Monday, June 23, 2014 1:12:26 PM
SPRWF/SL article out now!
There are a lot of companies throwing elbows in the recently-mostly-legalised Canadian medical marijuana sector, and investors are increasingly asking questions of those companies that they’re not used to answering. Things like, you know, ‘do you have a business plan?’
Stockhouse tracks over Canadian 40 ticker symbols in this space, most of which used to be mining companies that are now seeking to do business in the processing of weed, or researching its medical powers, or sticking it in energy drinks and vending machines and salads and vaporisers and lunchboxes and more.
But the largest – and most contentious - segment of the sector involves companies that want to grow the stuff. Investors and insiders alike drool at the thought of turning one of the most profitable illegal industries of the last century into a burgeoning legal industry going forward, with billions of dollars once destined for ‘motorcycle enthusiasts’ set to be vacuumed into corporate accounts.
But the devil is in the details.
The highest profile medical marijuana plays in Canada, right now, come down to four companies with plans for mega-grow ops – Tweed (TSX:V.TWD, Stock Forum), Creative Edge (OTO:FITX, Stock Forum), Medican (OTO:MDCN,Stock Forum) and Supreme Pharmaceuticals (CSE:C.SL, Stock Forum), with only the $115m market cap Tweed having sputtered to the starting line to this point, and Creative Edge and Medican facing questions over excessive claims of future glory.
Over the past few months, my take on Supreme hasn’t been far from my take on the other three, as my thinking has been that ‘pure grow’ plays may struggle to find patients to sell to, even if they can figure out how to grow weed on an industrial pharmaceutical grade scale and, for that matter, get a license to do so.
So in an effort to find out whether Supreme is part of the ‘big claim-no pants’ club, I talked in-depth to CEO David Stadnyk about what his plans are, how they’re getting to the starting line and, most importantly (as far as I’m concerned), assuming you can get a license to grow, what do you do with all that weed once you’ve grown it?
Let’s also be clear up front – Supreme has paid my employers, Stockhouse Publishing, for the placement of an interview within our distribution network, and they did so in the knowledge that, if I didn’t like the play at the end of it all, I’d come right out and say so. They didn’t pay me to write it, they didn’t get to say what would go in it, and neither Stockhouse nor myself own any Supreme stock, nor do we hold any short positions in this or other companies.
In putting together this piece, I’ve included almost every word spoken in the resulting interviews, because there are a lot of people out there who know about Supreme’s existence, but also know precious little about what they plan to do beyond growing weed in a big warehouse.
This article is intended to help all readers, whether they be weedco investors or those looking around the sector with a jaundiced eye, figure out exactly what Supreme Pharmaceuticals is, wants to be, and may one day achieve.
It’s a long one. Suck it up, princess.
SUPREME, THE SEEDLING:
Stadnyk admits, like many new weedcos, Supreme’s plans to become a medical marijuana company came to fruition quickly. Perhaps startlingly quickly.
“Everything happened so fast, frankly, it’s not even been three months since we were focused on pharmaceutical deals,” says Stadnyk. “I had previously worked setting up a company called Pharmaxis Pharmaceuticals (OTO:PXSLY, Stock Forum). We had this company that was a shell and we had identified a pharma deal out of there. The CSE put out a bulletin three months ago that said medical marijuana was doing fantastic, the volumes traded were great, so we thought it would be worth looking at. We’d already changed over to the pharma business, we thought let’s just see what happens when we look at the space - and all of a sudden we traded like crazy. The stars had lined up. We put out that first news release on a Friday, by Sunday I’d flown to Penticton and gone over a grow operation run by someone I already knew, and that deal was announced the next Monday.”
This isn’t a unique story. A lot of former mining execs are now lording over surging share prices and having to throw medical marijuana plans together in a hurry. Stadynk readily admits it would have been nice to have been planning the transition for a year, but says he lucked out in ways others haven’t, and that’s made all the difference thus far.
“A business associate told me he had access to the biggest marijuana license in the country, six football fields in size. So I made a few phone calls and they had run into problems raising money, so here was this real deal just lying there, waiting for someone to take it on. They had it all, the facility was right, and the deadline to buy was coming for a 340,000 sq. ft. facility. Pay for it or lose it, you know? So I flew to Toronto right away. They needed a million down to buy the building, and I happened to have $1.5 million in the bank, so we wrote a cheque and bought it. Leap of faith.”
Stadnyk says the timing was more than fortuitous, pointing out that with the market as bad as it has been over the last few years on the Venture Exchange, he wouldn’t likely have had the money to do the deal at any other point.
“Sometimes the planets align,” says Stadnyk. “This was one of those times. Everything’s going, from an operations standpoint, just great. The town is behind it – community, police, fire, all behind us 100%. We’ve had city officials ask if we’re hiring so their kids can get jobs here, so it just couldn’t be working out better.”
But buying a building isn’t a medical marijuana business plan. You’ve got to get a Health Canada license to actually grow and sell product, and most companies making big claims in this space either don’t yet have one, or have yet to start the application process. There are some 800 applications in the queue and, for many applicants, the still unfinished process of getting approved has taken months longer than anticipated – and could take months more yet.
Supreme doesn’t have their MMPR completed, but is at the final hurdle with their first facility. And it’s a hurdle they say turns their approval from an ‘if’ to a ‘when’.
“We have everything in order up to the final security inspection stage. We have to upgrade security at the facility and we know exactly what’s needed by Health Canada to get their sign off. It’s a case of completing those upgrades as directed, no guesswork. We’re estimating that final inspection is 60 to 90 days away, and we’ve certainly got enough money and time to complete that work. Once we get that license in Ontario, we should be able to get a real bump in valuation.”
Stadnyk says the company is pre-approved for 24,000 kilograms of medical marijuana production per year, if the required security is in place.
“That’s where we’re ahead of everyone else,” he adds. “We see all these news releases saying ‘we’re leasing a place’, ‘we’re going to be the biggest out there.’ We’re way beyond that. The sheer size of our facility and license is our competitive advantage.”
It must be noted that getting security upgraded is no small feat. Supreme’s 325,000 sq. ft. facility is massive, with a ‘from scratch’ replacement value of $17m. With upgrades, the company has paid $4.5m for it so far, which is admittedly quite the steal. The vault, when finished, has to hold up to $150m worth of marijuana and it doesn’t take much imagination to understand how attractive such a stash would be to the kind of element more traditionally associated with the marijuana game. That vault needs to be Oceans 11-proof.
“Our vault will be one of the biggest – if not the biggest - in the country, so security has to be perfect. Beyond perfect,” says Stadnyk.
That’s not a cheap process. To get there, the company may need to do a little financing, in the range of “half a million dollars to get Supreme into the operational phase by end of year, or first quarter of 2015,” says the boss.
Outstanding warrants, most of which have already been exercised, should help keep the lights on.
Beyond that, Stadnyk expects to do a post-MMPR financing of $7m-$15m over a couple of rounds, once the share price more accurately reflects where he thinks the business is at. The CEO says he has “a very big position” in the company, and thus has no plans to do any share rollback as long as the price can get to the $0.25 range post-MMPR approval.
Shares sit at $0.08 now, giving the company an $11m market cap which, even to someone jaded on grow plays, seems incredibly low compared to current valuations placed on competitors.
Tweed’s facility is half the size of Supreme’s, and has had problems getting a happy crop out the door. Despite that, they’re at ten times Supreme’s market cap. Creative Edge plans ‘the largest grow op in the world’ but is only approved by local officials for 60k sq. ft. to this point and has a market cap 15 times that of Supreme. Medican hasn’t started their MMPR process and has a $77m market cap, 7 times Supreme’s.
“People are waiting for us to get that one step done,” says Stadnyk. “Then we’ll be real to people. We could be half Tweed’s market cap after that, and that would mean a big jump to shareholders.”
SUPREME, THE SPROUT:
John Fowler is Supreme head of operations and, in talking to him, you quickly get the sense that he’s a no bull, straight talking, knowledgeable guy. This is evidenced by the company’s sheer willingness to get him in front of a reporter. Stadnyk must have told me five times in our first interview, “you’ve gotta speak to this guy, he’s amazing.”
Frankly, I didn’t want to talk to him initially, but I’m glad I did: If the company has lucked out with any aspect of their business to this point, it’s not in having a massive grow facility fall into their laps, it’s getting a guy like Fowler to oversee production. He doesn’t oversell, and he’s not rushing to get product out the door. He’s frank with the company’s limitations to this point, and about their plans moving forward.
“We’re looking to have a license by early September,” he says. “If all goes to plan, we should have medicine ready at the beginning of 2015 at the latest, and our first step is to make sure we’re producing the best quality meds in varieties that are effective in their stated purpose.”
He says the team is still being built out, and that the company took its time to find and secure the top name on their talent acquisition list.
“We think we have Canada’s top marijuana grower signed to the team,” he says, adding that a news release on that hiring will be coming once the deal is set in stone. “He’s a guy operating for many years under the old MMAR system, he has a large following in North America and Europe. When that’s announced, we expect a lot of attention.”
Fowler isn’t just about growing, he’s also putting plans in place for distribution. One such step is to have an on-staff doctor who will be targeting other doctors for education purposes, in the hope those doctors will be inclined to suggest Supreme over other suppliers.
But the biggest plank in Supreme’s distribution platform is their intention to grow low cost, high grade product, and present a variety of grades among their offerings.
And by low cost, I mean iTunes low. I mean low enough that it doesn’t make sense to get soil on your hands growing your own.
Come for the generic $2 stuff, stay for the $8 mindblower.
As someone who has watched this sector very closely, and taken a heavy shovel to the neck of several companies that have made bold promises without the ability to follow through, my big issue with strict grow plays has long been the back end of the process. For mine, it’s a pointless exercise to grow megatons of weed if you can’t distribute the stuff, and Health Canada’s rules make distribution tough.
Assuming you can get your MMPR together, you have to convince medical marijuana patients (40,000 in Canada under the old rules, but decidedly less under the new system so far), who are largely on disability, to go to a doctor for a new scrip, then go online and choose a company as the place they will buy online.
And companies going through that process have to do so without advertising.
For those positioned at the large end of the market, shoveling thousands of kilograms of weed out the door will be a daunting proposition, so Supreme’s big plan for pushing through that bottleneck is straight up old school: An entry level product priced between $1.50 and $2 per gram.
Behold, the Wal-Mart of weed.
Tweed’s product, by their reckoning, averages out at $7 per gram, with a discount for those in financial peril. As things stand today, with seven of 80 proposed strains available, Tweed’s median price is over $10 per gram. Supreme estimates they’ll come in on a $4 per gram average, and with the potential size of their crop, that will likely have a chilling effect on some of their competitors with high in-grained costs.
Fowler thinks that effect will be felt at both ends of the market, with large growers having massive running costs and debts to cover not being able to compete on margin, and lower end guys not having enough market heft to make it worth competing.
“The guy on disability growing his own meds for almost nothing, you’re still looking at him spending a few bucks per gram on his own production, and that’s excluding the time spent looking after it. If we provide a good range of pricing and fair pricing, we’ll find people transitioning over. With our scale, we can offer them the same price, but save 10 or 20 hours a week looking after their crop.”
Fowler understands his strategy will put pressure on the industry, but says it’s not his problem if others have geared their businesses with unsustainable costs – a situation he says will hit smaller growers hardest.
“One way we compete is to put things out at a price others can’t sustain themselves at. If you put money into a 5k sq. ft. facility, you don’t have long term sustainability when prices fall. If you get scared when prices hit $5 per gram, you’re going to lose your money in a few years. As much as I want to make money doing it, I believe in the medicine and I can’t say to people they should spend hundreds of dollars a month on their medicine at $12 per gram.”
Stadnyk agrees: “Tweed has a fairly hefty nut to cover every month and I’m sure, right now, their losses are sizable. Our timing is excellent and our costs will be reasonable.”
Supreme plans to employ, in the near term, between 50 and 80 people, and with a nuclear power plant not far away, they’ve signed a deal to receive power at a discounted rate – a big deal given that hydro is perhaps the biggest ongoing expense associated with a grow operation.
Stadnyk admits the licensing process still contains a lot of ‘ifs’, and that there are lots of potential issues that are likely to arise in the greater sector going forward while Health Canada figures out what it actually wants from license-holders. That may leave a lot of companies in the lurch.
In fact, Stadnyk says he sees carnage a-comin’.
“All those companies that don’t have an MMPR yet, it’s a total risk that they’ll find out some time in the future they’re not getting one – and then what? There’s no guarantee to this stuff whatsoever. If we’ve been able to produce a year down the road, Health Canada is going to want to have as few facilities as possible to watch over; they don’t want pot factories all over the country. That’s why the big guys like us are so far down the process. As soon as they get enough licenses out there, maybe 50 to 80 licenses, that’s it. They don’t want the small guys, they want big guys they can keep tabs on.”
Which means a lot of those late to the party may find themselves shut out.
“I wouldn’t invest in one company that’s entering the process now and saying they’re going to apply,” says Stadnyk. “Not one.”
Fowler agrees. He sees the Supreme Ontario facility as a big advantage over competitors like, for example, Maple Leaf Green World (TSX:V.MGW, Stock Forum), which hopes 52 polyethylene greenhouses they recently leased will be able to pass muster with Health Canada and be suitable in the weed growing process.
“Our facility was built in partnership with the Government of Canada in the 80’s and we had greenhouse engineers take look at it early on and they laughed. They couldn’t believe anyone would spend so much money on a facility. It’s the best of everything. In a poly or low quality glass greenhouse, that doesn’t happen. The shape and design, if you don’t have the right shape, and poly is round, you can’t clear condensation from the heat. A lot of companies I wouldn’t put my dollars behind because their facilities just won’t work for this kind of product.”
“Our first phase will be 60,000 sq. ft.,” says Stadnyk, “which we can do because ours is not one massive grow op, it’s divided into four sections of the whole. Each is closed off so that if something did happen to one crop, it won’t affect the next room, and we can scale production without too much expense and trouble.”
Almost every grower has found, at this early stage, that weed isn’t something you can just throw in a pot and get the best out of. Even outfits like Whistler Medical Marijuana, which has long term growing experience, have admitted to struggling to effectively get their process properly scaled to an industrial size, and others have had their licensing pulled after failing inspections.
Stadnyk says growing pains are (no pun intended) expected.
“I hope we won’t have to face that issue, but I think there’ll likely be some feeling out process. The guys we have in place have left no stone unturned, and all of our operations guys have healthy credentials.”
SUPREME, THE STALK:
Building out a real company in the weed space hasn’t exactly been a priority for a lot of weedco investors to this point. A bump in share price is often the focus of the exercise, with the details to be filled in later, but Supreme is putting a lot of brainpower into the fine details.
Fowler goes into more detail: “One thing a lot of people getting into this market don’t realise is, with the final product, 30% of the quality is based on genetics. Another 30% is based on the grow. 30-40% is based on the dry cure and manicuring process. A big part of our plan is providing perfect conditions to dry and cure, which could take three to six weeks after it comes out of the ground to be ready for sale.”
He says, “If you cut from a plant and try it one week after you cut it, then two weeks, then three weeks, it gets better every time. If you don’t cure it, you might have 17% THC, but it’s a type the body can’t use. If you don’t have the right industry experts advising you, you can grow the best weed around but not the best medicine.”
“We’ve tried to be as risk averse as we can be,” he continues. “Our greenhouse is sub-divided into somewhere between 2k and 4k sq. ft. areas, completely sealed, so we have better control of HVAC. You can control humidity in a 150k sq. ft facility, but it’s much more difficult than in a 3k facility. One strain might like 80 degrees and high humidity, another might want 72 degrees and low humidity. If, heaven forbid, we encounter mold, mildew, bugs, we can close that room and clean that out and production continues.”
Fowler’s plan is for the first crop to actually be 12 crops, of 3k sq. ft each in size.
“That means, if we got one or two strains that didn’t work out like we’d want, or one or two areas that aren’t perfect in delivering a premium plant, that doesn’t go to market. We can’t put out a sub-perfect product because we’re dealing with people’s health.”
The Supreme model is for each variety to have an established ballpark number of days in which to reach peak quality. “The longer you flower, the more THC will convert to CBD, so one reason we want smaller grow chambers is that we want to stagger it, and order will be dictated by the number of days each plant needs. So every day the harvest crew will be taking down a room, which means each plant is harvested at peak medical use.”
Some strains need only 50 days to ripen, others need 120, says Fowler. “It gets pretty scientific and planning is key, so we can harvest in a staggered basis. First day of sales, we might have one or two strains available. Six months in we should have a vault full of many varieties.”
And that’s just on the Ontario side. There’s another facility they’re working on in Okanagan Falls, British Columbia, which has four licenses under the previous MMAR rules. The expectation is both facilities will receive their MMPR, but if one doesn’t, or has significant delays, the alternate facility diversifies risk significantly.
That’s a good thing, as the BC operation recently heard that a lot more information is needed to move the MMPR process along to where the Ontario facility is at. Stadnyk says this wasn’t a surprise and is just part of the process, and that he expects all requests to be satisfied in time. The BC facility isn’t something the company needs operating in 2015, and by the time it is set to go, the company hopes it will help diversify the supply chain long before distribution ramps up to the levels where extra capacity is needed.
SUPREME, THE SELL:
Diversifying risk doesn’t just apply to the production end, the company is also looking to diversify distribution. To that end, they’re in talks with companies that may be looking to acquire supply for industrial uses.
“The second our door is open,” says Fowler, “we’d like to work with industrial processors, and we’re happy to talk to other growers in respect of sub-contracting so we can satisfy wholesale options.”
The talks have been very preliminary to date, but the thinking is to allow a partner company to open without production facilities themselves, perhaps branding Supreme’s product and, with a warehouse and a call centre, a company could cut 80% of their licensing costs. In mining terms, it’s an off-take agreement, and as other companies find they fail to get an MMPR approval, or can’t afford a facility, there may be a huge market in this area.
“You can sell it as our product or as a white label product,” says Fowler. “If my phone rings with a good business plan, I’m all over it.”
In the meantime, the company is taking a software-driven approach to production that it sees as another advantage.
“It’s no good to have best policies if we don’t know guys are following it,” says Fowler. “Our software was developed in California where regulations are tough, and we program it with what we’re growing, how we’re growing, how we want to grow. It downloads daily to a gardener’s iPad and lays out jobs for the day. I can use my smartphone to see what’s in room two, what are the tasks being done, I can know how many people are growing, drying, and how much is in the vault. I can PDF that to a regulator at the drop of a hat. From compliance, what’s great is if I got a bad batch of fertilizer, I can look at the software to see what batches got that fertilizer and what needs to be stopped in production, or who bought that medicine, and it’s instant.”
This sort of data will be important when cross-border trade becomes an option, something Stadnyk thinks will happen, eventually.
“You’d have to think there’ll be a challenge on NAFTA grounds at some point. I don’t want to be the one who is going to lead that charge, but they can’t not accept cross-border trade forever. We’ll keep one eye on it but we’re focused on what we have right now. We have more than enough on our plate, though those are great opportunities going forward and, if it does go recreational - and if [Liberal Party leader] Justin Trudeau [wins the next Canadian election] it will - assuming we get to production without issue, imagine what happens at that point.”
To prepare for US interest, Supreme has listed on the OTC (ticker symbol: SPRWF), and that’s helping drive volume at a time when many in the dot.bong sector are struggling to keep their story alive.
The company also has continuing interest from larger players looking at their tiny market cap with a view to acquisition potential.
“We’d certainly look at offers,” says Stadnyk. “Once we get our MMPR, I think it’s logical for someone to come in and take us out. If I was going into the business, I’d not want to be in with the small guys duking it out, I’d be looking at the leaders in the field. Big pharma, the tobacco industry, if you do your due diligence and see which guys have the biggest situation, you’d have to see us as either an investment candidate or a target to be taken out.”
One day. But not right now.
“We get a lot of interesting calls, every day,” he says. “We don’t even follow up with all of them because we know our valuation will be better once we get that license.”
What separates the company from the other three big grow plays mentioned earlier in this piece, for mine, is their lack of self-congratulatory rhetoric. Supreme isn’t a company I’ve invested in simply because of the sheer number of variables relating to how a company disposes of its product in this market, and that may still be something the company will struggle with in time.
But that applies to every company in the sector. What makes Supreme the most appealing of the currently listed straight grow plays, to me, is that they’re doing it with a straight face.
In terms of comparison, here’s how Medican, which has yet to grow a gram of weed, describes itself on its website:
Medican is the industry standard for pharmaceutical grade medical marijuana production, cultivation and distribution.
Compared to Supreme’s website:
“Supreme Pharmaceuticals Inc. is a company dedicated to securing multiple producing medical marijuana facilities in Canada and applying for several MMPR commercial production licences.”
The difference is stark.
“We don’t want to overblow ourselves and create something we’re not,” says Stadnyk. “None of us want any regulatory problems. We keep it matter of fact and say we can achieve what we know we can achieve. I don’t want to be one of those guys who don’t deliver. People are looking at the sector with cynicism and it doesn’t bode well to promise the world.”
“Build a real company and everyone, shareholders, customers and management, will do really well.”
--Chris Parry
@ChrisParry on Twitter
Chris(dot)parry(at)Stockhouse(dot)com
Read more at http://www.stockhouse.com/news/newswire/2014/06/23/supreme-pharmaceuticals-(c-sl)-looks-to-dominate-marijuana-market-with-low-pricing,-high-q#BtG4jrI9fyXjetuw.99
There are a lot of companies throwing elbows in the recently-mostly-legalised Canadian medical marijuana sector, and investors are increasingly asking questions of those companies that they’re not used to answering. Things like, you know, ‘do you have a business plan?’
Stockhouse tracks over Canadian 40 ticker symbols in this space, most of which used to be mining companies that are now seeking to do business in the processing of weed, or researching its medical powers, or sticking it in energy drinks and vending machines and salads and vaporisers and lunchboxes and more.
But the largest – and most contentious - segment of the sector involves companies that want to grow the stuff. Investors and insiders alike drool at the thought of turning one of the most profitable illegal industries of the last century into a burgeoning legal industry going forward, with billions of dollars once destined for ‘motorcycle enthusiasts’ set to be vacuumed into corporate accounts.
But the devil is in the details.
The highest profile medical marijuana plays in Canada, right now, come down to four companies with plans for mega-grow ops – Tweed (TSX:V.TWD, Stock Forum), Creative Edge (OTO:FITX, Stock Forum), Medican (OTO:MDCN,Stock Forum) and Supreme Pharmaceuticals (CSE:C.SL, Stock Forum), with only the $115m market cap Tweed having sputtered to the starting line to this point, and Creative Edge and Medican facing questions over excessive claims of future glory.
Over the past few months, my take on Supreme hasn’t been far from my take on the other three, as my thinking has been that ‘pure grow’ plays may struggle to find patients to sell to, even if they can figure out how to grow weed on an industrial pharmaceutical grade scale and, for that matter, get a license to do so.
So in an effort to find out whether Supreme is part of the ‘big claim-no pants’ club, I talked in-depth to CEO David Stadnyk about what his plans are, how they’re getting to the starting line and, most importantly (as far as I’m concerned), assuming you can get a license to grow, what do you do with all that weed once you’ve grown it?
Let’s also be clear up front – Supreme has paid my employers, Stockhouse Publishing, for the placement of an interview within our distribution network, and they did so in the knowledge that, if I didn’t like the play at the end of it all, I’d come right out and say so. They didn’t pay me to write it, they didn’t get to say what would go in it, and neither Stockhouse nor myself own any Supreme stock, nor do we hold any short positions in this or other companies.
In putting together this piece, I’ve included almost every word spoken in the resulting interviews, because there are a lot of people out there who know about Supreme’s existence, but also know precious little about what they plan to do beyond growing weed in a big warehouse.
This article is intended to help all readers, whether they be weedco investors or those looking around the sector with a jaundiced eye, figure out exactly what Supreme Pharmaceuticals is, wants to be, and may one day achieve.
It’s a long one. Suck it up, princess.
SUPREME, THE SEEDLING:
Stadnyk admits, like many new weedcos, Supreme’s plans to become a medical marijuana company came to fruition quickly. Perhaps startlingly quickly.
“Everything happened so fast, frankly, it’s not even been three months since we were focused on pharmaceutical deals,” says Stadnyk. “I had previously worked setting up a company called Pharmaxis Pharmaceuticals (OTO:PXSLY, Stock Forum). We had this company that was a shell and we had identified a pharma deal out of there. The CSE put out a bulletin three months ago that said medical marijuana was doing fantastic, the volumes traded were great, so we thought it would be worth looking at. We’d already changed over to the pharma business, we thought let’s just see what happens when we look at the space - and all of a sudden we traded like crazy. The stars had lined up. We put out that first news release on a Friday, by Sunday I’d flown to Penticton and gone over a grow operation run by someone I already knew, and that deal was announced the next Monday.”
This isn’t a unique story. A lot of former mining execs are now lording over surging share prices and having to throw medical marijuana plans together in a hurry. Stadynk readily admits it would have been nice to have been planning the transition for a year, but says he lucked out in ways others haven’t, and that’s made all the difference thus far.
“A business associate told me he had access to the biggest marijuana license in the country, six football fields in size. So I made a few phone calls and they had run into problems raising money, so here was this real deal just lying there, waiting for someone to take it on. They had it all, the facility was right, and the deadline to buy was coming for a 340,000 sq. ft. facility. Pay for it or lose it, you know? So I flew to Toronto right away. They needed a million down to buy the building, and I happened to have $1.5 million in the bank, so we wrote a cheque and bought it. Leap of faith.”
Stadnyk says the timing was more than fortuitous, pointing out that with the market as bad as it has been over the last few years on the Venture Exchange, he wouldn’t likely have had the money to do the deal at any other point.
“Sometimes the planets align,” says Stadnyk. “This was one of those times. Everything’s going, from an operations standpoint, just great. The town is behind it – community, police, fire, all behind us 100%. We’ve had city officials ask if we’re hiring so their kids can get jobs here, so it just couldn’t be working out better.”
But buying a building isn’t a medical marijuana business plan. You’ve got to get a Health Canada license to actually grow and sell product, and most companies making big claims in this space either don’t yet have one, or have yet to start the application process. There are some 800 applications in the queue and, for many applicants, the still unfinished process of getting approved has taken months longer than anticipated – and could take months more yet.
Supreme doesn’t have their MMPR completed, but is at the final hurdle with their first facility. And it’s a hurdle they say turns their approval from an ‘if’ to a ‘when’.
“We have everything in order up to the final security inspection stage. We have to upgrade security at the facility and we know exactly what’s needed by Health Canada to get their sign off. It’s a case of completing those upgrades as directed, no guesswork. We’re estimating that final inspection is 60 to 90 days away, and we’ve certainly got enough money and time to complete that work. Once we get that license in Ontario, we should be able to get a real bump in valuation.”
Stadnyk says the company is pre-approved for 24,000 kilograms of medical marijuana production per year, if the required security is in place.
“That’s where we’re ahead of everyone else,” he adds. “We see all these news releases saying ‘we’re leasing a place’, ‘we’re going to be the biggest out there.’ We’re way beyond that. The sheer size of our facility and license is our competitive advantage.”
It must be noted that getting security upgraded is no small feat. Supreme’s 325,000 sq. ft. facility is massive, with a ‘from scratch’ replacement value of $17m. With upgrades, the company has paid $4.5m for it so far, which is admittedly quite the steal. The vault, when finished, has to hold up to $150m worth of marijuana and it doesn’t take much imagination to understand how attractive such a stash would be to the kind of element more traditionally associated with the marijuana game. That vault needs to be Oceans 11-proof.
“Our vault will be one of the biggest – if not the biggest - in the country, so security has to be perfect. Beyond perfect,” says Stadnyk.
That’s not a cheap process. To get there, the company may need to do a little financing, in the range of “half a million dollars to get Supreme into the operational phase by end of year, or first quarter of 2015,” says the boss.
Outstanding warrants, most of which have already been exercised, should help keep the lights on.
Beyond that, Stadnyk expects to do a post-MMPR financing of $7m-$15m over a couple of rounds, once the share price more accurately reflects where he thinks the business is at. The CEO says he has “a very big position” in the company, and thus has no plans to do any share rollback as long as the price can get to the $0.25 range post-MMPR approval.
Shares sit at $0.08 now, giving the company an $11m market cap which, even to someone jaded on grow plays, seems incredibly low compared to current valuations placed on competitors.
Tweed’s facility is half the size of Supreme’s, and has had problems getting a happy crop out the door. Despite that, they’re at ten times Supreme’s market cap. Creative Edge plans ‘the largest grow op in the world’ but is only approved by local officials for 60k sq. ft. to this point and has a market cap 15 times that of Supreme. Medican hasn’t started their MMPR process and has a $77m market cap, 7 times Supreme’s.
“People are waiting for us to get that one step done,” says Stadnyk. “Then we’ll be real to people. We could be half Tweed’s market cap after that, and that would mean a big jump to shareholders.”
SUPREME, THE SPROUT:
John Fowler is Supreme head of operations and, in talking to him, you quickly get the sense that he’s a no bull, straight talking, knowledgeable guy. This is evidenced by the company’s sheer willingness to get him in front of a reporter. Stadnyk must have told me five times in our first interview, “you’ve gotta speak to this guy, he’s amazing.”
Frankly, I didn’t want to talk to him initially, but I’m glad I did: If the company has lucked out with any aspect of their business to this point, it’s not in having a massive grow facility fall into their laps, it’s getting a guy like Fowler to oversee production. He doesn’t oversell, and he’s not rushing to get product out the door. He’s frank with the company’s limitations to this point, and about their plans moving forward.
“We’re looking to have a license by early September,” he says. “If all goes to plan, we should have medicine ready at the beginning of 2015 at the latest, and our first step is to make sure we’re producing the best quality meds in varieties that are effective in their stated purpose.”
He says the team is still being built out, and that the company took its time to find and secure the top name on their talent acquisition list.
“We think we have Canada’s top marijuana grower signed to the team,” he says, adding that a news release on that hiring will be coming once the deal is set in stone. “He’s a guy operating for many years under the old MMAR system, he has a large following in North America and Europe. When that’s announced, we expect a lot of attention.”
Fowler isn’t just about growing, he’s also putting plans in place for distribution. One such step is to have an on-staff doctor who will be targeting other doctors for education purposes, in the hope those doctors will be inclined to suggest Supreme over other suppliers.
But the biggest plank in Supreme’s distribution platform is their intention to grow low cost, high grade product, and present a variety of grades among their offerings.
And by low cost, I mean iTunes low. I mean low enough that it doesn’t make sense to get soil on your hands growing your own.
Come for the generic $2 stuff, stay for the $8 mindblower.
As someone who has watched this sector very closely, and taken a heavy shovel to the neck of several companies that have made bold promises without the ability to follow through, my big issue with strict grow plays has long been the back end of the process. For mine, it’s a pointless exercise to grow megatons of weed if you can’t distribute the stuff, and Health Canada’s rules make distribution tough.
Assuming you can get your MMPR together, you have to convince medical marijuana patients (40,000 in Canada under the old rules, but decidedly less under the new system so far), who are largely on disability, to go to a doctor for a new scrip, then go online and choose a company as the place they will buy online.
And companies going through that process have to do so without advertising.
For those positioned at the large end of the market, shoveling thousands of kilograms of weed out the door will be a daunting proposition, so Supreme’s big plan for pushing through that bottleneck is straight up old school: An entry level product priced between $1.50 and $2 per gram.
Behold, the Wal-Mart of weed.
Tweed’s product, by their reckoning, averages out at $7 per gram, with a discount for those in financial peril. As things stand today, with seven of 80 proposed strains available, Tweed’s median price is over $10 per gram. Supreme estimates they’ll come in on a $4 per gram average, and with the potential size of their crop, that will likely have a chilling effect on some of their competitors with high in-grained costs.
Fowler thinks that effect will be felt at both ends of the market, with large growers having massive running costs and debts to cover not being able to compete on margin, and lower end guys not having enough market heft to make it worth competing.
“The guy on disability growing his own meds for almost nothing, you’re still looking at him spending a few bucks per gram on his own production, and that’s excluding the time spent looking after it. If we provide a good range of pricing and fair pricing, we’ll find people transitioning over. With our scale, we can offer them the same price, but save 10 or 20 hours a week looking after their crop.”
Fowler understands his strategy will put pressure on the industry, but says it’s not his problem if others have geared their businesses with unsustainable costs – a situation he says will hit smaller growers hardest.
“One way we compete is to put things out at a price others can’t sustain themselves at. If you put money into a 5k sq. ft. facility, you don’t have long term sustainability when prices fall. If you get scared when prices hit $5 per gram, you’re going to lose your money in a few years. As much as I want to make money doing it, I believe in the medicine and I can’t say to people they should spend hundreds of dollars a month on their medicine at $12 per gram.”
Stadnyk agrees: “Tweed has a fairly hefty nut to cover every month and I’m sure, right now, their losses are sizable. Our timing is excellent and our costs will be reasonable.”
Supreme plans to employ, in the near term, between 50 and 80 people, and with a nuclear power plant not far away, they’ve signed a deal to receive power at a discounted rate – a big deal given that hydro is perhaps the biggest ongoing expense associated with a grow operation.
Stadnyk admits the licensing process still contains a lot of ‘ifs’, and that there are lots of potential issues that are likely to arise in the greater sector going forward while Health Canada figures out what it actually wants from license-holders. That may leave a lot of companies in the lurch.
In fact, Stadnyk says he sees carnage a-comin’.
“All those companies that don’t have an MMPR yet, it’s a total risk that they’ll find out some time in the future they’re not getting one – and then what? There’s no guarantee to this stuff whatsoever. If we’ve been able to produce a year down the road, Health Canada is going to want to have as few facilities as possible to watch over; they don’t want pot factories all over the country. That’s why the big guys like us are so far down the process. As soon as they get enough licenses out there, maybe 50 to 80 licenses, that’s it. They don’t want the small guys, they want big guys they can keep tabs on.”
Which means a lot of those late to the party may find themselves shut out.
“I wouldn’t invest in one company that’s entering the process now and saying they’re going to apply,” says Stadnyk. “Not one.”
Fowler agrees. He sees the Supreme Ontario facility as a big advantage over competitors like, for example, Maple Leaf Green World (TSX:V.MGW, Stock Forum), which hopes 52 polyethylene greenhouses they recently leased will be able to pass muster with Health Canada and be suitable in the weed growing process.
“Our facility was built in partnership with the Government of Canada in the 80’s and we had greenhouse engineers take look at it early on and they laughed. They couldn’t believe anyone would spend so much money on a facility. It’s the best of everything. In a poly or low quality glass greenhouse, that doesn’t happen. The shape and design, if you don’t have the right shape, and poly is round, you can’t clear condensation from the heat. A lot of companies I wouldn’t put my dollars behind because their facilities just won’t work for this kind of product.”
“Our first phase will be 60,000 sq. ft.,” says Stadnyk, “which we can do because ours is not one massive grow op, it’s divided into four sections of the whole. Each is closed off so that if something did happen to one crop, it won’t affect the next room, and we can scale production without too much expense and trouble.”
Almost every grower has found, at this early stage, that weed isn’t something you can just throw in a pot and get the best out of. Even outfits like Whistler Medical Marijuana, which has long term growing experience, have admitted to struggling to effectively get their process properly scaled to an industrial size, and others have had their licensing pulled after failing inspections.
Stadnyk says growing pains are (no pun intended) expected.
“I hope we won’t have to face that issue, but I think there’ll likely be some feeling out process. The guys we have in place have left no stone unturned, and all of our operations guys have healthy credentials.”
SUPREME, THE STALK:
Building out a real company in the weed space hasn’t exactly been a priority for a lot of weedco investors to this point. A bump in share price is often the focus of the exercise, with the details to be filled in later, but Supreme is putting a lot of brainpower into the fine details.
Fowler goes into more detail: “One thing a lot of people getting into this market don’t realise is, with the final product, 30% of the quality is based on genetics. Another 30% is based on the grow. 30-40% is based on the dry cure and manicuring process. A big part of our plan is providing perfect conditions to dry and cure, which could take three to six weeks after it comes out of the ground to be ready for sale.”
He says, “If you cut from a plant and try it one week after you cut it, then two weeks, then three weeks, it gets better every time. If you don’t cure it, you might have 17% THC, but it’s a type the body can’t use. If you don’t have the right industry experts advising you, you can grow the best weed around but not the best medicine.”
“We’ve tried to be as risk averse as we can be,” he continues. “Our greenhouse is sub-divided into somewhere between 2k and 4k sq. ft. areas, completely sealed, so we have better control of HVAC. You can control humidity in a 150k sq. ft facility, but it’s much more difficult than in a 3k facility. One strain might like 80 degrees and high humidity, another might want 72 degrees and low humidity. If, heaven forbid, we encounter mold, mildew, bugs, we can close that room and clean that out and production continues.”
Fowler’s plan is for the first crop to actually be 12 crops, of 3k sq. ft each in size.
“That means, if we got one or two strains that didn’t work out like we’d want, or one or two areas that aren’t perfect in delivering a premium plant, that doesn’t go to market. We can’t put out a sub-perfect product because we’re dealing with people’s health.”
The Supreme model is for each variety to have an established ballpark number of days in which to reach peak quality. “The longer you flower, the more THC will convert to CBD, so one reason we want smaller grow chambers is that we want to stagger it, and order will be dictated by the number of days each plant needs. So every day the harvest crew will be taking down a room, which means each plant is harvested at peak medical use.”
Some strains need only 50 days to ripen, others need 120, says Fowler. “It gets pretty scientific and planning is key, so we can harvest in a staggered basis. First day of sales, we might have one or two strains available. Six months in we should have a vault full of many varieties.”
And that’s just on the Ontario side. There’s another facility they’re working on in Okanagan Falls, British Columbia, which has four licenses under the previous MMAR rules. The expectation is both facilities will receive their MMPR, but if one doesn’t, or has significant delays, the alternate facility diversifies risk significantly.
That’s a good thing, as the BC operation recently heard that a lot more information is needed to move the MMPR process along to where the Ontario facility is at. Stadnyk says this wasn’t a surprise and is just part of the process, and that he expects all requests to be satisfied in time. The BC facility isn’t something the company needs operating in 2015, and by the time it is set to go, the company hopes it will help diversify the supply chain long before distribution ramps up to the levels where extra capacity is needed.
SUPREME, THE SELL:
Diversifying risk doesn’t just apply to the production end, the company is also looking to diversify distribution. To that end, they’re in talks with companies that may be looking to acquire supply for industrial uses.
“The second our door is open,” says Fowler, “we’d like to work with industrial processors, and we’re happy to talk to other growers in respect of sub-contracting so we can satisfy wholesale options.”
The talks have been very preliminary to date, but the thinking is to allow a partner company to open without production facilities themselves, perhaps branding Supreme’s product and, with a warehouse and a call centre, a company could cut 80% of their licensing costs. In mining terms, it’s an off-take agreement, and as other companies find they fail to get an MMPR approval, or can’t afford a facility, there may be a huge market in this area.
“You can sell it as our product or as a white label product,” says Fowler. “If my phone rings with a good business plan, I’m all over it.”
In the meantime, the company is taking a software-driven approach to production that it sees as another advantage.
“It’s no good to have best policies if we don’t know guys are following it,” says Fowler. “Our software was developed in California where regulations are tough, and we program it with what we’re growing, how we’re growing, how we want to grow. It downloads daily to a gardener’s iPad and lays out jobs for the day. I can use my smartphone to see what’s in room two, what are the tasks being done, I can know how many people are growing, drying, and how much is in the vault. I can PDF that to a regulator at the drop of a hat. From compliance, what’s great is if I got a bad batch of fertilizer, I can look at the software to see what batches got that fertilizer and what needs to be stopped in production, or who bought that medicine, and it’s instant.”
This sort of data will be important when cross-border trade becomes an option, something Stadnyk thinks will happen, eventually.
“You’d have to think there’ll be a challenge on NAFTA grounds at some point. I don’t want to be the one who is going to lead that charge, but they can’t not accept cross-border trade forever. We’ll keep one eye on it but we’re focused on what we have right now. We have more than enough on our plate, though those are great opportunities going forward and, if it does go recreational - and if [Liberal Party leader] Justin Trudeau [wins the next Canadian election] it will - assuming we get to production without issue, imagine what happens at that point.”
To prepare for US interest, Supreme has listed on the OTC (ticker symbol: SPRWF), and that’s helping drive volume at a time when many in the dot.bong sector are struggling to keep their story alive.
The company also has continuing interest from larger players looking at their tiny market cap with a view to acquisition potential.
“We’d certainly look at offers,” says Stadnyk. “Once we get our MMPR, I think it’s logical for someone to come in and take us out. If I was going into the business, I’d not want to be in with the small guys duking it out, I’d be looking at the leaders in the field. Big pharma, the tobacco industry, if you do your due diligence and see which guys have the biggest situation, you’d have to see us as either an investment candidate or a target to be taken out.”
One day. But not right now.
“We get a lot of interesting calls, every day,” he says. “We don’t even follow up with all of them because we know our valuation will be better once we get that license.”
What separates the company from the other three big grow plays mentioned earlier in this piece, for mine, is their lack of self-congratulatory rhetoric. Supreme isn’t a company I’ve invested in simply because of the sheer number of variables relating to how a company disposes of its product in this market, and that may still be something the company will struggle with in time.
But that applies to every company in the sector. What makes Supreme the most appealing of the currently listed straight grow plays, to me, is that they’re doing it with a straight face.
In terms of comparison, here’s how Medican, which has yet to grow a gram of weed, describes itself on its website:
Medican is the industry standard for pharmaceutical grade medical marijuana production, cultivation and distribution.
Compared to Supreme’s website:
“Supreme Pharmaceuticals Inc. is a company dedicated to securing multiple producing medical marijuana facilities in Canada and applying for several MMPR commercial production licences.”
The difference is stark.
“We don’t want to overblow ourselves and create something we’re not,” says Stadnyk. “None of us want any regulatory problems. We keep it matter of fact and say we can achieve what we know we can achieve. I don’t want to be one of those guys who don’t deliver. People are looking at the sector with cynicism and it doesn’t bode well to promise the world.”
“Build a real company and everyone, shareholders, customers and management, will do really well.”
--Chris Parry
@ChrisParry on Twitter
Chris(dot)parry(at)Stockhouse(dot)com
Read more at http://www.stockhouse.com/news/newswire/2014/06/23/supreme-pharmaceuticals-(c-sl)-looks-to-dominate-marijuana-market-with-low-pricing,-high-q#BtG4jrI9fyXjetuw.99
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