This is an article on how we see the potentially most brutal short squeeze in modern times on the TSX. The setup is more or less as perfect of a storm as you can get and it’s almost as if we feel sorry for people with a short position in The Green Organic Dutchman (TGOD).
On May 2nd, the world’s (greatest, in our humble opinion) soon to be largest organic cannabis producer, IPO’d on the Toronto Stock Exchange (TGOD.TO). Pre-IPO, the company had privately raised >$160 Million and this was done through excluding institutional investors completely. Going into the IPO, TGOD had 4,500 shareholders, all retail investors.
2.5 months post-IPO, TGOD probably has 20-30,000 shareholders and the company has ~$300 Million in its treasury.
What makes TGOD so special, besides the fact that they are the world’s largest fully funded organic producer (no one else is even close), is its share structure. How this is structured is the reason for the large short position in the stock.
The only available shares that are free trading in the market are the shares from the IPO, everything else has a 6-month hold and comes free on November 2nd, 2018.
Traditionally, companies make profits and pay out some of that to their shareholders as a cash dividend. TGOD doesn’t do things the way most other companies go about doing things and to our knowledge, this exact structure to pay (issue) dividend has never been done before. It’s not only unique in the cannabis sector, it’s unique in the world.
TGOD management has already shown to the world their greatness in creating value for shareholders as well as how to create the perfect capital structure. Now they are about to do a repeat with TGOD Acquisitions and we are all invited to the party (if we own TGOD shares on the Record Date).
You are offered seed stock in TGOD Acquisitions and this is an opportunity all investors should embrace. Although we aren’t getting paid in cash, we are getting an awesome opportunity of wealth creation that rarely, if ever, comes around to retail investors like ourselves.
TGOD is currently trading below $6, which is undervalued in our opinion. But even so, we do see why someone would think that the stock will pull back come November and from this perspective, selling short makes sense for these people.
As of July 15th, 7.1 Million shares of TGOD were sold short. That doesn’t sound a whole lot for a company that has 229 Million shares out, right? Very wrong. Let us explain.
In our internal estimations, there is no more than 28-29 Million shares available for shorters since all the rest are in the hands of management & insiders and Aurora.
Let us break this down. TGOD issued 36 Million shares in its IPO to raise $132.2 Million. Of those 36 Million, Aurora and management combined is 7.5 million. The rest, approximately 28.5 Million shares, are the only shares available and free trading.
All of a sudden, the >7 Million shares short position seems huge to us, almost dangerous. This is why we actually feel a tiny bit sorry for the shorters because on Thursday this week, TGOD declared a dividend (news release).
If the dividend were a cash pay-out, anyone short the stock who still wanted to stay short, could simply just owe the cash dividend. That’s easy, pay the cash and stay short.
THE DILEMMA (IF YOU ARE SHORT)
We suggest that you go and read Thursday’s release in full, perhaps even more than once to fully grasp the wonderful situation we now have in front of us, in particular, the line about TGOD Management backstopping all unfilled orders.
Since TGOD will dividend (issue) a warrant unit and not cash, there’s no way for someone who is short to stay short. If they decide to stay short anyway (we highly doubt their broker will allow them since it can become 1) an administrative nightmare 2) extremely costly), they can lose their shirt. Literally speaking!
“The Company will distribute to its shareholders a Warrant to acquire a TGOD Acquisitions Unit for $0.50. Each Unit will consist of one share plus an additional warrant for the investor.”
Remember what we said about TGOD Management backstopping all orders? Well this means ALL these dividend warrants will be accounted for and will need to be delivered.
Let us ask you a question. What happens if you’re short a stock that issues a dividend, and you need to deliver that dividend consisting of a share and a warrant, and it’s in a private company? Well those shares aren’t delivered at $0.50. They’re delivered once public, IF you can get borrow, which you won’t because management is backstopping all orders. And even if you could get borrow, TGOD Acquisitions plans to follow a similar financing approach to TGOD (they’ve done it numerous times before, we wouldn’t want to bet against that) meaning you’d be delivering those shares at a $3-4 IPO price.
We can’t help to ask ourselves how the risk departments at the various brokerage firms will adjust the margin requirements with this unknown variable. How will they quantify that? It seems as though the client, and more importantly the firm, are about to be in a very precarious position. This leads to no firm wanting their credit risk department to ever be in the situation of forcing the client to go in the market and cover the short.
Why we did not see TGOD run to $7-8 on Thursday & Friday is beyond us. We think that due to the season, perhaps these people are out on their sailing boat sipping white wine or something. Let us explain just how costly that wine can become unless they wake up to their new reality/nightmare.
“TGOD ACQUISITIONS” SHARE STRUCTURE
Every warrant issued to current shareholders will give them the right to buy a unit in TGOD Acquisitions for $0.50. This is the seed round and everyone, management included, pay the same price as you and me. The structure is very honest and transparent, there are no “free rides” here and the new structure will be extremely tight:
For every share in TGOD you receive 0.15 warrants. This means that the structure will look like this:
1) 34,361,526 Shares Outstanding (From 229,076,844 TGOD Shares x 15%)
2) $17,180,763 being raised into TGOD Acquisitions (From 34,361,526 x $0.50).
3) TGOD to provide additional $25,000,000 repayable loan to TGOD Acquisitions resulting in a cash position of $42,180,763
4) Note: Any Units NOT purchased by existing shareholders WILL BE backstopped by TGOD management
5) Similar financing approach to TGOD is planned i.e., if you invested $10,000 into TGOD at the first financing, for 20,000 shares, the value proposition would look like this:
The Gecko Investor Group (GIG) offered the 50c seed round in TGOD back in 2016. Less than 2 years later, that $10,000 is now worth $116,000 or a 12-bagger if you will.
WHAT THE FUTURE HOLDS FOR SHAREHOLDERS
We can only make assumptions at this point but with the history of TGOD capital raises in mind and applying something similar to TGOD Acquisitions, an IPO around $3-4 is very possible. Remember, there will be a very different share structure than the mother company.
If you missed out investing in TGOD’s 50c round in 2016, here’s a second chance. The record date for when you need to be a TGOD shareholder is yet to be announced, but you will need to own the stock by then to be able to participate.
The record date is also the deadline for shorters to have covered their short position.
WHAT THE FUTURE HOLDS FOR SHORTERS
Sorry guys, you are screwed.
Imagine that the Record Date is a month away (22 trading days), 22 days / 7 million is 318,000 shares of net buying coming each day until that point. With the reduction of new shorts coming in and the fact that the stock has retraced nicely form its peak, gives us plenty of room to move as well.
Combine that with the tight share structure with approximately 28.5 million shares tradable, the news flow expected (don’t forget Aurora’s first 8% option takes place August 2nd, TGOD may just get an extra $100 million + in cash) and whatever else TGOD management has up their sleeves plus the fact that we are in the dead of summer might just provide the perfect buying opportunity, and the greatest short squeeze of all time on the TSX.
Hey shorters, hope that white wine on your summer vacation was something very special. So it was all worth it we mean.
TGOD (the company) & MANAGEMENT BACKSTOPS THE 50C ROUND
Any Units NOT purchased in TGOD Acquisitions by existing shareholders WILL BE backstopped by TGOD management. This sends a clear message to all existing shareholders of TGOD, this seed round of TGOD Acquisitions will be extremely sought after.
OUR MOVE NOW
We have loaded up shares in TGOD in the open market, on top of our already large position of restricted shares. We think there’s a huge opportunity and trade to be made here, one of the most obvious ones we have ever seen in our careers.
To our knowledge, what TGOD have done here has never been done before with such a large short position combined with such a small free float. We are already on board the train, are you?
Team Gecko Research
July 22nd, 2018
We have a disclaimer, we suggest you go and read it asap. All members behind Gecko Research own a lot of shares & warrants in TGOD, it’s safe to say that we are more biased than most. We intend to exercise our dividend warrants in full for shares in TGOD Acquisitions. We have not received any reimbursement from TGOD or anyone else for that matter, what we have written here are our own words and conclusions.
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