Supreme Pharmaceuticals Inc ( CVE:FIRE ) CEO John Fowler discusses their deals that lead to revenue including deals with Aurora Cannabis and Emerald Health Therapeutics. Supreme believes the wholesale model is one of the best retail strategies that lead to success.

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TRANSCRIPT:

James West: Hey John, welcome back.

John Fowler: Thanks for having me, James. Always a pleasure to be here.

James West: John, let’s start with the update: what’s new at Supreme?

John Fowler: So our biggest announcement over the last few months has been that we’ve entered revenue, and we’ve had a big expansion in our production footprint. So in September we announced $1.5 million of revenue generated through sales to Aurora Cannabis and to Emerald out in BC, and as well, last week, we were pleased to announce that we’ve added 30,000 square feet of approved cultivation space, which quadruples our annual output.

James West: Okay, great. So you’re selling on the wholesale model?

John Fowler: Correct. So we’ve always taken the position that leading retail brands generally tend to be wholesalers. They tend not on the point of sale. And we looked at the industry and we saw a lot of great LP retailers and a lot of great retailers in Canada that want to get in: Shoppers Drug Mart, Couche-Tard, things like that.

We also expected on the recreational side, we’d see non-LP retailers such as the CCBO here in Ontario, and other provincial sellers. So we’ve always positioned ourselves as building a strong retail brand, where we’d work with retail partners to access the end consumer.

James West: Okay. So do you see Supreme being a supplier to the LCBO under the recreational Act?

John Fowler: Absolutely. So our positioning is to grow the best cannabis we can, provide something that we believe the Canadian consumer is going to want, whether that’s a medical product or a recreational product in terms of the dried flower or the cannabis bud, and look to put that to the best retailers we can in medical or recreational. We’re going to get three important things: we’re going to give the best pricing we can, we’re going to give the best customers service in terms of how our end consumer is interacting with our brand, and that all ties in with getting the best brand presentment.

Who really is going to take seven acres and share it with the consumer in the best way?

James West: So, in the case of Aurora, are they selling Supreme marijuana branded as Supreme or Seven Acres?

John Fowler: Correct. So everything that we sell to Aurora, it says Aurora on the front of the label, but it has a producer’s mark. So given the regulations in medical, it’s much easier for us to use a producer’s mark, meaning that every package that goes out the door with Aurora, with Emerald or any other LP will say ‘Proudly sun-grown by Seven Acres’. What that means is, the consumer can have transparency in terms of where the product is coming from and in terms of the supply chain and the QA and all these things that went into producing the cannabis.

James West: Sure, okay. So you say proudly sun-grown. Does that mean that you’re embracing the difference between greenhouse marijuana versus enclosed-space marijuana?

John Fowler: We’re actually bridging the gap, I would say, more than embracing the difference. I think the facility that we built in Carderilly (phon) [0:02:48] is leading and innovative, and really is unique here in Canada. What it does is, it combines the best practices of indoor cultivation with the power of the sun. we use the greenhouse, actually, to increase our quality, using the full-spectrum light to supplement the artificial lighting and the mechanical cooling, which we believe gives us the best cannabis product at the end, which we can put out into the highest possible price point. We don’t do it just as a way to try to save a few pennies on our cost per gram.

James West: Okay. So what’s the total growing footprint now of Supreme?

John Fowler: Currently, we’re cultivating a little over 40,000 square feet, and that puts us on a run rate of about 20-25 million per year, given where we project wholesale pricing.

James West: Okay. And your stated admission has sort of been to reach the seven acres under cultivation mark; how far away are you from that?

John Fowler: So first, it’s actually eight acres. We thought seven acres sounded better for the brand –

James West: Set the bar a little lower.

John Fowler: But in terms of getting out there for about 350,000 square feet of cultivation, we’re well underway. We’ve taken our time over the last year to really plan the project and look at the infrastructure spend, and look at the operations: make sure this is a building that can generate revenue and value for our shareholders for decades to come. And we’re looking at completing the project somewhere in the middle to second half of 2019.

James West: How much does it cost to build an acre of greenhouse?

John Fowler: So we don’t really divide down in terms of the exact per-acre build. In terms of the full-out cost of building our greenhouse, that’s something that we’re looking to really define with our cost consultants. One thing that we’re looking for moving forward is, we think in the long run, this type of infrastructure is more likely to be built by debt. So we’re trying to build a costing structure working with great consultants like Finnegan Marshall, to build a Class B and eventually Class A budget, that we can take out the debt lenders when we look to build multiple of these facilities in the future, whether that’s here domestically in Canada, or abroad into emerging medical jurisdictions.

James West: Okay. So how do you anticipate revenue and, more importantly, net revenue, to ramp in the next 12-24 months?

John Fowler: So over the next 12 months, that’s where we’re very excited. So we have our current rooms; the revenue from those rooms that were just approved last week by Health Canada, that revenue hits in about six months. That revenue run rate takes us to about $5 million per quarter. That’s where we’re seeing some of the leading companies, like Aphria and Aurora, as selling at today. And without getting into too much details ahead of reporting it, because we are a wholesaler, we have a lot less costs in terms of acquiring the sale and executing the sale. At a very high level, we sell a big bit of cannabis, it goes out in bulk, shipped on a single courier. We don’t have to go through the expense of putting it into the small containers, acquiring the retail patients, or providing the customer service for those retail patients.

James West: I see. So the wholesale model actually gives you improvements in the whole cost structure?

John Fowler: That’s certainly where we went after. Given our time in the market, we saw a rapidly increasing cost to acquire patients; we also saw, obviously, a shortage of supply to service those patients. We’ve got a great opportunity not only to make a great business for ourselves, but to help our LP partners meet their own business objectives and really be supportive of industry. That allows us to essentially have no competitor in the space, and it makes us friendly with all the LPs in the industry, which is great, and really, every time we see a new license come on board, or a new sales license, that’s a new potential client rather than a new potential competitor.

James West: How do you see the interplay between the unlicensed market and the licensed market playing out post-recreationally once the provinces step up their enforcement against the unregulated market, versus the regulated market’s determination to remain viable and in business?

John Fowler: So I think there’s always been an economic issue. I think 80 years of failed prohibition shows if there is a bid, so to speak, for cannabis, somebody will fill that. And until the licensed producers and the legal industry can fill all of the demand for cannabis in Canada, we’re always going to have a black market. I think we need to accept that as being true, the same way we need to accept that the Canadians already use cannabis. It’s not a big secret that there’s millions of users out there already using the stuff.

In terms of how we see moving forward, it’s important that we find a niche for ourselves, and we’ve identified the higher-end premium market using our unique sun-grown cannabis that I don’t think exists currently in the legal space, but I also don’t think exists in the illicit space, either. And by having that market, we’re confident that we can find consumers for the 50 million grams a year we plan to be producing in 2020.

In terms of how the enforcement as you said go, I hope we don’t choose as a country or as a province to waste judicial resources on closing stores, putting people in jail – it’s just ineffective. I think those resources are better spent helping LPs grow, helping our product offerings improve, our breadth of product improve, and let’s win an economic war, not a criminal one.

James West: All right, well said! Well, thanks for joining us, John. We’ll catch up with you in another quarter’s time and see how you’re doing.

John Fowler: My pleasure. Thanks for having me.