December 6, 2018

Supreme Cannabis Company Inc (CVE:FIRE) President on $100M Bought Deal

Midas Letter
Midas Letter
Supreme Cannabis Company Inc (CVE:FIRE) President on $100M Bought Deal

Supreme Cannabis Company Inc (CVE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1) President John Fowler discusses the company’s recently completed $100 million bought deal with GMP Securities L.P. and BMO Capital Markets. Fowler also talks about the company’s partnership with Medigrow Lesotho, an operation with GMP certification and an annual production capacity of 40,000 litres of extracts. Medigrow Lesotho’s GMP certification provides Supreme with the opportunity to expand into additional international markets. Fowler emphasizes the company’s commitment to producing premium products and notes Supreme Cannabis’ Jean Guy strain, the most expensive SKU available on Alberta’s provincial online retailer, sold out. While in the near term Supreme’s medical channels are more lucrative, Fowler expects favourable margins in both spaces.


James West:   Welcome back. My guest this segment is John Fowler, President and Director of Supreme Cannabis Company, trading on the TSX Venture under the symbol FIRE! John, welcome back.

John Fowler:  James, always a pleasure to be here.

[stock_chart symbol=”FIRE:TSV” align=”left” range=”5D”]

James West:   Yeah. So lots going on in the world of Supreme, and foremost amongst them is, you’re no longer the CEO?

John Fowler:  Absolutely. So we decided to amend our roles a couple months ago, so now that I’ve been running the business together for almost two years now, and really seeing how the market was evolving allowed us to play to our strengths. It allowed me to focus on our Canadian and international operational rollout, really building big, long-term businesses, but at the same time, it allows us to give a little more attention to the market and start looking at the leading edge as we look to expand our business from Canada into international markets.

James West:   Okay. International markets – my ears perked up. Where are you going?

John Fowler:  Well, as you know, we were the first LP into Lesotho. Where Nav (CEO Navdeep Dhaliwal)is right now, so that’s our MediGrow investment. We believe MediGrow is on pace to be one of the largest producers in the world of high-quality GMP oil, and it’s that GMP certification that is key, because we can take that product and bring it into markets like the European Union and others to create medical products for consumer demand there.

James West:   Sure. So what is the size of the growing operations in Lesotho?

John Fowler:  So MediGrow is a beautiful spot, so it’s up on top of the mountain, pristine environment, no pesticides anywhere near, so really a great place to grow lots of cannabis. We actually bought one of the largest C02 extractors for the cannabis industry and put it on site; we expect that’ll be producing up to as many as 40,000 litres per year once it’s fully commercialized.

James West:   40,000 litres of extract?

John Fowler:  Correct.

James West:   Wow. That’s impressive. Okay, so what’s going on at home here in Ontario?

John Fowler:  So the big one for us is obviously the recreational launch for our 7ACRES brand. I think, you know, we’ve heard brands being talked about probably ad nauseum for the last twelve months, and we took a different approach. We tried to build our brand organically, really identify our core consumer – the cannabis enthusiast – a consumer that we believe is going to drive 70 or 80 percent of the cannabis spend in this country.  These are your daily and weekly consumers.

And we really understood what drives them, and that’s the smell, the look and the flavour of their cannabis. So it’s not effects-driven, it’s not marketing gimmicks, it’s really great cannabis, pitched authentically to the consumer. And I think if you or your viewers take a moment to look at the social media feedback, it’s quite clear that we can say we’re succeeding our goal to be Canada’s leading premium brand of dried flower, and the response from PEI to British Columbia has really just been phenomenal to the product.

James West:   Oh, great. Okay, so are you selling it into the government-run stores in the provinces where that’s applicable?

John Fowler:  Absolutely. So we’re listed in six Canadian provinces, and we’re currently working to supply the demand there. You know, as everyone knows, demand is well ahead of supply, and I think that’s something that, as investors and as Canadians, we should be excited about. I think somehow it’s played as a bad thing in the media, but for companies like ours, knowing that the massive amount of demand is there – demand that we saw. You know, when we first met, we were the ones that 50,000 kilos in one facility was considered huge; we saw the size of demand, I think, before many companies did.

We saw the demand for quality before many did. We built a brand specifically for that, and as a result, we’re selling some of the most expensive cannabis in the country. Our sell-through rates are very quick, and our feedback is strong. What that means is, we can build a real, long-term brand for premium, and that drives our economic model.

James West:   Sure. So you’re selling on the retail side, you’re selling to Tilray – really you’ve got sort of every corner covered. What’s the big catalyst coming up in 2019 for Supreme?

John Fowler:  So I think the big one for us is starting to look at adding the rec revenue. So our last reported quarter, we crossed 5 million; that was an important milestone for us. I think revenue growth has to be a prime consideration for any consumer goods companies, meaning, all cannabis companies. And if you look, we’re really punching above our weight. You know, if you look at where that 5 million puts us, we’re well ahead of some peers with greater market caps, and we’re quickly catching up. You know, we’re only four or five times behind some of the market leaders, even though they might have 10 to 20 times the market cap.

So I think as we continue to execute on that story, it’s going to be quite exciting. And then for us, the next one is products: taking that quality flower and starting to look at things like vape pens, things like oils, and as you saw recently, we announced our deal with MediPharm Labs.

James West:   Interesting. So two days after legalization, you announced that you’d done a $100 million bought deal, which is certainly punching above your weight, one would argue. Who is the sponsor of that?

John Fowler:  We worked with GMP and Bank of Montreal.

James West:   Oh, okay, fantastic. So you’re well cashed up for all of your hopes and dreams in 2019?

John Fowler:  I’d say they’re a little more solid than hopes and dreams, but we do have a lot of ambitions ahead of us, and I think, you know, our first goal was to create Canada’s top premium brand. And premium is important to us, because premium is a far sexier economic model; it’s better margins, better price point. You’re less focused on cost and you’re more focused on driving your revenue point up, which we’ve done successfully.

Now we can take what we’ve learned. We’ve learned how to build great facilities, we’ve learned how to build strong management teams, and we’ve learned how to build brands, and now we can start applying that to downstream products in Canada or the downstream products we plan to create with our partners, MediGrow, in Lesotho.

James West:   Sure. So as a premium cannabis supplier, do you realize a premium price in the retail marketplace?

John Fowler:  Absolutely. So I’ll give you an example: our flagship strain, Jean Guy, it’s a –

James West:   Jean Guy?

John Fowler:  Exactly. An homage to an old French strain that we developed internally, and in a province like Alberta, that went in as the most expensive 3.5 gram sku in the province, and I think it was a 10 to 15 percent premium to the next most expensive sku, and we sold out on the Alberta web store in, I think, about 48 hours.

James West:   Really.

John Fowler:  It shows that demand is there, it shows consumers are wiling to pay for quality, and our goal is, as much as you know, we want to enjoy economies of scale and manage our costs going forward, our real goal and our real drive with the 7ACRES brand is to look at, if Jean Guy can sell for X, how can we develop a better strain and a better commercialization strategy to increase that price point over time? It’s a strategy that has worked with epic success for the US wine industry: taking wine consumers and over the course of years and decades, moving them up the ladder price point from, you know, the box and bag wines when you’re in college, you know, up to some really nice bottles of wine when you’re a little later on in your years.

James West:   Yeah, that’s great. So it doesn’t cost more to grow premium cannabis than it does average cannabis, does it?

John Fowler:  I disagree. We actually run a lot of cost to get there; our return on investment is good. So our increase in sales price is greater than our increase in cost, but we do things. For example, we run a lot of labour to manage the plants and inspect the plants when they’re growing; you’ve been up there, you see how we clean them up and get the uniform canopy. It’s similar to if you grow grapes for good wine; to make really great wine, you actually have to spend money to manage your vines, reduce the amount of fruit you grow per acre, but the fruit you get is better, it makes a better wine, better economic model. And that is true of how we deal with our plants, it’s true of our two-week, whole plant dry, it’s true of our hand polishing process, and even when it comes to bottling, we actually fill every bottle by hand to make sure the consumer gets the right assortment of large and small flowers so they get the right experience.

You add all that up, certainly there are costs; but when you see a price point like Jean Guy in the Alberta market, and the sell-through, you know that’s money well spent.

James West:   Sure. So in Lesotho, does the same sort of approach to growing quality or premium calibre cannabis apply?

John Fowler:  So obviously the economic model there is a little bit different, but it’s still a premium model. So why we chose Lesotho is, we think they can grow cannabis there better than some of the other, call them low-cost jurisdictions. And we think that some of the elements of the plants we’re growing, the location we’re growing in, and that team, can drive premium brands downstream as we look to bring that product to market.

James West:   Okay.

John Fowler:  We have that premiumization in our blood, and it’s something that whether it’s recreational products in Canada or wellness products for the world, we’re always going to look to find that premium revenue source.

James West:   Sure. How many kilograms do you expect to grow in 2019?

John Fowler:  Quite a lot.

James West:   Yeah? That’s it, quite a lot? [laughter] More than – so I guess you just haven’t had a chance to sit down and do the numbers.

John Fowler:  Absolutely. So we’re ramping up, so what we are excited bout the 7ACRES flowering rooms on pace to be complete construction by the end of the year, and when you build in the licensing time, the ramp-up we’re looking for that full run rate of 50,000 kilos in the middle of 2019.

James West:   Oh, okay.

John Fowler:  So we are quite excited; we’re building, obviously we’re getting started as well on our expansion project in Lot 16 to bring an even higher quality product to market – again, chasing a higher price point – and then we’re excited to continue to work with our partners in MediGrow to bring that product to market as well.

James West:   In terms of the Canadian marketplace, where the government is managing the distribution of cannabis, they are continuously out of supply, and the LPs seem to be out of supply, too. Is it really the case that all of the government-sponsored distribution channels are consuming all of the cannabis? Or is it more that the distribution infrastructure is not sufficiently built out yet to take all of the cannabis from all of the LPs?

John Fowler:  So the supply chain as a whole was never in a position to supply all of the Canadian demand. I’ve been saying that consistently for two or three years, now. Remember, we have up to a $10 billion domestic market, and if you add up the revenue of every LP combined, let’s say, for the last year, we’re a couple orders of magnitude short of that.

So we knew under-supply would be the nature of the game for the near term. We’ve built our strategy to lever that to accelerate the growth of our premium brand, but for us, it’s about the one-on-one relationship with the provinces: making sure they get what we promised them. But also ensuring we work with great companies like Tilray on the medical channels to keep the Canadian medical program supplied as well. So that diversification of our revenue also allows us to work both channels, and, you know, do our part to start getting Canada to a more fully supplied environment.

James West:   Sure. Is the margin from the medical channel more, less or equal to the rec channel?

John Fowler:  In the near term, our medical margins are preferable; we get some of the highest price point in Canada for our B2B, especially on our spot sales. And that doesn’t come with the selling costs of packaging and marketing, right? That goes through to the LP retailer.

But over time, we think that we’re going to have very favourable margins on both. Again, it comes down to that premium pricing strategy, that ability to increase our price per gram quarter by quarter. So if you look at our last few reported quarters, I think we’ve been one of the best in terms of revenue growth, and I think that’s exciting, but if you dig a little deeper, you’re seeing increasing price point per gram, as well.

James West:   Interesting. Well, John, it sounds like you’re knocking it out of the park as usual. Great update – we’ll love to keep up with what’s going on. Thanks for joining me today.

John Fowler:  My pleasure. Looking forward to seeing you again soon.

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