We expect once Golden Leaf Holdings Ltd. (CSE: GLH) is able to realize synergies and consolidate its acquisitions, the Company has the ability to create a strong market position
SmallCapPower | August 9, 2017: Golden Leaf Holdings Ltd. (CSE: GLH) is one of the largest cannabis oil and solution providers in North America and is a leading cannabis company in Oregon. With a product portfolio built around recognized brands, Golden Leaf Holdings strives to provide cannabis users with superior value and experience. Golden Leaf Holdings has expertise in extracting, refining, marketing, and selling cannabis oil. GLH primary growth strategy is through strategic acquisitions and is well positioned to expand into other states within the U.S. that have legalized either medicinal or recreational cannabis use.
Investment Thesis
- Consolidation of high value brands under one roof
- Strong brand presence and rich product portfolio
- Proprietary cultivation Methods
- Growing through Acquisitions and Strategic relationships
Consolidation of high value brands under one roof – First Mover Advantage
Golden Leaf Holdings offers wide products ranging from flower, oils & dabs, edibles and E-joints with a focus on Western USA and Canada. The Company focuses on developing the highest quality oils with lowest cost production through its competitive advantage, economies of scale and intellectual property. Golden Leaf Holdings consistently invests in Research and Development to produce high quality products at the lowest cost of manufacturing. The cost cutting initiative undertaken by the Company in 2016 reduced operating expenses by 25%. Consolidation of acquired brands with similar infrastructures helps Golden Leaf Holdings to scale efficiently.
GLH has a strong brand presence and a rich product portfolio
Golden Leaf Holdings is one of the largest cannabis brand companies in North America and growing inorganically through strategic acquisitions. It has 1st in market share based on sales revenue with penetration in over 300 Oregon dispensaries and it is 4th in market share based on sales revenues with penetration in over 144 Washington dispensaries. Golden Leaf Holdings has a differentiated product portfolio with multiple brands like Golden, Proper, Chalice farms, Private stash, Liberty reach, Jackpot seaweed and Juju Joints.
Proprietary Cultivation Methods
With the demand of cannabis oil rising due to the health benefits and concerns arising over smoking, Golden Leaf Holdings is focusing on producing oils using proprietary production methods. By using proprietary extraction methods, it is able to produce cannabis oils, hash and edibles while controlling the flavors and potency of these products. GLH uses two separate extraction methods for extracting cannabis oil; carbon dioxide extraction (Co2) and hydrocarbon.
Co2 extraction allows Golden Leaf Holdings to focus on the extraction process so that desirable cannabinoids can be targeted, leaving behind non-beneficial compounds such as chlorophyll, lipids, waxes and fats from the plant. It operates five 20 liter Co2 extraction machines having capacity to produce approximately 450 grams of CO2-based cannabis oil per day. With five machines in operation production output capacity is approximately 2,250 grams of cannabis oil per day.
Hydrocarbon extraction uses non-polar hydrocarbon as a solvent. Hydro-carbon is especially well-suited for stripping dried cannabis material of its cannabinoids, terpenes, and other essential oils.
The Hydrocarbon process, unlike the CO2 process, generally requires higher quality cannabis material in order to have higher quality finished product. It operates one hydro-carbon extraction machine for the processing and production of hydro-carbon extracted cannabis oil. The machines yields approximately 3,200 grams of hydro-carbon extracted cannabis oil per day.
The Company’s CO2 oil products are sold under the brand names Golden and Private Stash through a number of delivery systems; e-pens, cartridges and dabs. The Company’s hydrocarbon products are sold under the name Proper, which are sold in one gram cartridges, or in 1 gram receptacles as crumble and shatter. Hydrocarbon is also sold in bulk in slab format.
Growing through Acquisitions and Strategic relationships
Golden Leaf Holdings acquired Canadian based Medical Marijuana Group Corporation (MMGC) in an effort to leverage MMGC’s relationship in the Canadian medical cannabis market and expand GLH’s branded products into Canada. The Company acquired JuJu Joints, a leading disposable cannabis oil vape e-joint product that utilizes proprietary vape technology and has established strong brand equity and market penetration in Washington, Oregon, Nevada, California and Canada.
Golden Leaf Holdings acquired Chalice LLC (Chalice Farms), a leading vertically integrated cannabis company in Oregon. Chalice Farms has developed a branded portfolio of cannabis products that have generated significant market penetration and brand equity within the Oregon market
To further expand, Golden Leaf Holdings acquired a cultivation license and an extraction license in Nevada from NevWa, LLC (NevWa). NevWa’s cultivation and extraction license allows for the distribution and sale of products across the state of Nevada, including in Las Vegas and Reno.
All these transactions are a perfect strategic fit and provide a competitive advantage to the Company. Golden Leaf Holdings intends to expand into other states within the U.S. that have legalized either medicinal or recreational cannabis use.
Financial Performance
Golden Leaf Holdings generated revenues of $2.26 million for
the three months ended March 31, 2017 compared to $2.32 million for the three mont
hs ended March 31, 2016. Despite flat revenue growth, the Company remains bullish for future quarters to capitalize on its wholesale product mix to include value priced cartridges, dabbable oils, edibles, and a wider variety of flower options.
Gross margin narrowed to 10.6% in March 2017 quarter as compared to 21.7% in the same quarter previous year. This was due to reliance on a third party to create its oil products, which adversely impacted costs per gram. Adjusted EBITDA operational loss decreased to 1.6 million from 2.4 million in March 2016 quarter.
Golden Leaf Holdings reported a net loss of $2.29 million for the three months ended March 31, 2017 compared to a net loss of $0.37 million for the three months ended March 31, 2016.
The reported total assets were $22.55 million (December 31, 2016: $24.84 million) and total liabilities were $19.96 million on March 31, 2017 (December 31, 2016: $27.7 million).
Outlook
We expect once Golden Leaf Holdings is able to realize synergies and consolidate its acquisitions, the Company has the ability to create a strong market position. Currently, the shares trade at TTM price to sales multiple of 11.04x and a price to book multiple of 12.5x.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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