Green Organic Dutchman Holdings (TGODF) would seem to be a cannabis company many in the market would be supporting and rooting for, primarily because of its focus on organic cannabis and the accompanying premium price and wide margins that come with it.
Yet, the market hasn't been especially kind to Green Organic, as it continues to experience downward pressure on its share price, and that's likely to continue for awhile because of the recent announcement by Aurora Cannabis (ACB) that it had sold off its position in the company, although it retains $22.3 million in TGODF warrants.
There are a number of pros and cons with TGODF, including little in the way of revenue, upcoming increase in production capacity, uncertainty about level of demand for organic cannabis products, its positive results in regard to organic cannabinoid dissolvables, and the aforementioned loss of Aurora Cannabis as a distribution source.
Because of the unknown negative catalysts listed above, TGODF is a risky stock because it may not be able to offset those catalysts with its positive catalysts.
What's interesting is if it is able to prove it can overcome those possible obstacles, it could surprise a lot of investors to the upside. For that reason, it does have a high reward in relationship to risk, but it's something many investors may want to wait on, especially in relationship to how much the demand for organic cannabis actually is.
Although there have been some delays in development of its two major facilities, the company is coming close to completing them, which will bring annual production capacity to a little above 200,000 kilograms, making it the largest organic cannabis producer in the world.
Its 166,000-square-foot Hamilton, Ontario facility will have the capacity to produce approximately 17,500 kilograms a year of certified-organic cannabis, while its 1.3-million-square-foot greenhouse facility in Valleyfield, Quebec will pruduce up to 185,000 kilograms a year at full capacity.
This is by far the most important development for the company at this stage of its growth.
A huge benefit Green Organic has gotten from the investment from Aurora Cannabis is Aurora, via Aurora Larssen Projects, which was behind the building of the cannabis facilities, with the goal of meeting the standards of Sky Class. It also had help from Aurora Larssen Projects on its smaller facility.
In the current quarter Hamilton is expected to reach full production capacity, and its Valleyfield facility will reach a capacity of 65,000 kilograms annually by the end of 2019, while reaching its full 185,000 kilograms in annual capacity in 2021.
One of the reasons for the market not bidding it up has been the fact the facilities had originally been slated for completion in the fourth quarter of 2018. That's the key reason why its revenue results have been so dismal. That will probably change.
Finally, if the company is able to boost revenue, its margins should be somewhat close to what Aurora generates, and that means the potential to move toward profitability within a couple of years.
Issue of demand
A major concern for TGODF is whether or not demand for organic cannabis will align with the robust supply coming down its pipeline. It's one thing to produce a lot of cannabis, it's another thing to have an available market to consume it.
On the surface it seems a no-brainer that organic cannabis will be very popular, but when the choice comes down to costs, a lot of consumers, even though they give lip service to preferring organic cannabis, could in reality go with less expensive options.
There is also the issue of how much medical insurance will cover if costs become an issue from that point of view.
Another huge factor in Canada is TGODF has only three supply deals in place with Canadian provinces. Until it is able to land more deals, it's going to be limited on the demand side; that will take time, even as its production capacity ramps up.
Part of the reason for that was TGODF was late to the game, so is playing catch-up with its competitors. The company also will struggle to brand its products because of the brands that have already been gaining share over the last year.
One positive there is the slow pace of Health Canada in licensing dispensaries and retail outlets may allow TGODF to compete on a more level playing field in some markets.
This is why the loss of Aurora Cannabis as a wholesale buyer hurts the company so much. It may have had lower margins, but it would have been a key generator of revenue as the company completed its facilities. More than likely TGODF increase its marketing budget in order to make up for that huge loss in revenue.
When considering it has over 202,000 kilograms a year coming on-line in 2021, and it only competes in three Canadian provinces at this time (it has some overseas markets it compete in), TGODF has a lot of work to do to convince shareholders and investors it will be able to overcome these large obstacles.
Water-soluble cannabinoid products coming
The Green Organic Dutchman recently stated in a press release with Caliper Foods, that the results from "a preliminary human pharmacokinetic study of Caliper CBD" were promising.
The study showed that Caliper Foods’ water-soluble CBD powder helped recipients experience a faster onset of the desired effect.
It was described this way:
"For this study, half of the participants were administered 30mg of Caliper Foods’ water-soluble CBD powder in 8oz of water while the other half received 30mg of CBD dispersed in MCT oil. Blood samples were drawn at pre-determined times over six hours. Early data shows that the group that received Caliper CBD demonstrated faster onset within 15 minutes, with higher concentrations achieved at 15 minutes compared to the maximum concentration achieved at 45 min with the CBD in oil formulation, and a 4.5-fold higher observed total bioavailability. The CBD was largely eliminated from the body after about 6 hours for both Caliper CBD and CBD oil subjects, and a more rapid reduction was observed with the Caliper CBD subjects after 45 minutes."
As it relates to TGODF, it is targeting the commercialization of the organic cannabinoid dissolvables in Canada in the latter part of 2019, once the legalization of derivatives is in place.
It's market it under its line of premium cannabis products, including in infused drinks, chewables, shots and teas.
If demand is high enough it could make a significant impact on the top and bottom lines of the company, although I think it'll take time to play out.
There can be no doubt that Aurora selling its stake in TGODF and going with its in-house organic producer and supplier Whistler was a huge blow to The Green Organic Dutchman.
At a time when it was getting positioned to boost production capacity and have a lot of organic cannabis supply on hand, it's going to have to find ways to replace the approximate 20 percent of product Aurora going to buy from them.
It also loses access to Aurora's distribution channels, which would it was planning on using to leverage and accelerate its pace of growth.
For that reason and the others mentioned above, TGODF remains a very speculative play at a time when it should have been ready to go on all cylinders.
A positive in all of this is if investors are willing to take a risk and put a little money in TGODF, the reward could be substantial.
The key to its near-term performance will be the actual demand for organic cannabis in Canada, not based upon what people assert, but based upon what they actually buy. That and finding ways to rapidly get licensed in other Canadian provinces is a key to its immediate success.
If it struggles to get licensed, it's going to take a lot more time than it thought to gain market share, or to even brand its products in markets it isn't even allowed to sell in at this time.
Although it may appear to be a potential value play, it's quite possible it's priced right where it should be. If it does surprise to the upside, its modest share price will without a doubt take off.