August 13th, 2018
Investors in the cannabis industry have been inundated with major transactions, large expansions, and new product launches over the past year. While Canada’s market is projected to reach C$22.6 billion over the coming years, according to Deloitte, many licensed producers have never operated at the scale needed to serve the country’s recreational market—even the largest companies have only been around for a few years.
Growing, producing, and selling cannabis in a new and highly-regulated market is challenging enough before considering the fact that these companies are expanding into new market verticals and geographies, as well as entering the brick-and-mortar retail business. The execution risks are not insignificant.
The Supreme Cannabis Company (TSX-V: FIRE) (OTC: SPRWF) (FRA: 53S1) is unique as they have not tried to make headline splashing news—instead they’ve been working quietly behind-the-scenes to ensure their core business is a success and build a proprietary competitive advantage and ensure they will be the leading premium cannabis flower brand in the Canadian market.
Prudently Scaling Up Production
Supreme Cannabis has been scaling up production without compromising its industry-leading quality. On July 11, the company announced that it received approval from Health Canada to commence cultivation on an additional 30,000 sq. ft. of flowering rooms at 7ACRES’ 342,000 sq. ft. facility located in Kincardine, Ontario, which will double its annual production run rate from 5,000 kg. to 10,000 kg. of dried cannabis per year.
“Since receiving its license just over 24 months ago, 7ACRES has demonstrated that it is one of the fastest scaling producers in the industry, having added more than 60,000 square feet of flowering capacity over this brief period,” said John Fowler, CEO of Supreme. “With this capacity expansion, 7ACRES is positioned as a top producer and the leading recreational brand for adult consumers seeking a high-quality product.”
Management expects to complete production of the 342,000 sq. ft. 7ACRES facility by the end of this year and hit an annual production run rate of 50,000 kg. per year by the first half of 2019. The revenue growth from their ability to scale at quality have made it one of the fastest growing licensed producers in the industry, with revenue hitting more than C$5 million during the nine month period ended March 31, 2018. It is noteworthy that 7ACRES only received their sales license about a year ago (June 28, 2017).
Securing Distribution Channels for Day 1
Supreme Cannabis has been equally focused on securing distribution channels for its growing production. On July 11, the company announced that it entered into supply agreements with the British Columbia Liquor Distribution Board to supply recreational cannabis to British Columbia’s private cannabis retailers.
“British Columbia is a bellwether province for the recreational cannabis space – we consider it one of the most informed and discerning consumer markets for cannabis in the country. It is a testament to our brand, culture and our people that we will be listed in the highest brand category in BC,” said John Fowler, CEO of Supreme Cannabis.
The new agreement marks the company’s third provincial distribution agreement, alongside Manitoba and Alberta. In each of these provinces, the company’s products are being listed in the highest brand category – an obvious indicator of pricing. Management will provide updates on further provincial partners as over time, but anticipates being listed on shelves from coast-to-coast in the first year of the Canadian recreational market.
The Supreme Cannabis Company (TSX-V: FIRE) (OTC: SPRWF) (FRA: 53S1) has been very successful in tangibly growing its production and distribution footprint across Canada rather than simply announcing new plans for expansion, letters of intent, or just aspirational objectives. By building these strong roots, the company is well positioned to move into other areas, such as new product categories that are expected to become legal next year (e.g. edibles, concentrates, and drinks), when it makes sense to do so. The concentrates market, in particular, has been a significant segment of the recreational cannabis market in the US and that product is driven by the quality of the input flower – Supreme Cannabis’ premium quality products provides an obvious advantage when that market comes online in the country.
In addition to the recreational market, the company offers investors exposure to the medical market through its investment in Medigrow—a Lesotho cannabis oil producer. It is worth noting that Supreme Cannabis was the first LP to make a deal in the country of Lesotho – Canopy and Aphria quickly followed in Supreme’s footsteps shortly after.
“Lesotho has a culture that’s supportive of medical cannabis without the baggage that other jurisdictions have in the narco business. The commonwealth’s language, laws, and stability are all favorable, and several other licensed producers have followed suit in the region” said John Fowler in an interview with the Globe & Mail.
The company has been building out its team as it executes on its strategic growth plans. Recently, the the former President of Starbucks Canada joined Supreme Cannabis’ board, bringing extensive branded consumer and global expansion experience to a team that already features veterans from the tobacco and alcohol beverage industries.
Investors may want to take a closer look at the stock given these many catalysts and its growth trajectory moving forward. Management has a proven track record of executing on their simple plan, they’ve shown how to prudently deploy capital, and they have a management team that has successfully navigated highly regulated consumer product industries. At the same time, their valuation is significantly lower than many peers likely reflecting the fact they have maintained a low profile as they built out a core business
For more information, visit the company’s website at www.supreme.ca.
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.
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