A Cannabis IPO From The Green Organic Dutchman
For the most part, we receive nothing but positive feedback about our articles, and that’s because most of us have MBAs and we’re not afraid to use them. However on occasion, we do piss people off. Usually its because of something we said about John in Mumbai, or Chinese people who speak Engrish, but recently we learned that you’re not supposed to say anything positive about the East India Company because it’s “insensitive”. (The topic came up in our article on British unicorns.) This made us immediately want to learn more about one of the world’s most successful companies.
Did you know that the East India Company had their own private army of 260,000 soldiers, twice the size of the British Army? Talk about a barrier to entry for your competitors, companies like the Dutch East India Company, which was the world’s first publicly traded corporation. Speaking of all things Dutch, a marijuana startup called The Green Organic Dutchman (TGOD) had an IPO a few days back, and we thought this would be a great opportunity to say some insensitive things about the Dutch.
While you may be tempted to think that all Dutch people do is get stoned and pick tulips, it’s not the only thing to do in the Netherlands. No, we’re not talking about visiting their famous windmills, but rather checking out the country’s many prostitutes who occupy Hong-Kong-apartment-sized rooms in the red light district. It’s a great place to do some window shopping, and then after your wallet is
50 euros 75 euros lighter, you can smoke a “cigarette” in one of the many cannabis cafes lining the streets of the capital city.
The association with marijuana isn’t the only reason that TGOD chose the word “Dutchman” in their brand. It’s also because the founder, Jeanette VanderMarel, seems to have some Dutch ancestry based on her last name that nobody can ever seem to pronounce correctly. Having spent her life as an accomplished medical professional, VanderMarel pivoted into medical marijuana and co-founded TGOD in January of 2013, going on to raise more than $60 million in funding led by Aurora Cannabis. So what does The Green Organic Dutchman actually do?
TGOD is a licensed producer of Cannabis, one of many that keep popping up in Canada. (According to TGOD, as of February 1, 2018 there are 89 Licensed Producers approved by Health Canada.) With the $124 million USD cash they now have on hand after a successful IPO which raised around $89.5 million USD, the company is now “building a combined 970,000 sq. ft. facility capable of producing 116,000 kg of premium, high quality, organic cannabis“. That’s almost a million square feet. To give you an idea of how big that is, here’s what a constructed one million square foot warehouse looks like:
That massive grow room will produce 116,000 kilos or roughly 127 tons of marijuana, much to the chagrin of the Mexican marijuana farmers who can no longer compete with industrial scale grow operations like this one. When it comes to estimating the revenues that can come from an operation like this one, we need to take into account the “organic” element. TGOD claims to be one of the few licensed organic producers, and consequently they can command a premium price for their “flowers”:
Back of the napkin math tells us that when operating at full capacity, revenues should exceed $1 billion USD using the above organic average price of $11.40 CAD a gram. Of course that’s not taking into account costs, which is something TGOD has on the top of their mind with the intent of becoming one of the lowest-cost producers around. That why they setup shop in Quebec, the Canadian province with the lowest electricity cost, and then locked in some low rates with some of the big utilities in the area. In addition to “hybrid greenhouses” (a bit of indoor and greenhouse combined), they’re also looking to use robotics to drive costs down even further. We can look at another grower, Organigram, to see that costs aren’t even that much to begin with:
Even if we assumed $1.50 CAD a gram in costs, the margins would still be around 86%. But growing cannabis isn’t the only thing TGOD wants to do with their war chest. They’re also planning to spend a whole bunch of dollars on research and development in areas like oil extraction, genetics and breeding, and locations which they can sling their product from:
In a testament to just how popular “marijuana investing” continues to be, TGOD managed to attract more than 4,000 retail investors who participated in the IPO. If some of those investors were hoping for a Japanese style rally on the first day of trading, they would be underwhelmed so far. Shares of TGOD were sold to investors at $2.84 USD, and the closing price the last day of trading was $3.07 USD. Of course that shouldn’t matter one bit to your overall strategy, because any true investment takes time to mature, otherwise you’re just a speculator who tries to time the market by jumping in and out of stocks.
In the case of TGOD, investors are making a huge bet on the company’s management team who needs to successfully execute on their plan with the $160 million CAD that’s been eagerly given to them. With a business potential that largely exists on paper at the moment, investors need to pay very close attention to the company’s ability to stay within budget, and hit stated targets like this one:
By 2020, the Company expects to have a production capacity of approximately 14,000 kg per year of premium organic cannabis from the Hamilton Facility.
Far too often we see companies burn through massive amounts of cash while continuing to issue more and more shares which dilutes existing shareholders. Many of you have probably watched Shark Tank, a TV show led by investors like Mark Cuban who negotiate with entrepreneurs for equity – which usually takes the form of “I’ll give you X dollars for Y percentage of your business”. Entrepreneurs will always try to give away as little as possible of their businesses and the same thing holds true here. The more a company issues shares, the less equity existing shareholders get to keep. The below table helps us understand what investors in this IPO actually bought:
In simple terms, participants in the IPO offering bought 31.5 million shares at $2.84 USD a share which means they paid about $89.5 million USD for just over 10% of the business implying a valuation of nearly $900 million USD for a company that now needs to execute and scale quickly. And it’s not just TGOD that needs to execute. The construction firms they’ve hired to build the buildings, the engineering firm that will build the greenhouses, and the electricity companies that have promised these low rates are all external risks that need to be managed. We haven’t even started to talk about regulatory risk, like the fact that recreational marijuana isn’t even approved yet in Canada, something that’s now been delayed until late this summer, eh.
Someone once said that the ability for people from different countries to take the piss out of each other, allows us to share the only thing we all truly have in common – a sense of humor – and it actually makes cultures more tolerant of one another. And as Austin Powers’s dad once quipped, “there are only two things I can’t stand in this world: people who are intolerant of other people’s cultures, and the Dutch.”
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