TGOD: Where Do They Go From Here?

The Green Organic Dutchman (TSX: TGOD) reported their second quarter 2020 earnings after the bell yesterday evening, and frankly, we aren’t certain where the company intends to go from here. TGOD managed to eke out revenues of $4.4 million for the quarter, while posting a net loss of $9.8 million.

TGOD's Logo

While posting a 58% increase in sales compared to the first quarter, this is still rather unimpressive for a cannabis operator that has raised a combined total of over US$217 million as per Refinitiv. Especially when you take into consideration that C$2.11 million of its sales, or 47.7%, come from its international hemp operations. The company pretty well says so itself, given that it reports gross revenues in its associated news release, a figure that doesn’t deduct associated excise taxes on its Canadian cannabis revenue.

In terms of gross margins, the company saw a cost of sales of $4.0 million on its net revenues of $4.4 million, resulting in a gross profit before fair value adjustments of $0.4 million. Operating expenses comparatively came in at $11.2 million. The company has such a problem in terms of sales that it spent $2.24 million in sales and marketing to generate its revenues, or roughly $0.53 for every dollar in revenues generated. General and administrative expenses totaled out at $5.7 million, while share based comp amounted to $1.7 million.

The magnitude of TGOD’s current struggles, and the evidence that it has limited options in terms of a viable path forward are found on its balance sheet however. The company currently boasts cash of $18.8 million, despite raising a total of $32.0 million over the course of the three month period. Effectively, it amounts to the company incinerating ~$6.0 million on a monthly basis.

In fact, the company hardly has a viable means of even paying its outstanding accounts payable, which sits at $32.7 million as of June 30. Sure, it has total current assets of $50.3 million currently, but the company has demonstrated that its unable to convert hardly any of its current $13.9 million in inventory into sales at a sufficient rate. Barring this, the company will need to raise further funds just to pay its routine bills.

Further, the company is currently faced with a negative working capital of -$12.3 million as a result of certain loans becoming current, due next June. Given that these loans already contain a secured first lien on the property, as well as an interest rate of 13%, its unlikely that they will be able to find additional lenders wiling to fork over cash unless subject to even higher interest rates. While the company does have $17.0 million available via a revolver that boasts a second lien, its doubtful that these additional funds are what will enable the company to achieve profitability.

The company itself doesn’t seem so certain on its prospects either. In its June offering prospectus, the company estimated that its Canadian operating cash flow through to the end of May 2021 would amount to $9.2 million, based on gross profits of $41.4 million. They have now revised cash flow estimates down to $1.9 million, based on reduced gross profit estimates of $34.3 million, while the company’s estimate for general and administrative expenses has risen.

The Green Organic Dutchman last traded at $0.44 on the TSX.

Information for this briefing was found via Sedar and The Green Organic Dutchman. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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