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Christopher Katsarov/The Globe and Mail

Another Canadian cannabis grower is seeking to go public in what will be a test of investor appetite for marijuana stocks after weeks of high volatility.

An initial public offering for The Green Organic Dutchman Holdings Ltd. is being marketed by a group of investment banks led by Canaccord Genuity Group Inc., with a goal of closing the deal and listing on the Toronto Stock Exchange in March. The company operates a small production facility near Hamilton and holds one of 90 licences in this country – and one of 48 in Ontario – that have been issued by Health Canada to cultivate marijuana plants for medical use.

The IPO filing comes months ahead of Ottawa's legalization of the drug for recreational use, a move that will allow growers to serve millions of consumers instead of just thousands of patients who are allowed to buy their products today. Investors have been trading pot stocks at a dizzying pace in anticipation of rapid growth in revenue and profitability, pushing up valuations in the sector amid wild swings in share prices.

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The choppy market conditions have made it more difficult for cannabis firms to price stock sales and size up potential acquisitions. Late last year and in early January, pot stocks soared to extraordinary levels as trading volumes spiked. The Horizons Marijuana Life Sciences ETF, an exchange-traded fund that tracks the sector, went up 102 per cent in the last three months of 2017 and another 6.7 per cent in January.

But the past month has seen a vicious correction. Nearly all of the three dozen public cannabis stocks tracked by investment firm Echelon Wealth Partners Inc. have tumbled over the month ended Feb. 22, plunging by an average of 24 per cent. Shares of the largest company, Canopy Growth Corp., have lost one-third of their value since hitting a new high on Jan. 9. Still, the average three-month return of the cannabis firms tracked by Echelon is 52 per cent – meaning big gains for those who got in early enough.

The Green Organic Dutchman, or TGOD as it's known in the industry, will join a crowded field by going public. It's not clear how much money the company hopes to raise in the offering. Company executives declined to comment.

The company is young, hasn't generated any revenue and has incurred losses of $10-million, according to a preliminary prospectus filed earlier this month. Yet it has more than 4,000 investors, according to its website, having raised $160-million in private capital since 2016 to improve its Hamilton facility and push into Quebec.

TGOD recently secured the backing of Aurora Cannabis Inc., which is fiercely competing with rival Canopy to be the largest cannabis firm by market capitalization.

Aurora acquired an 18-per-cent stake in TGOD last month for $55-million, buying subscription receipts at $1.65 apiece. Each receipt will convert to a unit when TGOD goes public, which has to occur before July 31. Otherwise, TGOD will have to cancel the receipts and repay Aurora. One unit is worth one common share and one-half of a warrant. The warrants have an exercise price of $3 a share and expire nearly three years from the date the company goes public.

As part of the deal, Aurora can bolster its stake to more than 50 per cent if The Green Organic Dutchman achieves certain milestones. Aurora also has the right to buy at least 20 per cent of the cannabis produced by TGOD each year. By 2022, TGOD expects to grow 116,000 kilograms of marijuana a year, according to the prospectus. Today, its Hamilton facility has room for just 1,000 kg of product and the company has decided to use any of the cannabis it has harvested for research and product development.

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The company bills itself as one of only three producers that grow "organic" cannabis that is free of pesticides and fertilizers that can be harmful when heated. But it remains to be seen if that pitch will resonate with customers.

TGOD has a limited operating history. In its prospectus, the company includes consolidated financial statements audited by Deloitte LLP for less than two months to Dec. 31, 2016, as well as selected audited annual data from 2014 to 2016. It offers unaudited results for the first nine months of 2017 to Sept. 30.

The company is also warning that it has identified "a material weakness in our internal controls over financial reporting" that could result in a material misstatement of its results not being "prevented or detected in a timely basis." It said that it didn't have effective controls over "the analysis of contracts and transactions, review of manual journal entries, reconciliation of balance-sheet accounts and tracking of property, plant and equipment."

TGOD says that it is working to address these deficiencies, aided by a newly minted director and audit-committee head, Nicholas Kirton, who is also the chair of the Canadian Investor Protection Fund.

The federal government now says legal marijuana won’t be available for sale before August. Health Minister Ginette Petitpas Taylor says once the Senate holds a final vote by June 7, provinces will need eight to 12 weeks to prepare. The Canadian Press
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