March 25, 2019

Supreme Cannabis Company Inc (TSE:FIRE) 50 Percent Revenue Increase QOQ

Midas Letter
Midas Letter
Supreme Cannabis Company Inc (TSE:FIRE) 50 Percent Revenue Increase QOQ

Supreme Cannabis Company Inc (TSE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1) CEO Navdeep Dhaliwal updates viewers on the company’s international operations and its performance in the Canadian recreational market. Supreme Cannabis is pleased with its investment in a Lesotho-based producer of medical cannabis oils and is looking to open export channels for that product. Dhaliwal emphasizes that the company has established itself as a premium cultivator and is pleased with the performance of its premium brand, 7Acres. The company’s Q2 2019 financials were impressive and included a 359 percent increase in revenue YOY and a 50 percent increase in revenue QOQ. Dhaliwal notes that in terms of run rate, Supreme Cannabis is 8th in the country, despite the company’s relative youth when compared to its competitors.


James West:   Nav Dhaliwal joins me now. He’s the CEO of Supreme Cannabis Company, my apologies, trading on the TSX under the symbol FIRE. Nav, welcome back.

Navdeep Dhaliwal:  Thanks, James, good to be here.

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James West:   Actually, this is the first time I’ve talked to you as the CEO.

Navdeep Dhaliwal:  Yeah, I believe so.

James West:   Well, that’s interesting. So you spent a lot of time as the CFO; to say you know the company inside out is not an understatement.

Navdeep Dhaliwal:  Uh, yeah, I think you could say that. John and I have been, you know, hard at work for a long time, so, you know, a lot of growth, very fast pace. But yeah, I’ve been involved for about three and a half years now.

James West:   Okay. What is the status of Supreme Cannabis’ development? What’s the whole footprint look like?

Navdeep Dhaliwal:  So our footprint is currently 120,000 square feet of cultivation. We’re about at a run rate of about 17,500 kilos a year. Construction is going to be completed on the cultivation rooms here in the next month or so, and then the entire facility, which also includes support infrastructure, centralized infrastructure, done in the next few months.

But I would say more importantly, the status is the markets realizing that flower consumers appreciate subjective quality, sensory characteristics…I believe we’ve been successful at establishing ourselves as a premier cultivator with a premium product, and that’s been recognized now with the brand 7Acres, which we believe is one of the leading premium flower brands in the country.

James West:   Yes. I had a party called the Cannabis House Party, and Supreme was one of the favourites of the company gathered.

Navdeep Dhaliwal:  I’m upset I didn’t get an invite, James.

James West:   Well, actually, I’m surprised I didn’t. it happened very all of a sudden, like it seriously, we had an idea in the afternoon and we just invited who had passed through the environment that day. But next time, Nav, next time.

So Supreme has also got operations internationally. You mentioned that you had a something growing in Lesotho.

Navdeep Dhaliwal:  Yeah, so we took a similar view in terms of international. So domestically in Canada, our thesis on our first business is very simple: you know, focus on somewhere where we can build a competitive advantage. We believe that would be in premium flower for the Canadian marketplace.

Internationally, when we looked at the market, we believe the international market is going to be primarily medical for the near term; you know, we believe more and more rec countries will also emerge, but you know, with that view, we wanted to make an investment in a producer of medical cannabis oils for international markets.

So we did a $10 million investment into a company called MediGro, based in the Kingdom of Lesotho, with also a long-term supply agreement. So we’re quite happy with that investment; the team is executing fantastically; you know, it’s comparable to Canadian operations. And we’re producing oil and we’re working on opening up export channels.

James West:   Okay. So where would you ship oil to from Lesotho?

Navdeep Dhaliwal:  That’s yet to be determined. I think, you know, there’s, it’s, in a previous life I dealt with physical commodities, and it’s all about opening up the channels. So I think there’s, for quite some time you’re going to have a shortage of supply in the medical markets. This is a project that’s far ahead; we believe it’s one of the most advanced international projects. So there’s the EU, there’s Canada, these things still need to be established, and that’s where a lot of the work we’re doing right now is in opening up that channel.

James West:   So then, is the progress of medical normalization, I’m going to call it, of cannabis as a medicine, proceeding at the same pace as it was in Canada in the earliest stages, or is it much slower in Europe?

Navdeep Dhaliwal:  Well, I would say it could be either. It could be slower, it could be faster. So for example, I think many forget that Canada had a fairly developed patient platform, you know. Patients have been accessing medical cannabis for quite some time under the MMAR program, so Canadians had a lot of familiarity with it, and it was a transition of supply chain and production.

I think in European countries, I would say it’s a much smaller patient base, much smaller access programs if any. However, it could go much faster if the supply can catch up. So for example, Germany: Germany is going into an established pharmacy distribution platform. So it could go either way, but on average, I think it will take time compared to Canada, because supply is going to have to ramp up, we’re going to have to see what the downstream markets look like.

But, you know, that’s the opportunity. You know, picking where you want to play.

James West:   Right. The proliferation of CBD as a component of wellness in North America – we’ve just seen the CBD rescheduled to Category 5…is that happening in Europe as well? Is CBD being uptaken as a sort of immediately available consumable for, call it, bioceutical or wellness, generally? Or is it still lumped in with THC as a sort of drug?

Navdeep Dhaliwal:  I would say you have a few markets. So one is, you have the food supplemental market in terms of CBD being an ingredient; so there’s many companies in Europe today operating that are selling CBD products.

You have your tobacco alternative market in terms of CBD flower being sold, CBD pre-rolls being sold, which is quite conducive to the European market. It’s much more of a high-volume smoking market, you know, more of a mellow experience, so to say. So I would say it’s actually a little bit more clear than it is here. I think there’s a lot of confusion in terms of, in the US with the Farm Bill, is it going to be FDA, you know, it’s not all that clear yet.

I think some companies have their own strategies and views on it, but I would say Europe has a lot of opportunities when it comes to CBD-type markets.

James West:   Sure. You have supply agreements with some of the other LPs where you also supply cannabis to them. Does that interfere with the quantity of cannabis you’re able to sell into the retail system?

Navdeep Dhaliwal:  No. I would say predominantly at the moment we’re still selling into wholesale as we ramp up our packaging, which, you know, has played well for us in terms of the brand. You know, introducing the brand to consumers, and it’s highly coveted brand. So over time, we will scale that down, and our intention is 7Acres will be predominantly for the social or recreational market, as we call it.

We believe there’s ample demand for that product. We’re quite happy with our positioning at the moment; you know, we believe there’s several competitors or peers that are producing a comparable product, in our view, in the smoked flower market, and I think that’s very important to define it as such; meaning, other products will be different. But in an environment, our view is, most of the country, the supply side response is going to be in the lower to medium quality product specs. We believe Canadian consumers are quite discerning, and are looking for a premium flower product.

So we feel quite good with our positioning in terms of, we believe we’re probably one of the only ones doing it at scale, and I think that’s something we really innovated and solved with the team at 7Acres is, you know, how do you produce a premium product at scale? We think very few are doing it.

James West:   Yeah. Well, as a consumer of premium dried flower myself, I find one of the biggest problems is that the process of irradiation that is mandatory in Canada causes such a destruction in the quality of the smoke, ultimately, because it has such an effect on the trichomes that are, you know, in the plant that make it what it is. How do you overcome that process of irradiation, and then combined with the amount of time it takes post-radiation for the product to get into the hands of a consumer, to the point where it’s very dry? This is my big, long-winded way of saying I’m disappointed, ultimately, with how dry all of the cannabis that I open up, that comes in the mail, is in Canada.

How do you deal with that to still deliver a premium dried flower, and is that something that is going to remain a challenge for most of the other LPs?

Navdeep Dhaliwal:  I agree with you, it’s a big problem. So it’s something, even if you look back at how we introduced it post-rec is, we really took an approach of ensuring that the product was fresh, especially as you’re introducing the brand. So we pay a lot of attention in terms of when we’re packaging it and when it’s going to hit the shelves and, you know, how long it’s been in package before consumers get it.

You know, there’s, for the most part, we’re quite happy with the product that’s gotten out there. You know, we’re still getting through some, you know, how do you improve that. But the fact is, you know, all these companies are start-ups. You know, this is serious CPG business, you know? It takes time to build these out, and that’s where we’ve focused a lot, ensuring that product quality meets the consumer’s expectations.

James West:   Do you think that ultimately the evolution of regulations will permit premium growers, and I’m not talking about the end product, but growers who focus on such a devotion to the environment that the plant is grown in, that mitigates or removes the requirement for radiation? Do you think that there’s ever a time where we can skip the radiation process and sell fresh cannabis to people at its peak?

Navdeep Dhaliwal:  You know, I don’t try to predict regulation or what governments do.

James West:   But there’s no conversation?

Navdeep Dhaliwal:  But I think in terms of, you know, I think the government took a very risk-averse approach to it. I think, you know, with more and more education – you know, everyone is still learning. The regulator’s learning, you know, there’s a big initiative to legalize cannabis Federally; you know, so everyone’s learning, and I think if there’s a, you know, if there’s a rationale or enough education to ensure consumers are protected as well, maybe it’s different for different channels, you know, possibly, but that’s not something like to predict.

James West:   Right, right. So you’re not aware of any dialogue at the regulators’ level surrounding…

Navdeep Dhaliwal:  Oh, there’s lot of dialogue going on; everyone has things, you know, initiatives that they want more discussion about, or more dialogue, so there’s a lot of things going on.

James West:   Okay, great. And finally, let’s talk about your financials. 359 increase over Q2 2018 in revenues; 50 percent increase from Q1 2019…like, that’s stellar double-digit Q on Q growth.

Navdeep Dhaliwal:  Yeah, we’re quite happy with our most recent quarter, and I would say, you know, more so when you even look at us on a comparable basis. I believe from a run rate perspective, we’re eighth in the country, but out of that Top 10 or Top 8, we’re by far the youngest. So I think a lot of investors or others in the industry forget that we’re only licensed March 2016, so we’re definitely one of the younger LPs. But I think that’s, our approach in the beginning was, you know, quite simple: focus and build a competitive advantage in one thing, because I think the cannabis opportunity, it’s so exciting, there’s a lot of things going on; you can pretty much do everything.

But, you know, that is somewhat dangerous in a robust capital market environment, because, you know, over time, as things mature, you know, certain business principles apply; meaning, you have to do something better than other people in the market to last and build value and build on that advantage.

So you know, we think it’s a testament to the initial focus. We focused on being good cultivators at scale, because we believe that’s the largest market in the world today and that’s the smoke flower market. And you know, even if you look at the US data that talks a lot about incremental or new products taking incremental market share, if you look at aggregate flower sales, they’re growing quarter over quarter. You know, we actually think the market is getting bigger.

So when you look at, we believe it’s a testament to that initial focus, you know, ensuring that we focus on scale; and you’re seeing it now in our results, our production in terms of how fast we’re scaling, and even the approach to scale was, I would say, different. We didn’t build out the greenhouse all at once and fill it all up, you know. We did a very iterative approach in ensuring that we were building IP and standardization. You know, we had a single room, we ran a crop, did another one, ran a crop, did another one, standardized, ran in four crops. You know, really understand that environment, and now we recreate that.

So when, you know, our team walks into a room, all of them are the same, you know? So we can scale them, and we believe that’s why we’re getting that quality, and that’s what makes us different.

James West:   Okay, well, that’s great. We’re going to have to leave it there for now because we’ve gone longer than I normally go on an interview, but it seems to be working for you; the numbers tell the tale. I wish you the best of luck and thanks for joining us today.

Navdeep Dhaliwal:  Thanks, James, great to be here.


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