Coverage begins: Golden Leaf (GLH.C) emerges from the fog as a value pick

RENEWED COVERAGE ALERT:

Company: Golden Leaf Holdings (GLH.C)

Website: GoldenLeafHoldings.com

Sector: Cannabis Extracts

Avg volume: 111k traded per day ($37k)

Shares out: 100 million

Last three months: $0.445 down to $0.345

Nutshell (from their website):

Investor Presentation:

[pdf-embedder url=”https://e4njohordzs.exactdn.com/wp-content/uploads/2017/02/Golden-Leaf-Investor-Presentation-Deck-January-2017.pdf”]

Why should you care?

Because this has been a horror show.

I realize most people would be averse to putting their money into something described as a horror show, but those people are thinking the wrong way. Like a condo for sale cheap because it has a shitty paint job, you have to look past the first glance on a company and see if it has ‘good bones’.

Golden Leaf has been put through the wringer, and for an extended period. There were times when it was all the company’s own fault, and there were times circumstances combined to punish the company through no fault of its own, but all that matters for you, the potential investor, is that it’s been beaten up and oversold, to the point where the market isn’t seeing it – or valuing it – clearly.

To paraphrase Dire Straits, “Oh yeah, old Golden Leaf, yeah I used to have a scene with him.”

Over the last few years, Golden Leaf has faced, in no given order:

• Ravenous short selling campaigns (now worked through, with some of those shorters now vocally supportive)
• Lawmakers accidentally outlawing the entire industry when they changed the license needed to do business before actually handing out said license (licenses are now secured)
• The county GLH was based in asking voters if they wanted marijuana companies doing business in their county, long after GLH had set up its facility. The ensuing no vote forced a move (now completed)
• Ongoing shenanigans with license requirements that saw the company chasing its own tail trying to stay regulated (now the holder of retailer, processor and wholesaler licenses)
• A critical cash shortage and poor timing of a financing that saw it take place at a drastically reduced price (recent financing and company-wide cost cutting has seen to that)
• A long term poor communication period where investors were in the dark about goings on at the board level (CEO says that’s changed)
• A partnership/merger with the biggest player in Washington State that couldn’t be announced properly due to ongoing ownership law changes in Washington precluding outside owners
• The Washington State partner having to stop production after the use of an unpermitted chemical (now sorted)
• Critically late financials at the end of 2015 that saw a CFO eventually moved on (financials now in order, though not yet showing new production revs)
• Months of halted or limited production, having spent much money on building out facilities and production equipment that was agonizingly underutilized (now back in business)

From an investor standpoint, you’re either sitting on GLH stock and hate that track record because it’s cost you plenty (hand raised), or you’re new to GLH and see that track record as a wonderful entry point – if those problems are now fixed.

I spoke to GLH CEO Don Robinson a week ago and his words were straightforward; “It’s been a terrible year, no question,” he said. “We’ve faced things no company should face, we’ve battled and battled, and every time we’ve come up for air, something else was dropped on us.”

“But,” he added, “We took it all and we’re still standing.”

So what does 2017 look like?

“Better.” he said. “I’ll be honest, there’s going to be some sluggish numbers as we’re still gearing things back up. There’s no point hiding that, but it’s also temporary. We’re cashed up now, we’re making forward plans, we’ve cut costs to the bone, the dispensaries in Oregon are clamoring for product, their shelves are literally empty, and we have all our licenses that get us back to where we need to be.”

Long term trends:

There’s nobody with an ounce of sense who would tell you that marijuana, be it medical, recreation or some hybrid of the two, isn’t a massive growth industry, and though the Oregon scene has had its trials and tribulations, GLH is by far the biggest player in it. Most Canadian-listed pubcos in the cannabis space have flown up in valuation over the last year, whether or not they’re in positive revenue currently. Only Golden Leaf, to my knowledge, has actually lost market cap over the last year. That’s an opportunity, considering the wheels are only now getting back to full speed.

The downside:

We’ve talked about that, but there’s another one not mentioned, and that’s the boardroom. Frankly, Golden Leaf has had a tumultuous time, and long term large stakeholders have not been happy watching the water churn for so long. There’s peace right now, all oars are rowing in the same direction for the first time in two years, but such a peace can at times be uneasy, especially if the company endures more roadblocks in the near term.

Value:

Golden Leaf’s value right now is, in my opinion, extremely strong, which is why I’ve been sitting on stock for some time. I’ve tried to get out and leave the company behind at various points when the joint was seemingly unable to get out of its own way, but I keep coming back, in large part because of the crazy potential of the thing. And that potential is CRAZY.

At one point in 2015, GLH was pulling in more revenue than any other Canadian weed play, period. it has never received the credit it deserved for that and, sadly, ended up trailing off when the regulators got stupid. But the upside of the regulator madness was it thinned out the competitor space for GLH completely, so now they have their license and just about nobody else does, with hundreds of Oregon dispensaries banging on their door. This is the moment.

Our take:

Back in 2015, when I first saw GLH’s presentation, they were a couple of guys with one machine making $300k per month. Then, the next month, it was $350k. And it stuck at that level for some time because that was the literal capacity of their machine. Back then, the only thing stopping GLH from shooting the moon was their capacity, but as they got another machine, their revs jumped to $750k per month. Then it got over $1m quick.

Then the wheels fell off and the shorters got involved and management did not respond as management should. A planned financing just as the share price fell by a chunk locked in a situation that has taken a year-plus to solve, where any time the share price climbed, it hit the glass ceiling of that financing price.

But the insiders did the right thing and refinanced at a premium to market, showing investors they were in for the long haul. And the dust? That’s settled. Finally.

It’s not clear sailing, by any stretch. The effects of the ‘annus horibilis’ that was 2016 will still be felt into 2017 as revenue interruptions are eventually shown on the books.

But I do believe the company is where it – finally – needs to be. And credit to the long term large shareholders who have held true through the worst of things to finally get out the other side.

In terms of customer numbers, you’re looking at 1.3 million across Oregon and Washington, and as rules liberalize elsewhere, I can’t imagine a now cashed-up GLH not expanding outward to other states, with potential customer numbers that will put the Canadian market into the shade.

Other states are now coming online -without residency rules hampering who can invest in them- and when I asked Robinson about those, he took a long time to answer, eventually coming out with the most broad and non-committal of responses. This I consider to be an indication of discussions, if not outright plans, to bring on a third state, or more. Or more partners. Or more brands. Or something.

To put this in perspective, when I asked Robinson the same question eight months earlier, he replied with a loud, “We’re focused on where we are.”

This time around, it was a pause, a thought, then a quiet, “there are many opportunities in this market and we’d be silly not to explore them.”

Is Golden Leaf ready for better things? I think they are. The sense I got from my call with Robinson is that he’s taken some serious lumps, but he’s proud to have stayed alive through storms that would have sunk a less sturdy ship. He’s raised his hand to his own mistakes, and he’s braced himself through things that he could not control.

The only question left for me is, will Robinson release news on the regular and keep his shareholder base abreast of what’s going down at GLH HQ, or will he sink back into old habits, of preferring to embrace silence over confirming weakness?

I have, historically, eaten a fair amount of shit by standing by GLH. To be fair, few could have expected the combination of acts of god that have combined to batter it (nice work chasing employers away, Marion County voters), and to be even fairer, I’ve at times had some contentious phone calls with management, but I’ve put my money where my mouth was throughout. We’ve a good track record of pointing investors to profits on Equity.Guru, and GLH is one of those few where, if the cut-off point to success is today’s share price, we got it wrong.

But our loss can be your gain, if this is the time you step in.

I hold GLH right now and continue to, even as the stock has dropped a little of late. But, unlike other points through 2016, I’m not holding against my will any more. I’m not bracing myself for what’s next. In fact, it’s notable that a lot of the loudest anti-GLH voices on stock messageboards over the last year are now talking of the value in the deal. Those guys were correct when they ranted against the stock in 2016, and I think they’re correct today when they point to it as ready to turn around.

If GLH shows strong news going forward, I believe there’s a big upward stock price push likely. I don’t care if it rolls to $0.30 or less in the meantime because I personally believe, when we hit the end of 2017, people will look at today’s GLH price and think it was a steal.

That said, I thought that at the end of 2016. And 2015.

This time, for sure.

— Chris Parry

FULL DISCLOSURE: Golden Leaf is – once again – an Equity.Guru marketing client, and the author continues to hold stock in the company.