Go Back

Here’s why Supreme Cannabis is worth a look

Second quarter results for Supreme Cannabis (OTCMKTS:SPRWF) were reported this week, and the numbers looked somewhere between really good and very solid. You may ask, so what?

Why spend the time looking at a company whose investors have suffered a 13.0 percent loss over the past year, whose small revenue base pales by comparison to Tilray and others and whose Wall Street following is close to zero?

Well, consider this. The Toronto based company founded way back in 1979 has a key asset at its disposal. It is called production, and it comes in the form of a 440,000 square foot facility in Kincardine, Ontario. Right now with full legalization in Canada and increasing numbers of states in the U.S. opening their doors to cannabis, having excess capacity is powerful.

Lately, the company has been making lots of noise about its principle brand 7ACRES. Federal licensing in Canada took place back in 2016 aimed at the medical market. But that was before legalization.

[MassRoots acquires COWA Science, expands offerings at “every step of the cannabis supply chain”]

I am not a good judge of difference cannabis brands, but that doesn’t matter. Though still in its infancy 7ACRES has already won “Brand of the Year” for 2018 at AdCann Advertising Awards conference. That’s not so bad.

From BNN Bloomberg

Standout quarterly results

Supreme reported results for their fiscal 2019 Q2 on Tuesday. It’s one of the few companies to report results (Aurora and Aphria being the others) since Canadian legalization last October. With not a hint of an analytical following, it is impossible to gauge expectations. Nevertheless, the numbers stand out like a giant bong.

Revenues increased 359 percent to CA$7.72 million ($5.79 million) and 50 percent on a sequential basis. This is a good performance in light of Canadian legalization and compares favorably with results from Aurora and other larger players.

Q2 ended with a net loss of CA$1.55 million ($1.16 million) down from CA$2.03 million ($1.52 million) during the same quarter a year earlier.

Supreme's Q2/19 revenue was $7.72 million, a 359% increase from Q2/18 ($1.68 million). Net comprehensive loss was $1.55 million this quarter, compared to a net loss of $2.03 million in Q2/18. Learn more: https://t.co/uLdbNLvmlM $FIRE #cannabis #supremecannabis pic.twitter.com/oSXfA7UDBD

— SUPREME. (@TheSupremeFIRE) February 12, 2019

With any of these fledgling companies, losses should be expected. The faster the growth, the more the losses. It’s the trends that count most especially when it comes to costs.

Supreme’s, gross margins in Q2 improved to 48 percent compared with just 8 percent, year over year. For the six months, GMs increased to 30.7 percent from 21.7 percent.

This is good financial music.

Marketing is moving forward

In Tuesday’s investor report, SPRWF shared it had made its first shipments of 7ACRES. This branded High-End Cannabis is now available in six major Canadian provinces.

[Liberty Health Sciences rebuts short seller attack as “materially inaccurate” amidst more change to board of directors]

Supreme plans to launch a line of cannabis oil products. During the quarter it reached an agreement with Medipharm Labs to accelerate the launch and promotion of the brand. In addition, SPRWF is preparing to begin international marketing and formed a partnership with Khalifa Kush Enterprises.

Financial moves to raise capital

During the quarter, Supreme strengthened its balance sheet by raising $100 million of gross proceeds through a “bought deal” offering of 6 percent unsecured convertible debentures due 2021.

The Debentures are convertible, at the option of the holder, into common shares at any time immediately preceding the Maturity Date at a conversion price of $2.45 per common share.

Considering that the stock has traded only briefly in January 2018 and spent most of its trading live under $1.75, this is a big hurdle.

The latest offering will double total debt. Long term obligations will amount to about 50 percent of total capital. This is not the best of all worlds. On the one hand, most of it $175 million is convertible into common stock. However, the terms are pretty steep.

All this is not exactly cool. The conversion premium is a huge 70 percent, and the life of the issue is less than two and one-half years. That could come back to haunt management down the road unless management gets the price much higher.

Rewind

Allow me to repeat the original question. Why spend time looking at a company whose investors have suffered a 13.0 percent loss over the past year, whose small revenue base pales by comparison to Tilray and others and whose Wall Street following is close to zero?

Call Supreme Cannabis a secondary player by just about any measure. You would be right. The conventional wisdom is to stick with the largest companies, especially those with deep pocket backers like Atria, Constellation Brands, Molson-Coors, etc.

The attraction to Supreme is its production, improving the distribution of its key 7ACRES brand and the favorable trends in its operating financials. Supreme’s results are constantly watched by bigger names in the cannabis business. There is not an industry player that couldn’t use a quick addition to production and a brand name to go along.

The fact that the stock underperformed its peers during 2018 falling 52 percent is another reason. From the December low in prices various cannabis stock indices gained about 50 percent, shares of Supreme gained 86 percent. In January alone SPRWF was the fourth best performing major cannabis stock with nearly a 50 percent spike.

[Aurora Cannabis: Q2 revenues rumble while margins crumble]

Supreme Cannabis may not be a threat to Tilray, Canopy, or Cronos but it is worth a look.

Add comment