Supreme Cannabis (TSX: FIRE): How Can They Continue to Grow?

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"How can Supreme Cannabis continue to grow under the circumstance of transition away from the B2B model? "
Supreme-Annual-Report-2019

OVERVIEW

Supreme Cannabis has already reported its fiscal 2020 Q1 results, which presents a boost in its revenue compared to the same period in 2018, as well as growths shown in its annual report. Overall its financials present positive results as they continue to grow. Since Supreme Cannabis started to trade as FIRE on the Toronto Stock Exchange (TSX: FIRE), they initiated a series of activities including acquisitions of BlissCo and TRUVERRA to transit from B2B to recreational sales. How can Supreme Cannabis continue to grow under the circumstance of transition away from the B2B model?

INTRODUCTION

The Supreme Cannabis Company, Inc is a diversified portfolio of cannabis brands that does cannabis-related business. Founded in 2014, Supreme is located in Toronto, Canada, and operates in Canada, UK, Netherlands, and Lesotho. Supreme harbors diversified brands such as 7ACRES, BlissCo, and TRUVERRA, and shares strong brand partnerships with KKE and PAX. Its uniqueness is the craftsmanship in producing the best cannabis which remains the obsession to meet consumers’ expectations.

Supreme Cannabis’s vision is to improve global well-being with cannabis. The mission is to exist to use the company's knowledge of the plant, to create transformative businesses, products, and brands that deliver positive experiences.

Supreme uses a broad differentiation strategy that they provide with focused products by meeting specific tastes and requirements for a broad spectrum of customers. The strategic objectives are listed in the statement in its annual report:

  • Build consumer experience driven brands that generate regulated and branded cannabis revenue;
  • Create high-quality products to ensure efficacy; and
  • Leverage experience in Canada to enter promising global markets.

Moreover, Supreme executes a centralized strategy in its management and diversification strategy in its primary and secondary business activities. Supreme's financial objective is to generate revenue between $150 million and $180 million in the fiscal year of 2020.

TRUVERRA by Supreme Cannabis
Source: The Supreme Cannabis Company, Inc.

ANALYSIS AND EVALUATION

Pros

How can Supreme meet its objectives and follow the guidance throughout 2020? Here are the pros and cons of initiatives by Supreme during the fiscal year of 2019.

  1. Supreme Cannabis has already occupied a large share in the domestic supplying market. In 2019, Supreme Cannabis, through its medical CBD product brand 7ACRES, entered in eight provincial supply agreements with Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, New Brunswick, and Prince Edward Island. These provincial supply agreements have made 7ACRES products available coast-to-coast in Canada. Nonetheless, it shows potential for new markets as Supreme’s subsidiary 7ACRES plans to sell its products in Québec and Newfoundland and Labrador. According to Yahoo Finance, Supreme announced to expand Canadian distribution to all 10 provinces through 7ACRES products. The expansion of 7ACRES contributes to Supreme's transition from B2B to recreational sales.
  2. On the other hand, Supreme Cannabis is strong in establishing a distinct portfolio of brands. This portfolio of brands creates a shared corporate services model that Supreme offers professional services for cultivation, commercialization, financial, regulatory, marketing and brand building. (Table 1)
  3. It is promising for Supreme to establish a highly sophisticated cultivation facility and to expand its operations. Supreme Cannabis will invest approximately $14 million for the construction of a state-of-the-art, 34,000 sq. ft research and development facility located in Goderich, Ontario. Therefore, they can include licensed extraction and R&D infrastructure in mid-2019.
Table 1: Supreme Cannabis Brands | Source: The Supreme Cannabis Company Inc. Annual Report 2019

Cons

  1. Supreme has a major issue in dealing with its expenses. Due to the construction plan of 7ACRES, the Company’s total wages and benefits expense increased to $13.1 million. Supreme's business activity and expansion of operations generated from the R&D infrastructure plan lead to a negative operating margin rate and net operating margin rate. The costs of the R&D infrastructure plan are so high that they contribute to a total of 16.5 million Canadian dollars in operating loss. Likewise, the company’s total sales, marketing, and business development expense, as another cost driver, increased to $2.3 million and $6.2 million respectively, from 26.1% to 32.6% of its net revenue. (Table 2)
  2. Furthermore, the heavy spending on R&D has resulted in a net loss in Supreme’s 2020 Q1 financials as well as declines in stock price. Supreme has experienced difficulties in return-on-asset and return-on-equity in the long run. However, Supreme shows capabilities in reducing negative ROA and ROE, according to its 2020 Q1 financials. (Table 2) Besides, its stock price gradually declines over the year since its first entrance to the Toronto stock market on February 4, 2019.
Table 2: Financial Ratios for Supreme Cannabis Company | Source: Supreme Cannabis Company SEC filings

Forward-Looking

Although they suffer from significant operating losses, Supreme believes that they can bring profitable returns on investments from its R&D infrastructure plan. However, Supreme needs to revamp its value chain system to lower its operating expenses caused by the construction plan. Therefore, Supreme can grow under the circumstance of transition away from the B2B model to recreational sales in an oversupplied recreational market.

Source: Yahoo Finance, The Supreme Cannabis Company, Inc.

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JayY@Vapebiz.net
Kentucky-based writer and editor focuses on business, finance, and investment in the cannabis industry. Jay made her first foray into the marijuana market through her friends in college, acknowledging medical cannabinoids in the psychotherapeutic area. Although she stayed active constantly during her college years in social activities including feminist movement and climate change, Jay did preserve with interest in marijuana. By exploring the volatility of weed, Jay intends to dig out innovation, technology, and culture in the cannabis landscape.

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