Supreme Cannabis – The Right Team and Foundation for Cannabis 2.0

The Supreme Cannabis Co. [stock_market_widget type="inline" template="generic" color="default" assets="FIRE.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has had a busy final few months of the year. While the entire cannabis market has been sliding, it’s been easy to overlook a solid performer. This piece reviews some of the bigger news items coming from the company.

Product Strategy – Start with an Award-Winning Brand

Supreme CEO Navdeep Dhaliwal credits the brand’s success to the passion of the team behind the product and their relentless focus on creating a good product at a good price.

For the second year in a row Supreme’s premium flower brand, 7ACRES, picked up the award for 2019 Brand of the Year at the Canadian Cannabis Awards.

The company has focused on pleasing the cannabis enthusiast, the most discerning consumer, and it’s clearly paying dividends. Supreme CEO Navdeep Dhaliwal credits the brand’s success to the passion of the team behind the product and their relentless focus on creating a good product at a good price.

While we’re still in the early days of the cannabis industry, this is a great start for the company. If they can manage to scale their formula for creating quality brands, then they should see strong sales with healthy margins as new value-add products hit the shelf.

One example of their focus on developing unique brands is their acquisition of Blissco earlier this year. Blissco is a cannabis extraction company focused on creating premium wellness products in the CBD and THC concentrate space.

The company’s facilities are built to an EU-GMP standard. They have now received their oil sales license and have released their first CBD product, Pur Dew. This diversifies Supreme’s product offering into CBD and signals they are serious about leveraging the Blissco brand.

The Blissco arm of Supreme’s business generated just shy of $1 million dollars this past quarter. Moving into the new year, the company expects Blissco to become a substantial revenue generator. As the company builds out its product offering it will provide investors a first glimpse at their ability to scale their premium status.

In other product-related news, the company announced a partnership with Indiva to manufacture and distribute pre-rolls across their portfolio of brands (7ACRES, Blissco, KKE). This allows Supreme to focus on growing cannabis and let Indiva leverage their pre-roll experience.

Lastly, in their 2020 Q1 earnings release Supreme announced they commissioned an automated bottling facility that will allow them to fill 12,000 3.5 gram containers per day. They also announced they will be commissioning a second and third unit in fiscal 2020.

These units are part of their strategy to complete 7ACRES’ transition from a wholesale business to a consumer brand by 2020 Q3.

Given the successful launch of their own in-house developed Jack Haze strain, investors should be excited to see this shift in their business. It will help bolster margins and provide the company with more access to consumers through additional flower SKUs.

Personnel – Net Bench Strength Increase

Over the last few months, Supreme has been adding serious depth to its management and operations team. While they announced the departure of Founder and Chief Advocacy Officer John Fowler, they’ve been adding experience everywhere else.

Most recent was the addition of Dan Sippel as the new General Manager of the 7ACRES facility. As the facility moves from construction and ramp-up to long-term operations this is a welcome addition. His role will focus on maintaining excellent safety standards, a high-performance culture, and solid regulations compliance protocols.

He brings 30 years of experience in high-volume production environments including Natra Chocolate America and Maple Leaf Foods. His track record of performance is well demonstrated and his experience working with the strict regulations around packaged foods is an asset.

Current GM Ram Davloor will transition to full-time Senior Vice President of Quality and Operations Improvement. Keeping his knowledge of 7ACRES and the Supreme team within the company while allowing him to focus on strategic initiatives enables a smooth transition for both Davloor and Sippel.

Another important addition is Joel Toguir as Senior Vice President of Commercial. Given Supreme’s transition from wholesale to retail-focused, this is a necessary addition.

His experience includes the role of vice president of sales at Aphria as well as time spent leading sales teams in the wine and spirits sectors (Souther Glazer’s, MolsonCoors, Beam Global).

He will be focused on leading Blissco’s launch of high-quality CBD products as well as maintaining the standing of 7ACRES, Supreme’s leading premium flower brand.

Lastly, Supreme announced the addition of Jon Grise as Chief Operating Officer. He brings 30+ years of CPG experience to their team and will be responsible for driving improvements across all operating assets and leading supply chain management.

Unlike most “CPG experience” additions made by LPs, Griese brings unique cannabis operational experience working in the California and Australia market (Creso Pharma Limited, Bloom Farms). On top of that, he has executive-level experience at Nestle and Pepsico.

Given Supreme is rapidly expanding their portfolio with the growth of the Blissco and Truverra business arms, his experience should help maintain high-quality operations as they scale.

As we’ve seen with CEO oustings and general underperformance of Canadian cannabis companies, having experienced leadership is key to a company’s success. The addition of the above members puts Supreme is a position to capitalize on their brand equity and solid financial standing.

Financials – Verified Credit Worthiness

We previously completed a full review of Supreme’s Q1 financial performance, however, we want to highlight some notable points.

First is the closing of a $90 million credit facility with tier one lender, BMO. The credit facility is secured by the company’s assets, primarily the 7ACRES facility.

The fact that the company was able to secure non-dilutive financing at a time when equity markets have dried up speaks to the company’s creditworthiness. Notably, only a handful of cannabis companies have been able to secure non-dilutive financing of this type.

Given the degree of due diligence that would be required for a loan of this size, it also speaks to the quality of their assets and operations. Investors should be pleased with this announcement.

Further, another important point to note as we near year-end is that Supreme has already undergone a fiscal year-end, third party audit of their financials.

While talk is heating up around pending write-downs for some LPs with bloated balance sheets, Supreme investors can rest assured that the company has come out clean on the other side of the process.

Looking Forward

The biggest catalyst on the horizon for Supreme is the launch of their cannabis 2.0 portfolio. While their bread and butter is premium flower, they are looking to dominate the vape category as well.

They want to create products that highlight the quality of their cannabis. They have a strategic focus on strains with great sensory characteristics and they want to leverage that for their vapable products.

The company also has a partnership with Pax and intends on rolling out “small-batch” concentrate products that focus once again on quality.

The cannabis industry is now entering a price war where companies will be forced to sell at rock bottom prices to move their excess schwag. At a time like this, cannabis producers with quality brands should be valued at a premium.

We believe Supreme has demonstrated they have the capabilities and passion to maintain and scale their premium standing in the cannabis industry.

In the coming weeks, we will be sitting down with a member of Supreme’s management team to discuss the state of their operations and what’s in store for 2020. Stay tuned.

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Supreme was a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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