Ready or not, big changes are on the way in the cannabis industry. Our neighbor to the north is preparing to officially launch recreational marijuana for sale in exactly eight weeks (Oct. 17, 2018). As a result, somewhere in the neighborhood of $5 billion is expected to flow into the industry per year, once it's fully ramped up.
As you may have rightly imagined, marijuana growers are angling to secure as much market share as they can following this mid-October launch. For the past year, that's meant an escalation of capacity expansion. For example, Canopy Growth Corp. is aiming to push its licensed capacity to 5.6 million square feet. Meanwhile, Aurora Cannabis has increased its expected annual production from just north of 100,000 kilograms on Jan. 1, 2018 to 570,000 kilograms today, once all of its grow sites are fully operational.
Everything you need to know about The Green Organic Dutchman's Q2 report
But just as important to capacity expansion are the tangible and intangible aspects of pot stocks that can only be examined by taking a closer look at their quarterly reports. This past week, The Green Organic Dutchman (NASDAQOTH: TGODF), which is expected to be the fourth-largest cannabis producer when at peak capacity, delivered its second-quarter operating results. After a closer look, here are the seven things you need to know about Canada's projected No. 4 producer.
1. Capacity expansion remains on time and budget
The most important takeaway for investors is that TGOD, as the company is also known in shorthand, remains on track with its facility construction in Ancaster, Ontario and Valleyfield, Quebec. The press release notes that more than 20.7 million Canadian dollars were spent on construction at these two facilities over the past quarter, with cultivation expected to commence sometime in the first half of next year.
2. Expected to be the fourth-largest producer
Just like Aurora Cannabis, which happens to hold close to a 20% stake in TGOD, The Green Organic Dutchman has been aggressive with its capacity expansion. In a stretch of just 13 days during June, the company announced a strategic partnership with Epican Medicinals in Jamaica, reported the construction of a 287,245-square-foot facility at Valleyfield that'll be devoted to its beverage division, and formed a joint venture with Queen Genetics/Knud Jepsen A/S in Denmark. All told, this increased the company's estimated peak annual production to 195,000 kilograms.
3. Aiming for a dozen markets
International expansion is also very much on the minds of TGOD's management team. Csaba Reider, the company's president said, "TGOD's business plan calls for operations in 12 countries on three continents by the end of 2018 with a focus on Europe and Latin America," in addition to Jamaica. Remember that domestic demand for cannabis in Canada will be dwarfed by foreign export potential. TGOD appears to have its sights set on making an impact in foreign markets.
4. It's all about infrastructure
Though TGOD is clearly focused on its two major construction projects, it has its eyes on more than just production. In fact, a good portion of the company's second-quarter press release focuses on its next steps, which include "investing heavily in consumer research, R&D [research and development] and simultaneously building both the capability and systems needed to rapidly scale as we prepare for the adult-use market," according to CEO Brian Athaide. This focus on brand building and e-commerce networks is probably what investors will be talking about for the next year.
5. Financing isn't a concern
You should certainly understand that money isn't really a concern at this point. The company's initial public offering wound up raising CA$132.3 million in gross proceeds, with the company also completing a bought-deal offering in June for another CA$25 million. By the end of the fiscal second quarter, TGOD was carrying CA$261.8 million in cash and cash equivalents on its balance sheet, which should be more than enough to complete is construction projects and build its sales channels.
6. Losses mount as sales are a ways off
Then again, one interesting thing that was missing from TGOD's quarterly report was anything having to do with its top or bottom line. In order to access this information, inquisitive investors would need to work their way over to SEDAR (Canada's version of the Securities and Exchange Commission).
What they would find is a company that has no sales to speak of and operating expenses that tripled from the year-ago quarter. Overall, it lost CA$8.5 million, which was more than three times what it lost in Q2 2017. With cultivation not expected until the first half of next year, losses will only get worse before we see any improvement.
7. Dilution is a killer
Finally -- and you knew this was coming -- dilution continues to wreak havoc on long-term-minded investors. A year ago, the company had 121.4 million shares outstanding. As of Jun. 30, 2018, it had 233.8 million. Plus, the company has nearly 75 million warrants outstanding and north of 14 million stock options that could still be exercised in the future. In short, dilution is liable to weigh on existing shareholders, as well as adversely impact earnings per share, for many years down the road.
Given that this is a company still many quarters away from generating sellable cannabis, my suggestion would be to stick to the sidelines.
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