| Supreme Cannabis reported FQ1/20 financial results (ended September 30) that came in above both our top-line and adj. EBITDA forecasts. However, the business saw its adult-use sales in Canada (the core value driver for the company at this time, in our view) remain relatively flat QoQ due to price compression during the period. For the quarter, Supreme achieved total net revenues of C$11.9M, which were up ~24% sequentially and higher than our estimate of ~C$11.2M. Although QoQ growth was relatively strong, we believe the composition of FIRE’s top-line was less attractive than anticipated. During the period, the company saw a ~17% increase in its adult-use volumes; however, pricing compression in the industry resulted in only a modest ~3% increase to its recreational revenues in FQ1/21 to ~C$7.5M. The company did note that recreational sales began to inflect higher near the end of the period, with September 2020 its largest-grossing month to date. For the quarter, the largest portion of Supreme’s growth was in its domestic wholesales, which we believe have more limited longer-term value given current market dynamics. However, FIRE saw ~25% growth in its international medical sales (Israel), which we believe is encouraging given the longer-term growth profile of these markets. Below the top line the company saw its adj. gross margin dip into negative territory to (C$2.2M) as a result of ~C$8.4M of inventory impairments booked to production costs. Ignoring these charges, management noted that its margin would have been ~53% – well above the prior quarter of ~41%. In addition, with operational right-sizing largely complete, the company saw its adj. EBITDA come in at +C$0.3M, compared to a loss of (C$4.2M) in FQ4/20 and a beat to our estimate of (C$1.8M) for the period. Investment Highlights · FIRE extends financing runway. During the period, Supreme made progress in right-sizing what had become a burdensome debt load – but at no small cost. The company converted ~C $63.5M of its C$100M Oct/18 debentures in exchange for the issuance of ~116.6M common shares (a ~32% increase to its FD share count at the time). In addition, the company was able to amend its credit facility, which now does not contain any maturities for the next two years. · Cash on hand. The company ended FQ1/20 with ~C$20.4M of cash on hand with an annualized FCF burn-rate of ~C$30M. As a result, we believe speed to profitability will become increasingly important in the coming quarters to guard against potential dilution. · Supreme partners up with Shoppers Drug Mart. Last week, Supreme announced a supply agreement with Shoppers Drug Mart that would see the company’s Truverra-branded medical cannabis products available on the Medical Cannabis by Shoppers e-commerce platform. As part of the arrangement, the company will initially introduce products under the dried flower, pre-roll and full-spectrum CBD oil formats. We believe this relationship could add weight to the company’s medical cannabis business segment as it continues to identify ways to diversify and strengthen its top line. Valuation We value FIRE using a SOTP analysis using DCF models with discount rates ranging from 10.0% to 13% and a TGR of 2.0%. After upating our model for the quarter, our price target remains unchanged at C$0.25 and we reiterate our SPECULATIVE BUY rating. FIRE currently trades at ~2.0x its 2021 EV/Revenue vs. its LP peers at ~4.6x. |