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CO2 Gro: Why I Sold

I recently sold my position in CO2 Gro after owning shares for three years.

While I think the technology has merit there have been far too many missteps and delays which have lowered my confidence in management’s ability to “cross the chasm”.

There continues to be financing risk as cash on the balance sheet dwindles. Ospraie Ag Science has 10 million warrants at $0.15 that expire on February 12th, 2022. If Ospraie declines to exercise the warrants I anticipate the share price to react negatively and retract to the prior private placement price of $0.12. (On the date of publish Ospraie did exercise their warrants).

The departure of Chief Science Officer Dr. Matt Julius was the final straw that lead me to exit my position and move on from CO2 Gro.

Previous Posts on CO2 Gro: CO2 Gro 2020 Results

CO2 Gro: Execution Risk

While GROW has clearly made progress over the past 3 years there continues to be plenty of execution risk. While this should not come as a surprise, since they are trying to commercialize a new technology. There have been too many delays accompanied by unsatisfactory excuses.

CO2 Gro Trial Delays
Commercial Feasibility Delays from Q3 2020 MD&A

The delays have been throughout numerous countries and crops. The reasons for the delays have been numerous and are mainly placed on the grower. These have included delays due to Labour Day, Ramadan, customs delays, growers switching crops, etc. I have no reason to believe the delays are not due to the grower but for a company that is not profitable, the constant delays are magnified.

I went through all the CO2 Gro news releases and compiled a list of trials. I’ve done my best with the information that is shared with the public.

Ongoing Trial Results
CO2 Gro Trials List

While the new trials are impressive, the list of trials that resulted in no sale or are delayed is long. The trial list does have some substantial growers on it including the 100 million square foot E.U. grower. The company has made progress over the past few years but there is a lack of consistency in closing deals and then communicating with shareholders. The company feels it is important to announce trials then they should announce the results of the trials as well.

Customer Opinions

I have had difficulty getting growers to talk about their experience with CO2 Gro or the grower was unnamed in the news release announcing their trial. To date I’ve spoken with Linn County, Golden Peaks and Prism Farms. Linn County (hemp for seed) and Golden Peaks (micro cannabis) spoke very highly of CO2 Gro. Linn County said that they could pay for their system in one harvest and that the company was excellent to work for. Golden Peaks also spoke very highly of the company but could not comment on yield or pathogen improvements. Golden Peaks built their facility with the CO2 Gro system installed so they did not have data to compare to.

It is concerning that Linn County had an excellent return on investment yet there was no follow up purchases from other hemp growers until December of 2021 to the hemp grower building a new facility in Tennessee.

I recently communicated with Prism Farms in Leamington Ontario. Prism was trialling the CO2 Gro system primarily because they have to vent their greenhouse during the warmer months which also vents the co2 gas. The contact I communicated with from Prism said that they did not see a benefit from the system. Instead they are researching a high-pressure fogging system for reduced cooling and humidity. I do not have any additional information from Prism Farms but it certainly sounds like a failed trial.

Q3 2021 MD&A

Based on what I learned from Prism I would count that as underperformance. This is a very small sample size since I’ve only spoken with three growers and two of them had positive comments. Prism is by far the largest grower of the three I have communicated with.

CO2 Gro: Management Guidance Mistakes

Throughout my time invested in CO2 Gro management has provided guidance to the market on how the company will perform. In each instance they they have failed to come close to meeting it. To me, this shows management’s inexperience and a lack of understanding of their customers. I’ll quickly recap the guidance given by management and the actual result.

2019

In a video with Midas Letter, CEO Archibald predicted that CO2 Gro would be EBITDA positive in 2019. Instead, GROW had a $1.5 million operating loss in 2019.

2020

CO2 Gro Corporate Update
CO2 Gro Corporate Update from June 27th, 2019

In full-year 2020 GROW earned $91,248 and had a negative gross profit of $108,000. I spoke with VP Sam Kanes about this forecast and his reply was that CEO Archibald made an “off-the-cuff remark” for a Proactive Investors video. They seemed to have adopted that off-the-cuff remark since they started adding it to press releases. I commented in my 2019 write-up that I could live with the mistake made by CEO Archibald. I was more disappointed that they refused to acknowledge their mistake and provide an explanation to investors. Instead, they completely ignored the $10 million forecast which I believe harmed management credibility and scared many prospective investors away.

GROW provided the following slide in one of their early 2020 slide decks.

CO2 Gro 2020 Goals

Later slide decks in 2020 no longer contained this slide and I had to email the company and ask where it went. Through an email conversation with Michael O’Connor (Investor Relations Manager for CO2 Gro) he provided some explanation why they missed these goals.The most disappointing thing about these 2020 goals was that the company distanced itself from these goals once they realized they would not be meeting them.

While it is always frustrating when a company fails to reach the goals/guidance they provide, hiding from them is ultimately worse and damages management’s credibility with investors. The constant “changing of the goal posts” is a serious red flag for me. Year-to-year the goals/forecasts swing wildly from trying to achieve profitability to no mention of profitability but focusing on revenue targets.

2021

In another video (I’m not sure which one, I didn’t want to go back and watch them all) VP Aaron Archibald said the company would be cash-flow positive by the end of 2021. As of Q3 2021, the company used $800,000 in cash. I expect the company thought they would have received a larger order from Hidroexpo than they received. The full-year 2021 numbers should be out shortly but the company will be nowhere near cash-flow positive. Do I expect an explanation about why they didn’t meet their goals? Based on their past communication strategy, I do not.

2022

CO2 Gro 2022 Operational Goals
CO2 Gro Q1 2022 Corporate Presentation

Now we see a 2022 revenue projection and no mention of overall profitability. As with other years, this revenue number is possible, all they need is one decent-sized grower to fully deploy the system but to date that has not happened.

Broken Business Model

The CO2 Gro business model has undergone changes since I’ve owned the company. The original plan was to generate recurring revenue by capturing a percentage of the increased value created by their technology. This business model lead to “two sales” that generated marginal revenue and some very misleading wording used by the company during a presentation (See section 4.7).

Instead of a recurring revenue model the company pivoted to a price per square foot purchase or leasing model. GROW has had some success selling to smaller growers, primarily hemp and cannabis, but had yet to fully close a large grower. In addition to the shift in revenue model GROW partnered with companies all over the globe. I have shared my thoughts on some of these partnerships in prior posts but one thing has always concerned me, many of the companies they are partnering with are not growers or have a focus in agriculture.

The company has partnered with industrial gas companies, a biogas plant developer, and companies that were created to sell CO2 Gro’s technology. Trials have been signed for numerous different plants and in countries all around the world. I don’t see how it is possible for GROW to manage all these trials so it must rely on its partners. Many of their partners are not growers and I’m skeptical they have the expertise to provide agronomy advice. The company has had little success sales wise outside of North America, with the large sale to Hidroexpo being the exception.

I think the company has tried to grow to far and too fast when they should have focused on North American sales with proper customer support to build the CO2 Gro brand. I expect we will see some of their partnerships end. The Gulf Cyro partnership was for 2 years which means it ended in November of 2021 (assuming it was not extended). They have only signed the one UAE lettuce trial which has not progressed past the first grow cycle.

In January 2020 the company signed a partnership with Israeli-based Dotz Nano and has already moved away from that partnership to Greenmist. Rika Biotech has had success signing up growers for trials but has yet to make a sale. The Rika agreement was on a “one-year rolling exclusivity” based on minimal sales achieved. There have been no sales by Rika to date. Some other early partnerships (OrganicGrow Solutions and Henry James) I haven’t seen mention since they were announced.

The lack of meaningful sales, global sprawl, changing business model and consistent delays lead me to believe the business model is failing and more narrow focus on North America might be a better fit.

CO2 Gro Financing Risk

The company once again is running out of money and another dilutive financing is a real possibility.

Q3 2021 Financial Statement
Q3 2021 Financial Statement

While nearly a million dollars seems like a lot of money, it rapidly disappears when you aren’t near cash-flow positive. For the 9 months reported in 2021 GROW used $800,000 in cash for operations. Expenses are also rising from $900,000 for the full year 2020 to over $1 million in the first 3 quarters of 2021. That’s approximately a $90,000 per month cash burn. At the same cash burn, the company will be out of money by June. The two recent large sales aren’t likely much help due to the payment terms. We don’t know what the Hidroexpo payment terms are and the other large sale in January is over 64 months.

There is a chance that Ospraie Ag Science exercised their 11.5 million warrants at $0.15 on February 12th, 2022. If Ospraie did not exercise their warrants then I think the stock price stinks to the previous private place price at $0.12 and another financing will be required with a warrant attached.

You might be thinking that Ospraie would be crazy not to exercise their $0.15 warrants when the share price is around $0.23. That is a 52% gain on $1.7 million dollars. How would Ospraie begin to sell a position like that? The average volume is 27,000 shares per day. To sell 11.5 million shares would take 425 trading days. If they start selling the market cannot absorb their supply of shares. That does not include their current position of 11.5 million shares.

The big risk is Ospraie does not exercise its warrants and GROW goes back to the market for dilutive financing near or even below their $0.12 private placement

(NOTE: While finishing this post Ospraie exercised its 11.5 million warrants for $1.7 million. I think this is the best outcome in the current situation.)

Additional Risks

I wrote in an earlier post that if Dr. Matt Julius leaves the company that was a major red flag for me. Without Dr. Julius on staff, I see a lack of real grower experience. The company has trials on numerous different plant types. I highly doubt they all respond to GROW’s technology the same. I felt that Dr. Julius was an excellent resource to answer questions growers might have on how the co2 technology would affect their crop. I think Dr. Julius leaving the company is a huge loss.

In October 2019 GROW was served with a lawsuit concerning alleged breaches of non-competition agreements. There hasn’t been any other news on this issue since. I suspect this has something to do with GROW’s perpetual licence to use the technology that dissolves the co2 gas into water. I requested the statement of claim from the company but they declined provide it. The Ontario court system was not friendly either and I needed to go to a specific courthouse to get a copy so this was not feasible. I have no opinion on the lawsuit, it’s just another risk.

The lack of a trial at Canadian cannabis produce Hexo is also disappointing. Rose-Marie Gage is a Director for both CO2 Gro and Hexo. It seems only logical that it would be an easy introduction to Hexo, unfortunately no trial with Hexo has been announced. Hexo could be the “significant” Canadian licence producer announced in this trial.

And lastly, I don’t believe the company has been awarded any of the patents they have sought. I also am concerned that the absence of Dr. Julius could hamper the patent process. I have no patent experience though, this is just a feeling.

CO2 Gro: The Good

I’d like to end this post on a positive note. There are definitely some good things going on at CO2 Gro. First, management at CO2 Gro has yet to take cash compensation. Their compensation has been only through options issuance. While this isn’t great for the share count it shows management’s commitment to the technology. Management doesn’t get rich unless the share price increases.

As you can see from the list of trials, GROW has made progress in signing up growers for trials. Even more important GROW made two significant sales in the past 6 months. They sold a system to Hidroexpo for 1 of their 36 greenhouses and sold another system for $127,750 in January. One comment on the January sale, the payments are over 64 months which isn’t ideal for a company running out of cash.

Management has been very kind to me during my time as a shareholder and has made themselves available to answer my questions as best they could. I appreciate their willingness to engage with shareholders.

Conclusion

Owning CO2 Gro was a bit of a roller coaster ride. At one point I had 2.5x my money when the share price got caught up in the weed pump. I have been an apologist for management mistakes because I thought the value proposition to growers was so strong. I know growers are slow to adopt new technologies but with a payback on some crops in one harvest, I thought more growers would have already bought systems.

My concern is the company is spread too thin, over to many countires and too many crops. In this business model, the company must rely too heavily on its partners, that, in most cases are not greenhouse builders or growers. I think there is a path to success for CO2 Gro. If they can fully deploy their system in Hidroexp or the major E.U. vegetable grower this will be a massive win for the company. The path to success is already visible but I have lost my conviction the company will be able to close these deals.

I wish the best to any CO2 Gro shareholders and management. I am still rooting for the company to succeed and will continue to watch the progress they are making, just from the sidelines.


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