Green Organic Dutchman Situation Could Get Dicey

The Green Organic Dutchman Holdings Ltd. (TSX:TGOD), one of the Canadian marijuana stocks, announced that additional financing is needed to complete construction of its greenhouse facilities, which might delay revenues

SmallCapPower | October 10, 2019: The Green Organic Dutchman Holdings Ltd. (TSX:TGOD), one of the Canadian cannabis stocks, announced Wednesday that it is reviewing financing alternatives to complete construction of its Ancaster, Ontario and Valleyfield, Quebec greenhouse facilities.

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Cannabis stocks are continuing to face a capital crunch. Cannabis stocks have underperformed since March 2019, with the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) down ~51% since its March peak, compared with the S&P TSX Composite Index, which is roughly flat over the same time period. As a result, capital markets have shifted, and cannabis companies are seeing constrained access to new capital. This can be seen through two recent capital raises in the sector. On September 13, 2019, Cresco Labs (CSE:CL) announced a $73.5M bought deal at $10.00 per share, a discount to the company’s share price at the time ($10.50). The stock is down ~25% since, trading at $7.50. Additionally, iAnthus (CSE:IAN) announced on September 30, that it closed a $100M convertible note at a 13% interest rate.

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TGOD could add some debt to its balance sheet. Yesterday, Green Organic Dutchman announced it had been in discussions for potential financing with commercial banks, but said that “due to changing market conditions, those sources of financing have been unavailable on acceptable terms within the timeframes required.” In an interview with BNN’s David George-Cosh, TGOD’s CEO Brian Athaide said, the Company is looking to secure about $160M in bridge financing to finish construction of its Ancaster, Ontario and Valleyfield, Quebec greenhouse facilities, in addition to cash needed for working capital purposes. As well, Green Organic Dutchman is now looking to secure an asset-backed loan with an interest rate in the low double digits with a non-traditional lender. This is likely similar to the $100M loan iAnthus received from Gotham Green at 13%. Of note, TGOD reported that it currently has $56.7M million in cash, plus $40.2M in restricted cash for capital expenditures, and no debt, with $212M in property, plant, and equipment that can be used as collateral to back the loan. With a strong balance sheet, Green Organic Dutchman should likely be able to secure a loan.

Likely difficult for TGOD to meet its F2020E revenue projections. To meet the consensus F2020 revenue estimate of $210M, the Company would have to grow its revenue by 83% per quarter, for the next six quarters, to fulfil this goal. This might be hard for Green Organic Dutchman to achieve, as it could face further delays to ramp-up cultivation. As such, first material revenues are not expected to come in until F2020, putting a further damper on TGOD’s ability to meet its revenue target. Additionally, it is not clear how the demand for organically-grown cannabis will turnout, as the product is priced at the high-end of the range, with Unite Organic currently selling for $52.45 for 3.5 grams through the Ontario Cannabis Store website. Statistics Canada recently released data that found, in the third quarter, black market cannabis was selling for $5.59/gram, which is 65% less than what the Green Organic Dutchman product is selling for.

Key Takeaways. While it is unfavourable for Green Organic Dutchman to have to get a loan from an alternative lender rather than a commercial bank, the delays in finishing construction of its facilities could put a damper on meeting revenue targets. Investors should remain cautious and pay attention to TGOD’s financial results over the next two quarters to see if the Company is making progress in executing on its business plan.

The Green Organic Dutchman stock closed Wednesday’s trading session down 17% at C$1.43. TGOD trades at a market cap of C$476.5M.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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