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Why TGOD’s L/T Formula for Success is a Winner

Marc Davis
0 Comments|January 15, 2019

Organic products rule supreme. At least that’s the viewpoint of today’s health-conscious consumers.

So it’s no surprise that thousands of savvy investors have fully financed The Green Organic Dutchman (TSX: TGOD) with a war chest of $460 million raised – making it the international poster boy for organic cannabis.

However, the company’s commitment to becoming the world’s only supersized cannabis grower may not actually be its biggest competitive differentiator after all, much to the surprise of many investors.  

M1.jpg
 
In the previous installment of this two-part article, we looked at how TGOD is establishing itself as the leading vertically-integrated organic cannabis producer in the world.  
 
This was identified as one of three major factors powering TGOD’s move to the front of the pack in the race to commercialize cannabis in CPGs across the food, beverage, wellness, and pharmaceutical markets.
 
As the global trend toward cannabis legalization continues, these massive markets lend support to the elevated valuations we see priced into many of the leading cannabis stocks.
 
But TGOD is probably quite undervalued at this time considering it has carved out a frontline position in across all these lucrative billion-dollar markets. Let’s have a closer look at the other two factors that should help the company maintain its leadership role once the race gets up to full speed.

Best-In-Class Greenhouse Technology: All Bought and Paid For
The second primary factor driving TGOD’s advance is financial stability. The company is fully funded and debt-free for the entire rollout of almost 1.4 million sq. ft. of state-of-the-art organic facilities in Hamilton, Ontario and Valleyfield, Quebec (slated to be the largest organic cannabis facility in the world).
 
Significantly, these will be ‘green’ GMP-compliant facilities with LEED-certified use of energy, automation, and water resources, which are key parts of the equation for a low-cost production profile at scale.
 
Production is on schedule to get underway in earnest throughout 2019 following exhaustive test-marketing and ongoing consumer engagement programs, like the limited launch of organic medical cannabis to 200 select patients/founding investors planned for late January 2019. TGOD projects 170,000 kgs of annual production by 2020, making it the 4th-largest Canadian LP measured by fully-funded production volume.
 
The company has cash on hand of over $300 million, as stated in 2018 Q3 results. The results also show a cash burn for the three and nine months ended Sept. 30, 2018, of $11.3 million and $27.1 million respectively. These figures are on budget and reflect the progress being made on facilities construction, ongoing R&D, and international expansion.
 
Speaking of spending $11.3 million and $27.1 million respectively, wouldn’t investors like to see where that money is going? Well, TGOD takes a unique approach to updating investors with weekly construction progress videos. Have a look  here.
 
https://tgod.ca/pages/investors-information

Becoming a Global Leader in Infused CBD CPGs  
A fully funded suite of strategic international expansion ventures make up the third driver for TGOD, with partnerships and acquisitions in the EU and the Americas.

Poland
The company gains instant revenue – numbers will show up in Q4 results – through its recent acquisition of HemPoland, with one of Europe's most popular CBD (cannabidiol) brands, CannabiGold. It currently sells as a dietary supplement in over 700 locations in multiple EU countries.
 
M2.jpg
 
HemPoland is a vertically integrated industrial-scale organic hemp producer with advanced technology and experience in pure, natural cannabinoid extraction. This dovetails nicely with TGOD’s overarching strategy of producing premium, all-natural organic ingredients and derivatives from premium organic plants.
 
Annual production for HemPoland in fiscal 2017 was over 32,000 kgs of organic dried flower non-psychoactive hemp and 310 kgs of organic CBD oils.
 
It will be interesting to see how the new US Farm Bill will effect TGOD and HemPoland. Although imports aren’t allowed under this revised hemp-friendly Farm Bill, they certainly could be in the near future.
 
By comparison, Aurora Cannabis reported total production of 4,996 kgs of THC-based dried flower cannabis in the quarter ended Sept. 30, 2018 – this while racing all-out to fill provincial supply commitments for the Canadian recreational market launch.
 
Aurora’s market cap? Let’s call it CAD$8.0 billion, give or take. TGOD’s investment in HemPoland? Less than US$40 million, all in, partly in cash and partly in restricted and contingent shares, including over $10 million to be invested in rapid European expansion. We’ll have to wait a couple of years to see how the exact share costs work out, but the rough comparison indicates a highly accretive deal for TGOD at a very reasonable price.
 
And, since we’re comparing... TGOD’s market cap? Currently well south of CAD $1 billion. That’s with over $300 million cash on hand, and a ready-made HemPoland revenue stream with projected growth to US $32 million in annual EBITDA by fiscal 2021. And the revenue comes with an established pathway into the EU for TGOD brands, product lines, partnerships, and further M&A activity, starting now, not to mention the possibility that TGOD may at some point be able to import CannabiGold products into the US.

Denmark
An ongoing JV production partnership in Denmark with Knud Jensen, a global leader in plant genetics and horticulture systems, is targeting R&D work and additional local organic cannabis production.
 
This further strengthens TGOD’s frontline position in existing EU medical and wellness supplement markets, and in future recreational markets, with access to a total EU population over 20 times the size of Canada’s.

Jamaica
 
M3.jpg
 
TGOD’s fully funded investment in Epican Jamaica (49.18% ownership) is generating revenue from the flagship store in Kingston, with four additional stores scheduled to start opening throughout 2019.
 
All told, TGOD and Epican are scaling up to produce 14,000 kg of organically grown strains of Jamaica’s finest cannabis, with ready access to Central and Latin American markets as local legislation regimes evolve.

Mexico
More recently, TGOD has entered into a 50/50 joint venture with one of Mexico’s largest pharmaceutical distributors, LLACA, which has 7,600 points of sale and 100% national coverage of Mexico’s 125 million consumers.
 
According to Brian Athaide, CEO of TGOD, "This is a pivotal step in our strategy to export TGOD branded products produced in Jamaica, Poland, and soon to be Canada and Denmark for the global markets.”
 
And why would LLACA choose TGOD for a strategic supplier partnership?
 
Alejandro Perea, LLACA’s Medical Cannabis Commercialization Director, makes the reasoning crystal clear: "We respect TGOD's organic principles, which will serve well in the medical market in Mexico. We like their forward-thinking management and are excited about the brand. We expect that the Mexican market is ready for the organic cannabis story."

United States
Enter TGOD Acquisitions – a high-powered consolidator of strategic US cannabis assets.
 
TGOD shareholders of record at late-December, 2018, will receive -- as a dividend -- a fractional warrant to acquire shares in “TGOD Acquisitions Inc.” These warrants will offer common shareholders, founders, and executive insiders alike the same cost of entry, with no pre-existing insider shares.
 
This corporate spin-off is required because TSX-listed companies are prevented from holding US-based cannabis interests, in respect of the overhanging federal cannabis prohibition in the US. The spin-off will list initially on the CSE, which has no such limitations.
 
TGOD Acquisitions will act on opportunities wherever they are located. Given the advanced stage of the American cannabis industry on a state-by-state basis, and the overall market size, many exceptional opportunities are being identified in the US.
 
This amounts to a fairly speculative play at the moment, but it is backed by the full weight and track record of TGOD’s exceptional management group and distinctive organic brand expertise. For those reasons alone, the offer deserves serious consideration by investors.

Investment Summary
Some TGOD critics have pointed to delays in facilities construction, minimal production volumes, and limited revenues generated to date. But TGOD management stands behind a strategy that targets the massive second wave of cannabis consumers – on whom all the long-term growth in the cannabis industry depends. By therefore becoming a major player in the global CPG marketplace, TGOD is sure to thrive.
 
The race to supremacy in the cannabis-infused consumer packed goods market is a marathon, not a sprint. It will take a few years to reach maturity. Accordingly, TGOD is well-equipped to come out on top thanks to a strategic vision that is backed by a powerful treasury and a management team that has a history of executing at the highest level.
 
Still, for the time being, there’s a good chance that TGOD will continue to be judged by still small-scale production profile vis a vis other volume-driven cannabis growers. This is a mistake that many near-sighted investors are making.
 
In other words, there still exists an opportunity for forward-looking investors to unlock significant value in an undervalued multinational organization – one that is poised to go become a dominant player in the fast-emerging cannabinoid-infused consumer packaged goods industry.
 
On a technical note, TGOD’s share price is rebounding after being over-sold, but is still trading a discount to its IPO price. Yet the company is fully funded to a production capacity of 170,000 kilograms – which is both a massive de-risker and a powerful value catalyst. Accordingly, TGOD should experience a re-rating within the investment community in 2019 once domestic production gets underway in earnest.

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