Tweed Marijuana Inc. (TSX.V:TWD) Chairman Bruce Linton Chairman Bruce Linton outlines Tweed’s ‘first mover’ advantage, the company’s compelling business case to sell 15,000 kilograms per month of medical marijuana, and the market size going forward.

James West: Bruce why don’t you give me a quick overview, if it’s not obvious to investors, what is the value proposition to investors in buying Twee shares right now.

Bruce Linton: So Tweed became the first federally approved medical marijuana company listed on a stock exchange in North America. In the U.S., obviously you can’t be federally approved, and in Canada, there were no others prior to us and there are none currently trading. So there’s a big brand advantage, the company has come out of several gates early in terms of getting a license, getting into production, getting listed, and getting a brand that was recalled. So where we are really is at the front of the pack.

And as was announced yesterday, we’ve decided to take a $15 million bought deal financing as presented by GMP (Griffiths McBurney Partners), so we’re reasonably well capitalized which hopefully will convert into further execution and owning a major part of the market.

James West: Sure. So first mover advantage in the most profound sense of the word.

Bruce Linton: Yeah.

James West: Great. Okay so let’s talk about the numbers. I saw in your registration statement that you are licensed to produce 15,000 kilograms of marijuana per year. Is that the case?

Bruce Linton: Its an approval premised on the size and capacity of the facility. Our facility for production in that area is about 160,000 square feet.

James West: I see. And so at what price will you sell 15,000 kilograms of marijuana per year?

Bruce Linton: Well the market’s still going to define that but we model a range that can be anywhere from 7 to 9. The range of prices that we have available are from the low 4’s up to 12$ plus –

James West: And you’re talking per gram?

Bruce Linton: Per gram yes.

James West: Okay so for the case of back-of-napkin calculation should we assume a price of $8 per gram for 15,000 kilograms?

Bruce Linton: Yeah I think people are building models in that range and it’s going to be a function of supply and demand and I think you’ve seen in other jurisdictions the initial demand often exceeds supply.

James West: Okay so that is a price of about $250 per ounce of marijuana. I know on the street – and don’t ask me how I know this – but I know on the street, that you can buy marijuana in British Columbia that is of global quality shall we say, for less than $200 an ounce, and in some cases, you can grow it in a home environment for less than $100 an ounce. So now in view of the fact that 38,000 licensed users of medical marijuana in Canada have been growing it or at some level accessing for cheaper than what you’re proposing to sell it at, do you think that the federal legislation that’s mandating them to buy from producers like Tweed now, is going to cause them to give up their former sources and abide by that, or do you think there’s going to be some resistance to that?

Bruce Linton: Sure. There’s a multi-thread question. I’ve got about three threads on that one. The first is our price range is from about half of the average you’re using up to about 50% above the average. What you get on the street varies in terms of what I’ll say is the THC and the quality and there isn’t a correlation between the THC and the price. In fact, some of the stuff which we grow, which has the highest yield and the highest volume and the lowest price actually has reasonably high THC. So I think you’ll find there’s a price point down the range.

The second is that we’ve gone through the process of testing that product which you’ve described from getting on the street. It contains a number of unadvertised benefits such as pesticides – one strain had DDT on it – some with intense levels of molds and mildews – all of which, won’t be on our product.

Mainly the third thing is once you get past the fact that you probably wouldn’t ingest if you knew what was in it from any of these available on the street. With ours, if you have a prescription – a medical document – you’ll have access over the course of the years as we get fully grown out, to more than 80 strains. And they’re always the same as the last time and there’s the diversity you might choose to buy from. When it’s delivered, it’s next day, it’s free of shipping costs, and it’s lawfully in your possession. And in Canada, the thing that is maybe under-reported is the fact that the federal legislation has three or four components. One about how it gets grown in factories such as ours, and the other about how the access to getting a medical document becomes much easier, or it became much easier April 1, 2014.

But the third one is that if you’re growing six or more plants in an area you’re responsible for, they’ve set some notion of a minimum sentence of approximately six months for doing so. So I’m not saying everybody’s going to change, but I think what the government’s doing is taking a bunch of things and weaving them together. Our model however, has never been focused on people who have had the right to grow because half or more may continue to do so. But the change in the access is the big thing, and that’s why Health Canada even has said that a tenfold increase in the number of people who have a prescription or medical document is quite likely. With that perspective, really what we’re aiming at are the people – if you’ve never grown it in you house and you’ve never done all these other steps, it might seem more normal and reasonable to just get on your smart phone and order it.

James West: Okay. That’s a good answer. So at present there are 38,000 registered users giver or take. Is that accurate?

Bruce Linton: Ah yeah there’s a range of numbers we see but that’s in the range.

James West: So what is the average consumption of each of these licensed medical marijuana users per day?

Bruce Linton: Well it’s an unbelievably huge number. And so I say that in that the way that the number is arrived at was that , if you had a medical marijuana document when in the past you were allowed to grow, the amount that you were allowed to grow was driven by your prescription. And that converted into the number of plants you could have and then the average amount each plant was deemed to produce, was reasonably low. So if you take than and you work it all the way back, the average is 10 grams a day. You seemed good on the conversion from ounces to grams, but ten grams per day as an average is a heck of a lot.

James West: Yes. I happen to know that. And not from first hand experience.

Bruce Linton: But as you can imagine, if that’s your average, what’s your outlier? Forty grams a day? It’s a function of the prior method of the granting of permission that had a benefit of the average being quite high. I think more realistically if you took an average of somewhere between 1.5 and 3 grams – and that average will vary depending on which segment of the medical sector responds most rapidly. So if it’s chronic pain, say neuro pain, versus Parkinson’s, you have a different volume of prescription rate by the different types of underlying medical conditions.

James West: Alright so give me an idea – what is your projection or what is Health Canada’s projection in the rate of growth of medical marijuana users in Canada?

James West: Because we’re public now we of course rely on other people’s forecast projections. Health Canada has the number of people with medical access, and I don’t have the chart directly in front of me. But it’s available on the web – it’s a Health Canada view that you’re getting to around between 4 and 500,000 Canadians who will have medical access some decade plus or so into the future. If you look at Colorado in the period when it was medical access only, in about the first three years approximately two percent of the population gained a medical permit. And so if you take the population of Canada at 35 to 37 million, there’s some kind of reasonable correlation across those two models. Our medical system has different financial drivers for doctors that will probably cause the rate at which it grows to be a little slower than maybe a for-profit medical, but I don’t think that the initial 100 or 200,000 patients will necessarily be those where the doctor says ‘you should try this’ but perhaps where the patient says ‘I think this might work for me’.

James West: Hmm. So I guess with the growing acceptance of its presence within the medical covered, there’s going to be a lot more people step forward and say they want to try that as an alternative to medicine.

Bruce Lintoin: Yeah the focus corridor for us is in Ontario through Québec and it’s an area with approximately 10 million residing, so it’s 10 million people that are disproportionately baby boomer, sort of middle class, middle income. And who I think you’ll find generally mostly receptive to this as a method of dealing with the aging process. Perhaps more openly and comfortably than would have been the thought five or ten years ago. Because the conversation change in the last year has been dramatic as everybody would recognize, one year ago –really – this was a topic that was still whispered, and as you go forward in that year this conversation has been made into an open topic, and a year from now, I think you’ll have people at bridge games talking about someone who’s fallen ill to some form of long term challenge for which medical marijuana provided a benefit. And that’s a pretty dramatic conversation change over a couple of years.

James West: Okay. So I’ve done a quick calculation here and if we have 38,000 users using an average of ten grams per day, that’s a 138,700,000 grams per year equals 138,700 kilograms of marijuana per year just with the current licensed user base. You’re licensed for 15,000 kilograms. Do you have a strategy to grow more over time through increased licensing allowance by the government?

Bruce Linton: The license is granted based on the capacity of the secure environment in which you’re growing. Our facility that we’re starting with is 168,000 square feet on a property which has a total of about 450,000 square feet already built out. We may or may not find the other area suitable. It also has open land which would easily permit 200,000 square feet of growing space to be constructed. I think that really is the first potential tranche. I think you’ll also find that this sector has real costs of being in it that if they’re not offset by real revenue, under-capitalization is a major liability. And if you have too many participants start and they get built out but maybe they don’t get traction in the market that they’d be interested in selling. And so I think you’ll have a combination of those two factors which will mean that you’ll end up with some large-ish companies over a not too terribly distant future ‘cause the compliance costs and the upfront costs for producing the product is pretty material.

James West: So there’s going to be a consolidation phase early in the game?

Bruce Linton: Well I expect so. I’m willing to be proven wrong, but when you look at the capital costs, and you look at the operational cost before you see income – and remember; in Canada, you can not advertise – I can’t buy Google Adwords. So unless people are familiar and confident in your brand, you’re not going to have a lineup at your door to buy your product.

James West: Hmm. Interesting. Okay so again with my perhaps faulty back-of-the-napkin mathematical calculations here, I’m estimating that 15,000 kilograms is going to net you, on a very rough basis, $120 million per year.

Bruce Linton: Ah…net or gross?

James West: Oh yeah…sorry. Gross!

Bruce Linton: That doesn’t seem totally faulty no.

James West: Okay so my question to you is, what is your growing cost per gram going to be?

Bruce Linton: Well, we’re early on and we’re public, so I can’t forecast, but taking a look around the sector, you’re going to find generally that people are trying to drive the production costs down and that you’ll end up with somewhere between 10 and 20 percent after tax at the bottom line if you’re functioning well as a full production facility.

James West: Uh-huh. In the early stage…

Bruce Linton: Ya. And you know, this is early stage where so much of the focus is on the construction and making sure you’re thinking about your Opex model. But you’re also juggling the requirements for a lot of equity to be raised because the Capex is significant and often as you will find to build something very Opex responsible can be more Capex costly.

James West: Mm-hm. So then will the margins improve over time?

Bruce Linton: I can’t say yes or no because we haven’t been there but usually I think you’ll find that as you build out a bigger facility under the common platform, compliance for 250,000 square feet isn’t much more than compliance for 160,000 square feet, for example. You still have to have a lab, you still have to have a QA environment, etc. But you don’t need three of them. And so we think we’ll get economies of scale. We’re seeing them already in terms of 160,000 whereas some people are trying to do it in 20,000 square feet.

James West: Okay so then is your product organic?

Bruce Linton: It is in the sense that under the federal laws you’re not allowed to apply any form of pesticides or herbicides. Everything that’s produced is produced with the expectation that it’s for human consumption. Where I think you’ll find if you did a survey or review of grow ops that have really high humidity, and are selling without the testing, the amount of mold and mildew that occurs in the product is minimized by using a lot of fungicides, pesticides and other things that we just are prohibited from using.

James West: Okay well that’s interesting Bruce. So I’m not a licensed user. Is it possible for me to try your product through any other process?

Bruce Linton: That is the only method. The only path is for people to get a medical document set from their physician. And then they will choose – if they chose us – to give us the forms. We go through a process of confirming that doctor is a doctor, and what your address is etc., and you then can order from us. You can pay – because in Canada the banks are allowed to – you can pay with multiple credit card types, you can pay with direct deposit – the options for payment are pretty reasonable and available.

James West: Okay so let’s assume that I’m infirm and immobile, is it possible to have your product delivered to my home if I am a licensed user?

Bruce Linton: Yes in fact it’s mandatory! We deliver to your home in a courier package. So in Canada there is not retailing. It arrives at your door – the next day typically – in a courier or Canada Post package. And it looks just like any package. Inside is where the mark and serial is and so there’s no odour that can transmit in the process or anything of that nature.

James West: Okay well – it’s making me want to get sick Bruce. But I’m not going to go to that extent. And finally, you raised $15 million in a bought deal through GMP: How far is that going to get you through your Capex and Opex requirements, until you need to go back to the market and raise some more?

Bruce Linton: For the site we have, we don’t anticipate any need to return to the market.

James West: So that’s the extent of your capital raise from the markets at this point?

Bruce Linton: Yeah unless we add more locations. I think what we have now is an organization which is – we hope and expect – sufficiently capitalized to really focus now on the operationalizing of the business because when you can quit juggling the continuous necessity to raise capital it really can bring a lot more focus to the production environment.

James West: Well Bruce, I’ve got to thank you. I must say I’m surprised at how well you articulate the answers, how well you know the business – For some reason, I was expecting to be talking to a stoner today.

Bruce Linton: Maybe I’m talking to one, who knows?!