Supreme Cannabis 2020, A Simple Approach On The Path To Profitability

Many expect 2020 to go down as the shakeout year for the Canadian cannabis industry; the year where winners will make their way to the top and companies with weak fundamentals will be ruled out. Of the potential winners, The Supreme Cannabis Company (TSX: FIRE) (OTCQX: SPRWF) is one Canadian player that stands out with its simple yet differentiated approach,  strong core business and focused growth drivers. 

In 2019, the company built the infrastructure, developed the brands and attracted the people necessary to establish a winning Canadian cannabis business. In 2020, a few key drivers are accelerating the company forward and setting it apart from other players in the space: 

1. Realizing scaled efficiencies with construction on flagship facility complete 
2. Transitioning to a high-margin CPG business with consumer-facing brands 
3. Gaining recreational market share with new brands and product formats 
4. Delivering 2.0 products that showcase high-quality cannabis inputs 
5. Relying on a proven team from operations to the c-suite

1. Realizing scaled efficiencies with construction on flagship facility complete 

With the completion of the company’s flagship 7ACRES facility in Kincardine, Ontario, Supreme Cannabis joins the small list of licensed producers with fully built-out operating assets and is first on the list of producers with a scaled cultivation asset capable of producing premium cannabis. 

This 440,000 square foot facility includes administrative areas, processing space and of course almost 250,000 square feet of cultivation space. In order to maintain a premium product, the company takes a small-batch approach to cultivation, growing in rooms no larger than 10,000 square feet, completing a full plant 2-week dry, and finishing the cannabis with a hand-trim.  

With construction complete, 7ACRES has the ability to maintain its premium practices while truly benefitting from scale; operating at scale brings about production efficiencies, increases the number of harvests per week and allows for greater automation and other advancements that help both top and bottom lines.

From the beginning, the company aimed to build meaningful square feet, not the most square feet. As the industry enters into an anticipated period of oversupply, Supreme Cannabis’ approach to premium cultivation is more important than ever. 7ACRES’ differentiated high-end product makes the company less susceptible to the pricing pressures the industry is facing.  

2. Transitioning to a high-margin CPG business with consumer-facing brands 

With construction complete, Supreme Cannabis also gains additional packaging capacity at the 7ACRES facility. Since inception, packaging constraints have left 7ACRES dependent on making bulk wholesale sales to other licensed producers. With a desirable premium product, strong consumer brands and greater packaging capacity online, Supreme Cannabis is now able to transition to 100% consumer-facing sales and capture more attractive recreational margins.

With 100% consumer-facing sales expected by the company’s fiscal Q3 (January 2020 to March 2020), management is on track to transform Supreme Cannabis from a wholesale supplier to a consumer packaged goods (CPG) company. There is nothing subtle about the change and the increased capacity, as the integration allows 7ACRES to sell all products into the lucrative recreational market directly to retailers that currently are having difficulty keeping popular – and award winning – 7ACRES products in stock.

After recently inking deals to supply retailers in Quebec and Newfoundland and Labrador, 7ACRES products are now available throughout all of Canada. With additional distribution opportunities, the company intends to install two new bottling lines at the facility during the current fiscal year (which runs through to June 2020), further increasing 7ACRES’ output.

3. Gaining recreational market share with new brands and product formats 

In July 2019, Supreme Cannabis closed the acquisition of wellness cannabis brand Blissco. The company subsequently installed a large-scale ethanol extraction system in addition to the existing CO2-based extraction system Blissco was operating in British Columbia. Blissco is forecasted to have the capacity to produce 7 million tincture bottles annually.

In the first half of the calendar year (H2 of Supreme’s fiscal year), the company will begin to realize the benefits of these additional operations and new products coming online. Blissco recently launched a new full-spectrum CBD (cannabidiol) oil branded Pūr Dew. Supreme Cannabis also introduced Sugarleaf by 7AC, offering a new product format and brand for consumers seeking more convenient and accessible cannabis experiences.  

4. Delivering 2.0 products that showcase high-quality cannabis inputs 

Also upcoming – the company expects to benefit from a full quarter of 2.0 product sales by Q4 fiscal 2020 (May-June). The first 2.0 product to market will be from a partnership struck last summer with vaporizer company Pax Labs, a market leader with over 1.5 million devices sold worldwide. Pax was proactive in penning  agreements with select producers ahead of Cannabis 2.0. In October 2019, Canada amended its cannabis regulations, allowing new products, including vaporizers, but with requisite product approvals the market is only just getting off the ground. 

Through its agreement with PAX, 7ACRES is one of only four licensed producers chosen as initial partners to create cannabis oil pods for the PAX Era. Supreme Cannabis is in good company, other initial partners include: Aurora Cannabis Inc. (TSX: ACB) (NYSE: ACB), Aphria Inc. (TSX: APHA) (NYSE: APHA) and Organigram Holdings Inc. (TSX: OGI) (NASDAQ: OGI). 

5. Relying on a proven team from operations to the c-suite 

As Supreme Cannabis and the rest of the cannabis industry mature, attracting top talent is of the utmost importance. Supreme Cannabis’ appeal and potential is clearly illustrated by the types of leaders it is attracting at every level. Most recently, John Griese joined the company as Chief Operating Office. This executive has held senior level positions in operations and supply chain with Nestle and Pepsico. In addition to John, Joel Toguri recently joined Supreme Cannabis as SVP Commercial, Joel brings over 20 years of regulated industry knowledge from both the cannabis and alcohol and beverage space. 

To achieve its vision of operating as a CPG company, Supreme has clearly been building out a strong management team, bringing in seasoned vets with success in the CPG business. On January 6, the company announced the departure of CEO Navdeep Dhaliwal and appointed Colin Moore, Supreme Cannabis director and former President of Starbucks Coffee Canada as Interim President and CEO. Moore will guide the ship while the board conducts a search to hire a new CEO to with the background to succeed in its mission for profitable, long-term growth. In the interim, there are few people better positioned than Mr. Moore to take on the role of CEO. Colin has 40 years of experience driving growth and efficiencies in consumer businesses like Starbucks, as well as deep familiarity with the Company and management team as a Board director.

Supreme Cannabis trades as FIRE on the Toronto Stock Exchange (TSX: FIRE), SPRWF on the OTC Exchange in the United States (OTCQX: SPRWF) and 53S1 on the Frankfurt Stock Exchange (FRA: 53S1). Follow Supreme on Instagram, Twitter, Facebook and YouTube.

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About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.