Supreme Cannabis Company Inc (CVE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1) CEO John Fowler discusses the company’s latest supply agreement with the Manitoba Liquor Corporation and their plan to use their consumer brand, 7ACRES, to cultivate quality cannabis on commercial scale. Supreme Cannabis’ position in relation to their competitors and their larger product strategies, including premium flowers and concentrates for the recreational market, are outlined.

TRANSCRIPT:

James West: Hey, welcome back to Midas Letter Live. My guest in this segment is John Fowler; he’s the CEO of the Supreme Cannabis Company. John, thanks for joining me again.

John Fowler: As always, happy to be here.

James West: John, I saw you on the stage of Moses Znaimer’s Idea City recently, and I was interested to hear how that went for you.

John Fowler: It was great. So we were invited to the Idea City event, and wanted to bring, I think, a unique perspective on legalization. And the whole point of the talk was, legalization as a political event: hugely successful, October 17th stores will open, but unless the industry does better to produce the quality of products the consumers want, as a consumer change and as a long-term event, legalization risks failure.

James West: How could it possibly fail?

John Fowler: Well, if you use an analogy, in Canada, we essentially have a legal alcohol shortage. So, picture all the LCBO shelves, nothing in them.

James West: Found a shortage. [laughter]

John Fowler: As an industry, we’re primarily responding with low-end good, so, essentially, the malt liquor of the alcohol world. And I think like alcohol, we need a range of products because there’s a range of consumers.

James West: Right.

John Fowler: Our target consumer, we call the cannabis enthusiast, not only is a heavy use consumer, consuming weekly or more; they’re spending far more than the average per month on cannabis, but they’re also spending a lot per gram on cannabis because, quite frankly, they want the good stuff.

James West: Or they like to be high all the time.

John Fowler: Something like that.

James West: Interesting. Recently you had announced that you have a supply agreement with Manitoba Liquor Corporation, which I found intriguing because my understanding was that you were always going to be a wholesaler to other brands, but now you’re more of a branded consumer-facing product yourself?

John Fowler: So to date, we’ve always wanted to be one step away from retail. We think retail, whether it’s online with medical, or brick and mortar for recreational, is a challenging business. It’s a business that few are successful at, and it’s not where our expertise lies. We believe we can make great brand around our proprietary flower, we can make a great brand around our downstream product from that flower, and we can work with great retailers. So retailers in the great province of Manitoba, and elsewhere nationwide as we continue to succeed with listings.

James West: Okay. So is this product going to be branded as Manitoba Liquor Store Marijuana, or is it going to be branded Supreme?

John Fowler: No, this will be Seven Acres, so that’s our consumer brand, our entity out in Kincardine.

James West: Seven Acres.

John Fowler: So when you walk in, you’ll see a beautiful table like this, sniff jars generally across the country, so it allows our aroma, we think some of the best-smelling cannabis in the market, to entice the consumer right away. They can smell, they can look, they can purchase, and when they take home, they’re going to take home a Seven Acres branded container.

James West: Wow, that sounds fantastic. So the rollout of the rules October 17, 2018: is that – you mentioned earlier before the segment started that was more or less what you were expecting to happen.

John Fowler: Yeah, so I think it’s easy to underestimate the complexity of doing what Canada is doing, as the first G7 country to legalize and create a national market, you know, 10 provinces playing in that market…there’s a lot of laws that need to be passed and regulations, if you think Federal, provincial and municipal, there’s businesses that need to be opened. So I think October gives the industry enough time to get ready and put our best foot forward as we launch to, you know, four or more million Canadian consumers come October 17th.

James West: Okay. Your strategy going forward: I’m going to refer to the chart here, because of all of the ACMPR earliest ones, probably Supreme Pharmaceutical is one of the few ones who has not yet sort of soared into the billion-dollar capitalization range. One might argue that this represents an opportunity for investors because the market hasn’t properly valued the company; others might argue that this is the valuation you deserve. What would you say to that?

John Fowler: Obviously we’re looking at the former on that. You know, for us, I think we’ve been successful on a number of fronts. Our initial business plan was to launch Seven Acres as a premium brand for high-quality flower; we succeeded in that. I put our team and our facility on par with any grow I’ve been to, whether that’s the United States, Europe or elsewhere in Canada. We validated the value of our brand through preferential pricing, so our wholesale pricing has been $6.00 or more, and we’re very excited when we’re in a position to announce what our recreational pricing is going to be.

All that ties into, you know, Seven Acres, I believe, is one of Canada’s leading brands today. As we move forward, I think that where we’ll be excited to unveil our strategy is how we’re looking at proprietary products, flower being the first one, then looking at concentrates and other downstream products as well.

James West: Okay. What are the big catalysts in 2018 besides the obvious October 17th, that are going to be representative of adding shareholder value to the whole value proposition?

John Fowler: That’s why I think the big one is scale. I think scale is a big risk in this industry; all licensed producers are moving very quickly on this front. I think we’re doing a better job than most maintaining our quality as we scale. So we announced recently, all of our flowering rooms will be complete by the end of this calendar year, and over the next calendar year we’ll hit that full run rate of 50 million grams per year.

James West: Wow.

John Fowler: The second catalyst is going to be pricing. So when we’re in a position to compare our pricing versus our peers, we expect it to be favourable, and I think we’ll stop treating a square foot as a square foot and a kilo as a kilo, and start looking at margin on a sku by sku basis.

And the third one that’s exciting to us is really unveiling our larger strategy about downstream products for the recreational market, you know, building margin, building consumer loyalty, and the hint I’ll give you is, when you look at the US, 70 percent of the market is made by two categories: dried flower and concentrates, and you can expect Supreme and its brands to be a leader in both.

James West: Okay. So you previously focused on the idea that premium dried flower would outstrip demand for the extracts in your particular market, and do you still feel that – you sort of seem to have modified that message a bit by including extracts now, or is that something that’s always been part of the message?

John Fowler: So we draw a hard line between what we call concentrates and what we call extracts. So concentrates, your shatter, wax, products like that, they’re a representation of the flower; in essence, you need really good dried flower to make high-end concentrates, that’s what’s driving sku sales in the US, and that’s what’s driving margin.

On the other side of that you have your extract products, which are really molecule-based. You know, 10 milligrams of THC or CBD; the quality of the flower doesn’t matter. Internally, we call them the hot dogs – it’s essentially the asses and lips of the cannabis industry.

James West: [laughter] The asses and the lips: that’s a graphic analogy! The idea of these concentrates that are, in case of shadow, running to 90 percent and above THC – at this point, the regulatory body has no experience with that kind of potency in the world of cannabis, because there’s no experience with cannabis. Do you think that those potencies are going to be permitted to continue to be available to the public on a recreational basis?

John Fowler: So I think, you know, in Canada we don’t have that experience, but I think if you look to the US markets, whether that’s Colorado, California, or any of the other emerging recreational markets, they’ve found ways to safely educate consumers. Going back to alcohol, we don’t take the position that all we can sell is beer and we can’t sell spirits; we take the position we need to educate people on the relative risks involved with higher-concentration products. So I have confidence that ourselves, our industry association, other producers, will be working with the government to ensure these product categories are available. Because again, at 20 percent or more of the market, if we don’t bring those consumer goods to collegial industry, we’re saving that entire market for the illicit market here in Canada.

James West: Okay, which brings me to the next point: the illicit market. We’ve still got over 100 dispensaries that are not affiliated, or not sanctioned, by ACMPR, are not going to be legal, are the illegitimate source of cannabis that has been supplying 100 percent of the recreational cannabis market since, call it, 1965. Do you think they’re just going to pack up and go away as soon as the rules kick in, or do you think that there’s going to be potentially a constitutional quagmire in the courts as a result of Canada saying, “You can grow, but you can’t”?

John Fowler: So fundamentally, we had prohibition for almost 100 years and it failed miserably at policy objectives. In essence, we had demand for cannabis, and we chose a very restrictive supply side response; entrepreneurs, pot dealers if you will, found a way to supply those Canadian consumers. The same will be true as long as Canadian demand chooses illicit cannabis. The only way we can be successful is to provide Canadians with the quality they want, the price points they want, the range of assortments. So, you know, it doesn’t all have to be high-end flower like Seven Acres; there’s going to be lower-end product service from other brands as well, and only if we can satisfy the consumer demand can we hope to get rid of the illicit supply chain.

James West: All right, John. We’re going to leave it there for now. Thanks again for joining us today.

John Fowler: My pleasure. Thank you.

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