Canada's No. 4 Marijuana Grower Just Delivered Another Subpar Quarter

Despite forecasting 219,000 kilos of peak annual production, this grower hardly has any revenue to show for it.

Sean Williams
Sean Williams
Mar 27, 2019 at 9:21AM
Health Care

It may be late March, but that in no way means earnings season ever officially ends. When it comes to the blazing-hot marijuana industry, where pot stocks often have fiscal years that don't line up with the traditional calendar year, quarterly reports can hit the newswire at any time.

Last week, the cannabis industry's fourth-largest producer, The Green Organic Dutchman (OTC:TGODF), announced its fourth-quarter and full-year results. And while the company did manage to throw a laundry list of accomplishments into its press release, the bottom line is that this was yet another subpar quarter for what's expected to be a major marijuana player in Canada.

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The Green Organic Dutchman ups its peak production forecast

This was definitely a quarter of firsts for The Green Organic Dutchman, with the company recognizing its first sales of 1.88 million Canadian dollars. Of course, this CA$1.88 million wasn't from organically grown cannabis. Rather, this was revenue that TGOD, as the company is also known, recognized from its cash-and-stock deal to acquire HemPoland, a hemp producer and cannabidiol oil products company located in Poland. The acquisition closed during the fourth quarter, allowing TGOD to recognize its first-ever sales. 

It was also a year of firsts, too, with TGOD completing the largest initial public offering (not to be confused with a reverse takeover) in Canada last May. All told, The Green Organic Dutchman raised CA$132.3 million with its IPO, completed two bought-deal offerings that raised CA$101.2 million in gross proceeds, and netted CA$77.6 million in gross proceeds from private placements. With CA$263.5 million in cash and restricted cash on hand, TGOD is in good shape as it works to build out its prized Valleyfield and Hamilton properties.

Speaking of building out capacity, TGOD's report notes that peak production forecasts have moved higher once again. Having previously projected 195,000 kilos in peak yearly yield, the company, thanks to improved designs and engineering updates at its greenhouses, now expects 219,000 kilos at its annual peak. That puts TGOD within striking distance of Aphria for the No. 3 spot among growers, and should keep the company well ahead of Tilray for the time being. 

These were the highlights. Now for the lowlights.

Check out the latest earnings call transcripts for the companies we cover.

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Sorry, folks, but this was another disappointing quarter

The big issue with The Green Organic Dutchman continues to be the company's late start to capacity expansion. Even though it spent nearly CA$97 million on its Hamilton and Valleyfield properties in 2018, even accelerating that spending in the fourth quarter from the sequential third quarter, it's pretty much the only major or mid-tier grower not to be generating revenue from its own production at this point. Even Emerald Health Therapeutics, an industry laggard on the grow side of the equation, managed to net its first sale from its Pure Sunfarms joint venture with Village Farms International. Chances are that TGOD won't recognize an organic sale until the midpoint of 2019.

This leads to an even larger concern. The longer it takes for TGOD to bring its organic projects online, the more we could see market share divvied up between its peers. In other words, the company is losing out on a precious opportunity to forge long-term supply agreements, as well as lure in brand-name partners in the food, beverage, tobacco, and/or pharmaceutical industries.

The bottom line is that TGOD reported a negligible gross loss for the year before accounting for fair-value adjustments of biological assets, and its operating expenses nearly tripled to CA$44.7 million in 2018. That's a loss from operations of CA$44.5 million, and a nearly equal net loss of CA$45.2 million.

If this isn't enough, TGOD's capital-raising tactics seemingly aim to bury its shareholders. Prior to being a public company, it had 60.4 million shares at the beginning of 2017. But TGOD ended 2018 with just shy of 270 million shares outstanding. Expect this figure to go higher with almost 70 million warrants and more than 12 million options outstanding.

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TGOD has one path to redemption in 2019

Not mincing words, but laying the puns on really thick, TGOD is not a pot stock I've been high on. It does, however, have a path to redemption in 2019. Rather than focusing on aggregate revenue, which should finally be meaningful this year, The Green Organic Dutchman can impress with its push into alternative products.

Last year, the company announced that it would be devoting about 40,000 kilogram-equivalents at its peak per year to the production of cannabis edibles and infused beverages. According to Health Canada, edibles, extracts, and topicals will all be approved for sale by no later than the one-year anniversary of the commencement of recreational weed sales (Oct. 17). That gives TGOD ample time to get its line of edibles and infused beverages ready to hit dispensary-store shelves. As a reminder, alternative cannabis products almost always have higher price points and juicier margins than dried flower, making them excellent products for growers to focus on.

As an addendum to bringing its alternative consumption options online, this would also be the perfect opportunity for The Green Organic Dutchman to land a major partner. We know Coca-Cola has had interest in nonalcoholic infused beverages based on its discussion with Aurora Cannabis. We also know that spirits maker Diageo has interest in a beverage partner. With TGOD devoting 18% of its aggregate output to edibles and beverages, it would seem to be a logical choice for a brand-name company in the food or beverage space.

To again be crystal clear, I'm not suggesting folks buy The Green Organic Dutchman on the off chance that it lands a partnership. But in the event that the company does secure a major partner, it could be worth revisiting its outlook. For the time being, the company's dismal fourth-quarter results are more than enough reason to keep your distance.