It’s no secret plant-based foods have been one of the real go-to investor categories of the rampaging North American stock market over the last year, especially since Beyond Meat (BYND.Q) went public in the US in late 2019 and went on an insane run, eventually settling in as a $10 billion company.
It started a real trend that has shown no sign of stopping. Locally, we told people about plant-based baby formula deal Else Nutrition (BABY.C) over a year ago and watched that also slingshot from strength to strength. When we initially began covering it as a non-client company, online naysayers mocked us, calling it ‘fake formula’ and insisting it would be a massive bust, but here we are a year later with the stock loving life at $4.12, with a $390 million valuation before it’s sold a pallet of product to consumers.
The Bridgemark crew-connected Modern Meat (MEAT.C) also hit nine figures in valuation as it sprung out of the gate, and while you’d have been forgiven for dismissing that deal as a pump based on its origin story, it’s undeniable that, in hitting its $100 million valuation, Modern Meat can now buy its way to legitimacy. As recently as a week ago, we saw Pontus Protein (HULK.V) run to a $75 million valuation out of the gate, with a business plan to extract protein from water lentils.
So with organics and veganism and plant-based food tech finding a willing market audience, it stands to reason an organic-focused grocery store chain would find similar love.
But for Organic Garage (OG.V), an Ontario-based small specialty grocer, that didn’t come easy.
With five stores open in Canada’s center of the universe, Organic Garage is not exactly a nationally recognizable brand. And with profits yet to be realized, it hasn’t been blowing the doors off on its quarterlies. In fact, a look over its newsflow over the last year shows a long list of notes about exchanging debt for stock, decent sized quarterly losses, and paying off debt interest with stock, none of which fills the casual observer with an urgency to jump in.
For longer than a year, the OG stock chart was a straight line. No trading volume. No rises. No inexpensive financing opportunities.
And yet, in 2021.. this.
When a stock is illiquid for a long period of time, it doesn’t take a lot of buying to get it moving fast. On December 1 of last year, someone took a position, launching OG from $0.11 to $0.19 in a day. The shift triggered a trading halt and the company released the usual ‘we’ve got no idea why this is happening’ news release. Not long after, the company noted a zero per share loss, coming ever so close to profitability, which triggered more upward motion.
The time had finally come to raise money.
With the company raising $1 million at $0.25, the stock ran past that mark even as the paperwork was landing and didn’t look back, notching a close as the raise was announced of $0.485, well past the warrant execution price of $0.33, which saw more money still being tossed at the company.
From there it has continued, reaching $0.89 this past Friday, up 11.3% over the previous day.
For those studying the market with a view to learning about effective rehabbing of an ignored and broken brand, this is a case study that shows how to do everything right.
OG was a company we looked at two years ago and wanted little to do with. It was struggling, the organics business hadn’t really yet resonated with investors, and its regional footprint meant every potential investor would have to be educated from scratch as to what the company actually was.
Also, it didn’t have a marketing budget, so…
But while losses certainly kept the company down, a lot of the red ink was based around capital expenditure involved in opening new stores, perfecting supply chains and increasing buying power, which allowed them to enjoy the economies of scale just now showing the business plan as workable.
It would have been dumb to invest in OG in 2019. But as COVID-19 hit in 2020 and folks packed into grocery stores and tried online delivery for the first time, suddenly the story became real.
Certainly insiders have helped OG survive the dark years, and I suspect a lot of those ‘shares for debt’ have gone to folks at the wheel. Currently, 28% of the company is held by insiders, which is decent and keeps hem aligned with investors. Their patience, today, is paying them back a fat profit, with a ten bagger so far and more on the horizon.
Organic Garage has largely de-risked their deal. Two stores doesn’t bring you many favours from suppliers, but five turns the screw on those vendors somewhat harder. Better prices, better terms, faster turnaround – Organic Garage is now a player. A deal with the Uber-backed Cornershop has allowed the company to offer online ordering and delivery without a big up-front spend, and just at the right time.
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And their ongoing ‘Dump It List‘ tells a compelling story to picky consumers that the company is doing the work of aggregating quality products for them and omitting ‘fake’ organics.
But none of that is why the stock has 10x’ed.
Six weeks after the company began to get noticed by investors, OG announced its first real baller move; to acquire an actual plant-based product line, thereby allowing them to make money from their competitors’ brick and mortar stores, as well as their own.
Organic Garage Ltd. has entered into a binding letter of intent to acquire all of the issued and outstanding securities of The Future of Cheese Company Corp., a private Canada corporation. Future of Cheese is an organic, vegan premium plant-based company based in Toronto, Ont., in the business of developing, manufacturing and marketing plant-based cheeses and plant-based cheese products.
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Let’s be clear here: The Future of Cheese is not a national product line being pounded out through Wal-Mart. It’s essentially two guys – one of Canada’s foremost cheese experts, with a long line of certifications and awards that read include more French words than any reasonable man should be festooned with. The other is a celebrity chef, seen on Canadian TV more often than Friends re-runs, and able to blast open doors with his rep.
Pursuant to the terms of the letter of intent, the company will issue 13.8 million common shares to the shareholders of Future of Cheese at a deemed price of 42 cents per share in consideration for all of the issued and outstanding securities of Future of Cheese, resulting in Future of Cheese becoming a wholly owned subsidiary of the company. The company will also issue 690,000 common shares to an arm’s-length finder in connection with the proposed acquisition.
That’s a $5.7 million deal, which is expensive for a company still at the startup stage with a website that doesn’t register on the first page of Google search results for its name (we’ll help them out a little by linking to it here).
For the sellers, it’s now a $12.2 million deal after OG went on its recent run. That’s a lot of cheddar, if you’ll excuse the pun.
But that’s not necessarily a bad thing. Sometimes paying above the odds for an asset can pay you back in multiples based on the ensuing increase in your market valuation. As an example, if Google shocks the world by buying a loss-making tech startup for $1 billion but sees its market cap rise $5 billion as a result of enthusiastic investors, were they actually overpaying? Countless weed companies overpaid for assets during that industry’s green rush, and enjoyed that market cap boost, the downside of which is still being felt through countless asset writedowns and stacking losses.
In shunting $5.7 million of stock at this deal and spending no cash in the process, Organic Garage grew their cap from roughly $19 million to $38 million, a 4x return whether Future of Cheese becomes a celebrated national brand for vegans and health nuts or not. Frankly, they could write the investment off tomorrow and be way in front, though I suspect that’s far from the plan.
Now, I know as you read this your mind is going to go to a very specific question, and I’ll tell you in advance it’s a good one: With all the shares for debt and shares for interest and shares for acquisitions – is Organic Garage’s share structure blown out to the point where there’s so much cheap paper it’ll weight the thing down?
If you’re used to the way weed companies blew paper out their asses to do business over the last few years, you’re going to love this…
44 million shares issued. That’s it.
Even if you throw the 13.8 million shares that bought Future of Cheese on top of that, 58 million shares would be a VERY low base to build from, considering what the company has endured getting here.
The move to having a subsidiary that creates the food that the company sells at retail is a smart one, as it gets them out of a reliance on their own expense-heavy brick and mortar stores and allows money to be made through competitors, restaurants, online ordering and more. OG gets to skip the wholesale middleman entirely and stack margin every time they sell a wheel.
But does it have more room to run?
You could think that at $0.89, things are going to cool off a little bit here and flatten out, maybe even drop off as people who sat on the stock for a year or more take their profits.
Those aforementioned $0.33 warrants will take some steam out of the rise, with presumably anyone who holds them being likely to execute them now, and perhaps needing to sell some of their existing stake in the company to finance the move. And the 4 million shares involved in the $1m financing will come free trading around April, which may see more profit-taking.
But those figures aren’t scary numbers, and we’ve already seen some of that action. The company keeps climbing, profits get trimmed, it then finds a new base and moves up again, where more profits are taken. So far, with the heavy upward action giving sellers reason to think twice before cashing in too hard, the rising tide has protected the downside.
High fives on the reputational rebrand and financial turnaround. But now the pressure is on organic garage to show their work, solidify, find more acquisition targets that make sense, and raise money if needed at 10 times the valuation they could have just three months ago. On this run, they could go to the market looking for dough to build out four more stores and get it without hassle. Alternately, any other interesting acquisition target will see the double Future of Cheese earned on its all stock deal and likely be intrigued at the chance to do likewise.
I would expect the results that came from OG’s recent news will show the board and C-Suite they need to be proactive, and there’s no indication they missed that memo. Make more such deals, secure more subsidiary products, expand their revenue potential out beyond their own stores, enhance their online offerings, make sure their products are going out to competitors, and that they’re making money from everyone else’s deal rather than just their own.
The bottom line:
For 14 months now, naysayers have been suggesting the plant-based revolution is over. Certainly we’re not hearing every fast food restaurant spending tens of millions marketing their Beyond Burgers and Impossible Meat options like we were in early 2020, but a significant chunk of the North American market now looks for healthy, vegetarian, vegan, non-GMO, dairy-free, gluten-free, preservative-free, and flexatarian meal options.
Folks, I love my meat and I think dairy is something we must consume lest we find ourselves at a place where we realize cows only exist because of it and are faced with their impending extinction. Release all the cows tomorrow, they’ll be eaten by predators inside four days, so we owe a duty to the cows to consume their udder love and protect them from what’s outside the farm gate.
But hey, we could probably put an end to factory farming and meet the animals halfway, you know?
If anyone is going to perfect non-dairy cheese, it’ll likely be this team. In the meantime, every time I try a plant-based food and don’t immediately spit it out, a vegan angel gets its wings and companies like Organic Garage make money for their shareholders.
Don’t fight it. Take another bite.
— Chris Parry
FULL DISCLOSURE: Organic Garage is an Equity.Guru marketing client.. at last.