I recently wrote about Golden Leaf Holdings ($GLH), and that I’d taken a position on them. The buy was predicated on the stock being ‘cheap’, as in: it was inexpensive relative to other legal cannabis assets currently being priced by equity markets.
$GLH has been around awhile, putting out product in ‘legacy’ states Washington and Oregon. Unlike the patchwork approach taken by others, these two (along with Colorado) opened the sector up to any and all…..with no limits on licenses. I had a person at an MJBiz Conference a couple of years ago remind me that California has had medical cannabis in place for more than 20 years. Oregon had actually decriminalized in 1973(!), and Washington was the first state to legalize recreational back in 2012.
The reality is that the ‘left coast‘ has generally been more tolerant about cannabis than most jurisdictions. And this extends north into Canada’s British Columbia, where unlicensed weed dispensaries were unofficially tolerated for years prior to Canada’s national legalization via 2018’s Bill C-45.
So. ‘Legacy’ or ‘mature market’ are often used to describe these jurisdictions. I think they are incredibly useful to an investor – as once the US gets to some point of weed being ‘legal’ – I think they provide a useful example of what the sector will ultimately look like.
I noted in our last podcast that few MSO’s are entering these markets. And for good reason: some are already dominated by particular brands and companies, many of them private. As a ‘normalized’ consumer good, cannabis just isn’t anything special with regard to profitability, with supply/demand economics trimming margins down to where only the efficient can operate. They are also a little unique as well – as large business eschewed entering a highly stigmatized and often political industry, leaving it to the bold. Banking and financial services are still a mess for the sector, yet as companies like $GTII and $CURA demonstrate, it hasn’t stopped them from hard growth and expansion.
I go on a little about this, because I view the hesitation of the Tier 1’s ($GTII/$CURA/$TRUL/$CL) to enter legacy markets as a function of their cost of capital. I have most of them thumb-nailed in the high 20’s. Traditional commerce is usually thrilled with returns on assets in the mid-teens. Add in regulatory and execution…..and layer in high volatility in equity pricing, I see a landscape of high risk matching equivalently high expected rates of return. The important word in there is ‘expected‘. A regulatory meteor strike at the state or federal level has the potential to crater those expectations in a day. Removal of license caps or the emergence of inter-state commerce will vaporize high-margin-limited-competition playgrounds. In New Jersey, $CURA currently holds relative dominance of licensed production in the state, and will enjoy this dominance for at least two years. Or so it’s expected.
Illegal actors in the legacy markets have shifted sales on the street to shipping excess production to neighbouring states. Wisconsin is an outlier in legal cannabis, yet even persons can drive themselves over a state line to acquire it. Many discussions at the political level in the US are now centring on tax leakage, rather than the illicitness of the substance itself. While good for activists and people who believe in the freedom of consenting adults to ingest a relatively low harm substance. Or that drug policy should be governed within the realm of health care, and not by criminal law.
It’s not going to be good for many business models out there that are currently enjoying a halo of asset valuation that’s unlike anything I’ve seen since the ‘dot-com’ boom 20 years ago. Many of the assets currently being built will be rendered worthless overnight….while others will come into the money immediately (like, for example, Village Farm’s ($VFF) vegetable greenhouses. I still have a hard time believing – that even if repurposed and fully operationalized – those greenhouses would ever realize something their current valuation suggests). And that’s why I see legacy markets like CO/WA/OR as a great window into the future of MSO’s.
This is our first go at $GLH in years. I’m not going to dive deep on history, but do a snapshot of where they’re at and what I see. I do have an expectation that it’ll look more ‘normal’ – that is, it’ll look like what typical ‘retail’ does…which is modest margins and relatively tight inventory control.
To the financials!
- Cash at $1.3MM. A recent raise of $3.4MM came in (at $0.065), and full 2 year warrants went out (at $0.10). More on this raise below.
- Last fall they came to an agreement with another debtor, shoring up what was going to be a $5MM problem of an earn-out payable next May. They put themselves on an instalment plan, and swapped half the obligation for shares. These shares – like the ones granted to debenture holders – are at a deemed value of $0.06, which, is a positive.
- Should they have been valued closer to market at the time ($0.03), it would have seen 90MM shares printed rather than 45MM to restructure the obligation.
This one’s going to be short up top. We’ll come back to operations shortly.
The previously announced move of $8MM in convertible debentures became formalized on January 21st, when an extraordinary meeting passed the required motions. To get the payment date extended by a year, $GLH needed to pony up a fee of $160k (granted in shares @ $0.06), they were repriced from $0.30 to $0.06, and there were two hurdles also tacked on. That $GLH needed to raise a minimum of $5MM, and that they needed to report positive operating cashflow in any of the quarters before the new expiry date.
And….add that the debentures can be converted over at $0.06 at any time. Repricing and accelerating that optionality was expensive for existing shareholders.
The $5MM raise requirement is interesting, as $GLH just made a recent private placement – initially announced as $3MM CAD in December 21……and re-press released in mid-January…. said then to be increased to $4MM. It ultimately came in at less than $3.4MM. A closer reading sees that $300k in cash was ponied up by management, and another $400k in foregone executive wages was tossed in as well, which leaves what it all probably started as: they found someone willing to give them $2MM USD.
I think it reveals that capital scarcity does exist, even in the US. It’s not a resounding endorsement either, but I suspect the market is well into the ‘show-me’ stages – at least in mature states. It also puts a different spin on that debenture amendment, where they’ll need to find another $1.6MM somewhere by November to stay onside with the revised indenture.
$GLH just announced a letter of intent to pick up a company in Oregon, that’ll bring in estimated sales of around $10MM annually. Tellingly, net operating margin is a modest 10%, which, isn’t exactly a barnstormer. I’m not a fan of press releases about potential acquisitions that don’t offer terms nor cost.
A previous deal with a company called BMF landed in the courts about a year ago. A guy named Peter Saladino – listed as a founder emeritus of a state level business association – had sold a couple of brands to Golden Leaf Holdings for $15,000,000 back in 2018. It ended up on the rocks pretty quick. From what I can gather, the claims are that Saladino sold and subsequently leased back some assets that included IP and trademarks…..but…… the trademarks weren’t actually in the deal, and, there was accusations of copying of hard drives with proprietary information. And so on. $GLH says they got a bag of magic beans, and is trying to get $9.3MM back. BMF has since declared bankruptcy. The two sides got together in early November 2020, and ended up asking for more time to negotiate. It’s still up in the air. $GLH says that the outcome is “not currently determinable.”
I mention legal because I recall how I saw their dealmaking a couple of years ago. And, due to how material $9MM is to an outfit of this size. I assume they’d like to get what they can, put this in rearview, and simply move on.
$GLH did end up paying out a previous president of a couple of Canadian subsidiaries, and gave him $100k in stock last September, some 11 months after they told him his services were no longer required.
<While looking this up, I came across a whack of litigation currently in the sector. The US is more litigious than Canada in the general, and this sector itself seems to have more than its’ share of legal tussles>
Regarding operations, it looks pretty thin.
They’re going to have around a billion shares outstanding after with this raise/debt restructure, and likely a few hundred million more coming with the acquisition just announced. Operationally, I haven’t said much, because there isn’t much to say. Sales are up 10% YoY, and G&A is down. But.
An announced review of the Oregon ops is slated to save about $400k/yr. Given that G&A exceeds gross margin by $1.7MM YTD….they’re going to find much more than $400k in annual savings. Being in business this long in a tough market – I’m uncertain how much more there would be to find. One’s gotta assume they don’t have marble floors in their offices as it is.
Royalty income is helpful, but largely immaterial at this point. There’s a whack of share supply coming from any debenture conversions, and earn-out restructuring.
Good disclosure in segmentation. YoY increases in ORE are in the right direction. Nevada’s wholesale isn’t material, and looks like it’ll be down about 30% YoY barring a jolt in the 4th quarter. As it is, Nevada looks to be a tough market for wholesale as it’s currently reporting a negative operational margin. It would explain much of the revenue weakness we’ve seen in some other outfits there. Sales could be harvest dependent. Excluding royalty income, core operational margin comes in around 35%:
And that’s all there is. They’ve lost $8MM YTD on $16MM in sales. Incrementally adding $1MM operational margin from an acquisition won’t close that gap. Presumeably there will be redundancies to be trimmed, synergies to synergize, and perhaps $GLH can get more velocity out of what’s there.
Either or, I don’t see a shop with $20MM (or even $30MM) run rate with a capital structure like this as attractive. I did as a ‘mis-priced’ asset (at least in the market). But not as investment. I’d be inclined to give the benefit of the doubt if they were operating in jurisdictions that were moated or emergent. In the case of ORE, like WASH, CO, and CALI….weed isn’t the magical road to riches that the big MSO’s have got people believing. In legacy states, it looks more like plain old retail.
And plain old retail won’t do it. Getting rid of $2.5MM in earn-outs and punting the debenture obligation for a year is a ‘good’. But they’ll be facing that same $8MM issue again in a couple of quarters. Perhaps there will have been a reduction in the obligation, but then there will have been another 133MM shares issued. And creditors likely won’t be earnest to hold. Without operations pumping, all that lays ahead is more share issuances. And that’s if they can even find another angel….let alone public raise.
Management passed the hat around, and more than half of their buy-in came in via IOU’s. Tripling sales & royalties and cutting G&A in half is what needs to happen. At this point, I can’t see how they can get there.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $GLH.