Supreme Cannabis Company Inc. 

Supreme Cannabis Company Inc. (TSX: FIRE) is a Canada-based company engaged in the production and sale of medical and recreational cannabis. Its portfolio includes products that address recreational, medical, and wellness consumers. 

Key Updates:

• Acquisition by Canopy: Recently, the company reported that it would be acquired by Canopy Growth Corporation (TSX: WEED) at a price consideration of CAD 435 million. Canopy is the market leader within the cannabis segment and offers products like high-quality dried flower, oil, softgel capsule, infused beverage, edible etc. Under the terms of the Arrangement Agreement, Supreme Cannabis shareholders will receive 0.01165872 of a Canopy common share and CAD 0.0001 in cash in exchange for each Supreme Cannabis Share held. The transaction is likely to be completed in June 2021.

• Launch of a new product: Earlier on March 08, 2021, the company launched THC gummies under its sugarleafbrand, which would be available at the end of March 2021. Recently, the gummies segment has received tremendous traction from the consumers, and hence, this product is likely to drive the revenue.

Q2FY21Financial Highlights:

• FIRE announced its quarterly result, wherein the company posted net revenue of CAD 18.311 million, significantly higher than CAD 9.059 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the recreational sales coupled with higher average selling prices.
• Gross margin, excluding fair value items stood at CAD 8.349 million, considerably higher from CAD 2.633 million in pcp. The increase was driven by higher income, partially offset by higher production costs (CAD 9.962 million v/s CAD 6.426 million in pcp).
• Operating expenses stood at CAD 8.434 million, lower than CAD 19.755 million in pcp. The decline was supported by lower wages and benefits costs, lower facilities costs and sales, a drop in marketing and business development expense.
• Adjusted EBITDA stood at CAD 3.640 million v/s CAD 0.266 million in Q2FY20.
• Net loss was recorded at CAD 7.909 million, as compared to a loss of CAD 17.315 million in pcp, partially supported by lower finance expense.

Source: Company Reports

Risks: The products are comparatively new to the consumers and are yet to be established in the market. Hence, a change in the in-consumer preference would dampen the company’s overall performance.

Stock Recommendation:

The company has an impressive portfolio, and the recent acquisition news by WEED has fueled the stock price. Supreme Cannabis (FIRE) shareholders will receive 0.01165872 of a Canopy (WEED) common share as per the transaction agreement, which values FIRE share at ~CAD 0.39 (considering WEED closing price on April 29, 2021). This reflects ~6% benefits, if someone go long on the FIRE stock at the closing price of CAD 0.37 on April 29, 2021. Also, since the acquisition news is in public domain, price of FIRE shares will move in tandem with WEED’s share price. Additionally, after the successful completion of the acquisition of Supreme, the stock of FIRE would be de-listed from the exchange. The above transaction is expected to be closed in June 2021. Hence, considering the above facts, we suggest investors to ‘Avoid’ the stock at the closing price of CAD 0.37 on April 29, 2021.

One-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

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