September has been a tough month for The Green Organic Dutchman (TSX:TGOD), as the stock nearly lost half its value. Let’s look at what might have caused this sharp drop in price.
Aurora quit its partnership with TGOD
TGOD suffered a major setback at the beginning of September when its long-time cornerstone investor Aurora Cannabis sold its remaining 10.5% position in the company through a block trade at $3 per share for total proceeds of $86.5 million. The sale was made at a 14.5% discount to TGOD’s closing price of $3.51.
In January 2018, Aurora took a 17% stake in TGOD, with the option to eventually increase its position to more than 50%. The stake was bought at a pre-IPO price of $1.65 per share. The investment also gave Aurora the right to acquire up to 20% of TGOD’s annual organic cannabis production.
Over the next 18 months, Aurora didn’t exercise its options. On the contrary, since late 2018, Aurora has been slowly selling off its stake in TGOD. In January, Aurora bought Whistler Medical for $175 million, eliminating the need to buy organic cannabis from TGOD.
In September, Aurora completely left the partnership. After TGOD lost its main long-term partner and potential buyer, a huge sell-off of its shares followed, bringing down the small pot company shares.
What looks like a setback could actually become an opportunity for TGOD’s to grow faster. The company used to sell its premium cannabis to Aurora at wholesale prices, but it will now be able to sell the same product at market prices to other customers.
Good news didn’t affect the stock price
There has been some good news for TGOD in September, but unfortunately, that didn’t have a positive impact on the stock, as the share price continued to fall throughout the month.
The first good news was released on September 3, when TGOD announced that it has received approval from Health Canada to start cultivation operations at its Hamilton hybrid greenhouse. The 123,000-square-foot state-of-the-art facility will serve to increase TGOD’s premium organic cannabis production as sales increase in Canada.
Then, on September 12, TGOD announced that following its launch in Ontario at the end of August, which was its first entry into the Canadian recreational market, the initial demand for premium organic cannabis has exceeded expectations. TGOD’s high-THC signature strain, Unite Organic, is performing well online and at dispensaries, triggering a second OCS’s order earlier than expected.
The premium certified organic cannabis producer has received positive feedback from retailers and consumers across Ontario. The price premium is not an obstacle for cannabis users looking for a high-quality flower.
What to expect in the coming months
There is a long way to go before TGOD becomes profitable, but the small pot company is on the right track.
TGOD’s team is working tirelessly to increase the production of its premium organic products as it prepares to expand distribution with additional strains and product forms, as well as to other provinces in the coming months. With the completion of its hybrid greenhouse in Hamilton, and a second one almost completed in Valleyfield, TGOD is on track to distribute its products nationally early next year.
As a survey by Hill & Knowlton pointed out earlier this year, over 50% of recreational consumers intending to buy cannabis said it is important that their cannabis be organic.
It looks like TGOD has a lot of potential, but expect to still see a lot of volatility in the coming months. I would wait for things to become more stable before investing in a small pot company like TGOD.
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Fool contributor Stephanie Bedard-Chateauneuf owns shares of Aurora Cannabis.