Mr. Navdeep Dhaliwal reports
SUPREME CANNABIS ANNOUNCES Q1 2020 FINANCIAL RESULTS AND $90 MILLION CREDIT FACILITY LED BY BANK OF MONTREAL
The Supreme Cannabis Company Inc. has released its financial and operating results for the first quarter ended Sept. 30, 2019.
The company also announced that it has entered into a credit agreement with Bank of Montreal (BMO) as lead arranger and agent on behalf of a group of lenders for $90-million of senior secured credit facilities consisting of a term loan of $70-million and a revolving credit facility of $20-million.
"In the first quarter of fiscal 2020, we operated through challenging market conditions while integrating new businesses and product planning for the second half of the year. Over all, our financial results reflect the inherent difficulties of operating in a new regulated industry and the transitionary period we are in as we evolve from a predominantly wholesale business to a leading cannabis CPG company in Canada. Despite these challenges, in the quarter, we improved production operations to generate industry-leading margins of 62 per cent and made the strategic decisions necessary to position our businesses for meaningful revenue generation from flower, flower convenience products and select derivative products in the remainder of fiscal 2020," said Navdeep Dhaliwal, chief executive officer of Supreme Cannabis. "The closing of up to $90-million in credit facilities from Tier 1 lenders is a significant achievement that positions the company to execute on our strategy and prudently grow the business in fiscal 2020 and beyond.
"In connection with the credit facility, the company underwent a rigorous due diligence process to secure this favourable, non-dilutive financing from leading financial institutions," continued Mr. Dhaliwal. "There is only a select group of Canadian federal licence holders who have obtained such financing over the past year. In the current challenging operating environment, our ability to secure credit facilities with Tier 1 lenders speaks to the strength of our management, business and operations, and our ability to deliver strong financial results."
SELECT FINANCIAL AND OPERATIONAL RESULTS
Three months ended Sept. 30, 2019 Three months ended Sept. 30, 2018
Net revenue $11,433 $5,140
Operating expenses 18,491 5,938
Net (loss) after taxes (16,525) (5,385)
Basic and diluted (loss) per common share (0.05) (0.02)
Adjusted EBITDA (4,932) (849)
Cash 36,420 31,197
Supreme Cannabis's wholly owned subsidiary, 7Acres, accounted for the company's year-over-year increase in net revenue, growing 122 per cent from $5.1-million in first quarter 2019 to $11.4-million in first quarter 2020. The net revenue achieved during first quarter 2020 was composed of $10.5-million from 7Acres and $900,000 from Blissco. Quarter over quarter, net revenue decreased 40 per cent from $19-million in fourth quarter 2019. The quarter-over-quarter decrease in net revenue is predominantly attributable to the combination of a rapid deterioration of pricing and demand in the wholesale market and the previously announced 7Acres mechanical failure in grow rooms 1, 2 and 3, which was an isolated one-time event with all three grow rooms recommissioned and replanted in September, 2019.
In first quarter 2020, in response to wholesale market conditions, the company prioritized its annual performance objectives by product planning for future quarters and holding back product from wholesale channels. In the second half of fiscal 2020, the company expects this inventory of high-quality products to serve as inputs for flower convenience products and select cannabis derivative products, including prerolled joints, CBD (cannabidiol) oils and vaporizer oils. The company continues to reduce its reliance on the wholesale market as it increases packaging capacity at its 7Acres facility and transitions 7Acres to solely recreational sales. In first quarter 2020, wholesale sales accounted for 57 per cent of cannabis flower sales, as compared with 65 per cent in fourth quarter 2019 and 100 per cent in first quarter 2019. As Supreme Cannabis transitions into a CPG company, sales from recreational markets continue to increase. In first quarter 2020, the company saw strong demand for its consumer-facing brands, with net revenue from recreational sales increasing 68 per cent quarter over quarter.
The credit facility is secured by the assets of the company, including the 7Acres facility. Pricing is based on a set margin over the BMO Canadian-dollar prime rate or bankers acceptance and a pricing grid linked to certain financial ratios. It is expected to be at the outset between 5 and 6 per cent per annum. The credit facility has a three-year term and contains customary financial and restrictive covenants. Supreme Cannabis may repay any portion drawn under the credit facility at any time without penalty. Supreme Cannabis has the option to increase the revolving credit facility by $10-million subject to agreement by the lenders and satisfaction of certain legal and business conditions. In connection with the closing of the credit agreement, the company has initially drawn $55-million of the term loan under the credit facility.
In first quarter 2020, the final phase of construction at 7Acres' premium cultivation facility accounted for the majority of capital expenditure in the quarter. Subsequent to quarter-end, the 7Acres facility reached a pivotal point in its construction process. In October, the company completed construction on the facility's two-storey central processing, administrative and laboratory spaces (the centre core), adding approximately 48,900 square feet of operational space to the facility. As production scales, the additional space will be licensed to accommodate the facility's growing processing needs.
In addition to completing construction on the centre core, 7Acres has commissioned an automated bottling line capable of filling up to 12,000 3.5-gram containers per day with best-in-class auto-filling features, which meet 7Acres' high standards for its final packaged product. The company expects that 7Acres will commission a second and third automated bottling line in fiscal 2020. The additional in-house packaging capabilities will complete 7Acres' transition from a wholesale business to a premium consumer brand by third quarter 2020.
The company expects the 7Acres facility, including all administrative infrastructure, to be complete by the end of calendar year 2019. With 7Acres' major infrastructure completed, the company expects construction on the facility to have a lower impact on capital expenditure in second quarter 2020.
Additional licensed space in the centre core will be dedicated to the production of 7Acres prerolls. 7Acres branded prerolls will be produced in-house with whole flower inputs from 7Acres' premium strains. 7Acres expects this format to appeal to both its existing consumers and new consumers. Approximately 15 per cent of frequent cannabis consumers report using a prerolled joint as their last consumption format, and approximately 23 per cent of all cannabis consumption in Canada is made up of prerolled joints (1). 7Acres expects to launch this new high-margin and in-demand product in third quarter 2020.
In addition to in-house preroll capacity, the company aims to bring this high-margin product form to market under different Supreme Cannabis brands through contract manufacturing agreements. Subsequent to quarter-end, the company signed a definitive agreement with Indiva Inc., pursuant to which Indiva will manufacture and distribute prerolls for select Supreme Cannabis brands.
In first quarter 2020, the company closed the acquisitions of Blissco and Truverra, expanding its focused operating assets. Subsequent to quarter-end, Blissco's 12,000-square-foot extraction facility in Langley, B.C., received its Cannabis oil sales licence from Health Canada. In November, Blissco completed construction on its large-scale ethanol-based extraction lab, expanding upon Blissco's existing carbon-dioxide-based extraction capability. By the end of calendar year 2019, Supreme Cannabis expects that the Blissco facility will have the capacity to produce over seven million tincture bottles annually and meaningfully contribute to net revenue in second half of fiscal 2020. Blissco expects to ship its first full spectrum CBD oil product to the Canadian market in second quarter 2020 to satisfy unmet demand for CBD oils nationally.
In the quarter, Supreme Cannabis gained an additional operating asset with the closing of its acquisition of Truverra. Truverra's subsidiary, Canadian Clinical Cannabinoids Inc. (CCC), operates a 5,000-square-foot licensed facility in Scarborough, Ont. In the near term, the CCC facility will be equipped to process high-quality inputs for cannabis 2.0 products, including concentrates.
In the quarter, 7Acres continued to establish itself as the leading premium flower brand nationally with the launch of its new premium strain, Jack Haze. Jack Haze is 7Acres' first sativa-dominant strain with rare sensory characteristics. With the successful launch of Jack Haze, 7Acres achieved premium pricing across all provinces the strain entered. Based on sales data from the Ontario Cannabis Store, in its first two months of sales, the Jack Haze strain achieved the highest sales velocity of any 7Acres strain. To date, Jack Haze is 7Acres' highest-priced and most successful launch into the market.
The successful launch of Jack Haze demonstrates the company's proven ability to bring winning consumer-centric products to market. Supreme Cannabis's product development team identified and anticipated consumer demand for a high-THC (tetrahydrocannabinol), sativa-dominant strain with rare sensory characteristics. The Cambium Plant Sciences' genetics team was responsible for selecting Jack Haze's proprietary genetics and based such selection on consumer demand. 7Acres cultivated this leading strain, and the company's marketing team ran a targeted campaign to support its launch into the Canadian market. 7Acres' ability to foresee consumer taste, create custom flower products and market to consumers is what positions it as a leading Canadian flower brand and brand of the year for the second year in a row at Lift & Co.'s Canadian cannabis awards in November, 2019.
Supreme Cannabis confirms its financial outlook for fiscal 2020, which was previously announced on Sept. 17, 2019:
Expected net revenue of between $150-million and $180-million;
Expected positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) on aggregate over the course of the year;
7Acres to complete its transition from a wholesale business to premium consumer brand by third quarter 2020, with complete in-house packaging capabilities for all flower products under the 7Acres brand;
Fully financed to execute on all planned initiatives.
In addition to the outlook, the company will host its annual and special meeting of shareholders on Dec. 9, 2019, at 10 a.m. EST. All registered shareholders are welcome to attend the meeting, which will be held at 22 Adelaide St. West, Toronto, Ont., floor 34, room 302. In conjunction with the meeting, the company has filed its information circular and related proxy materials under its profile on SEDAR.
Supreme Cannabis's management's discussion and analysis and consolidated financial statements for the first quarter ended Sept. 30, 2019, along with all previous public filings of Supreme Cannabis, may be found on SEDAR.
(1) Cannatrack, Cannabis Consumption Study (Canada, October, 2018, to September, 2019, general population, n equals 11,639).
About The Supreme Cannabis Company Inc.
Supreme Cannabis 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 by effectively deploying capital, with an emphasis on disciplined growth and high-quality products.
Supreme Cannabis's portfolio includes 7Acres, its wholly owned subsidiary and multiaward-winning brand; Blissco, a wellness cannabis brand and a multilicensed processor and distributor based in British Columbia; Truverra, a global medicinal cannabis brand and licensed cultivator; Cambium Plant Sciences, a plant genetics and cultivation intellectual property company; Medigrow Lesotho, a cannabis oil producer located in Southern Africa; Supreme Heights, an investment platform focused on CBD brands in the United Kingdom and Europe; and a brand partnership and licensing deal with Khalifa Kush Enterprises Canada.
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