With recreational cannabis widely expected to be legalized in Canada by July 2018, the industry is already moving full throttle in anticipation of a new multi-billion-dollar consumer market essentially opening up overnight. But for licensed cannabis producer The Green Organic Dutchman (TGOD), legalization is only the starting point of a much longer race. In fact, while many of the cannabis companies are preparing for next year, TGOD already has its eyes five years down the line for when the market finally sheds its hype and novelty and becomes a full-fledged household product category. The company’s experienced management team is building with staying power very much in mind, and believes it is well positioned to dominate the industry.
With a 978,000-square foot production expansion plan underway, a roadmap to raise a total of $175 million to get there, and a growing shareholder base of thousands of retail investors, it’s clear to see that TGOD has a lot going for it. Equities.com had the opportunity to speak with Danny Brody, Vice President of Investor Relations for TGOD, to learn more about the company and how it plans to capitalize on the massive cannabis supply and demand shortfall expected upon next year’s legalization for the consumer markets, as well as become a mainstay producer for decades to come.
EQ: just to start off can you provide us a brief overview in your words of The Green Organic Dutchman and your operations.
Brody: TGOD is a Canadian licensed cannabis producer. We grow a completely organic product, which is one of our differentiators. We believe that cannabis is medicine, and anything that you’re ingesting that is medicine—whether it’s smoked or eaten—should be organic. There are so many pesticides out there nowadays that, especially when heated up, you just never know what the side effects are of what might be used to grow some of these things. So, from day one we believed that an organic product is key. That is one of our key differentiators that we will be continuing as we build out our operation.
We have one of the largest announced expansion plans — up to 978,000 square feet across two of the most populous provinces of Canada in Ontario and Quebec. We’ve also created I think one of the best management teams in the industry, which has helped take two previous licensed producers public, those companies being OrganiGram in 2014 and Emblem in 2016. In addition, we have several key industry leading alliance partners that are helping us de-risk the construction and build-out side of this.
Another thing that makes us unique is that we’re a completely retail-focused licensed producer. We are in the middle of a financing effort, but once it closes, we will have over 4,000 private shareholders, which is probably a world record for the number of shareholders for a private company. We believe that the retail investors can be so many things for us. They’re not only shareholders, but they’re able to become brand ambassadors and customers as well. It goes quite further than just raising money.
EQ: We have seen a lot of momentum and really a lot of progress being made on the legalization front in the last couple of years. Obviously, there are big expectations for 2018 as well. What kind of tailwind does this provide TGOD, and how are you positioning the company to capitalize on it?
Brody: it’s pretty exciting. This is the first time probably since 1933 where an industry is going from illegal to legal. We’ve got an opportunity of a lifetime in that we literally know the size of the market. We know the scale of the market. We know it’s becoming legal and it’s just the matter of getting the production numbers up to speed to satisfy that market. It has not been done on a commercial scale yet. For us as a company, there are so many different things that we’re doing, but the main one is obviously our expansion and what we’re looking to build out.
Let’s put some context to this. The Canadian beer market is approximately $8 billion a year. The Canadian wine market is approximately $7 billion a year, and the spirit market is $5 billion a year. Cannabis is looking to come in, on the low side, at $4.2 billion and around $12 billion on the high side. Using the average between the wholesale and retail price of $6 a gram, if we just take the low side of $4.2 billion and figure out how many grams of cannabis we need to produce to get to that number, we would need to produce 700 million grams of cannabis, or 700,000 kilograms.
The last recorded quarter that Health Canada reported said we produced 6,000 kilograms as an industry. If you produce 24,000 kilograms a year, and you need to get over 700,000 kilograms by July of next year, you have got a serious, serious gap between supply and demand. That is one of the things that TGOD as a company is trying to work towards.
EQ: You mentioned your expansion plan to get your production numbers to help meet that industry demand. Can you give us more details of your goals there?
Brody: We have announced a 150,000-square foot expansion in Ontario and an 820,000-square foot expansion in Quebec. It’s expensive, which is why we’re financing right now. Farming out 820,000 square feet in Quebec at a $165 square foot works up to $135 million. But what that allows us to do is get production to about 116,000 kilograms of cannabis alone between Ontario and Quebec. Our goal is to increase efficiency with logistics, cheaper shipping costs, and provide next-day delivery for patients and customers.
EQ: So, it isn’t just about the land package and production expansion. You’ve also planned in logistic and cost efficiencies?
Brody: big time. As I mentioned, there is a big supply-demand gap right now, however, with any new industry that number will catch up. It will probably take at least three years before it catches up, but mark my words, it will catch up. It happens to every single industry. To be at the top of any consumer package goods industry, you need to be cognizant of two major items: You need to have a high-quality product, and an extraordinarily low cost.
We will see margin compression within the next three to five years, whether it’s from wholesale once the supply-demand gap is filled, or whether it’s taxation, we will see price compression. That means that if you’re not focused on becoming a high-quality, low-cost producer, you will be left behind. Thinking this through and building this out, knowing where we need to get to, we knew we needed to start figuring out how to get there.
EQ: What were some ways you’ve optimized efficiencies in your build-out of your production facilities?
Brody: For us, the two largest inputs to any cannabis operation are electricity and labor.
Being in Ontario makes a lot of sense for us because it has such a large population base. However, the power cost here is one of the most expensive in Canada, which is interesting because there are 32 licensed producers in Ontario, which is a whole other subject. But we wanted to figure out a way to reduce our power cost significantly.
We started looking at different provinces, and Quebec at 5.1 cents per kilowatt hour was significantly more cost effective than most others. For reference, Ontario is 13 cents per kwh. I mean that is over 50% savings right there. If we’re able to reduce our input significantly, what do you think that will do for our bottom line? We also combine that with efficiently run systems supplied by Larson Greenhouse, one of the most efficient, high-tech greenhouse manufacturers in the world.
We have the goal of becoming a high-quality, low-cost producer, and we’re going to do that by lowering our inputs such as electricity and using automated facilities to help us work towards that goal.
EQ: You mentioned that electricity costs in Ontario are significantly higher than that of Quebec. How are you addressing that?
Brody: We knew that being in Ontario, we would face a high cost of power, and needed to find a way to reduce that further. Working with our strategic partner Eden, which is a $30 billion company, they helped us partner with the Hamilton Utility Corporation, which is the city of Hamilton’s actual utility company. We got them to develop a 6-megawatt cogeneration natural gas power plant on our property right beside our facility to drop our cost per kilowatt hour down to approximately 5 cents. That’s a huge savings on that front, furthering our efforts of becoming a high-quality, low-cost organic producer.
If you’re not focused on that now, today, building the facilities to withstand margin compression when it comes, you’ll be left behind. We’re firm believers that we need to build the most efficient, the most sustainable, the most advanced, the most automated facilities out there to maintain that standard and we need to be thinking about it now, which is exactly what we’re doing.
EQ: you mentioned that you’re currently raising funding for the expansion. Prior to this round, you successfully raised $41.5 million from over 2,400 retail shareholders. The company is still private, but what is the value proposition for investors?
Brody: we’re still a private company, so that means you do have to be an accredited investor. But we’re going to go public in February, and from day one, we have always had a focus on the retail investor. Like I mentioned, the retail investor can be so many different things for us, which is why we have gone through the extra effort to make it happen. Most companies could just get funding from a few funds that can write $10 million checks each and away you go. That doesn’t provide any value for us. It’s just an empty check.
We want to take the time and try a different approach. That is what we have done from day one. We even put tough terms on it. On the first financing, we set out to raise $10 million at 50 cents per share. We said that there was going to be no warrant attached to that. There was going to be a six-month hold from the IPO date and the maximum that anyone could invest was $10,000. We thought people would say we’re nuts, but we ended up having a line out down the street. We closed on $13 million with 1,300 retail investors. That was the start of our retail-focused approached.
Our second financing was set up to raise another $10 million. We ended up closing on $28 million with an additional 1,100 subscribers at a $1.15 per share, which take us up to a total of 2,400 retail shareholders with $41.5 million. That closed last April. Now, we’ve set it up to do the same thing. We priced the financing at $1.65. We set up to raise $20 million. We had orders for over $45 million come in, so we have increased the $20 million up to $36 million. We have had so much demand from the retail investors. It’s just unique because most companies don’t open up their financing at this stage of our company to retail investors. We’re just trying to do something a little bit different. It’s definitely working, so we’re pretty excited to get this financing closed, but more so excited that we’re going to have a little over 4,000 shareholders by the time we go public in February.
EQ: What are some notable upcoming milestones and anticipated developments we should be watching for as we follow the TGOD story?
Brody: We’ve highlighted 19 press releases from now until the time when we’ve planned to become public, so there will be continual news flow from us. It shows our commitment to keeping everyone informed and being the most transparent private company out there. We are all about newsflow and moving quickly. Most of us don’t even take weekends. We’re all working 96-hour weeks. It is definitely aggressive, but we’re able to get so much done in maybe half the time than some of our competitors.
With regards to the next six to 12 months, there are just so many different things in terms of partnerships, updates on production expansion, sales numbers, and so on. There are a lot of things that we’re working on behind the scenes with different partnerships, but there are some neat ones coming likely in the next few weeks. One of the things that we’re trying to do is we want to open up our communication right now with different US brands that are building and selling quality products in the States, getting traction and looking to access international markets. We can start partnering with some of these companies early on to help them get production, not necessarily production licenses in Canada, but we can help them distribute products like edibles or vapes once it becomes legalized. So, there are a number of different things on that front.
Generally speaking, there are quite a few unique things that are going to be interesting for the investment community, and with the momentum that we’re building, we’re not going for second or third place. Let’s, put it that way.
EQ: Do you have any final takeaways or closing comments for our readers?
Brody: A lot of people are talking about legalization coming, but not a lot of people get the opportunity to actually invest in something before it goes public. We’re pretty excited to allow that opportunity, which is pretty unique for retail investors to participate in a pre-IPO company in the cannabis space.
We’ve got this very large expansion on the way, and once this current round of financing closes, we’ll have raised close to $85 million privately, which shows that we’re doing something right. We’d like to raise an additional $40 million on the IPO, which would fund the second half. Then we’ve got a plan in place with some warrants to be issued that would result in an additional $56 million coming in.
But once we’re public, we’ve got a plan in place within about 30 days to fully fund our 970,000-square foot expansion. We’ll be pushing $175 million at that point and we’ve got a plan in place to do it. Our team has previously taken two companies public and we have learned a lot in that time. Management still owns just under 50% of TGOD prior to this round in closing after buying 80% of it initially, and everyone involved in the company is still writing checks this round as well.
This is a global industry that has the potential to be the biggest economic opportunity in our lifetime. The disruptive potential for everything associated with the plant — edibles, drinks, pharma, pet care and potential cures for diseases — is staggering, and the Green Organic Dutchman will be an international reputable brand that people can trust. It’s an exciting specifically for our company and the industry as a whole.