The Green Organic Dutchman (TGOD) – Analyst Tour Recap

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"] is starting to ramp production and complete their greenhouse buildouts. To show off their progress, they hosted a group of analysts at their Ancaster and Valleyfield facilities.

This article is a review of that tour, starting with our high-level take and followed by a detailed account of all aspects of the tour based on our understanding of the various presentations.

The High-Level

While most of the industry has been focused on establishing cannabis supply and processing companies, TGOD has been focused on building a CPG company that produces cannabis.

They’ve leveraged their substantial CPG experience in every aspect of the business. From product optimization, to brand awareness, to supply chain management, it’s all been methodically thought out.

But more on that later, first I’ll address the questions on the top of everyone’s mind; how’s their production capacity ramping, and will they need to raise capital.

From our perspective, production capacity is well on track to meet the guidance they released recently.

With the first greenhouse room in Ancaster being planted shortly, and the dialogue started with Health Canada for the Valleyfield license amendment, solid progress is being made (See below for a more detailed account).

Looking quickly at the numbers, assuming modest HemPoland revenues of $3 million dollars per quarter, TGOD should have revenues of approximately $4 million in Q3 and $18 million in Q4 based on our estimates and the mid-point of their guidance.

In terms of liquidity, TGOD needs approximately 6,000 kg of sales in Q1 2020 to breakeven and they appear on track to reach that goal. However, with $123 million in cash on the balance sheet and just shy of that in planned construction costs, cash flow in Q1 will be tight if left as is.

TGOD is building an organic cannabis empire, and while they are moving slower than most investors would like, we believe patient investors will be rewarded handsomely.

Given that, we expect to see TGOD close a credit facility similar to other LPs with banks such as BMO. Given the value of their assets and the minimal liabilities on their balance sheet, we wouldn’t be surprised to see a credit facility of between $75-100 million.

This would eliminate any liquidity concerns and give them more than enough runway to achieve profitability

In addition to this, they have stated they are considering the sale and leaseback of their Co-Gen facility ($20 million). As they put it, “we always intended to sell the facility once completed, we are not a utility company.” This should provide additional liquidity if required and help minimize expenses.

In the end, we are very impressed by the construction progress and the detailed strategy they have developed. Put simply, they are building an organic cannabis empire, and while they are moving slower than most investors would like, we believe patient investors will be rewarded handsomely.

TGOD is like the first-round draft pick that’s been hyped up for years. They are just about to get their shot at the big leagues and all eyes are watching to see how they perform.

As an investor, you can choose to wait until news starts flowing and hope you didn’t miss the boat, or you can buy a first-row ticket and a chance to see history unfold.

As we laid out in our Organic Cannabis Initiation Report we see serious upside in TGOD. They only need a fraction of their full capacity to come online to be profitable and validate their current valuation.

The recent tour has only strengthened our conviction – we continue to see TGOD as a strong buy at these levels.

Below follows a more detailed review of the facility tour.

Facility and Production Capacity Reviews

As we have seen with the early shipments of product to the OCS, TGOD can cultivate premium organic cannabis that consumers want to buy. Right now, they are in the process of ramping production capacity so they can achieve customer satisfaction at scale and validate the quality of their product.

In the past, we have heard pushback that the company cannot cultivate cannabis at scale. Quite frankly however, until now, most of the facilities just haven’t been usable as they have been under construction or awaiting licensing. That’s about to change – the greenhouse grow rooms are ready.

Ancaster

Most of the cannabis produced until now has been produced from Ancaster’s two smaller facilities (Beta Facility, Pharma Building). However, with license for main hybrid greenhouse in hand, they will start ramping operations.

TGOD will plant the first greenhouse grow room in Ancaster this coming week. And with multiple additional grow rooms ready, they expect to plant a new room every 7-10 days.

We have seen the ~2-week-old clones that will be planted and they are ready for the greenhouse. We have also seen the next batch of clones (cuttings) which are rooting well – these will constitute the plants for the third greenhouse grow room.

From here on out it will be a matter of planting a new room every 7-10 days and harvesting the crops once they are ready (approximately 8 weeks after being planted in the greenhouse).

Valleyfield

As expected, Valleyfield is not at the same stage of construction as Ancaster, however, Valleyfield makes Ancaster look like a small craft grow.

Describing the vast size of the Valleyfield facility is difficult. Perhaps the best way is anecdotal; within the facility, there will be two individuals whose full-time job is nothing but changing air filters. Think about that for a second.

There are lots of articles and presentations detailing the size of the facility, so I’ll jump right to the important aspect – growing cannabis.

TGOD has submitted their evidence package to Health Canada for the two greenhouse rooms they will initially be using to grow the Mothers. The dialogue with regulators has already started, which suggests they will have the amendment to their license within ~2 weeks.

Once they receive the green light, they will plant the Mothers, which are currently being grown in their small licensed indoor facility at Valleyfield.

Construction on most of the remaining rooms is progressing well, with many finished. Once construction for all of Phase 1a is complete, they will submit a second evidence package to amend their license to include the remaining 22 rooms and auxiliary facilities. This is expected to be mid-October.

Individual Grow Room

Looking at timelines, assuming they submit the second evidence package the week of Oct. 14, and the amendment takes 8 weeks, they will be able to start planting rooms the week of Dec. 16. This will leave them ample time to prepare the rooms and clones for the planting.

While it would have been great to have written this update a year ago, that’s simply not the reality. Outlined above is how the production ramp is most likely to unfold, well in line with their recent guidance.

Operational and Product Strategy

As their facility construction has been progressing, TGOD’s team has been busy building the framework of their business. This includes taking advantage of a slower start.

As CEO Brian Athaide put it, TGOD has leveraged their late construction start into a second-mover advantage. They’ve learned lessons from other LPs’ early mistakes that have resulted in tripled HVAC capacities for cooling, higher processing capacities, and designs that properly account for the heights and weights of the plants.

Management has taken a medium- to long-term outlook with their strategy, focusing on making data-driven decisions with substantial market research for all product rollouts. For example, with some of their first crops in February, they strategically held back half the crop to begin working on R&D initiatives instead of selling the product to appease investors with insignificant revenues.

TGOD is focusing on cultivating organic cannabis at scale and outsourcing core segments to other industry professionals.

In terms of technological design – they’ve left no stones unturned. From the custom plant box designs to a Co-Gen facility, they are putting everything in place to ensure optimal performance.

In general, management has taken a disciplined approach that puts TGOD in a place to succeed. Time and again we’ve heard Athaide say they are going to focus on their task – cultivating organic cannabis at scale – and outsource core segments to other industry professionals.

We see this as a smart strategy that will yield the same product with greater capital efficiency.

They have also clearly leveraged their substantial beverage CPG experience to develop a product line that will resonate with consumers.

Management has taken the time to build products consumers will want to buy, with a focus on the experience and not just what’s easy. One example of this is their unique glass packaging for their products.

While some think beverages will be a dud that can never replace beer, which may or may not be the case, TGOD has chosen to focus on wellness products (sleep aids, relaxation, pain relief, etc.).

As they ramp up production capacity and can realize their product initiatives, we believe investors will start to see a substantial return on their patience and their investment.

 

The Green Organic Dutchman is a consulting client of Capital 10X.

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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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