- TGOD shares lost more than 90% of value since the 2018 IPO mainly due to its wrong bet on a massive greenhouse that is now being sold.
- The company spent $500M on operations and capital expenditures since 2018, the majority of which was spent on the Quebec facility.
- Now that TGOD is turning a page on its past, the company will likely survive as a niche Canadian player, but investors have many better options in the cannabis sector.
The Green Organic Dutchman (OTCQX:TGODF) completed its IPO at $3.65 per share in May 2018 and subsequently garnered much fanfare due to its purported focus on organic cannabis. However, it has struggled since then mainly due to its wrong bet on a massive greenhouse in Quebec that almost took down the whole company. The massive greenhouse in Quebec turned out to be a huge drag on its cash flow and balance sheet, leading to large dilution and borrowings that culminated in a ~90% decline in its share price.
(All amounts in C$)
One Giant Mistake
TGOD has spent an enormous amount of capital on its greenhouse building and funding its operations since its IPO. In total, we estimate that TGOD spends ~$500M on capex and operating cash burns. What TGOD has accomplished in this time frame are essentially two production facilities: the smaller facility is in Ancaster, Ontario and the massive 1.3 million sq ft greenhouse is in Valleyfield, Quebec. In order to finance the $500M of cash needs, TGOD raised $115M in IPO and subsequently increased its share count by 65% from 234M to 385M between Q2 2018 and Q3 2020. At the end of September, TGOD had $41M of debt outstanding and only $4M cash. Luckily, TGOD was able to raise significant new capital since Q3, benefiting from a broad rally in the cannabis sector:
- Oct 2020: raised ~$13M at $0.24 per share
- Dec 2020: raised ~$13M at $0.28 per share
- Dec 2020: announced $15M at-the-market ("ATM") equity program
Therefore, the company should have anywhere between $40-$50M of cash on its hand right now, excluding Q4 cash burn and capex. As we will discuss below, the bulk of the capex was spent building its massive Quebec greenhouse that is currently being sold, likely for pennies on the dollar. The impact on TGOD is massive and represents one of the largest failed greenhouse developments by Canadian LPs; others include Aurora Cannabis (ACB) and Canopy Growth (CGC). The difference here is that TGOD doesn't have the balance sheet or access to capital markets as others do.
The greenhouse that almost single-handedly sunk TGOD is the massive 1.3 million sq ft greenhouse located in Quebec. Since TGOD went public, this facility has always been a central piece of its strategy to become a large producer in Canada. However, the execution was one of the worst among Canadian LPs as the project was severely delayed and the construction costs were too much for TGOD's balance sheet to handle. The company initially planned to receive its cultivation license in 2018 which proved to be overly optimistic. Due to capital constraints, TGOD decided to complete the Valleyfield facility in phases in order to save costs. Ultimately, the facility never started cultivation before TGOD announced that it is looking to sell the facility. Based on recent anecdotes from Aurora Cannabis selling its 1 million sq ft greenhouse in Exeter for less than $10M and Canopy Growth selling its two massive B.C. greenhouses with a combined 3 million space for ~$40M, after spending more than $1 billion on the facilities. The amount of capital destruction from LPs from overbuilding greenhouses is staggering and TGOD will join the list now with its Valleyfield facility up for sale.
(Source: 2019 Presentation)
Recent Progress & Outlook
While the announcement to sell Valleyfield greenhouse marks the end of a disappointing chapter for TGOD, the company is now a much leaner LP that has finally begun selling cannabis products in Canada. The company now operates just one production site in Ancaster with 17,500 kg of nameplate capacity. In the corporate update published on February 9, 2021, TGOD announced that its Q4 gross revenue would be $11M which is a 91% increase from Q3. TGOD only generated $11M of gross sales during the entire 2019 which demonstrates the progress it has made in its Canadian business. TGOD now expects its 2021 net revenue to be $40-45M which implies little growth from Q4 2020. As a result, management is again delaying the target of reaching positive operating cash flow after previously committed to Q1 2021. The way to understand TGOD's current revenue potential is very simple: as the Ancaster facility is expected to produce ~13,000kg of cannabis in 2021, with an estimated selling price of $3.0/gram, TGOD's maximum revenue potential is ~$40M excluding the European hemp operation. This excludes any 2.0 product sales which would have to rely on wholesale flowers as input.
TGOD is far behind other Canadian LPs in its business and we think capital constraints have been a big part. Now that it has raised additional equity and is looking to offload the massive greenhouse to save future costs, it will likely have more money to invest in its Canadian operation. It took the company more than two years to finally come to grips with the reality and refocus its resources as a small LP in the Canadian market. It is also looking to divest its European hemp operation as part of the downsizing. These changes are encouraging but the company had already suffered huge losses from building the Quebec greenhouse that is now for sale. The unfortunate undertaking almost took down the entire company and delayed TGOD's entry into the Canadian market almost two years after full legalization.
TGOD has a market cap of $150M and trades at 4.7x EV/Sales based on preliminary Q4 results. The stock is valued in-line compared to other small-cap Canadian LPs and most of this group remains unprofitable. We began warning investors in early 2019 to focus only on the select few large-caps in Canada and prioritize U.S. cannabis names. We named small-caps in Canada as the worst group based on our outlook for a severely oversupplied market. Now we continue to think the Canadian small-cap space is unattractive due to ongoing oversupply and significant pricing compression.
TGOD's downfall was due to its bad decision of overspending on an unnecessary greenhouse at the expense of damaging its balance sheet. Unlike some of its peers that were also overbuilding but had fortress balance sheet or access to equity markets, TGOD suffered from liquidity shortfalls which eventually led to over a ~90% decline of its shares since the 2018 IPO.
Meanwhile, we think TGOD has made the correct decision to divest its massive Quebec greenhouse because it couldn't afford to operate the facility. Further, the current Canadian market is massively oversupplied right now with no relief in the near future and retail pricing has continued to drop after falling ~25% since early 2019 based on data reported by various LPs. The wholesale market is even worse with pricing dropping more than 50% to ~$2.0/gram which implies very thin profit margins even for the most efficient growers. Going forward, TGOD will most likely position itself as a niche organic-focused grower in Canada with ~13,000 kg of annual capacity. We are Neutral on the stock because we think investors have so many better investment options in the cannabis space and TGOD still has high balance sheet risks.
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