Supreme Cannabis Announces Q2 2020 Financial Results and Updated Plan for Accelerated Revenue Growth
- Focuses business on accelerated, near-term revenue growth with enhanced, coast-to-coast sales partnership with humble+fume
- Enhanced cost structure and near-term revenue generating opportunities expected to drive profitable growth
- Reports 17% year-over-year net revenue growth and maintains a strong liquidity position with total cash and restricted cash balance of $55 million with $35 million of undrawn capacity on the Company’s Credit Facility
TORONTO, February 13, 2020 – The Supreme Cannabis Company, Inc. (“Supreme Cannabis” or the “Company”) (TSX: FIRE) (OTCQX: SPRWF) (FRA: 53S1) today announced its financial and operating results for the three and six months ended December 31, 2019, as well as an update on its strategy and outlook.
As announced on February 11, 2020, Supreme Cannabis has implemented a new operating structure, including staff reductions, to drive efficiencies and support long-term, profitable growth. With an optimized cost structure in place, the Company is moving forward with its strategy to transition to a premium cannabis CPG company, driving near-term revenue with new high-quality brands and products at every price segment. This expanded, consumer-facing brand portfolio is being supported by an innovative sales model that achieves comprehensive distribution across Canada.
“As we realign our structure and expectations with the current state of the industry, I maintain my strong belief in Supreme Cannabis’ ability to drive near-term revenue growth, profitability and long-term value with new high-quality brands and products at every key price segment,” said Colin Moore, Director and Interim President and CEO. “I’m proud of the team’s progress and difficult work rightsizing the Company’s cost structure and focusing the business on near-term revenue drivers. As one of the few licensed producers with completed cultivation infrastructure and in-house value-added processing capabilities, as well as proven premium brands in the recreational market, we are well positioned to accelerate our CPG-focused transition. Our strong liquidity position, including the Credit Facility arranged by a tier one bank, further ensures we have the capital necessary to execute going forward.”
In the quarter, Supreme Cannabis built on the success of its premium 7ACRES brand with the launch of the Company’s first pre-rolls under Sugarleaf by 7AC (“Sugarleaf”). The Sugarleaf brand will addresses a mid-tier price point and continue to introduce products that offer more convenient and accessible consumption experiences. In the remainder of fiscal 2020, Supreme Cannabis will further expand its brand portfolio to capture additional market share and drive revenue growth with recreational brands that address the ultra-premium and value segments. Products launched under these brands will drive incremental sales volumes by growing and sourcing additional cannabis inputs not intended for 7ACRES premium products.
Supreme Cannabis also expanded distribution of its 7ACRES brand to all 10 Canadian provinces last quarter. The Company is addressing this national revenue opportunity through an enhanced retail sales strategy and partnership with Humble & Fume Inc. (“humble+fume”), a leading distributor of cannabis accessories in Canada. Under a comprehensive sales representation and cost-sharing agreement, humble+fume will act as a sales agent for Supreme Cannabis’ recreational products across Canada, creating the only sales force in Canada able to offer a complete solution of cannabis brands and accessories to retailers. Supreme Cannabis will efficiently and effectively achieve coast-to-coast sales coverage and build brands at a store level, with an initial team of 14 sales professionals driving distribution, brand advocacy and budtender education.
With the number of retail stores in Canada quickly growing and cannabis consumers making their purchase decisions in store, having representation at the individual store level provides an essential opportunity for our business to drive near-term revenue growth and support our transition to a cannabis CPG company.
Colin Moore, Director and Interim President and CEO
Our partnership with humble+fume allows us to realize industry-leading sales coverage and focus our sales and marketing efforts at the most impactful stage of the cannabis consumer’s journey. We enter the second half of 2020 focused on the opportunity to address the Canadian market with competitive consumer brands supported by an unmatched sales force.
Select Financial and Operational Results
Net revenue increased year-over-year by 17% from $7.7 million in Q2 2019 to $9.1 million in Q2 2020 and decreased quarter-over-quarter by 21% from $11.4 million in Q1 2020. The quarter-over-quarter decrease in net revenue is primarily attributable to the Company’s planned transition from a focus on wholesale to recreational sales. In the quarter, lower wholesale sales were partially offset by the increase in recreational sales. Net revenue was also impacted by actual and anticipated price adjustments of $0.5 million.
In Q2 2020, wholesale sales accounted for 38% of net revenue compared to 54% in Q1 2020. Supreme Cannabis’ remaining wholesale flower supply agreements came to an end, which contributed to lower quarter-over-quarter wholesale selling prices and sales volumes. Despite this factor and market-wide wholesale price compression, Supreme Cannabis continued to achieve favourable wholesale pricing, with an average wholesale flower price of $3.26 per gram. As the Company advances its transition to a CPG focus, it will continue to opportunistically supplement recreational sales with attractive wholesale transactions.
Recreational sales in Q2 2020 reached $5.7 million and, as a percentage of net revenue, increased from 46% in Q1 2020 to 62% in Q2 2020. In the quarter, recreational sales were impacted by market conditions, including slower than expected store roll-outs in key Canadian provinces. Recreational net revenue was also impacted by a lower than expected contribution from the Company’s other businesses. Recreational net revenue for Q2 2020 was comprised of $5.0 million from 7ACRES products and $0.7 million from Blissco products. Supreme Cannabis continued to achieve strong recreational pricing with a net average selling price of $5.39 per gram.
Adjusted EBITDA was down year-over-year from $(3.3) million in Q2 2019 to $(10.4) million in Q2 2020 and quarter-over-quarter from $(4.9 million) in Q1 2020. Lower average selling prices and higher impairment charges related to inventory write-downs resulted in decreased margins. Adjusted EBITDA was also impacted by a quarter-over-quarter increase in operating expenses.
Capital expenditures in the quarter were $11.9 million, primarily reflecting the completion of construction at the 7ACRES Facility, the addition of an ethanol extraction lab at the Blissco Facility and phase 1 retrofitting to the Kitchener Facility. With the completion of these construction projects, capital expenditure for the remainder of fiscal 2020 is expected to be minimal, consisting of additional CPG equipment and minor retrofitting to the 7ACRES Facility where supported by near-term cash flow returns.
Balance Sheet and Liquidity
In the quarter, Supreme Cannabis entered into a credit agreement with Bank of Montreal as Lead Arranger and Agent on behalf of a group of lenders for $90.0 million of senior secured credit facilities (the “Credit Facility”), consisting of a term loan of $70.0 million and a revolving credit facility of $20.0 million. The Company initially drew $55.0 million of the term loan under the Credit Facility, ending the quarter with a total cash and restricted cash balance of $55.0 million and $35.0 million of undrawn capacity.
During Q2 2020, the Company completed its standard evaluation of investments which resulted in a reduction in the carrying value of MG Health Lesotho. This reduction is reflective of general cannabis market conditions and recognized as a loss in Other Comprehensive Income.
Prior to calendar year end, on December 21, 2019, all major construction on the Company’s 440,000 square foot premium cultivation facility (the “7ACRES Facility”) was completed. Since completing construction and optimizing new equipment, Supreme Cannabis has realized greater operational efficiencies, improving its throughput trimming rate by 400% and increasing its packaging capacity by 200%. Subsequent to quarter end, 7ACRES brought a second automated bottling line into production, increasing total packaging capacity to a maximum of 24,000 containers per day. The Company expects that 7ACRES will bring a third automated bottling line into production prior to fiscal year-end.
The 7ACRES Facility has approximately 250,000 square feet of licensed cultivation space, comprised of 21 flowering rooms and four rooms dedicated to vegetation and propagation. With major construction complete, the Company has put in submissions for licenses to Health Canada and expects to bring an additional 20,000 square feet of flowering space and 10,000 square feet of vegetation and propagation space online in Q3 2020. An additional room that previously operated as a storage and support space is currently undergoing minor retrofits to be converted back into a flowering room. The remaining 25th flowering room is operating as 7ACRES’ processing and packaging space. Once necessary processing and packaging capacity is brought online at the Company’s facility in Kitchener, Ontario, the company intends to convert this room back into a cultivation space.
As previously announced, Supreme Cannabis leased an 107,000 square foot building in Kitchener, Ontario to serve as a central manufacturing, processing and packaging centre for Supreme Cannabis brands (the “Kitchener Facility”). The Company has completed the first phase of construction on the Kitchener Facility, which includes a retrofitted multi-purpose processing clean room. The Company has submitted its application to Health Canada for a cannabis processing license. This license will allow Supreme Cannabis to conduct product packaging and value-added processing at the Kitchener Facility. In Q4 FY2020, the Company expects to begin whole flower packaging and pre-roll manufacturing for Supreme Cannabis brands at the Kitchener Facility.
In Q2 2020, Supreme Cannabis completed construction on Blissco’s 12,000 square foot extraction facility in Langley, British Columbia (the “Blissco Facility”), adding a large-scale ethanol-based extraction lab that expands on Blissco’s existing CO2-based extraction capability. In the quarter, Blissco received its Cannabis Oil Sales License from Health Canada as well as a license amendment that allows for the sale of cannabis 2.0 products. As previously announced, with this license amendment and the capacity to produce over 7,000,000 tincture bottles annually, Blissco’s state-of-the-art extraction facility will process product for 7ACRES’ vaporizer partnership with Pax Labs, Inc. (“PAX”).
Products and Brands
At the end of Q2 2020, Supreme Cannabis launched Sugarleaf pre-rolls, the Company’s first offering priced below the premium category. Sugarleaf is currently available in Alberta, Ontario and Quebec, and will increase distribution in fiscal 2020. Sugarleaf will launch an additional pre-roll strain in Q3 2020 and enter more product categories prior to fiscal year end. The company will use Blissco’s oil extraction and formulation expertise to introduce an additional oil under the mainstream Sugarleaf brand. This builds on Supreme Cannabis’ position in the CBD oil category, with Blissco’s full spectrum CBD oil, Pūr Dew, addressing the premium end of the category.
Through the Sugarleaf brand, the Company has seen strong demand for pre-roll products and intends to bring whole flower pre-rolls to market under the 7ACRES brand in Q3 2020. By the end of Q3 2020, 7ACRES will also introduce its first 2.0 cannabis product in the form of PAX pods for the PAX Era vaporizer. 7ACRES inputs will be extracted at the Blissco facility and Blissco’s experienced team will formulate premium oils for the 7ACRES PAX Era pods. Prior to fiscal year end, the Company expects to introduce additional 2.0 products under the 7ACRES brand in the form of concentrates.
Supreme Cannabis continues to achieve capital light international exposure in the EU and UK through its Truverra branded CBD products. Truverra’s e-commerce model, includes distribution on Amazon UK and on truverra.com. Supreme Cannabis is gathering valuable market insights through Truverra’s consumer website. Subsequent to quarter end Supreme Cannabis launched a new Truverra website, improving the consumer journey and shopping experience. Supreme Cannabis will continue to address international medical opportunities under this international brand.
Due to current market conditions, including a slower than anticipated retail rollout nationally, Supreme Cannabis is withdrawing its previously issued financial outlook for fiscal 2020, which was originally announced on September 17, 2019 and subsequently confirmed on November 14, 2019. This decision is discussed in further detail under the heading “Outlook” in the Company’s MD&A for the second quarter ended December 31, 2019.
The Company is confident in its ability to grow near-term revenue and reach profitability based on its accelerated transition to a premium Cannabis CPG company, its improved operating structure and its expected offering of new high-quality brands and products at every price segment. The Company provides the following updated outlook for the remainder of the fiscal year:
- Efficient and effective coast-to-coast sales coverage with the humble+fume sales partnership. The partnership will allow for brand building at a store level, thereby enhancing distribution, brand advocacy and budtender education.
- Launch of 2.0 products including PAX era vaporizer pods and cannabis concentrate products.
- Expanded brand portfolio with the launch of recreational brands that address the ultra-premium and value segments.
- 7ACRES to complete its transition from a wholesale business to premium consumer brand by Q3 2020, with completed in-house packaging capabilities for all flower products under the 7ACRES’ brand. Supreme Cannabis will continue to opportunistically supplement recreational sales with attractive wholesale transactions.
- Engaged an internationally recognized search firm that is identifying and evaluating candidates for the position of CEO.
- Fully funded to execute on all planned initiatives.
Supreme Cannabis’ MD&A and consolidated financial statements for the second quarter ended December 31, 2019, along with all previous public filings of The Supreme Cannabis Company, Inc., may be found on SEDAR at www.SEDAR.com.
All figures are in Canadian dollars.
About Supreme Cannabis
The Supreme Cannabis Company, Inc., (TSX: FIRE) (OTCQX: SPRWF) (FRA: 53S1), is a global diversified portfolio of distinct cannabis companies, products and brands. Since 2014, the Company has emerged as one of the world’s fastest-growing, premium plant-driven lifestyle companies. Supreme Cannabis’ portfolio of brands caters to diverse consumer experiences, with brands and products that address recreational, wellness, medicinal and new consumer preferences.
The Company’s brand portfolio includes, 7ACRES, Blissco, Truverra, Sugarleaf by 7AC and Khalifa Kush Enterprises Canada. Supreme Cannabis’ brands are backed by a focused suite of world-class operating assets that serve key functions in the value chain, including, scaled cultivation, value-add processing, centralized manufacturing and product testing and R&D. Follow the Company on Instagram, Twitter, Facebook, LinkedIn and YouTube.
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