The Green Organic Dutchman Earnings Signal a Potential Mismatch between Perception and Reality

The Green Organic Dutchman [stock_market_widget type="inline" template="generic" color="default" assets="TGOD.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] posted 2019 Q2 results, and while it wasn’t the quarter TGOD investors deserved, it was the one they needed.

The company set the stage for an exciting second half of the year with their first cannabis orders from the OCS in hand. CEO Brian Athaide confirmed they will be shipping their first batch of recreational cannabis this week.

With sentiment so negative, it feels like the next 6 months will be the window to accumulate this stock before the company begins putting up real revenue and cashflow growth.

While some fatigued investors reacted poorly to the results early Wednesday morning, we think the mismatch between investor sentiment and good operational execution are creating a very intriguing buying opportunity. Greenhouse construction and production ramp-up are progressing well and operationally they are targeting positive cash flow generation in Q1 of 2020.

The time to buy any stock is not when investors are smiling and tweeting rocket emojis, it’s when the public makes it sound like all is lost while management just continues to execute on the plan.

With sentiment so negative, it feels like the next 6 months will be the window to accumulate this stock before the company begins putting up real revenue and cashflow growth and investors are no longer worried about the cash balance.

As we’ve seen in the past with this company, a shift in sentiment has a powerful impact on share price performance.

Not to mention based on the projected 2020 EV/EBITDA estimates, TGOD is one of the cheapest opportunities in the Canadian cannabis industry. TGOD has always been a few quarters behind their peers, but we still think patient investors will be rewarded as management is now only six months away from the future they have been promising investors since the IPO in early 2018.

2020 EV/EBITDA Estimates

Source: SEDAR, Capital 10X Estimates

While the information in their Q2 financial statements was par for the course, the company provided significant colour during their conference call. We get into both, but first, a review of Q2 numbers.

Q2 Financials Hold Steady

While the cannabis sold in their “Growers Circle” pilot yielded minimal revenue in Q2, TGOD still managed to grow their top line 20% to $2.9 million. This came almost entirely from their HemPoland subsidiary, which continues to perform well.

Quarter over quarter, HemPoland’s gross margin increased from 60% to 67% as revenue grew by $0.5 million and costs held steady. Management also confirmed that HemPoland’s current business plan can still obtain their 2021 $42 million EBITDA performance-based goal, although it will be backloaded.

Overall, operating expenses saw a slight uptick from $16 million to $18.4 million on the back of increased sales and marketing and share-based compensation. This is expected as their operations continue to ramp up and will likely increase as they continue to execute on their plans.

The sales and marketing increase was based on the company’s preparations for their product roll-out in the second half of 2019, while share-based compensation increased due to share grants for new hires.

The net result for the quarter was a loss of $16.4 million, increasing marginally over Q1’s net loss of $14.7 million.

The Expansion Continues

TGOD added an additional $53.1 million to their plant, property, and equipment while edging closer to the Hamilton facility finish line. With only $7.6 million left until completion, construction on the facility is expected to wrap up by end of Q3.

Management confirmed that construction has progressed well since the end of the quarter. The license amendment for their hybrid greenhouse in Hamilton has been submitted as of two weeks ago. They are expecting to receive confirmation any day and will move plants into the facility as soon as permitted.

The company also appears to be keeping a lid on the construction costs with budgets increasing less than 4% quarter over quarter.

With $123 million of cash and restricted cash remaining, TGOD has stated they have a clear runway to fund the construction, equipment, and operating expenses until the Hamilton and Valleyfield Phase 1a facilities are generating free cash flow. They can also now lean on secured credit facilities to bridge construction costs as operations continue to ramp.

Management has confirmed the company will be relying on those free cash flow streams to complete the remaining phases at Valleyfield. Based on the projected free cash flows, there is no expectation that they will need to slow down construction.

They are targeting their first harvest from the hybrid facility approximately 2 months from now. The main unknown being the Health Canada licensing timeline. For Valleyfield Phase 1a, they are expecting first harvests near the end of the calendar year. Overall they are projecting 2,500 kg sold in Q4 of 2019.

Looking Forward – 2020 Profitability

CFO Sean Bovingdon has confirmed that they are targeting break-even sales of 6,000 kg for Q1 2020. Based on their construction progress and production ramp-up, they should have no issues meeting and exceeding this goal.

Bovingdon also provided loose guidance of C$250-C$300 million in revenue for 2020, which would represent substantial growth over this year.

TGOD confirmed that they are receiving premium pricing on a wholesale and retail basis. Their Unite Organic product will retail at $52.99 for 3.5 grams ($15 per gram) in the OCS, where they are achieving wholesale pricing of ~$8 per gram. Medically, they are still selling their product at $12 per gram.

Breaking down the numbers, TGOD would need a gross profit of $3 per gram to achieve breakeven on 6,000 kg of sales. While this is 11% higher than the average gross profit of Canadian LPs, they are achieving wholesale prices that are almost 50% higher than the average selling price of Canadian LPs. We feel this is a very achievable goal, especially considering production capacity and sales are very likely to exceed 6,000 kg.

Overall, these positive numbers speak to the value of the organic vertical and help assuage any concerns over their ability to reach profitability.

Other notable highlights for the quarter include their application to list on the NASDAQ, of which they expect to hear back in 6-8 weeks; the extraction and processing deal with Neptune; a license extension at Hamilton, and; new supply deals with BC and Alberta.


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TGOD was a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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