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How this Cannabis Co. Attained one of the Sector’s Cleanest Balance Sheets

Dave Jackson Dave Jackson, Stockhouse
1 Comment| March 12, 2021

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(Click image to play video)

Investors – both retail and institutional – have seen the ‘green’ flowing back into the cannabis market. And bounce-back is now in full swing. One of the sector’s most impressive performers over the past 12 months has been Golden Leaf Holdings Ltd. (GLH) (CSE.GLH, OTCQB: GLDFF, Forum). Operating seven dispensaries to serve Oregon, as well as California, Nevada, and Washington, GLH is a consumer-driven cannabis company that specializes in production, processing, wholesale, distribution, and retail…with a focus on health and wellness.

The company recently reported a record-breaking increase in revenue, as it builds its portfolio around recognized brands such as Chalice Farms.

In this exclusive video Q&A, Stockhouse Media was joined by Golden Leaf’s CEO Jeff Yapp and Executive Chairman John Varghese to discuss the recent company news, what’s to come for this intriguing company, and investment opportunities this exciting market.


SH: Thanks for joining us today, gentlemen!

GLH: Thank you very much, Dave. Thanks for this opportunity. I think those who know the Golden Leaf story will know that we've been public company for many years. We were one of the early-stage companies. We started off with great fanfare, raised a lot of capital, and then like a lot of cannabis companies. We hit some road bumps. We have, I'm happy to say since the day Mr. Yapp here took on the role of CEO. We have started the long uphill climb to credibility restructuring, repurposing and effectively reigniting Golden Leaf Holdings today. We are now proudly, also proudly happy to say we're on the other side of the turnaround. And as a statement that I saw in today, you know, you could say we've now entered the growth stage. And I think Jeff can give you a little more highlight as to sort of where we are overall today before you ask some specific questions, Dave.

I've been with the company about John -- he joined a little bit before I did -- I joined first in adviser and then about a year ago, a little over a year ago, joined as CEO. It’s been quite a journey. I spent most of my career, but the first 35, 40 years in Fortune 25 and 50 companies. So large companies… I went the entrepreneurial route later in my career. And then I was, was introduced to the cannabis and the opportunities that represented through Golden Leaf Holdings, which has been quite the ride. We put together an amazing team. And over the last year it's been quite a journey, but we're here today and we're very excited about the future for the company.

And Dave, I think one of the things that, you know, Jeff is very, like, there was no chance if this was a normal situation, you would have had a man of his experience and a talent level and commitment walk into a place like Golden Leaf.
And I think one of the things that people should know and take away from is the quality of the man and the commitment he's made. You know, the, we worked through most of the past year with just a $2 million of cash. And Jeff tone of the top, Jeff led off with a voluntary pay cut and the rest of the team committed behind him. And we all followed suit and you know, the passion and energy and drive that he brings to this story is what really has made the difference in us being here today.
With that said the other side of that though, is we put together an amazing team and it's a balance between people I've worked with for a long time. We have a long trusting relationship. And then those also who are from the industry, we've tried to balance the art and science of the business. We put together an amazing team and the results we see today are largely driven by that team.

SH: Management has seen another vote of confidence from debenture holders as you look to amend terms of your Convertible Debentures. Can you break down what this means for shareholders and what the extension means for your operations?

GLH: That's a great question, Dave. I think a lot of shareholders don't understand, you know, a lot of the capital structure and, you know, back in the Golden Leaf is no exception. Once a company has a hiccup, it's really hard to go raise equity. And also when a company's doing well, what they want to do is avoid dilution. So back when debt was raised, both in 2017 and 2018 Golden Leaf was able to do it by a convertible debenture. So that was great then, because while we got debt holders to pay whatever the investment number was at the time with the promise to be able to convert into shares at a higher price later. So for an existing shareholder, what that meant was okay, well, we get money in to help keep the operations running, but we don't have to dilute.

That works if the story keeps going upwards. In Golden Leaf’s case like most of the cannabis industry, the story didn't go up. And then all of a sudden you had a declining share price. Well that doesn't take away the liability that the company has. And what shareholders seem to forget was we saved dilution then and through no fault of the shareholders or even the current management we're not in the same position, but the debentures are still owed. And so the debenture holders rightfully, actually technically in, in the absence of cash, debenture holders actually technically own the company. So any patience that debenture holder gives the company is the only way a shareholder has a chance to actually ever see real equity upside again. So in our case, we were fortunate in 2017, the 2017 debenture, we were able to get converted in 2019 as part of Jeff and I joining and fixing the company.

Without that wave of support, we couldn't have gotten to 2020, so that first wave allowed us to convert then equity. It wasn't a large dilution, but it brought another day. Fast forward now to 2019, 2020, when we started the process, we had two pieces of debt due. One in November 2021 sorry. Yeah, 2021 this year coming up for roughly 8 million Canadian. And then we had a deferred payout to an old acquisition. The Chalice Group of nine-ish, 9.5 million US that was due May 2022. While we are doing all the right things in terms of fixing the business that, you know, when you looked at where we were in October, there was no chance we would be able to raise equity enough to pay that off. So we had to go to the debenture holders and work with them to convert the debt to stock and or defer payments.

And we started with the Chalice Group when the stock was trading at 2 cents Canadian. The Chalice Group and we've Jeff and I have constantly stated we've been undervalued, and we were at 2 cents Canadian. We were dramatically undervalued. We went to the Chalice Group and said, look, here are all the reasons why you should believe in what we're doing and why we think we're undervalued. And we'd laid out that story for them. They agreed back in November to convert stock, debt that was due. Of the debt that was due, 5 million was doing cash and four and a half in stock in May 2022. They agreed to convert two and a half million dollars US into 6 cents US stock when the stock was trading at two. That is an unbelievable vote of confidence. That then allowed us, and by the way, they also, the other important part of that was the balance that was left, they agreed to let us pay them over 60 months, starting May 2022. So instead of having a bullet payment, we bought ourselves a lot of time, manageable time, which Jeff, for the way he's running the business can create from cashflow.

We were able to take that momentum and then go to the 8 million debentures due November 2021 and say, look, we now have a new price. We need your help. We need to extend the debt because give us time. And again, back to hear all the good things we're doing took that story, got them to agree to extend to November 2022 and their conversion price was also 6 cents US. Once we got those two things done the balance sheet, I think now we have one of the cleanest balance sheets in the industry. That then allowed us to go raise the first, which is a small $3.4 million raise in January.

We were able to get it done very quickly. And you know, we got lucky because combination, you know, two or three things happened. The market dynamics took off, the debenture holders supported us and, and the performance of the company. So performance, market, and support. From there, Jeff was able to attract an acquisition opportunity which is going to, we're going to give you the details at the end of when we finished diligence that we've signed an LOI to go acquire a retail chain that will add at least 10 million US in revenue to our business upon close in 2021. We were able to raise we announced a raise of just of up two to $11 million to fund this acquisition. And we were able to do that at six and a half cents, a unit at six and a half cents, and with a full share and a warrant at 10 cents. So in January we raised at three, we were able to raise at six and a half. And those things tell me that we're finally starting to get some recognition for all the hard work and the story's just beginning. And I think from here, I think, you know, I think we, if Jeff finds more opportunities, I think the ability to raise the capital will be there. And I think it over to you now, Dave, do you have any other questions, but I think that gives you a good story.

SH: It is. In fact, it's a great segue into my next question. And simply put, why is GLH now able to raise that kind of equity?

GLH: I think it's, it's exactly what I just said. The combination of we've done the turnaround, Jeff proudly stated in our third quarter release, or we have completed the turnaround. Now we're moving into growth stage. He'll talk to you about his crawl, walk, run strategy. We've, we've come out of crawl. And, you know, and Oregon is a state that is in a run stage. People don't understand that. And, you know, Jeff will explain why, but because we're in the run stage and acquisition in Oregon, that's highly accretive. We're buying the less than one times revenue, this revenue we're getting that will compound our value, I think, and, and shareholder value. So it is the benefit of having cleaned up the balance sheet and then being able to show the story. And one other thing I forgot to tell you, and, you know, we're starting to see debenture holders convert. So now actually our debt obligations are, are getting lower. So the balance sheet is getting even stronger as we, as we're in this current stage,

John and I got together about a year ago, and we agreed that I would, we would focus the company's energy on driving performance. We would stay basically quiet, go, and do our jobs and see if we gave the company turned around, we put a really disciplined approach into both capital allocation, the way we spent the money and the way we kind of pursued growth, but based upon pretty amazing journey. If you think about the last year we've been through a vape ban, then COVID, then we tried to burn Portland down through unrests on social injustice issues. And then the state itself caught on fire. Through all of that, our team has been able to stay very focused, continue to grow, had some of the best quarters we've ever had, but really a function of the way the team was able to focus. And I think as a result of that performance, we're now in a place to say, Hey, we can raise money to really accelerate our growth. And it's all through a fairly disciplined approach. But one of those was to earn the trust of our current shareholders and the debenture holders to allow us to go raise the money to then expand, which is what we're doing now.

SH: So gentlemen, how will your experience in the most competitive market in the US, or at least one of the most competitive, help the company in the future?

GLH: No question. It is the operational discipline that succeeded in a market like Oregon requires that I think really puts us in a place to really go into any market. And I think, you know, clearly Oregon is seen as one of the most competitive mature markets in history, but if you can compete in this market, you're well positioned to compete in any market you want to go into.

SH: Golden Leaf is cashflow positive right now for the first time in the company's history. I think you briefly mentioned this. You just reported record quarterly revenues of $6.2 million, an increase of 42% from Q3 2019. Can you speak to how the company really got here?

GLH: I think, yeah, as I said before, I think first and foremost was a very disciplined strategy in terms of how we're going to grow our business. Second was the ability to put together an amazing team. We brought in professionals. John was saying earlier that by no definition should be here other than we trusted each other, we've been there. And we believed in the opportunity together. And we also believed in the brand. But we put together a plan. We focused on that. I think part of that is focusing on Oregon, as you know, it was our most mature market and then succeeding in that market, despite an incredible number of obstacles thrown in our way. The team persevered through that. And I think when other people were pulling back, we leaned in, as a result, you're seeing really, really strong performance.

SH: Well recently in December, the US House of Representatives passed the MORE Act, which would decriminalize cannabis use at the federal level. What kind of opportunities does this open up for Golden Leaf?

GLH: For me, it's really an exciting time. You know, I've had a long career. And very rarely do you get to say things like I'm in the right time at the right place, with the right team, and the right company. But I think cannabis represents that opportunity. You think about the market today, 25% of the population has a relationship with cannabis, 75% doesn’t. When you think about the issues, people are dealing with anxiety, stress, sleep, focus, that’s 100% of the population.

I think by decriminalizing, two things are happening. One from the legitimacy perspective, it opens the door wide open to us. Most importantly, from a banking and financial perspective, it opens markets to us that have never been available. So I think both the savings making to a broader market as a consideration. Opportunity. And we've seen that worked quite well for us in Oregon, but importantly, the way it opens up the financial markets, the banking systems, which have been constrained. And importantly, you know, we would expect 280 to be repealed. And that's our tax. That's really a punitive tax on the company that seeing that go away, I think is going to create great deal more capital for the businesses to put back into the business and grow. But we think long-term there isn't a better industry to be in.

SH: Now, can you tell us about any exciting new product offerings that might be of interest to investors and consumers?

GLH: Why I’d tell you but then, you know, I’d be in trouble. It wouldn't be -- they wouldn't be new anymore. We are really excited. We've got a series of announcements coming that, you know, you'll be hearing about, which is exciting for us. Clearly, we think innovation continues to drive growth in our business. We think we sit in one of the most innovative states when it comes to our products that we are currently in. So we've got some very exciting news coming in the not-too-distant future. And I think, you know, it will be very well received.

SH: Well lastly, I'll throw this out to both of you gentlemen, if there's anything that I've neglected to ask that you'd like to add, please feel free to elaborate.

GLH: So I've got two things. I think the one, one point to, to make is when the journey's just beginning, but we've done the hard work. The, if you look at most of our peer group, they're trading at four- or five-times revenue, we're still under two, two and a half. We think that as we do these accretive transactions combined with our organic growth, there is a value that is to be unlocked here. To that end, we've made announcements, but you know, part of the discipline of getting to here was not spending money and only spending money where we had to. So we cut out investor relations cause partially without we're pushing water uphill. Now today, part of, as we were able to raise the capital, we are going to we have, we have now actually engaged investor relations. So I think the people that are listening to your podcast should know and see that there's going to be more of an effort to tell the story better. And, more often, so that we can then support the operations with capital markets support.

Two thoughts I'd like to leave you with. One. I think we have a team, none of us came here to run a $25 / 30 million business. There's capacity to run a much, much bigger business. That's our intent. The second thing I'm thinking would bring into it is the level of discipline the team has continued to show in that discipline through, you know, really lean times is the exact same discipline that we are going to approach. We look at every single, you know, invested dollar return on every dollar of capital we invest very carefully. John talked earlier about a process called Crawl, Walk, Run. It's about validating revenue streams before you spend. You then once you validate your revenue stream or walk phase, you then invest to accelerate growth. And in that third phase, which we call run or fully mature, you're really investing to maximize the earnings, your margins. And with that, you kind of know exactly how to, you know, discipline application capital to drive growth. And we're in that phase now of disciplined application capital to drive growth.

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FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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