While The Green Organic Dutchman
To truly understand how Aurora’s exit effects TGOD, we spoke with management to hear what they think about the whole thing. Ultimately, we believe this is non-issue for long-term focused TGOD investors — we will try to be brief.
Aurora Uses Block Trade to Avoid the Chopping Block
For anyone following Aurora’s cash burn closely, it was clear they needed a cash infusion. Ideally one with minimal dilution for shareholders.
In market conditions of old, companies would have turned to public markets without a second thought. However, at these price levels and with deals being much harder to close, cannabis companies need to be more creative.
A creative move is exactly what Aurora pulled. They sold their 10.5% stake of issued and outstanding TGOD shares at a price of $3.00. This yielded proceeds of $86.5 million.
I won’t get into how long that may last Aurora, but it’s certainly more than a drop in the bucket. At this time, they no longer hold any shares but do continue to hold over 16.6 million purchase warrants.
While some investors claim this is a sign that Aurora no longer believes in the value of TGOD, this move was clearly telegraphed for anyone paying attention to Aurora’s strategy.
After the purchase of organic producer Whistler and their decision to decline an option to increase their stake in TGOD, the strategic value of holding these shares diminished significantly. With a need for cash, this was an excellent way of raising substantial capital with zero dilution.
In order to facilitate a clean block trade, they had to offer a slight discount to find a buyer for all 28.8 million shares. In the end, they turned to BMO for $3.00/share for shares trading at $3.51 at market close.
Why the Stock Price Drop?
Initially, it looks as though the market reacted poorly to the news, with a 15% drop on open. However, thinking about it this way is incorrect.
In short, this was a large block trade pre-arranged with the exchange and regulators and set to occur after market close. With the deal for 28.8 million shares occurring at $3.00, the stock price was now reset to $3.00 and only the price action from that time forward gave a true indication of how the market felt about the trade.
The market reaction was muted with the stock down only 2% after the trade took place. A 2% decline was in line with the sector performance for the day indicating investors were completely non-plussed by the news.
TGOD looks to have decent market support at prices below $3 judging by stock price action over the past year.
Air Cleared for TGOD
As for TGOD, while it looks like they took a big hit, management sees this as an opportunity to clear the air of something they knew was coming. While it’s not fun for shareholders, it positions the company better for the future.
According to management, institutional investors had previously raised concerns about the stock overhang that Aurora posed. With that out of the way, TGOD is better positioned to increase the number of institutional holders. Something this deal may already take care of.
This transaction also clears up any issues around revenue and gross margin mix. Aurora had previously held certain claims under the Investors Rights Agreement, and now TGOD shareholders will not see the repatriation of that money.
Finally, management has indicated Aurora still wants to hold the purchase warrants, signalling they still want exposure to TGOD and believe in the upside potential.
Ultimately, we see TGOD as a screaming buy at these levels. Not only has nothing fundamental changed about the company, but they are also better positioned to succeed with the air cleared and catalysts on the way.
The Green Organic Dutchman is a market awareness client of Capital 10X.
TGOD was a market awareness client of Capital 10X.
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