I’d taken a harsh view of The Green Organic Dutchman ($TGOD) when I had my first look at them on their Q1 F2018 financial statements. The financials had been released at the zenith of Canadian legalization fever way back in June 2018, and I remember the hard pump and enthusiasm around the company at the time.

I also recall being mystified by the price run across the sector, and often wondered aloud how existing fundamentals could justify asset valuations at the time. Which in turn, attracted many catcalls and boos from both retail investors and stock promoters alike <here’s a chance to use my favorite line from the television show Rick and Morty: “Your boos mean nothing, I’ve seen what makes you cheer”>

A year and a half later, we noted an expensive credit facility being taken on, and spent time putting together a Structure on their Q1 F2020.

Since that minor lift to their share price 15 months ago – absolutely nothing has happened. $TGOD’s sales declined further in 2020, ending up at $7.7MM for the year while sporting a 17% margin.

$TGOD’s still been press releasing like gangbusters though. I thought this one about a total product overhaul was quite the admission, in that it can be summarized by saying they realized that they’ve been doing it completely wrong from the start.

A press release from them yesterday saw an announcement that their flagship greenhouse sold for some $27MM. All in cash, they’ve also decided that they’re going to need production from somewhere – so they’re going to lease back a block of the space for cultivation and processing in a combination of lease and pseudo royalty payments.

The facility cost some ~=$240MM all-in to construct and operationalize, but had been listed on their last financials as ‘assets for sale’ at $43.2MM (since most of it has already been written off).

So, yet another $16MM loss will be added to their equity, which is packing $424MM in cumulative losses so far. (it’s way cute that they tie getting the hydro deposit back to the sale value).

Anyhow, while this might feel like a ‘how the mighty have fallen‘ piece, it’s meant to point out how little value there actually is in cultivation assets. I’ve seen 5 transactions over the past 6 months, and IIRC, they’ve all been running around $0.10 of the dollar. Which is an incredibly consistent valuation in liquidation settings around undesirable assets. Extraction equipment is marginally better.

I think it’s a good idea to have a look at a company’s asset base through that lens within the context of capacity utilization. There’s still a ton of under-utilized space out there. And although one might be tempted to see companies moving forward in terms of EBITDA improvements – I’m curious if there is unabsorbed overhead that they won’t ever be able to grow into. That outfits should get these assets out and gone – even if they take a good smack on the ass along the way.

I look at this as runway: time is money. And if the initial runway was EBITDA, the other side of that coin (as GoBlue likes to point out) is unabsorbed overhead. Holding onto excess capacity in expectation of ‘growing’ into utilization faces the same harsh reality that everyone on this planet ultimately faces: time.

I’m looking for signs of where companies will be shedding capacity before they’re forced into it (like $TGOD). Cannara Biotech Inc is seeing growth potential, but I’ve understood them to be severely capacity constrained prior to this buy.

Canopy has shed some domestic cultivation, but I expect they’re going to be shedding more of their native capacity in exchange for folks who can grow (like Supreme).

I think the outfits that get ahead of waiting to grow into the oversized clothes they’re wearing will be a smart move.

<EDIT: I thought I’d include this article on $TGOD I came across after writing this. Its’ timely but fluff. I note it because of the common refrains it presents regarding overbuilds and execution and efficiency and accountability and consistency and such. It’s being sung by every midsize out there right now, but really – the only thing they should be singing about (and doing) is growing market share.>

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $TGOD, $WEED, or $LOVE