Interview with Sean Bovingdon CFO of The Green Organic Dutchman

Capital 10X sat down with Sean Bovingdon, CFO of The Green Organic Dutchman to discuss the potential of organic cannabis market.

Transcript

Capital 10X: I saw Sean at the GMP conference which was crazy. I saw the GMP conference go from three years ago in this little ‘hut’ to two floors of the Regency. Sean, I thought had one of the best presentations of that entire day. He really brought forth a really compelling case for organic specifically as it relates to cannabis. What I wanted to do is ask some follow on questions [for] our Capital 10X audience. If you could just give me a very high level overview on where organics fit in the cannabis chain and ultimately how big you think that slug could become?

Sean Bovingdon: One of the main reasons I joined TGOD was because of the organic branding of the product. Organics in all CPG products represents about 15-20% of the product market and that sector is actually growing whether you look at a Whole Foods, or any other organic parts in your local grocery stores. For organic cannabis we see it being about the same 15-20% potential. So if you’re looking at a $5 billion market in Canada, you’re talking about a $1 billion market organic potential. We’re the largest scale cannabis producer in that market so we want to own that category.

Capital 10X: I think one of the important things, and you really said it well in the presentation at GMP, was around the pricing power of organics and how that’s become such an important aspect across all consumer products. Maybe you can expand on how you view that for cannabis specifically and are there any other consumer vectors or verticals that could be analogues for cannabis in terms of pricing power?

Sean Bovingdon: Well I think all of the [organic] vertical products have that kind of pricing power. In cannabis specifically now what we’re seeing is a 33% premium. If you look at Whistler which was the first one out of the gate with organic cannabis, they’re doing about a 33% premium over ‘regular’ cannabis and that’s shown on the OCS or any of the provincial websites. So we’ll be in that same kind of ballpark and that doesn’t matter whether its medical or recreational. But it also applies when you get to oils, when you get to vapes, when you get to edibles, when you get to beverages. And you see that in organic beverages, whether its Kombucha in [grocery stores], they all have a premium, and the premium they have is because of the quality and because of the cleanliness and the purity of the product. Whether again if it’s recreational or whether it’s medicinal.

Capital 10X: So the one question I wanted to ask you because it’s literally everywhere, is [about] CBD. Because I haven’t seen one person talk about organic CBD. Is there a vertical there for you guys? I was going to tie it in with one other question, in the presentation you really went out of your way to talk about R&D as a hallmark for what TGOD does, maybe I could marry those two questions. You’re thoughts on CBD, how you guys are going to play in that, is there a market for organic? And then secondarily just what’s happening in the lab?

Sean Bovingdon: Absolutely, there’s a market for organic CBD and we’re actually involved in CBD worldwide. Our HemPoland subsidiary does CBD products and they’ve been certified organic as well throughout Germany, Poland, UK, and several other European countries with their cannabinoid oil, which is a premium organic nice golden oil. In Canada we’ve got our CBD oil going through Valens which was [announced] days ago, we’re really happy about that. So it allows us to do all of our extraction on an organic basis on the hemp side, as well as on our full spectrum cannabis CBD strains that will be coming out later this year.

Again, we’ll do that into vapes and into all the other verticals on an organic basis. It’s very important for us to have that as part of our culture across the world. As to the second part, R&D, we’ve built up our science team led by Dr. Rav Kumar who came out of Apotex and Glaxo, is building up a big team from that perspective also from a lot of pharma background.

It’s important for us to ensure that everything we do is founded in science and in data on that R&D side for all of our products, edibles and beyond. And it’s making sure that we’re doing studies that ensure and can verify that the cleanliness, purity, and the efficacy of organic can have a cleaner, purer burn, a better onset, a better efficacy of result and entourage effect. As well as ensuring that we can do purely organic through all of the topicals and different products that come out of the vertical market.

Capital 10X: So if I were to think correctly about the R&D sleeve, it really is pushing that organic across all consumer [products], the breadth just continues?

Sean Bovingdon: It’s not just the breadth but also marrying the science of the plant into the products and into the results for the consumers and the effect for the consumers when they consume it in whatever manner they do.

Capital 10X: We talked about the ‘supertanker’ of organic, because you clearly are on one side the 5th largest by production capacity when all is said and done. Could you give me a progress update on Hamilton, Valleyfield and how things are progressing on both those fronts?

Sean Bovingdon: Certainly. You can actually see, we post videos on our website, tgod.ca, that shows you the progress for both Hamilton and Valleyfield. Hamilton, the first part of that is going to be coming online at the end of May and fully coming on in Q3, full harvest that’s about 17,000 kg of capacity. Valleyfield, which is our flagship construction project and facility, which will be over 1 million square feet, will be on by Q4 of this year, for the first phase that will do about 130,000 kg in the first phase, the second phase coming on later in 2020 which will add another 55,000 kg.

Capital 10X: Fantastic. The one question that everyone asks around how big this could be, how big organics can be as a part of the total cannabis market, then you see the pricing power that it attains, it’s just really around cost. How should an investor think about cost? Because if there is one question is that it’s going to be more expensive. But quantifying that and understanding that and how we can do that at scale. Maybe you could give us some signposts as to how I should think about that as an investor?

Sean Bovingdon: There are some additional elements in cost for organic. But they’re not overly material beyond the scale that you see in Aurora or Organigram or other major LPs [licensed producers]. There are some specific barriers to entry for example which is actually an opportunity for us in terms of keeping our organic space because of building out specific requirements and design elements that you need for organic. You’re growing in living soil which adds to the benefit of yield and again the efficacy of the plant, higher THC potential content. But it is a little more expensive in terms of the soil rather than the rockwool. There’s larger robotics involved, there’s some increased HVAC cooling systems that are involved, but all of those really only add maybe $0.40-$0.60/gram at scale on the total cost part of that. Which when you combine that to extra $1.50-$2.00/gram on the retail side, the extra margin, we should be and expect to be industry leading gross profit margin from our sales.

Capital 10X: That’s really helpful. I know you said we’d have a chance to meet your master grower out there as well, so I’m excited to that because I want to dig deeper in understanding the differences in organic. The one thing you left at the end of your presentation [at the GMP conference], which we’ve highlighted in our own comp sheets, is the valuation anomaly here. Which is that obviously TGOD is at the very lowest end of the scale in terms of valuation relative to peers, and that’s one thing that I think will be one of the most interesting things to come out of the following year. As everything gets built out, this is a period of execution right?

Sean Bovingdon: Exactly right. It’s a transition year for us. We’re going from a point of the promise of the delivery to actual delivery and execution. As that product comes online and we roll out our products, and we’ll be ready for all manner of verticals come October, across the spectrum, we’ll be in a position that then that discount that we have to the other market players now should disappear. So we’re pretty excited about that opportunity for investors getting in now when we’re just months away from having that full product spectrum.

TGOD is a Market Awareness client of Capital 10X.

The Green Orgnaic Dutchman is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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Thomas has over 17 years of global institutional investment management experience. At TD Asset Management he was Director of Global Resources and lead Portfolio Manager for over $1 billion of global equities (resource and sustainability funds). Thomas is a Chartered Financial Analyst and has been featured on BNN Bloomberg, CTV, Benefits & Pension Monitor and the National Post. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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He’s really doing a good job, price was up