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The Supreme Cannabis Company, Inc. (TSX: FIRE) (OTCQX: SPRWF) Struggles to Achieve Earnings Growth

Source: The Supreme Cannabis Company, Inc.
" Supreme Cannabis showed incapability in achieving earnings growth and meeting its financial objective, therefore it decided to withdraw its revenue guidance announced previously. The difficulty in moving forward lies ahead of Supreme Cannabis’s transition from a focus on wholesale to recreational sales. "

SUMMARY

  • Supreme Cannabis reported second-quarter fiscal 2020 results on Thursday, which leading $9 million net revenue, $2.6 million gross margins accounted for 29.1% of net revenue, and $17.3 million net loss.
  • Q2 fiscal 2020 SG&A increased to $4.5 million from 32.6% of net revenue in Q1 fiscal 2020 to 50.1%.
  • Supreme Cannabis drifted away from its financial objective and withdrew fiscal 2020 guidance.
  • Change in the executive team and cost structure reduction accelerate Supreme Cannabis’s transformation to CPG company.

FISCAL Q2 2020 FINANCIALS

The Supreme Cannabis Company, Inc. (Supreme Cannabis) (TSX: FIRE) (OTCQX: SPRWF) announced fiscal Q2 2020 results on Thursday, February 13, 2020. Net revenue was $9 million with a $2.6 million gross profit margin (GPM), which accounted for 29.1% of net revenue in Q2 fiscal 2020. GPM receded drastically to 29.1% from 61.8% in fiscal Q1 2020, along with revenue plunging 20.8% from the previous quarter. Net loss accounted for 17.3 million Canadian dollars, resulted in increases in operating loss and net loss margin. Adjusted EBITDA continued to decline from -$3.3 million in Q2 2019 to -$10.4 million in Q2 2020, accounting for -115.2% of net revenue. Leading causes of net loss and adjusted EBITDA include increases in sales and marketing and general and administrative expenses (SG&A). Its SG&A in fiscal Q2 2020 soared to $4.5 million as 50.1% of net revenue.

Supreme Cannabis showed incapability in achieving earnings growth and meeting its financial objective, therefore it decided to withdraw its revenue guidance announced previously, which was to generate revenue between $150 million and $180 million in the fiscal year of 2020. The difficulty in moving forward lies ahead of Supreme Cannabis’s transition from a focus on wholesale to recreational sales.

Profitability Expense and Leverage Ratios of Supreme Cannabis
Source: The Supreme Cannabis Company, Inc. Public Filings

TRANSITION FROM B2B TO CPG COMPANY

Supreme Cannabis is undergoing the transformation from the B2B model to a premium cannabis consumer packaged goods (CPG) company. However, inadequate market conditions slow down its national retail rollout and therefore hinder Supreme Cannabis’s transition to recreational sales. Consequently, Supreme Cannabis decided to restructure its operations to accelerate the transformation and to meet its financial guidance eventually.

Expansion of 7ACRES

After adding Québec, Newfoundland, and Labrador in its territories, Supreme Cannabis has expanded the distribution of its 7ACRES brand to all 10 Canadian provinces last quarter. Now Supreme Cannabis aims to compete on a national scale and to gain coast-to-coast revenue growth. Specifically, Supreme Cannabis focuses on an enhanced retail sales strategy by partnering with Humble & Fume Inc., a leading cannabis distributor in Canada. Under their comprehensive agreement, Humble & Fume, as the only salesforce for Supreme Cannabis’ recreational products across Canada will help it establish brand presence and engage consumers, and achieve coast-to-coast sales.

Recreational Sales

On December 12, 2019, Supreme Cannabis launched Sugarleaf by 7AC (Sugarleaf) to introduce its premium pre-roll products. Targeting consumers with more specific tastes and preferences, Sugarleaf provides differentiated products made with high-quality 7ACRES strains. Its products are currently available in Alberta, Ontario, and Quebec, and will be distributed to more locations across the Canadian marketplace in fiscal 2020. In addition to more distribution, a refined pre-roll strain and more product categories including cannabis 2.0 products will be added to Sugarleaf ‘s product offerings by the end of fiscal 2020.

Moreover, previously Supreme Cannabis announced the agreement with the established vaporizer company PAX to introduce 7ACRES-branded vaporizer oil. It is available exclusively in PAX’s era-compatible pods as the first 2.0 cannabis product by Supreme Cannabis. Additionally, their joint cannabis products will be sold in the form of PAX pods for the PAX Era vaporizer by the end of Q3 2020. Prior to the end of fiscal 2020, 7ACRES is expected to introduce more cannabis 2.0 products in the form of concentrates.

Likewise, in parentship with Khalifa Kush Enterprises Canada ULC (KKE) established by Wiz Khalifa, Supreme Cannabis launched KKE oil as their first cannabis product under the KKE brand on June 25, 2019. This premium recreational product provides high THC potency, convenient and precise dosing to meet specific consumer demand. These differentiated product offerings will undoubtedly boost Supreme Cannabis’s sales and help improve quarterly performances, but the problem remains as inadequate market conditions impede its national retail rollout.

Sugarleaf by 7AC
Source: The Supreme Cannabis Company, Inc.

R&D Infrastructure Plan

Although Supreme Cannabis suffers from significant operating losses, it believes that its R&D infrastructure plan can bring profitable returns on investments over the long-term. On December 21, 2019, Supreme Cannabis claimed that all major construction on 7ACRES’s 440,000 square foot premium cultivation facility was completed. As a result of the completion of construction, Supreme Cannabis will improve its operational efficiency and efficacy by increasing the trimming rate, its packaging capacity, and adding an additional bottling line into production. This R&D infrastructure plan will improve processing, manufacturing, and commercial packaging operations, as well as update the product inventory to support recreational sales eventually.

Operation Restructure

In cope with difficulties in its transition to recreational sales, Supreme Cannabis determined to implement its operating structure.  According to its operating restructure, Supreme Cannabis has rightsized corporate and operational positions, which resulted in an approximately 15% reduction in employee headcount across the company. This decision will inevitably save its total wages and benefits expenses and lead to improvements in operating margin. As another initiative of the operation restructures, its Board of Directors appointed Colin Moore interim president and CEO to succeed Navdeep Dhaliwal, who has departed Supreme Cannabis. Hence, the operation restructure can accelerate Supreme Cannabis’s revenue growth and transformation to a leading cannabis CPG company.

Additionally, Supreme Cannabis decided to exit its investment in Supreme Heights, a cannabis investment platform in the EU. Similarly, this initiative will improve Supreme Cannabis’s performances and help achieve operating profits by saving additional SG&A expenditures from its investment.

Supreme Cannabis Slogan
Source: The Supreme Cannabis Company, Inc.

Looking Forward

Although Supreme Cannabis has difficulties in achieving earnings growth and unappealing financial results, it established a series of initiatives including operational restructure and new product offerings. These initiatives altogether would probably help accelerate revenue growth in the Canadian market and support Supreme Cannabis’s transformation to the CPG company. We place the best hope on Supreme Cannabis and expect it to grow under the circumstance of transition to recreational sales, while Supreme Cannabis continues to launch its new product offerings and to present its best performance in the highly competitive recreational market.

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Source: The Supreme Cannabis Company, Inc.

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Jay Yang
JayY@Vapebiz.net
Author Bio
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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