amount will be payable in the event that certain gross sales targets are met within 18 months of marketing efforts commencing in Canada of GLH branded products (the "Earn-in Period"). The Contingent Consideration is payable in Common Shares at a price of C$0.28 per share. Initial consideration was provided via placement of note for C$2,062,080 to fund construction and working capital needs.

On October 27, 2017 the Company executed this definitive agreement for MMGC early with assurances that the cultivation license would be received imminently in order to facilitate the closing of its recently announced debenture financing. The company issued 35,571,428 shares as consideration for this acquisition.

Description of the business

Retail

The Company owns five retail stores. One retail store, Left Coast Connections, was owned by GLH before purchasing Chalice Farms, and four more have been acquired as part of the Chalice acquisition: Tigard, Powell, Dundee and Airport Way. The retail stores carry as a wide variety of products from local distributors and aim to cater to all demographics and tastes. Two retail stores are currently under construction with expected opening dates in the fourth quarter of 2017 and the first quarter of 2018.

Production & Sales - Oil Extraction

The Company aims to be a leading cannabis oil brand in North America and as such owns significant capital assets for the purposes of CO2, BHO and distillate oil processing and refinement. These assets have been largely inactive since Q4 2016 due to the Marion County referendum vote followed by the inability to receive city licensing to process at the Company’s north Portland location due to multiple building code and regulatory complications. After consolidating operations at the Airport Way location, the Company is still awaiting licensing for processing due to regulatory complications.

To supplement the lack of internal production the Company continues to source oil from third party processors. Since early 2017 many local brands have begun leveraging the same specialized processor leading to some commoditization of this source and price pressure which the Company has been forced to respond to.

Wholesale

As of the balance sheet date the Company distributes three main types of products; cannabis flower, cannabis oils and cannabis edibles. All of the Company’s products are independently lab tested and certified for pesticides, contaminates and potency before being packaged and labelled with detailed information about the levels of THC and CBD contained in each product. The Company has been building strong market demand for two new high end distillate products profiles branded as Gold Label ReserveTM and Private StashTM. These products are produced by a third party oil processor in bulk and then filled into cartridges, packaged and distributed by the company to its wide distribution network. These products built strong market demand as consumers grew to accept the higher price point and embraced the flavor and purity of this product. The Company sources flower from third parties and distributes to its network of retail customers primarily in 1 pound bags. The Company began selling Chalice FarmsTM branded edibles and CO2 cartridges in late June 2017. These products have received mixed reception due to market pushback against a competing retail brand name. The Company is currently evaluating whether to continue offering Chalice branded wholesale products to third party dispensary customers.

The Company’s oil products are sold under the brand names Golden™, Gold Label Reserve™, Private Stash™ and Proper™

The Company’s edibles products have been sold under the Chalice FarmsTM brand name and have been received with mixed reception due to inherent competitive resistance from local dispensary owners who are the primary customers for Greenpoint wholesale operations. The Company has edible products under development under the Golden™ brand name which the Company expects to attain broader distribution for the wholesale channels due to simple branding differentiation.

Specialized Skill & Knowledge

From the time GPO became licensed to extract and refine cannabis oil, it, and now the Company, has developed certain proprietary intellectual property (IP) for operating Carbon Dioxide (CO2) Extraction and the Hydrocarbon Extraction machinery, including best production practices, procedures, and methods, as outlined above. This requires specialized skills in cultivation, extraction and refining.

At the corporate level the Company employs university graduates with degrees in marketing, economics, accounting and business finance. Staff have joined the Company from a variety of industries and corporations such as Walt Disney, Oracle, Cisco Systems, Organically Grown Produce, and Mighty Leaf Tea, Deloitte, Moss Adams, and Kinder Care.

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