Supreme Cannabis Co. – Structure & Current State Q2F2020
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Our previous structure on Supreme ($FIRE) noted a decline in sales, growth in inventory, and pointed out what we saw as a rather heavy hand dipping into the SBC till. Still do. These financials are heading straight into what Blue calls the ‘important ones’ – and these might show some of the things an investor should be looking for.
Their share price performance over the past 6 months has been tortuous, yet they haven’t been alone.
To the financials!
- The opening of a $90MM credit facility last November has provided runway, cash at $48MM
- Given they lost $17MM during the Q, they’ll likely need it.
- Gross margin of 29% is a notable drop, down from a stellar 61% last Q. Sales dropped 20% as well, half of their sales high point last summer. Driven straight from inventory impairment. Yet see this.
- Inventory up to $42MM, from $27MM….eep. $26MM of the current total is in finished goods no- less. I haven’t seen any other company transform and accumulate so much, it’s usually held in WIP to support diversion to wholesale or other channels.
- Professional fees on a straight line upward. While only $1.3MM in the quarter (up from $950k previous), these are sometimes a portent of change. And change – as we’ve seen – has definitely happened.
- Capital spend is stabilizing and appears to be reaching a steady state. As they have $23MM in A/P, cash conservation is priority.
- Supreme Heights – what to say. A folly of $1.7MM, was announced late last June as an investment platform of differentiated CBD and wellness brands. Good lord. And no, I didn’t make that up. It and its’ £2MM option didn’t survive the year. At least $FIRE got their money back. As a related party, Ex-CEO and John Fowler’s replacement was Chair of Supreme Heights.
- The Lesotho investment is showing a $1MM book value, and an unrealized loss of some $9.2MM reported since June.
- Their longer term debt is still a ways out, and relatively cheap. Next tranche of convertibles isn’t due until October 2021.
- I’m gonna skip right over the warrants and options. We’ve detailed them in the past, and they are largely far out of the money. The cash settle mechanism of the array of compensation tools they launched last July though will be seen in our “Junk in the Trunk” graph. I’ll post it tomorrow.
- SBC at $4MM. Yep.
Note 9 shows a planned disposition:
Ex-CEO John Fowler has been offering up a notional cannabis job finding service on his Twitter account. Although this tweet offering direction to legal resources for ex-employees is an interesting one to me.
$1.4MM was recorded as provisions for reorganization. Perhaps it was in the works for a while, or maybe just a side project to optimize operations post build. I suspect the latter:
The storyline to me here is pretty straightforward.
From their nadir last summer – with some $20MM in sales in their 3rd Q – the past three financials have flatlined to running around half of that rate. They dropped $20MM for a ‘Health Canada Licence’ (read Truverra’s ‘goodwill’ <sic>), and paid $28MM for a whopping $2.1MM in assets (Blissco)^1.
Other investments (KKE, Heights) have underperformed to say the least. Inventory being impaired (while simultaneously growing) is problematic.
Interim CEO Colin Moore has some time. Probably 2 more sets of financials to show some sort of potential beyond presenting another company at some risk – this one being more promising than most such a short time ago. Just 2 weeks passed between Dhaliwal’s abrupt departure and the following actions taking place:
One take is that they’re looking to conserve cash by compensation via stock. The options might have come on board with Moore (those 5 year tenors are sexy). If they are his, he’s got a fair bit of motivation. More likely it acts as retention for the folks in the front office that dodged the bullets. We’ll see the results of their recent changes in the next financials.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $FIRE
^1 – One might suggest that the prices paid for these assets were what they were at the time. Yep. And that’s no absolution from whether they are worth it or not. Time will bear that out).
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