Green Organic Dutchman Holdings Ltd. (TSE:TGOD) (OTCMKTS:TGODF) (FRA:O1GA) convincingly broke its post-IPO low of $3.51/share on-open today, and never looked back. The foreboding price action couldn’t come at a worse time for retail shareholders, most of which are bound by a six-month lockup period ending November 2nd (six months from the IPO date). We look at a couple possible scenarios as TGOD’s share price descends into territory lacking any provable support.
Out of all the unfortunately happenstance bombarding retails cannabis shareholders presently, Green Organic Dutchman investors are undoubtedly suffering the most. With somewhere in the neighborhood of 100 million shares about to go unrestricted this Friday, broad sector cannabis weakness couldn’t have been more inopportune. Soon, TGOD investors will face a difficult decision: sell now and book still-material gains (the majority of pre-public subscription receipts sold at $1.65/SR, with lesser amounts selling at $1.15 and $0.50), or stick out the voracious bear slamming the sector. Keep in mind, the stock has lost almost 2/3’s of its value (↓64.23%) since attaining an all-time closing high of $8.78/share on September 20th.
While it’s tempting for interested investors to start nibbling on TGOD shares at these levels, a few disconcerting issues must be reconciled by the market.
Of course, the biggest immediate concern is the massive overhead supply about to come online. In coverage initiated by investment bank Canaccord Genuity on October 24th, they specifically referenced supply as an operational risk factor in their report:
“…We estimate there to be approximately 100 million locked-up shares that will be free-trading on November 2, 2018. While we do not expect the entirety of the shares to be sold in the near-term, or for the sale to have an impact on the operations of the company, the potential for near-term selling pressure may have a materially negative impact on the price of TGOD shares”
Although it’s tempting to attribute TGOD’s recent bout of weakness to front-run selling linked to Canaccord’s risk assessment, it may be too early to make that determination.
As we can see, Green Organic Dutchman has been in non-stop sell mode since late September. However, the pre-October 16th decline was likely influenced by negative fallout from Aurora Cannabis declining their additional 8% milestone option in the company, and $76 million bought deal preceding it (announced October 1st). The key question now is whether recent selling is just carryover from broad market cannabis weakness, fear related to oncoming shareholder supply, or both. The answer isn’t obvious, as the Aurora Cannabis milestone news was announced on October 12th (Friday) after market, coinciding perfectly with the rabid sector decline ensuing the following week. Either way, the extra supply won’t help bulls near-term—especially if the market hasn’t yet priced-in its full potential impact.
Another issue for TGOD is that despite the fact the stock has been chopped down, early round investors are still well in-the-money. At today’s prices, any accredited investor who purchased at $1.65/SR is still up ↑90.30% on their investment at today’s prices—excluding warrants. Many early-stage investors have much better prices than that.
As we’ve seen recently with Canopy Rivers—another early-stage cannabis operator—investors aren’t bashful about taking profits. In Canopy Rivers case, its share price now resides just $0.48 above the fully-diluted final go-public financing round in $3.50 established in June. Purchasers of that round—announced on June 18th—were freely trading on opening day. In today’s exceedingly bearish environment, the risk is that TGOD investors elect to book profits while they’re still available.
Lastly, Green Organic Dutchman may not have operational visibility on its side. We note Canaccord’s “Risk of high cost production of organic cannabis” missive in their operational risk factors write-up. Despite the favorable 3.5c/kwh power rate obtain from Hydro Quebec, the investment bank believes that “growing organic cannabis will nonetheless be higher than its greenhouse peers…” We also note than other highly-efficient and potentially lower-cost producers like James E. Wagner Cultivation Corp. will likely be operating—or close to operating—on TGOD’s turf by harvesting time in 2H 2019.
On the bright side, TGOD has two very important things going for it: money and a media ace-in-the-hole named Tim Seymour.
Regarding the former, the company professed a strong balance sheet—with cash and cash equivalents of $261,816,000—as per Q2 results announced August 15th. That makes the company one of the most cash-rich LP’s in the sector, although most will be diverted to their Valleyfield production facility. While Aurora Cannabis declined the milestone option, they did maintain the right to purchase up to 20% of TGOD’s premium organic cannabis from the Company’s two facilities under construction in Canada. The selling price is based on a revenue sharing arrangement, similar to wholesale pricing.
Investors also should not discount the importance of Tim Seymour joining the company’s Advisory Board. Tim is a contributor on CNBC‘s popular Fast Money telecast, a show which frequently exerts a material impact on share prices. Mr. Seymour has been tasked to facilitate big U.S. investment, while expanding TGOD’s investment profile to the masses. Either of these scenarios could serve as powerful backstop on price, as retail “dumb money” exits stage left. The lower price drops, the more prominent these forces become.
The Green Organic Dutchman’s price action profile is a fascinating one. One one hand, the 9-figure share unlock, limited operational visibility, and unfavorable sector pre-revenue stage environment poses a formidable opponent for bulls. On the other hand, the company is mostly (or fully) financed to build-out its production facilities, has sound management structure, and has a Big Media ace-in-the-hole it can presumably call upon at any point. TGOD has shed almost 2/3’s of its value in a little over a month, making early-stage profit taking a more difficult call.
Whatever happens, our sympathies go out to locked-out retail investors, who’ve seen fortunes come and go without the ability to act. With a little luck, the infamous lockout expiry many are talking about will end up being more paper tiger, than ferocious lion.
Update 8:22 pm EST, November 1
Since the article was published, TGOD’s price action has materially lagged the market.
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