Supreme Cannabis (TSE:FIRE) on Securing 90M Corporate Credit Line

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Supreme Cannabis (TSE: FIRE) (OTCMKTS: SPRWF) (FRA: 53S1) CEO, Navdeep Dhaliwal on joins Midas letter to provide a company updates, including appointing their new Chief Operating Officer, John Griese. James and Nav dive into Supreme’s Q1 financials, which included announcing securing a $90 million credit line from BMO. Supreme Cannabis recently won Brand of the Year at the Canadian Cannabis Awards for their Seven Acres brand. Nav discusses the Canadian Cannabis CPG 2.0 market, and the impacts on revenues across the industry. 

Transcript

James West: I’m joined now by Nav Dhaliwal, who is the Supreme Cannabis CEO. Nav, welcome back.

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

James West: You bet. Nav, lots of big news in Supreme’s universe. You hired a new Chief Operating Officer?

Navdeep Dhaliwal: Yeah, so John Griese. We’re really excited about that. So, he comes with, you know, 30 years of CPG experience with big companies such as Frito-Lay, Nestle, PepsiCo – Canada and US. But I would say the more exciting part for us is, also been in the cannabis industry in California. So you know, sometimes it’s a risk when you’re bringing on people from CPG; they’re used to normal markets, you know, mature markets, whereas, you know, we’re still building an industry. So someone that comes with that combination of experience, you know, we think it’s going to be a very valuable addition to our team.

James West: Sure. And then, actually, I want to talk about the $90 million corporate credit line, first and foremost, because that’s an impressive coup in this market. Tell me how that came together, and some of the hoops you had to jump through to make that happen. It seems like November 14 is not the most intuitive timing for that, according to, you know, what you would expect in the investment climate that we’ve been in, in the last year.

Navdeep Dhaliwal: Yeah, so I think a few comments there. Number one is, you know, it’s something that we had provided guidance that it was an objective for the company, and we achieved that. Two is, I think, you know, in the current state that capital markets are in, you know, with equity just being vacuumed out of the market, I think it’s a key accomplishment, and really sets us apart in a certain manner, because, you know, the company is credit-worthy. So this requires, you know, assessment in terms of business plans, forecasts, and so, you know, being credit-worthy with equity markets retracting, you know, that’s a key step.

And I think lastly, I believe we are the first company, you know, post-some big regulatory issues in the industry, that we went through a complete, rigorous third party audit on compliance with Health Canada requirements. So for us, you know, in terms of just the regulatory aspects of our operation, our business plans, assessment of management, and just generally being capitalized in the current state of the market, you know, it’s a big validation for us. And I think it really sets us apart and puts us in a rare group of LPs that have Tier One debt.

James West: Wow, you bet. You won Brand of the Year at the Canadian Cannabis Awards; what brand won? The Seven Acres brand?

Navdeep Dhaliwal: Yeah, so that’s two years in a row, Seven Acres won Brand of the Year. And, you know, I think very well-deserved. It’s, you know, the company – we believe the reason why the brand is so powerful is just in terms of the passion of the people that produce the product, and just a general belief in the ethos of it. And I think even more so is, you know, the success of our Jack Haze strain launch. 

So showing how, you know, we can carry over that marketing ability, that brand-building ability, to new products and new product launches, which is, you’re seeing in the market, is becoming absolutely essential. You know, the consumer – at the end of the day, it’s a consumer market, and if you don’t have new and attractive products that consumers are demanding, and be able to package it, brand it and market, you know, that’s something we think always has set us apart.

James West: Wow. Impressive. And then, you also in your last financial, you announced a 122 percent year-over-year net revenue growth, and so it would appear that financially, you’re also executing rather well on your building of a credible revenue package.

Navdeep Dhaliwal: Yeah, so I think, you know, thanks for pointing out the positives. You know, year-over-year, it looks good, but you know, we had a 40 percent decline in revenue quarter-over-quarter, which, you know, you have to expect that in this market. So, building a new industry.

But I think the key stat is, 33 percent, you know, on average, over the last four quarters. So in terms of the trend, we’re experiencing great revenue growth. But also, we’re seeing a significant increase in our CPG revenue, and you  know, a key milestone for us is, come January, you know, we have the ability to put out all our product in CPG and in the brand. And I think what you’re seeing in the market is a significant decline in the B2B market: the pricing, just the demand for it. So showing that, you know, you have to be a CPG company, and you have to have strong brands, and that’s how you’re going to protect and, you know, likely increase margins over time.

James West: Sure. Do you think that the Canadian Cannabis 2.0 CPG market is going to add to the overall revenue picture for the entire industry, or do you think it’s going to take away from just the premium dried flower market that we’re in now?

Navdeep Dhaliwal: So I think in terms of looking at the aggregate market size, what’s really going to add to it is just more distribution. You know, I think that’s obvious. You need more places for consumers to buy product.

I think 2.0 should bring in a lot of novel consumers, but, you know, I think you should also expect big challenges just as you had with the rollout of 1.0. So, you know, we see the flower market continuing to grow. You know, in terms of relative percentage you see a decrease, but you even see this in the US. You know, you see some consumers transition into more flower convenience products, so you’re seeing pre-rolls emerge as the second-most popular product in the country, which we see as really a flower, flower convenience product.

So overall, you know, we think you’re going to see a lot of challenges with 2.0. But in terms of our focus, we’re still big believers in the flower market, flower convenience products, and in terms of 2.0, you know, we’re making a big bet in terms of vapes. You know, it’s going to be a very competitive category, but a big one, and so we’re very confident of our partnership with PAX. You know, we’re one of five.

And then we have quite an exciting strategy coming on the concentrates side of things. So you’ll see, you know, small batch, you know, limited drops. You’ll see some exciting marketing campaigns around that, or educational campaigns. So, you know, we’re pretty excited about that rollout.

James West: Sure. You’re still focused on producing all of your cannabis in Kincardine, Ontario? For the most part?

Navdeep Dhaliwal: So, for the most part, in terms of our flower products, yes; that’s our primary production site. And then just recently, about five months ago, we announced the acquisition of a company called BlissCo. So when it comes to our oil products, we produce those in Langley, BC, and you know, coming into the New Year, you’ll see that start contributing significantly to earnings. Just even last quarter, it did just shy of $1 million in revenue.

James West: Do you think that the competitive environment for all these new products is going to be, like, a case where, you know, we’re almost  suffering from oversupply of dried flower products across the board; are we going to suffer from an oversupply of, for example, vape pens and candies and all of this stuff?

Navdeep Dhaliwal: So on the flower side, I think it’s too early to say if it’s oversupply. Yes, supply is definitely catching up, but distribution is not built out. So without the, you know, it’s kind of, you know, one builds out and it maxes out with supply, but until you have, you know, real distribution built out, retail built out…like in Ontario, probably a couple percent of what it should be at, right? So that still needs to be built out.

In terms of, you know, the flower side of things, you know, we still see that market increasing.

James West: And the black market has, you know, has proven to be a little bit more resilient than everybody thought going into this first year of full cannabis legalization, and HEXO has responded by rolling out this lower-priced product, which obviously is going to eat into margins and, probably, eat into consumption of their more expensive products. Do you think that that is sort of the reality of the runway that’s ahead of the whole industry in Canada, going forward, is that more LPs are going to have to introduce lower-priced stuff that can compete with the black market? Or do you think that the product variability is going to be the silver bullet?

Navdeep Dhaliwal: So I think pricing is just one component. You know, the informal market being resilient, you know, shouldn’t be unexpected. You know, at the end of the day, this is a consumer product; consumers will make the choice, and if consumers are, in their perception, finding a better product at a better price, they’re going to buy that. They’re comfortable with that channel. 

So price is just one component. I think if you have inventories building out, dropping price, you know, should theoretically help move that product; but in the grand scheme of things, you know, if you want to bring consumers into the legal market, you have to produce a quality product that’s fairly priced with, you know, a great brand promise around it. And, you know, there’s still a lot of work to do.

I think there was a lot of assumptions made about this consumer, you know, not recognizing it’s a very discerning consumer. And the informal market has produced a very quality product for a long time, so as a company, you know, we really respect in terms of the history of what’s got us here. And, you know, in terms of having a respect for the plant, so, you know, I would be very concerned if I had millions of square feet of greenhouse and now you see the market turning, and these prices are going to be cut in half. You know, 75 percent.

So you know, our view has always been focused on what’s that end product we want to produce and, you know, do we have enough demand to sell it. And so we feel confident about where we’re at right now, because our premise from the beginning, you know, we’ve been saying this for years – we haven’t changed this – is, you know, this consumer is discerning. They want a good product, they want a good price, and they want the brand to stand for something. And I think we’ve accomplished that.

James West: There was a time when you were actively developing production in Lesotho. And I haven’t heard that mentioned in a long time in the context of Supreme; is that still something that you’re chasing?

Navdeep Dhaliwal: Yeah, so the overall, that project is progressing quite well.

James West: Oh, okay, great.

Navdeep Dhaliwal: I would say, you know, we’ve been very impressed with the team there, especially for that part of the world. So in terms of an update on that project, you know, the EU-GMP ready facility, you know, it’s designed for those requirements, you know, is near complete. And we expect consultants from regulators in the European market to be there early Spring.

So the thing is, it takes time. You know, building out a large production facility, you know, cultivation, then extraction, all to EU-GMP standards, and then having it accredited, takes time. But once that channel opens up, you know, that’s a really attractive asset for us, and long-term supply.

James West: You bet. All right, Nav, that’s a great update. We’ll leave it there for now. Thanks very much for joining us today.

Navdeep Dhaliwal: Thanks, Jim. Always fun to be here.

 

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.