The Green Organic Dutchman
We’ve previously covered TGOD’s announcement of a slowed production ramp-up for their Ancaster and Valleyfield facilities. In short, the company needed C$70-80 million to complete the updated plan.
If all aspects of this deal close, this should provide the company with enough runway to carry them through construction and into the second quarter of 2020. At which point, once their growing operations are proved out, the company will be able to secure a credit facility as per their previous announcement.
Ancaster Energy Centre Sale-Leaseback
This sale-leaseback has been part of their plan for a while and it was something we noted in our review from our analyst tour recap. TGOD never intended to be a utilities + cannabis company.
They believed they would be able to sell the facility for approximately $20 million at the time of the tour, before the financial challenges emerged. This suggests the $23 million they will receive as part of the deal is a fair price.
The closing of the agreement is still subject to standard due diligence and review from the infrastructure investor. TGOD also maintains the right to repurchase the energy center for $1 after the 10-year agreement ends.
We see this as a smart move to securing the additional funding needed to complete their facilities. It was something they had already intended to do and is non-dilutive for shareholders.
Construction Mortgage Loan
TGOD also announced they have signed a term sheet for a $40 million construction mortgage loan that is backed by both their Ancaster and Valleyfield facilities.
Upon closing, $15 million will be payable, with another $25 million in additional funding advanced upon achieving certain operational milestones. TGOD stated they expect to achieve these milestones in 2020.
The loan carries an interest rate of 12% over an initial 2-year term, which has the ability to extend further.
We see this as the deal that investors expected once it became clear the larger credit facility wasn’t an option. While the rate is higher than a credit facility might be (Aurora’s was just over 4%), they have not yet finished building out their operations.
Overall, this is another solid deal for shareholders — it’s non-dilutive. While it does carry 12% interest, if they secure the larger credit facility in the first half of 2020, they would be able to pay this down immediately and carry debt on more favourable terms.
Convertible Equity Note
Finally, TGOD announced they entered into a term sheet for a $40 million (USD$30 million) convertible equity note with a 5% coupon. Upon closing, TGOD would receive USD$10 million, with the remaining USD$20 million placed in escrow and released as the note converts into shares.
While the coupon rate is favourable, the exact terms of the arrangement (conversion price, maturity) have not been released. With a conference call scheduled for tomorrow morning, we expect the details of the agreement will come out at that time.
Although the dilution for shareholders isn’t ideal, the company was able to reduce the total dilution to $40 million by also securing the sale-leaseback and the construction loan arrangements.
This represents approximately 43.5 million shares or based on the current price, which would be approximately 12% dilution based on their full diluted share count. However, until the terms of the agreement are released, it’s difficult to discern the exact impact on shareholders.
Looking forward, investors now have much more clarity on TGOD’s financial standing. With an earnings call scheduled for tomorrow morning, we expect even more information to emerge.
The Green Orgnaic Dutchman is a market awareness client of Capital 10X.
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