In our last structure on Supreme ($FIRE), we really stepped into them.

In watching this company over time, we’ve noted excessive executive compensation, bloated G&A, inconsistent operations…all things which added up to why it had become the complete dumpster fire this company was by last December. An interim CEO cleaned house in January….and stayed around a few months more getting the frat kids out of the place. They changed the composition of the Board to reflect more independence and (presumeably) enact better governance. The new ‘permanent’ CEO Beena Goldenberg (she of Hain Celestial fame. Some may know that Aphria’s CEO Irwin Simon was a CEO of the company as well), has spent the better part of two quarters negotiating with debenture holders, all while likely having to repeat the words ‘right size’ more times than could be considered healthy.

For $FIRE, 2020 itself has been far from smooth. I suggest taking a moment with our last structure to catch up, they’re definitely at a crossroads.

To the financials!

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• Cash at $28MM. There is runway.
• Sales of $44MM in the year…..and an annual gross margin of…..<drum roll>……minus $21k.
• Sales QoQ down $500k to $9.2MM. Not the right direction.
• Over the year: $20MM in wages. $15MM in SG&A. $17MM in SBC. Finance expenses….$17MM. With impairments, it all adds up to a $150MM loss for the year. Ouch.

• At least SBC went from $4MM last quarter to some $400k in this one. Looks like retention bonus’ are finished for now.
• Sales and marketing down to $700k in the quarter (from $1.1MM prior). Professional fees, facility costs, wages, all down. 20% in the case of wages. Exception was in G&A, which went up by $1MM.
• They’ve recognized $3.2MM in restructuring charges over the year. That rise in G&A might have some bleed over from it, or, perhaps it reflects the new CEO’s alignment to how things are going to be done from now on (internal reporting, responsibilities/lines of reporting, corporate org chart, you know, general and administrative stuff).
• Inventory at $40MM. Cumulatively, they’ve written off $60MM in product over the year.

• Nice clean up in Aisle 3 (Notes 2(e) & (f)), adopting new accounting policies around costing of inventory under GoB & lease valuation. Good disclosure and so simple to enact.

Ok. There’s not much more to see here.

The readers of these financials get to revisit some of the less palatable transactions from 2019, which can be stated as the year that almost sunk the company. By the time the Board ‘came to‘ last December, there were related party liabilities associated with preferential ‘rights’ to do business. In Note 12(e), they do mention the ‘indefinite’ nature that the value the rights possess, and state that 9 months after recognizing a million dollars for those ‘rights’….that maybe the last guy shouldn’t have done a deal with himself:

Notice I said ‘came to’ above regarding the Board. Most people know there’s a big difference between ‘waking up’ and ‘coming to’. Just like ‘falling asleep’ isn’t normally confused with ‘passing out’. Either or, it was great timing for $FIRE’s Board to ‘come to’ when they did.

Impairments totalled some $61MM on the year. BlissCo and TruVerra and Wiz rounding out the numbers….which saw goodwill and value ascribed to licenses from the purchases get vaporized:

What is ‘good’ about this company is their current story. That a profligate and reckless past is being atoned for, and will never be repeated. A seasoned professional is in charge. And now $FIRE will crystallize the promise of solid multi-sector CPG penetration via facings and top selling SKU depth in categories of highest margin contribution. Beena’s got eight terribly sexy acres of production space; processing, packaging, and testing capability; supply chain and distribution within every province/territory; and some durable consumer love for their Jack Haze to build upon.

All laid bare.

Which, is why I like the story. It’s a deck clearing turned to promise. The best part is that there’s no excuses from here….none that can be reasonably produced. COVID? “It was like that when I got here”. Need to tackle costs? “Just did that”. What about leverage and funding? “See previous answer”.

I don’t like the stock though. Blue and I have been pretty savage at times about this company, yet I believe it’s been for good reason. They’re really in a pickle. <As a sidebar, I’ve interacted with the company several times, requesting promotional items for some work outside of TheCannalysts. They’ve been fantastic, forthright, and generous. Far better than they needed to be. Their Jack Haze is very good as well.>

Beena’s going to have to pull a hard differentiation of their product, increasingly penetrate consumer wallets month over month……all while a raft of premium little guys are coming online. Hey – don’t snicker. Those ‘little guys’ will likely be putting out decent product…..and individually……they’re not a threat to any specific larger producer per se. But they do permit retailers to curate product offerings. A wider range of products allows retailers to differentiate within that mechanism. And the thing about that mechanism – working capital and retailer space dictate facings offered.

If one accepts that retailers do indeed want to differentiate themselves – they’ll be doing so via product curation. And that leads us to what I believe the impact of ‘craft’ will have in-sector: it’ll be disruptive.

Retailers will be ambivalent to anything other than what moves at the till. Incremental sales is their life. Should ‘craft’ or ‘small batch’ or ‘limited availability’ be a popular thing – it’ll take up the facings and working capital that so many ‘mid-size’ producers desire to get.

And that’s where I see challenges for the Supreme’s of the Canadian legal space.

I like the story because – to myself – Beena’s in exactly the position a CEO who’d take that job would want to be in. Now relatively ‘clean’, they’ve a shop that’s dealt openly with it’s boogeymen and ready to take over the world.

If this last quarter’s sales are any indication of the next few…..$FIRE’s primary concern in a year won’t be about getting shelf space.

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