COMPANY REPORT
October 9, 2015
 (CSE – GLH - $1.00 USD/$1.30 $CAD*)
Price Target: $5.00
Rating: Speculative Buy
*denotes price of most recent private round
 Download Report in PDF Or Scroll down to read the complete report below.
| GOLDEN LEAF HOLDINGS, LTDThe Golden Ticket in the Cannabis Market |
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| GOLDEN LEAF HOLDINGS, LTD. (CSE – GLH – $1.00 USD*/$1.30 $CAD) |
| Price Target: $5.00 |
Rating: Speculative Buy |
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COMPANY SNAPSHOT |
INVESTMENT HIGHLIGHTS |
Golden Leaf Holdings is one of the largest Cannabis oil and solution providers in North America. GLH is the leading Cannabis products company in Oregon built around recognized brands providing medical users with a superior value and experience. A vertically integrated entity, GLH’s model is scalable with respect to production, sales, and geography.
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| KEY STATISTICS |
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| Price as of 10/9/15 |
$1.00* |
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| 52 Wk High - Low |
N/A |
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| Est. Shares Outstanding* |
63.0M |
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| Market Capitalization* |
$63.0M |
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| 3 Mo Avg Vol |
N/A |
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| Exchange: |
CSE |
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| COMPANY INFORMATION |
Golden Lead Holdings, Inc.
1235 Bay Street,
Toronto ON M4W 3R1 CANADA
Website: https://www.GoldenLeafHoldings.com
Phone: 416.725-6458
Email: info@goldenleafholdings.com
Note 1: *Denotes price as of most recent private offering.
GLH’s stock will begin trading on the CSE on 10/14/15.
Note 2 : All dollar denominations in this report are $USD.
Note 3: The author of this report is the beneficial owner of 200,000 common shares of GLH.
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Golden Leaf Holdings is one of the leading players in the U.S. Cannabis market, which is estimated to grow from $2.7B in 2014 to $10.8B in 2019.One of the largest Cannabis oil and solution provides in North America, GLH already dominates sales its segment of the medical marijuana market in Oregon and is a direct beneficiary of the recently effective recreational marijuana sales in that state.
A vertically integrated entity, GLH owns a growing facility, a dispensary and produces extraction and vaporizer oil vape pens. Thus, GLH is poised to enjoy major margin expansion and economies of scale.
With some form of marijuana sales approved in 23 states and potentially 9 more on the way, GLH plans to replicate its model into other markets, beginning with Washington and Nevada.
GLH is the low cost, high quality provider of high demand products, has unmatched leadership, is well-capitalized, and will likely serve as an acquirer of complementary businesses.
The Company generates $1.5M in revenue per month and we project $13M in sales this year with positive EBITDA potentially achieved in 4Q15. We forecast CY16 revenue of $60M with EBITDA of $15M+ and that number could be much higher if a recently signed MOU results in an M&A transaction in Washington State.
Currently valued at a paltry 1x CY16E sales and a 75% discount to its key Canadian peer, GLH is the number one play and best value in the Cannabis space. Our $5 target is based upon 5.3x CY16E revenue, which is the low-end of key publicly-traded U.S. peers. Slated to begin trading on the CSE on October 14, 2015, we rate these shares Speculative Buy.
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COMPANY OVERVIEWHeadquartered in Toronto, Ontario but with essentially all operations in Portland, Oregon, Golden Leaf Holdings is one of the largest Cannabis oil and solution providers in North America. There has been a huge buzz (pun intended) in the capital markets regarding marijuana/Cannabis, given the early stages of hockey stick-type growth in the medicinal and recreational Cannabis markets in select states in the U.S. and the hyper-growth expected in this nascent, multi-billion dollar industry.
However, to borrow a phrase: “This is not your father’s Cannabis company.” It is far more advanced.
Golden Leaf has ever-increasing critical mass of sales, high demand for its products, a scalable production and sales model, unmatched leadership, and is well-capitalized. Moreover, with EBITDA profitability around the corner, GLH is not just the number one pure play on the growth of the space but as one of the first vertically integrated players in the industry, the Company is actually a margin expansion and consolidation play.
Since early 2015, the Company has enjoyed enviable sales growth and could approach the $100M annual revenue run-rate next year through a combination of organic and inorganic sales growth. Monthly sales have grown from essentially nil in August 2014 to $1.5M in September 2015 and could reach the $2M monthly revenue run-rate by year-end due to heavy product demand and greater product yield production from the installation of new extraction machines. The dominant player in Oregon, 85% of the Company’s current revenue is generated through the sale of concentrated Cannabis extracts housed in its popular brands of CO2 disposable vape pens and cartridges for medicinal marijuana use that provide 1 gram of oil, which is equivalent to 10 grams of Cannabis and provide 200 eight-second doses. It should be noted that in addition to serving as the largest Cannabis extraction company, Golden Leaf Holdings generates more Cannabis revenue than any other North American-domiciled publicly traded pure play company, save for biopharma firms.
Going forward, there are multiple tangible revenue growth drivers for the Company. These include Oregon’s recent legalization of the sale and recreational use of marijuana, expansion into new and existing states as they approve the sale of Cannabis and the introduction of new products such as edibles. Plus, as part of its efforts to grow its own raw materials, the by-product of oil extraction, the flower, can be sold for well in excess of $1000/lb. This resulting benefit provides GLH with a separate revenue stream through its Company-owned dispensary subsidiary and other channels. As a result, Golden Leaf is poised to generate significant top-line growth over the next few years. Excluding any acquisitions, we estimate that the Company will record roughly $13 million in total revenue in 2015, growing to $60 million next year, with more than $15 million in EBITDA.
Image 1: Medical Marijuana Approvals
Source: (National Cancer Institute, www.Cancer.gov) Although the federal government deems possession of Cannabis illegal and the Federal Drug Administration (FDA) has yet to approve Cannabis as a treatment for medical conditions, the National Cancer Institute (NCI) recently published an interesting overview of Cannabis and its prospective medicinal properties on its website (https://www.cancer.gov/about-cancer/treatment/cam/hp/Cannabis-pdq#section/all).
According to the NCI:
- Cannabis has been used for medicinal purposes for thousands of years.
- Chemical components of Cannabis, called cannabinoids, activate specific receptors found in the body to produce pharmacologic effects, particularly in the central nervous system and the immune system.
- Commercially available (and largely synthetic) cannabinoids are approved drugs for the treatment of cancer-related side effects.
- Cannabinoids such as Cannabidiol, or CBD, may have benefits in the treatment of cancer-related side effects.
Interestingly, 50 years ago in Israel, scientists made tremendous inroads in the study of cannabinoid use (such as THC and CBD) for various medical treatments. As a result, Israel is considered one of the leading sources for the refined production and use of Cannabis for medicinal purposes. Meanwhile, a number of studies have demonstrated that the properties of the cannabinoids can treat anxiety, depression, nausea and vomiting from chemotherapy, appetite improvement, and treat chronic pain resulting from the effects of cancer and other diseases.
In fact, the U.S. agency National Institute on Drug Abuse (NIDA), long a staunch opponent of marijuana, confirmed in a publication on its website, that cannabinoids can kill cancer cells and shrink certain types of aggressive brain tumors. Specifically, the comments follow the release of findings from a U.K. glioma study using mice that demonstrated the positive impact of cannabinoids such as cannabidiol (CBD) and tetrahydrocannabinol (THC) in cancer treatment. The NIDA statements mark the first published acknowledgement of favorable attributes and characteristics of marijuana and this could help lead to a lower grade designation for marijuana in the next few years, thus removing the industry’s primary impediment to growth. After all, a 2013 poll published in The New England Journal of Medicineshowed that fully 76% of doctors polled are in favor of the use of marijuana for medicinal purposes—and that number has to be even higher now.
Studies have also demonstrated a clinical effect on patents suffering from multiple sclerosis, fibromyalgia, diabetes, Parkinson’s disease, and others. The use of Cannabis as a medical treatment or for recreational use can be via the dried bud, or flower, but oil extract concentrate in vaporizers has become popular due to the hash oil extraction which provides the same level of cannabinoids as one would when smoking the flower, but faster. A newer offering, edibles, which can incorporate Cannabis oil, is also gaining in popularity for those patients or consumers who do not wish to use a vaporizer.
The Lay of the Land
True success and evolution in a new industry must be driven by a combination of political, economic, and market conditions, not just grass roots and narrow legislative support. The companies that have scale, vision, capital, and competitive advantages become niche leaders, and end up being acquired by major players seeking to gain critical mass through acquisition rather than building products and a food chain from scratch. We see the same things eventually happening with the Cannabis space. The early players (even now) are largely budding stage or Mom and Pop shops soon destined to be acquired by bigger, better financed players with real business experience.
The firms run the gamut from growers, to equipment providers, dispensaries, refiners, marketers, financial technology providers, and food/retail businesses. Since it is largely a cash business due to the federal regulations scaring off most banking institutions, few have the resources to compete. However, to a large degree, strength may reside in the hands of the growers, since quality, quantity, and pricing of the raw material is the first segment of the food chain.
One interesting segment that tends to maintain a high valuation is in the medical marijuana treatment space due to the inherent leverage of its model and huge growth potential should their products receive FDA approval. These include biopharma companies GW Pharma (NASDAQ – GWPH) and INSYS Therapeutics (NASDAQ – INSY) which have products already being sold in the U.S. and others in various stages of clinical studies. These companies and other industry segment leaders of critical mass would be considered Tier 1 players.
THE GOLDEN LEAF BUSINESS MODELTarget Markets
Although headquartered in Toronto, Golden Leaf’s operating model and target markets reflect the U.S. opportunity rather than the Canadian Cannabis industry. Leveraging its dominant market position in Oregon, Golden Leaf plans to widen its sales and product line footprint in the Pacific Northwest by attaining 20% market share overall in Oregon’s oil sales market and plans to soon enter Washington State. Today, the medicinal marijuana markets in these states alone total an estimated $445 million with over 200,000 patients.
Now that the recreational market is open in Oregon, Golden Leaf expects material sales to begin in 3Q16, after crops are grown in its facility and when new machines specifically designed for the production and refining of recreational Cannabis are installed. Management estimates that the total market opportunity for vapes, flower, oil, and edibles in these two states represents nearly $2.5 billion, with 1.2 million potential consumers out of a population of 11 million residents.
The strength of the Company’s retail brands, its reputation for the highest quality oil, and its unmatched scalability could enable Golden Leaf to enter the Nevada market in the coming months, once legalization and Adult Use protocols are in place. Although this medicinal market is just an estimated $9 million in 2015, Nevada could be huge, given the 50 million annual tourists that visit the state each year. With a current projected market opportunity of $1 billion for 335,000 consumers out of the 2.8 million residents, that number is set to skyrocket in the coming years.
True Vertical Integration
Figure 1: The Golden Leaf Process
Source: (www.GoldenLeafHoldings.com) A vertically integrated entity, GLH acquired a grow operation, a processing facility and medical dispensary, Left Coast Connection, in May 2014. This unique positioning has created barriers to entry through branding, low cost production and processing techniques. As a result, on the back-end, oil extract products are the core competence, while flower is the Company’s traffic generator. On the front-end, the application of proven food merchandising strategies has resulted in the sale of GLH products to over 200 medical dispensaries in Oregon, with consistent, heavy demand each month.
With its own scientific division in Israel, considered to be on the cutting edge of research and production, Golden Leaf has developed the lowest cost production while achieving the highest quality oils based on competitive advantage rooted in economies of scale and intellectual property by creating proprietary strains and growing techniques. Important, Golden Leaf’s processes are highly scalable, with proprietary production capabilities that are focused on raw material self-sufficiency, extraction and refinement and applying the application of best practices from other industries to the Cannabis market. In fact, the Company’s proprietary extraction machinery was developed by aerospace engineers.
While sales have passed the $1 million mark on a monthly basis since April, the Company has not yet met its heavy product demand due to capacity constraints. However, the Company recently purchased two CO2 extraction machines and GLH now operates five CO2 extraction machines and two hydro-carbon extraction machines which enable it to generate $1.5 million of revenues on a monthly basis just from the extraction of oil. Two more machines come into operation in October and before the end of the year an additional four machines are expected to be in operation. Management hopes to have 20 in operation by the end of 2016. Each extraction machine has the capacity to convert 10 lbs of trim per day into 1 lb of oil.
The development of Aurora, the GLH 96-acre Campus, is well underway. The first greenhouse is operational and ready to harvest roughly 340 plants in October. The next development is the construction of a one hectare greenhouse that can harvest 2,000 plants each month. Construction commences in January 2016 subject to regulatory approval. Once complete GLH is capable of harvesting over 6,000 lbs of Cannabis flowers each month and 5,000 lbs of trim (to remain self-sufficient.) Moreover, the thousands of pounds of flower available for sale following the oil extraction could result in substantial post-extraction, by-product revenue.
Cultivation and Grow FacilitiesThe Company enjoys a competitive and cost advantage by supplying its own trim combined with chemical-free pest management and scalable grow facilities. Moreover, its dynamic breeding process drives higher yields due to its optimized genetic, agronomy, crop modeling, and climate strategies. All of these factors shorten the time to market, increase harvest cycles, and expand plant capacity.
ExtractionThe Company’s high yield and capacity extraction methods and industrial size extractor technology have resulted in high volume production, greater trim conversion yields, shortened throughput time, and a reduction in production costs. As a result, the Company is able to provide the oil for its vapes, its soon-to-be released edibles product line, and enter into agreements with other edible suppliers for the potential sale of the Golden Leaf oil extracts.
RefinementIn just a short period of time, Golden Leaf has executed a best-in-class winterization refinement process that leverages organic chemistry to perfect product refinement.
MarketingManagement’s C-level experience in the food and consumer products space has resulted in a top-tier consumer packaged goods model that includes an optimized brand portfolio strategy. The end result has been strong demand for key products such as Proper and XTRX.
SalesThe Company’s innovative sales and distribution strategy includes an optimized pricing and promotions model that relies on deep industry experience and relationships. Moreover, management’s direct sales and merchandising experience leverages data driven performance analytics to ensure product sales.
The Brands
Image 2: The CO2 Oil Vaporizer Products
Source: (www.GoldenLeafHoldings.com)
Image 3: Butane Vape and Edibles
Source: (www.GoldenLeafHoldings.com)
ON THE HORIZONThe Company is on track to achieve significant milestones over the next few quarters which should further enhance the GLH positioning, including campus, grow and production expansion, as well as new product and market development. Considering the Company’s relative size, growth rate and favorable capitalization, we expect that GLH will be active in M&A, buying complementary businesses to increase its scale and emerge as one of the dominant players in the industry, which in turn could make GLH a very attractive target down the road for an acquirer seeking a sizable footprint, instantly.
 To that end, we should note that GLH has signed a Memorandum of Understanding (MOU) with a company in Washington, a state with a Cannabis market twice the size of Oregon. Subject to due diligence this acquisition would double GLH’s size. As no transaction is slated to close at this time, we have not included any potential revenue from this potential deal in our revenue forecast. Separately, GLH has also signed a MOU with one of the largest edibles companies in North America to be the preferred supplier of extraction oil for their products.
Finally, investors can expect significant margin expansion as the Company reaps the benefit of its vertical integration and economies of scale.
MANAGEMENTUnlike most companies in the Cannabis space, GLH is long on experience at senior and C-level positions in operations, merchandising, management, R&D, marketing, investments, and crop production.
Rick Miller, ChairmanIn 2010 Miller co-founded the private equity firm Rogue Venture Partners to invest in Oregon based entrepreneurs and early stage businesses with funding and mentorship. Miller also founded the Avamere Group in 1995 and currently serves as its Chairman. Avamere is a diversified family of companies headquartered in Wilsonville, Oregon. Avamere Group is one of the Northwest’s largest senior care and housing providers with more than 8000 employees, serving more than 20,000 customers daily in ten states, with annual sales in excess of $1B (along with affiliated companies founded by Avamere and later merged with outside organizations).
Rick serves on Portland State University’s Board of Trustees, is Chair of the Audit and Finance Committee, and serves on the Executive and Administration Committee. He also serves on the boards of Portland based ID Experts and Diabetomics. He received a Master of Business Administration (MBA) from Portland State University in 1991 and a bachelor’s degree in marketing and management from the University of Oregon in 1987. Rick was recognized in the Portland Business Journal’s “Forty Under 40” in 2004, and “Oregon’s Most Admired Companies” (one of the top ten companies, Health Care category) in 2010, and again in 2014. In 2013, Rick and his wife, Erika, received the Simon Benson Award from Portland State University, which recognizes Oregon philanthropists.
Don Robinson, CEO, DirectorDon Robinson has over 30 years of management and leadership experience in the consumer packaged goods and hospitability industries. He began his career in a general management and marketing role with Nabisco Brands, and then spent more than 20 years with Mars Incorporated before his role as President and CEO of Cara Operations Limited. Mr. Robinson was Executive Director of The Food & Consumer Products of Canada, and the Chairman of the Board of the Confectionery Manufacturers Association of Canada. Mr. Robinson has been a member of various academic councils, including Ted Rogers School of Management Advisory Council, University of Guelph School of Hospitality & Tourism Management Policy Advisory Board and the Queen’s University School of Business Advisory Board.
Andy Hartogh, President, DirectorAndy is expert and visionary in the area of Cannabis growing and processing. He has 9 years of progressive experience in the Oregon market and is highly respected in the cannabis industry. Andy has developed proprietary growing techniques that set GLH apart in terms of quality and production. In November of 2013, Andy created a CO2 extraction company turning excess marijuana material into a usable, highly profitable product. Andy’s efforts and vision are the foundation that Golden Leaf builds upon for the future.
Brian Gentry, CFOBrian has over 25 years of progressive and comprehensive financial management experience, and an expertise in business planning and analysis. He has generally focused on the consumer goods and retail industries, where he has had significant exposure across all areas of the value chain. Brian has been CFO of several companies, and has worked for industry leaders like the Walt Disney Company and Ocean Spray Cranberries. He is a CPA, with a degree in commerce from The University of Virginia’s McIntire School of Commerce and an MBA from The University of North Carolina’s Kenan-Flagler Business School.
Bliss Dake, Chief Marketing OfficerBliss is an entrepreneurial and creative strategist with over 15 years of marketing, general management and operations experience. He has worked in the consumer packaged goods and tech industries in addition to practicing law as an attorney. Prior to joining Golden Leaf Holdings, he played a key role as CMO of Mighty Leaf Tea in building the company into a success story and leading premium tea brand. He conceived and grew the e-commerce channel from the ground up into a multi-million dollar business and one of most popular online tea stores. He has also held positions at LuxN, an optical networking company, and various law firms. Bliss received a Bachelor of Arts degree from Harvard University and a J.D. from the University of San Francisco.
Philip van den Berg, Director-Business Development, DirectorPhilip graduated cu* laude in economics in 1985 at the University of Amsterdam. During his 30 year career, Philip has worked on the sell-side and the buy side as analyst, member of the investment policy committee, head of research, portfolio manager, CIO and managing director with responsibility for investments, finance, compliance and operations. Most of his experience on the sell side was with Goldman Sachs in London where he joined when its European equities division was established in 1987. In 1997 Philip moved to the buy-side as cofounder of Olympus Capital Management, one of the first European hedge funds (l/s equity). In 2006 Philip co-founded Taler Asset Management, a wealth management company based in Gibraltar.
Moshe Bar, Chief Technology OfficerWith over 23 years of experience in the seed industry (since 2007), Moshe served as global crop leader for pepper and as global head of scouting and strategic projects at Syngenta. During this time at Syngenta Moshe gain his experience working in a global senior management positions as a team member of Vegetable R&D leadership team. Prior to joining Syngenta, Moshe served as a Tomato breeder and VP R&D at Zeraim Gedera, a leading Israeli vegetable seed company, where he gained his first experience in plant breeding and management. Moshe brings in-depth knowledge in plant breeding, biotechnology.
Tim Fitzpatrick, VP OperationsAfter studying Agri-business at Oregon State University, Mr. Fitzpatrick began his career with the largest “Field to Fork” vegetable processor in North America (Agrilink / Birdseye) where his team was responsible for harvesting, processing and packaging over 250MM lbs. of frozen vegetables annually. After 9 years, having held a variety of operations management positions at Birdseye, Mr. Fitzpatrick left to join the plant based start- up, So Delicious Dairy Free, where he served as Vice President of Operations for nearly 8 years. So Delicious was recently acquired by White Wave (Silk). Most recently, Mr. Fitzpatrick served as Vice President of Operations for 6 years at the iconic NYC based and nationally distributed, Ciao Bella Gelato.
Beau Whitney, VP Government and ComplianceBeau Whitney has a BA from Macalester College and an MBA from Thunderbird School of Global Management and 15 years of professional operations experience in High Tech Industries. Beau has held positions at Intel Corporation and TriQuint Semiconductor. In addition, Beau is a university level instructor of Economics and his Oregon Economic Cannabis analysis has been cited in several publications. Strong on processes and control, Beau has managed an inventory portfolio valued at over $100M and brings his process discipline to this emerging industry.
Andreas Met, VP SalesAndreas has over 20 years of experience in Food, Hardware, Online and Retail industries, most notably at Walmart where Andreas managed the Household Chemical Desk, with revenue of $5B and $1B in profit. Andreas is equally comfortable in large corporate settings as well as small startup environments, his skill sets are ideally suited to help scale the business.
Eli Cohl, DirectorEli Cohl was born in Toronto, Canada, and has spent the majority of his life exploring & working throughout the world. Initially making headway in the ranks of the traveling circus most call rock & roll. Eli worked as an integral team member for several high-profile tours including stage rigging, carpentry & video/camera positions with the Rolling Stones, David Bowie, The Police & Shakira. Eli spent some time working as a Manager for Live Nation Artists and S2BN Entertainment in Miami before moving back to Toronto in 2010, to launch Two Cohls, which specializes in growing & branding emerging acts, strategic partnerships and other music related ventures, with its main focus overseeing management, record label and publishing services for musical artists & performers. Eli and his family reside in Los Angeles, CA.
Sam Pillersdorf, DirectorSolomon (Sam) Pillersdorf is President of La Prima Investments Ltd. and of Sep Holdings Ltd., which are companies involved in agricultural, real estate, securities, mortgage, and insurance investments. Dr. Pillersdorf has been an Assistant Clinical Professor of Rheumatology and Internal Medicine at the McMaster University Medical Centre. He has also served as Head of Rheumatology Outpatient Clinics and Head of Rheumatology training there. He has retired his medical practice. He is President of Shadchen Resources Intermediaries Inc., which has successfully facilitated the takeover of several Canadian mining resources by foreign investors.
He has been and is currently a Board member and Director of TSX Venture Exchange listed junior companies, and serves on the advisory committee of several companies.
RISKSIn our view, there are three categories of risk with these shares: legal, business, and capital markets. Although nearly half of the states in the U.S. have already approved the sale of Cannabis in some shape or form, until marijuana’s Schedule I classification is modified or downgraded by the federal government, there will always be risk in doing business in the space. Moreover, there may be delays by states in making the sale of marijuana effective, or could change regulations mid-stream. A related risk is the effect the marijuana designation has had on many players directly operating in the industry such as the difficulty in engaging and maintaining banking relationships.
Business risk includes but is not limited to potentially higher production costs, flower pricing variability and availability, a decrease in consumer demand, delays in entering new markets, and others, which could impair revenue and profit growth.
Capital markets risk for these shares are associated with the fact that as of 10/14/15, the Company’s stock will trade on a public exchange in Canada, although essentially all of its business is transacted in the U.S. Therefore, the stock may be subject to liquidity and other related issues such as greater than average volatility, as evidenced by the volatile trading of other, albeit smaller Canada-traded Cannabis stocks. All of these risks are typical of firms GLH’s size and standing.
FINANCIALSGLH has generated around $1.5 million per month for several months and would have recorded even greater sales if capacity issues could have been addressed sooner. At this juncture, as many as 13 extraction machines could be in operation in the next few months, enabling the Company to achieve a monthly revenue run-rate of $2 million by year-end. Since GLH will harvest its first own crop, the Company should enjoy EBITDA profitability in 4Q15 due to gross margin expansion relating to its own sourcing of raw material. Going forward, the combination of growing its own product, the sale of post-oil extraction flower, as well as production and economies of scale could raise gross margin from an estimated 40-45% in 4Q15 to north of 80% in the next year or so.
From the revenue perspective, we expect GLH to enjoy hockey stick-type growth, especially in 2H16 via the sale of its products for the recreational use market, as well as its current medicinal marijuana targets. Moreover, the introduction of new products (edibles), new markets (Washington and Nevada) and new potential production relationships should take total revenue to $60 million next year with EBITDA north of $15 million. Plus, with much of the Company’s capex front-end loaded, the growth and profit prospects are bright.
With over $15M in equity and $2 million in convertibles raised since 2014, and the potential of $15.3M from warrant exercise, GLH is well capitalized for future organic and inorganic growth. We should note that we have not accounted for the aforementioned potential Washington acquisition, which, along with other potential consolidation plays, should enable GLH to approach the $100 million revenue run-rate in 2016.
VALUATION AND CONCLUSIONGLH shareholders will be gratified to know that major shareholders have such confidence in the outlook and outcome for this Company that holders owning between 20-25% of the current shares outstanding (approx. 15M shares) have entered into a voluntary lockup agreement. This arrangement calls for no sales of stock until January when holdings are then available for sale 1/6 at a time, for six months. This unusual arrangement is a major positive for new shareholders as downward pressure from the sale of stock is reduced and upside is dramatically enhanced.
Golden Leaf Holdings is in an interesting position, valuation-wise. The stock trades in Canada yet does business in the U.S., a much larger and faster growing market. It could be argued that Canada had its act together before the U.S. and thus enjoyed first-mover advantage. However, the Canadian market has been through fits and starts, as evidenced by the volatility in many of the Cannabis stocks that trade on its exchanges.
The Company’s publicly traded peers in Canada include Canopy Growth Corporation (CA – CGC) and Mettrum Health (CA – MT) which trade at market caps of $146M and $51M, respectively. Canopy is the result of recent consolidation in the space and given its cultivation, integration, production, and marketing strategy, it most resembles Golden Leaf. CGC controls 20% of the medical marijuana patient market (Bedrocan) and has a strong recreational brand (Tweed), along with huge greenhouse facilities.
However, for all of its advantages in terms of lead time and leadership status CGC recently reported (pre-consolidation) quarterly revenue of roughly $1.5 million. As noted above, GLH has been generating $1.5M per month! Moreover, even with its recent acquisition of Bedrocan, CGC will likely generate revenue in calendar year 2016 that may be just more than half the revenue we have projected for GLH. Part of the problem is that the size of the medical marijuana market right now is small compared to even Oregon’s 71,000 patients.
At current levels, this bellwether trades roughly 4x CY16E revenue. Clearly, with greater sales, a bigger market, high gross margin and other factors, GLH should immediately be valued at a premium to CGC and other players trading on Canadian exchanges.
Considering the U.S. business and the likely listing of GLH’s shares in the U.S. in 4Q15, we expect a re-valuation of GLH on the upside may occur which could provide a boost to the Company’s overall value. There are many Cannabis-focused companies trading in the U.S. including biopharma companies, equipment manufacturers, vape providers, consumer organizations and others. Unfortunately, since many of the companies could be considered at the low end of the spectrum, and generating little to no revenue, the space has been quite volatile. However, once GLH trades in the States, we expect that the appetite for a Cannabis-focused company with material sales and profit could quickly place GLH in the top tier of valuations.
Today, the leading companies include: GW Pharma (NASDAQ – GWPH) a developer pf plant-based and synthetic cannabinoids for the treatment of multiple diseases, Zynerba Pharma (NASDAQ – ZYNE) an early stage synthetic cannabinoid drug developer, INSYS Therapeutics (NASDAQ – INSY), a generic provider of a cannabinoid-based treatment for nausea due to chemotherapy, and other products. MassRoots (OTC – MSRT) is a mobile social community for Cannabis enthusiasts and providers.
 As noted above, GWPH and INSY are noteworthy for their current approvals and pipeline. However, ZYNE, with a treatment in Phase 1 trials, remains in an early stage of development and could take years before seeing dollar-one in revenue. Although this peer group is primarily comprised of biopharmaceutical companies, and they tend to trade at high valuations, we proffer that with a higher growth rate, bigger market opportunity, and burgeoning profitability, the continued execution of GLH’s model can ultimately support a superior valuation.
At a price of $1, GLH’s shares are valued at a paltry 1.05x CYE16 revenue of $60M, which is a ridiculous discount to its U.S. peers and a 75% discount to CGC’s P/S valuation on CY16E sales. As a result, we believe substantial upside exists from current levels. Our price target of $5 represents roughly 5.3x our projected CY16E GLH sales which still represents the low-end of the U.S-traded P/S multiple peers, and is a modest premium to the valuation afforded Canadian-traded CGC. Looking ahead, we expect multiple expansion could occur toward the 8x-10x level on CY16E sales once these shares trade on a U.S. exchange, and as GLH executes its business model. We rate these shares Speculative Buy.
Senior Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 25 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
Analyst Certification
I, Robert Goldman, hereby certify that the view expressed in this research report or article, accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.
Disclaimer
This Opportunity Research report was prepared for informational purposes only and Goldman Small Cap Research was not compensated for its publication. |