VIDEO: The Supreme Cannabis Company Inc (CVE:FIRE) Tilray (NASDAQ:TLRY) Supply Agreement

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Midas Letter
VIDEO: The Supreme Cannabis Company Inc (CVE:FIRE) Tilray (NASDAQ:TLRY) Supply Agreement
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The Supreme Cannabis Company Inc (CVE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1) President John Fowler talks about Supreme’s recent $2 million premium supply deal with Tilray Inc (NASDAQ:TLRY) (FRA:2HQ). Fowler believes there’s a small amount of high-end capacity and that Supreme’s ability to produce high-quality premium dried flower at scale for its Seven Acres brand positions the company favourably. Fowler explains that Supreme invested in Medigrow, the largest active cultivator in Lesotho, because it believes Medigrow will be one of the largest oil producers in the world. Supreme Cannabis is not focused on retail operations and as such, it’s easier for the company to scale globally. Supreme has prioritized product availability ahead of Canada’s October 17th legalization date in hopes of securing consumer brand loyalty.

Transcript:

James West:   Oh, hello. Guess what? John Fowler is here. He’s the CEO of The Supreme Cannabis Company, and Supreme Cannabis has been on FIRE lately! John, how are you doing?

John Fowler:  Very good, thanks for having me again.

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James West:   Yeah, of course. It’s a pleasure, it’s a pleasure. So big news for you guys is the signing of a cannabis supply agreement with Tilray.

John Fowler:  Absolutely.

James West:   Always nice to have a partnership with a $10 billion company. And so what – I mean, they’re going to start taking $2 million worth of cannabis off of your hands?

John Fowler:  Absolutely. For us, working with Tilray, you know, market success aside, they’re one of the oldest licensed producers; they’re known for quality, and we always look for quality-minded retailers to work with. It was great working with their team, and vetting the quality of the Seven Acres product and getting that supply deal in place.

James West:   So, does Tilray actually have a supply issue, and that’s why they’re signing deals with various suppliers?

John Fowler:  I wouldn’t say that, I think that their demand is growing very quickly, and like many, when you have a good brand for quality, as Tilray does, patients, recreational consumers and international opportunities come your way, and as one of very few companies in the country to produce good flower, Seven Acres is a very unique supply partner for larger companies like Tilray.

James West:   I find it interesting that Tilray, rather than electing to build more capacity itself, and operate it, is looking to acquire supply from existing operations. Does that, in your mind, sort of represent a shift in the industry where it’s like, okay, collectively we all agree we’ve got enough greenhouse capacity?

John Fowler:  So I think we have a lot of biomass capacity; that’s not where Seven Acres plays. I think we have a very small amount of high-end capacity; that capacity takes time to come online, so I think diversifying a bit, I certainly think, is a smart move by Tilray, and obviously they know what they’re doing. But we did the same thing when we invested in Medigrow in Lesotho, we didn’t own the asset outright; we were looking to get access to that high-quality, GMP-certified oil. So I think companies are smart to diversify in a rational way.

James West:   And that agreement with Lesotho, when do you start to receive supply from there?

John Fowler:  So we’re still working through that. So they are cultivating; they’re the largest active cultivator in the country there. We’re working through our GMP process; we purchased an insulin extractor there for C02 extraction that I think is big enough it could probably extract you in the tube. So we’re excited to bring that to market, and we think that asset is going to be one of the largest oil producers in the world.

James West:   Really? Lesotho, so how many acres do they have under cultivation, and is it outdoor?

John Fowler:  So it’s greenhouse. It’s at the top of a mountain, so we look for high, hot and dry as the primary place you want to grow; this is one of the best geographies I’ve ever seen in the world for cultivating, and it’s the kind of business where, to be honest, we don’t measure in acres; we can expand as we need to. We measure in the number of litres of oil we’re going to get out, and we’re very excited to finish up those forecasts and get that to market.

James West:   So the sort of momentum in the cannabis space towards larger-scale grows, and now apparently we’re going to start growing cannabis outside in Canada…I mean, is that ever going to be a source of premium dried flower at the ultra-premium level?

John Fowler:  So I would say outdoor flower, no. Outdoor flower is an ingredient for biomass, so I think the outdoor industry will put the most pressure on the low-cost greenhouse guys that are competing in mostly the same space. People talk a lot about, you know, the myth of the Northern California cannabis; well, the reality is, a lot of that isn’t consumed as dried flower in the last couple of decades.

So we’re very comfortable with our Seven Acres investment: premium dried flower for the consumer market. We’re expanding that through our Lot 16 project out on site, and we’ll continue to invest in high-quality cannabis at scale. That’s our competitive advantage. We’ve spend the last five years developing that technology and management systems to be able to do that, and I think there’s very few companies globally that can produce that level of quality on our scale.

James West:   Okay. I’m not familiar with this Lot 17, did you say?

John Fowler:  Lot 16. So it’s the adjacent property to our facility at Seven Acres.

James West:   Oh, okay.

John Fowler:  We acquired the land at the end of last year, and announced the project. And essentially, this is going to take Seven Acres and even take it up another notch, go indoor, allow us to do longer flowering strains, which consumers want. What that mean for investors is, similar cost of goods but better price points as we go forward – even better than what we’ve achieved with Seven Acres.

James West:   Interesting. So are you still committed to the idea of just staying in the wholesale supply to existing brands space?

John Fowler:  So what we like about our model is, it’s globally scalable. So we never want to be the point of retail; we want to work with great retailers, whether that’s a public entity like the Nova Scotia government, where we’re listed, whether that’s a hybrid model like BC or Ontario or Alberta, where there’s a bit of public and private to go, or whether that’s a pharmacy in Germany or wherever else the business will take us. That model allows us to focus on what we do best, which is making great flower; it allows us to make products from that. So I think investors are quickly going to learn that great products are made from great cannabis, and garbage in produces garbage out.

And because we’re not focused on retail, it’s going to be much easier for us to scale globally.

James West:   Somebody just informally observing the market would likely be a little bit critical of the fact that Supreme really hasn’t caught the wave that has taken a lot of these cannabis companies, some would say with lesser operations, you haven’t been taken into the $1 billion, $2 billion range yet. So this is why I’m constantly watching Supreme, because it strikes me that it’s just a matter of time till the light bulb goes on in somebody’s head and they start buying it.

John Fowler:  Yeah, I certainly think what we’ve done as a company is, we spent the last five years building Seven Acres. And I think we’ve built the best cannabis asset in the country, if not globally in terms of what we said we would do, which is high quality cannabis at scale. We’re going to take that expertise, and as we move forward, as we look to the international markets through Medigrow, as we start assessing the product market here in Canada, we have the expertise in Seven Acres, but we also have that quality product for the Canadian market. So we’ve got an exciting few months ahead.

James West:   Sure. In this deal with Tilray, if they bought $2 million worth of cannabis off you, how much of that would be gross margin?

John Fowler:  We haven’t disclosed that type of details, but I encourage investors to look at our next quarter.

James West:   Okay. And it’ll be visible there?

John Fowler:  Absolutely. But what I can say is, we’ve always prioritized price. You know, I think this is a business where you sell goods and you have to make money selling those goods; you can’t only make your money selling stock. So for us, it’s been very important to get premium price for our premium product. To me, the only real definition of a premium brand is being able to get a premium price, and if you can’t do that, then you’re not in the premium category. And that’s where we play, and that’s where some of the greatest companies in the world have been built in those premium categories. And we’re excited to take that for dried flower in Canada, we’re excited to look at that internationally, and we’re excited to look at that for other products.

James West:   So, will the cannabis sold through Tilray locations be branded as Supreme Cannabis?

John Fowler:  So the cannabis sold to Tilray locations will be medical only, under Tilray’s brands. You know, they have some strong brand partnerships, so we made an agreement that they would be able to put it out that way, and they can put that out into the international market as well.

James West:   So, what percentage of your annual capacity right now does that $2 million represent?

John Fowler:  That’s a tiny portion. So you’ve seen we’ve got a lot of capacity approved over the summer; I’m pretty sure we’re one of the fastest-scaling licensed producers since we’ve gotten our licensing. So we’re at a run rate of about 12,000 or 13,000 kilos per year annualized; we intend to hit the 50,000 kilo run rate pretty quickly. Our flowering rooms are on pace to be completed by the end of this calendar, so 2 million really is just a drop in the bucket.

James West:   Interesting. Okay, and so you’ve also secured supply agreements with Nova Scotia and Prince Edward Island?

John Fowler:  Absolutely.

James West:   Is that as a wholesaler to existing retail brands?

John Fowler:  So this is how rec is going to work across the country, is, in every province with the exception of Saskatchewan, you sell to some sort of government wholesaler that then sells to the retailer – either government-owned retail, private retail, or hybrid. So our strategy, we called it ‘first in, wins’. We felt it was important to be on those shelves Day One, because that’s going to be our foot in the door to sell more skus over time. So we are listed coast to coast, from British Columbia to PEI, and we’re one of, I believe, only five companies that are in more than six provinces. I think we may have added CannTrust to that list yesterday, they had a great day, but you know, we’re sitting in a group with Canopy, we’re sitting in a group with CannTrust, we’re sitting in a group with Tilray, we’re sitting in a group with Aphria, you know, we’re sitting with the biggest cannabis companies in the country, and distribution is going to drive revenue – not funded capacity.

James West:   Sure. So that’s – but that interests me. So that’s going to be Supreme branded cannabis, then?

John Fowler:  That’ll be our Seven Acres brand, absolutely.

James West:   Okay. So that’s, I mean, that’s one of the things that I think the market misses, is that yes, you are a wholesaler, but you also are a retailer at the provincial level.

John Fowler:  Correct, and that’s where we’ve always tried to clarify. We’ve intended Seven Acres to be a retail brand, but not the retailer. So if you look around Canada, there are many brands that are sold in this country that have been around for decades. If you look at retailers, there’s a lot fewer, and actually, retail cannabis size is one of the most challenging industries in this country. You look at retailers that have not had success, whether that’s Target or others, and I think that cannabis retail today is a bit of a blue sky for some, but the real money is going to be made from the brands producing a great product and providing a great consumer experience. Because at the end of the day, consumers are going to decide who wins and loses in this industry.

James West:   Okay, so as soon as it is legally possible, we’re launching the Midas Letter store online. Can I buy cannabis from Supreme and have it white-labeled as Midas Letter Brands?

John Fowler:  Well, to start, I hope you’re getting a license for that and you’re not going –

James West:   No, no, we’re going to do it legally! Of course, we’re going to get a license. But that’s just sort of an idea at this point, we haven’t really moved forward with it. But I’m just curious, is that something that somebody could do who had a retail presence and a distribution channel, could they white-label some cannabis?

John Fowler:  So, our demand is so far ahead of our ability to supply over the next few quarters, and quite frankly, beyond that – we’re not white labeling product in the rec market. What you can do, if properly licensed, I’d love to see Seven Acres in the Midas Letter Store, and that could be a great magnet to bring people onto your platform, and then you can sell someone else’s white label product.

James West:   Okay, interesting. John, that’s a very interesting update as per usual. Thanks very much for joining me today.

John Fowler:  Always a pleasure. Thanks for having me.

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