Supreme Pharmaceutical’s John Fowler on the Path to Profitability: A Visual Podcast

Transcript:

 James West:   John, welcome back to the show.

John Fowler:   James, always a pleasure. Thanks for having me back again.

James West:    It’s been a while since we’ve chatted, John, and you’ve had some significant developments in Supreme Pharmaceuticals. Why don’t you start with the listing on the TSX Venture?

John Fowler:   Absolutely. So moving from the CSC to the Venture has always been something in our plan, something as part of our corporate progression. We’re eminently thankful for the CSC for the time we had there. A lot of investors may not be aware that for early stage cannabis companies, the CSC was one of the only ways to access public capital prior to reaching licensing milestones. So with our trajectory, it was essential we were able to go on to an entrepreneurial exchange, keep our costs low, build a good rapport with the regulators, and make sure we could meet our business objectives. But you know, as we grow in terms of market capitalization, in terms of type of capital we’re looking to access and the type of investors we’re looking to attract, at some point, there’s always a chance to move on.

So we looked at this as a graduation from the CSC onto the Venture, and we look at the Venture as one step towards the big board, which we see as our eventual home.

James West:    Okay. Now yesterday, it was announced that we would see a bill tabled to legalize recreational marijuana imminently, and I’m wondering how much of that had to do with your 5 million-plus traded shares yesterday, and how much of it was your move to the TSX Venture?

John Fowler:   I’m not a trader, so I have no idea. I would hope that it’s because of the great internet memes that have been going around about the company, but we’ll never know. I think there were some positive macros in the industry yesterday, I think pretty much everybody was up, but regardless, I don’t focus too much on what we do on a day to day basis or even quarter by quarter; the team at Supreme and myself, our vision is to build the strongest cannabis company we can have, to have the leadership position in the global emerging industry over the coming years and decades. So we try not to get bogged down in trading days, good or bad.

James West:    Sure. Now one of the things that I was expecting to see, and I haven’t really seen, is press releases relative to your harvesting and sale of an entire crop on a wholesale basis. Is that something that I’ve missed, or is that something that’s been delayed?

John Fowler:   No. so we take the position, we try to keep our news flow to a minimum. We take the position that when you don’t say much, when you do have something to say, people listen. So we don’t tend to news release smaller milestones, like harvested crops, things like that.

We have successfully completed three full crop harvests. We have a few hundred kilograms of dried cannabis in the vault, ready for sale. We have buyers, LP buyers that have very strong demand to buy all of that product. And right now, we’re just working with Health Canada to get the right, check the right boxes and get our sales approval.

• Read the Canadian Government’s legalization overview;
• Read Bill C-45 The Cannabis Act in its entirety;
• See the Canadian Government’s Infographic on Canada’s marijuana legalization strategy.

The process takes some time, very diligent process, but it’s one that we feel like is moving towards a conclusion, and one that we think is very important. I think, you know, it’s important that we have a strong regulator who’s really making sure that every company in the space is a good operator and is contributing to the growth of our industry, which really is world-leading. So when you have the whole world watching you as an industry, I think it’s prudent that the regulator takes its time. But as I said, once we get that sales approval and we move to the other side, we’ve got a vault full of cannabis, we’ve got a room full of buyers, and I think we’re going to show some very quick success at that point.

James West:    Sure. Is it within your plans to become a purveyor of a retail brand of marijuana distributed directly to ACMPR patients at any time in the future? Or are you positioning to do so for the advent of recreational marijuana, or do you plan to remain a wholesaler?

John Fowler:   So our vision right now is to take advantage of a very unique market opportunity, where you have immense macro positives, whether that’s regulatory or business changes here in Canada or abroad, but at the same time, you have a lot of uncertainty in terms of the minutiae. So when in terms of deploying resources at Supreme or Seven Acres, we have to be on the minutiae, which tends to be unknown. So our objective is to build in as much flexibility to the business as we can.

So our philosophy is, right now, we’re building a core competency in scale cultivation. It’s an area of the market that we feel globally there’s not a lot of expertise in, and that we have an opportunity to be a global leader and the ability to produce at a craft quality cannabis, or homegrown quality, some people might call it, at a large commercial scale.

What that’s going to give us is a large flow of cannabis, and you know, the market cap and access to capital that comes with that. For now, we’re distributing that to our LP partners under a branded wholesale model, so we’re looking for every partner to put an Intel Inside type label on it, that says grown by Seven Acres. And what that means is, we have flexibility to see how the economics shake out and where we think we get the best return between staying on that platform, moving to the front of the label, or actually owning the retail ourselves.

I think if Intel wanted to start manufacturing computers tomorrow, they’d probably be able to transfer their brand reasonably well, but it’s telling to see for business reasons they’ve decided that’s not the business for them.

So for me, it’s too early to say, but I think the flexibility is important. I think we’ll be able to lever success in the future off of the core competencies and cultivation and scaled cultivation that we’re building today.

James West:    Okay. Looking at your recently posted financials for the period ending December 31^st, I see you’ve still got 71 million in cash on the balance sheet, suggesting that you haven’t deployed much capital into your expansion. Is that an accurate perception, or is it just that your expansion hasn’t cost you that much?

John Fowler:   Well, the quarter end was only a few weeks after we had raised the capital, so it’s probably for the best that we didn’t deploy 55 million in two weeks over Christmas. But generally speaking, we are moving forward with our expansion strategy. We’re looking to finalize that plan and put it forward when it’s ready. But we’re a company that’s not in a rush. We see capital as a huge benefit to the business; cannabis companies are fortunate to have great shareholder support and access to capital that allows us to do things and grow at a rate that otherwise wouldn’t be possible. But at the same time, that access to capital can quickly be the rope to hang you if it’s not deployed properly.

So we don’t feel like it’s burning a hole in our jeans or anything like that. We’re going to deploy it prudently when it makes sense, but I think you’re going to see in the near term a clear plan of execution in Kincardine at our Seven Acres property, and an executable plan, and continue to develop our brand as a public company, which is a company that does what it says, means what it says, and continues to execute on milestones.

James West:    Sure. Okay. So you’ve sold three full crops; that’s not reflected on this balance sheet, so obviously –

John Fowler:   Oh sorry, we’ve produced, we haven’t sold yet. It’s sitting in inventory in our vault.

James West:    Ah. I see. Okay, so do you have a handle on total costs per gram all-in for your product at this point?

John Fowler:   Yeah, but we’re still looking to define that before we put that to market. Our goal is not to be the lowest cost provider; we think that cost control is very important, whether you’re a wholesaler or a retailer, particularly with the likelihood that margins will compress as more companies come into the value chain in distribution and retail, or companies or public entities. But for us, we look to provide the best value. So we believe we’re growing some of the highest quality cannabis in Canada, we’re doing it for a reasonably low cost, and we think that’s going to be a model of success for Supreme and for Seven Acres.

James West:    Sure. How much square footage will you have under cultivation by the end of 2017?

John Fowler:   By the end of this year, we’re still working on the right mix, so we’ve reassessed our plan based on the government timelines. We’ll continue to do that as we get more data. Basically what we look at is, we’re trying to bring the whole facility online as quickly as possible and in a sensible way from a capital perspective, and sometimes that doesn’t mean rushing into delivery of the first few rooms. So we will have significant expansion this year, but the exact amount hasn’t been finalized.

James West:    Okay. So how much product do you have growing right now?

John Fowler:   Right now we’re producing at a rate of approximately 100 kilos per month.

James West:    100 kilos per month. Okay, well that’s great. John, do you have any plans to avail Supreme of the evolution of the export market for Canadian cannabis?

John Fowler:   Absolutely. We’ve spoken to a few companies that would be importers in foreign markets. At this time, we take the position that Seven Acres’ business model right now is to sell to anyone legal to do so, where we get the best return. The return is not just looking at the actual dollars we get back for every gram, but also looking at where do we build brand and how do we build brand.

So in the short term, we actually have a preference to distribute into Canada when we’re building a Canadian brand here. I think the one risk with a lot of foreign export strategies is, it’s not clear if the exporter will be able to build brand value in that foreign jurisdiction or if it’s just a way to generate a couple extra bucks per gram in the short term. So we have a strong preference for Canada in the near term but that said, a deal can change in a moment, and if we find the right partner for export, we’d be all over them.

James West:    Sure. And finally, when can shareholders in Supreme expect profitability?

John Fowler:   Again, I think that’s going to depend in part on the pace of expansion of the business, the pace that the government sets for legalization once our products are available. We’re very conscious of our bottom line, so our goal is to reach profitability as soon as we can, but at the same time, not doing that at the expense of growth. I think we’re not tech companies here, we’re not building on that kind of ramp where you can comfortably lose money for a long time until your big win or monetize later, but at the same time, we are at a high growth environment. Where cost control and managing the burn is very important, I think if you prioritize that too much, you risk maybe curtailing your medium and long term growth.

So an exact deadline is not set out right now, it’s definitely something we look forward to, and we think it’ll be a huge milestone for the company, but we don’t want to rush to that at the expense of our expansion, our ability to grow our brands and market share, and our ability to set ourselves up for years and decades of growth to come.

James West:    Okay, well, I’ve got to put it out there: does this mean that Supreme is pursuing an Amazon-type of business plan whereby it might be years before profitability occurs because you’re going to invest so much in expansion and market share?

John Fowler:   No, I wouldn’t want to comp us to a tech company; I think tech companies have a very different trajectory. I mean, at the end of the day, we’re a farm, we’re a manufacturing company, we’re producing a product, so I think profitability has to come much earlier than it does for tech. all I’m saying is, we want to be cognizant of the growth environment we’re in, and make sure a quick push to profitability doesn’t hurt our long term success. So just to give an example, right now our costs are higher than they would otherwise need to be because we carry a higher ratio of management to non-management employees in Kincardine than we will when we’re a mature company. The reason for that is, that management team is really the boots on the ground that are going to support the growth over the next few years from 100 kilos a month to eventually our objective to doing almost 1,000 kilos a week.

So that’s an example if profitability in the short term was the sole objective, we could probably get rid of that management team, put in cheaper staff, and reach profitability faster, but that’s going to heavily curtail our ability to meet the objective in Kincardine of growing 50,000 kilos per year. so that’s the type of thinking we apply when we’re pursuing those objectives, but definitely it’s not expected to be an Amazon or a tech-type strategy where you’re comfortable with large losses for extended periods of time.

James West:    Okay, John. I appreciate the update and thank you for your time. We’ll leave it there today and come back to you in a quarter’s time and see how you’re making out. Once again, thank you very much and congratulations on your success.

John Fowler:   Sounds great, James. Thank you very much.

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