The Supreme Cannabis Company, Inc. (OTCPK: SPRWF) is a Canadian publicly traded company, engaged into cultivation and distribution of sun-grown cannabis through its wholly-owned subsidiary 7ACRES. 7ACRES is a federally licensed producer of medical cannabis pursuant to the ACMPR operating inside a 342,000-sq. Ft. Hybrid Greenhouse facility. The Hybrid Greenhouse combines the best technology of indoor production with the efficiencies and sustainability of a greenhouse, in a single large-format production footprint.
In the recent past, the company’ operating and market profile has substantially benefited due to lucrative and growing Canadian cannabis market. Supreme focuses on executing on its B2B strategy in the cannabis space and intends to position 7ACRES as Canada’s leading brand for premium cannabis flower and leverage its perceived quality advantage by working with multiple re-sellers to capture the premium market segment.
Consequently, management is focused on developing and maintaining 7ACRES’ position as a leading brand of premium cannabis flowers at scale. The B2B model is designed to allow 7ACRES to grow its revenue through high-value bulk sales while maintaining its focus on cultivation, without the expense of patient acquisition and retention or retail order fulfillment and logistics. Supreme anticipates construction of all the 7ACRES flowering rooms to be complete by the end of calendar 2018.
Supreme is regularly considering opportunities in emerging cannabis markets and over the past few months have significantly expanded its market profile.
Key recent highlights:
- The firm reported investment in Medigrow Lesotho (PTY) Limited (“Medigrow”), a licensed producer of cannabis in the Kingdom of Lesotho. Supreme anticipates Medigrow to become a leading supplier of GMP-Certified medical cannabis oil produced in Lesotho.
- During the three and nine months ended March 31, 2018, Supreme added multiple retail partners including International Herbs Medical Marijuana Ltd. d/b/a/ Zenabis, Terrascend Corp. d/b/a Solace Health, Puresinse Inc., and Potanicals Green Growers, Inc. Strong bulk sales transactions continued during the three months ended March 31, 2018 resulting in revenues of $2,023,184, a 24% increase from the previous quarter.
- On February 26, 2018, Supreme, through its wholly-owned subsidiary 7ACRES, entered into a definitive supply agreement (the “Supply Agreement”) with BlissCo Cannabis Corp. (“BlissCo”). 7ACRES will supply BlissCo with a minimum of 1,000 kilograms of premium quality dried cannabis on a take-or-pay basis over a twelve-month period starting July 1, 2018. The maximum aggregate value of the Supply Agreement is estimated to be $6,000,000 representing a further validation of Supreme’s premium-focused, branded wholesale B2B model.
- On January 25, 2018, Supreme, through its wholly-owned subsidiary 7ACRES, entered into a definitive supply agreement (the “Agreement”) with Cannmart, Inc. (“Cannmart”) a wholly-owned subsidiary of Namaste Technologies Inc. (CSE: N) (FRA: M5BQ) (OTCMKTS: NXTTF), whereby Cannmart has committed to purchase 1,000 kilograms of premium quality medical cannabis from 7ACRES in 2018, on a take or pay basis.
From a liquidity perspective, As at March 31, 2018, the Company has a working capital surplus of $75,911,920 (June 30, 2017: $54,195,849). The Company believes that after the substantial completion of the Facility positive operating cash flows will be generated. Should additional capital requirements or the replacement of debt be necessary, the Company expects it could satisfy these requirements through debt restructurings, capital raises or asset sales.
Taking all this into consideration, analysts tracking the stock believes that SPRWF has all the reasons to succeed over the near to medium term. Also, SPRWF is now an attractive play due to the legalization of recreational cannabis. Taking a valuation call on the stock and the sector, share now ruling at $1.25, it can move to a level of $2.70 in next few months.
About 7 Acres: 7ACRES is a Licensed Canadian Producer, focused on cultivating premium dried cannabis flowers on a commercial scale. 7ACRES is a leading Canadian B2B Licensed Producer, a cannabis business model it pioneered in 2016. Currently, 7ACRES operates 40,000 sq. Ft. of operational capacity which is expected to have an average output of approximately 5,000 kilograms of dried cannabis per annum in the current fiscal year. The Company does not have any Canadian operations independent of 7ACRES.
The 7ACRES Facility is located in Kincardine, Ontario. It is expected that the Facility, once complete, will span more than 342,000 sq. Ft. Management expects the Facility will be able to produce 50,000 kilograms of premium dried cannabis flowers per year once it is able to operate at full capacity. The Facility has been developed to produce premium dried cannabis, at scale. The Company expects that the facility will be fully completed in early 2019.
Financials for three months ended March 31st, 2018:
SPRWF has a FYE of June 30th.
Revenue: During the three and nine months ended March 31, 2018, the Company generated revenues of $2,069,032 (March 31, 2017: nil) and $5,309,671 (March 31, 2017: nil), respectively. On June 28, 2017, the Company, through its wholly-owned subsidiary 7ACRES, was granted permission to sell under the ACMPR regime. As a result, commercial sales and execution of the Company’s B2B business model have commenced.
Construction of the 7ACRES Facility: For the three and nine months ended March 31, 2018, the Company’s total capitalized expenditure related to the Facility increased to $18,259,680 (March 31, 2017: $2,114,380) and $46,595,273 (March 31, 2017: $5,003,022). For the nine months ended March 31, 2018, the capitalized expenditures include $3,743,779 (March 31, 2017: $467,593) of borrowing costs directly attributable to the construction of the Facility. The increase in capitalized expenditure is a result of accelerated construction efforts aimed at the rapid expansion of the Facility including the three newly licensed growing rooms.
Profitability: Gross profit, including the impact of fair value changes of biological assets for the three and nine months ended March 31, 2018, was $1,846,634 (March 31, 2017: nil) and $4,580,306 (March 31, 2017: nil), respectively
Liquidity and Financial Flexibility: As of March 31, 2018, the Company had a cash balance of $78,496,912 and current liabilities of $12,778,276. The Company’s existing resources are sufficient to settle its current liabilities. Management believes the current resources available will provide for a substantial expansion of the Facility, barring any unforeseen delays or complications. All of the Company’s liabilities are due within 12 months, except for a 13 portion of its convertible debt, which is due November 14, 2019. Subsequent to March 31, 2018, $100,000 of the convertible debt was converted into 62,500 common shares.
Key risk factors and potential stock drivers:
Continuing expansion of the legalized cannabis sector could be a catalyst for the company’s shares;
Supreme is focussing on high volume B2B market; therefore, this strategy could lead to lower realization and risk related to commoditization in an overly supplied market;
Company’ ability to grow revenue while significantly improving its profitability will continue to remain a critical price sensitivity for the company;
Company’s ability to maintain its liquidity and financial flexibility to fund its incremental capital requirements. Any significant time and cost overrun in its ongoing 7ACRE project could adversely impact the company’ business and financial profile.
Stock Chart:
Comments:
- On Wednesday, June 13th, 2018, Supreme was at $1.28, on volume of 373K shares exchanging hands. Market capitalization is $313.247 million. The current RSI is 45.68
- At $1.28, shares of Supreme are trading equal to its 50-day moving average (MA) at $1.28 and below its 200-day moving average (MA) at $1.41
- The present support and resistance levels for the stock are at $1.1833 & $1.3833 respectively.
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