Mr. Colin Moore reports

SUPREME CANNABIS ANNOUNCES Q2 2020 FINANCIAL RESULTS AND UPDATED PLAN FOR ACCELERATED REVENUE GROWTH

The Supreme Cannabis Company Inc. has released its financial and operating results for the three and six months ended Dec. 31, 2019, as well as an update on its strategy and outlook.

Highlights:

• 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-per-cent 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.

As announced on Feb. 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 consumer packaged goods (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's 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, interim president and chief executive officer. "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 1 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 prerolls under Sugarleaf by 7AC. 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 ultrapremium 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's 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," continued Mr. Moore. "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
  
($ thousands)                                    Q2 2020         Q1 2020        Q2 2019

Net revenue                                       $9,059         $11,433         $7,718
Gross margin, excluding fair value items           2,633           7,065          4,525
Operating expenses                                19,755          18,491         10,891
Net (loss) after taxes                           (17,315)        (16,525)        (1,551)
Basic and diluted (loss) per common share          (0.05)          (0.05)         (0.01)
Adjusted EBITDA                                  (10,439)         (4,932)        (3,265)
Cash                                              48,705          36,420         91,966

Net revenue

Net revenue increased year over year by 17 per cent from $7.7-million in Q2 2019 to $9.1-million in Q2 2020, and decreased quarter over quarter by 21 per cent 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 $500,000.

In Q2 2020, wholesale sales accounted for 38 per cent of net revenue compared with 54 per cent in Q1 2020. Supreme Cannabis's 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 per cent in Q1 2020 to 62 per cent in Q2 2020. In the quarter, recreational sales were impacted by market conditions, including slower-than-expected store rollouts 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 consisted of $5.0-million from 7ACRES products and $700,000 from Blissco products. Supreme Cannabis continued to achieve strong recreational pricing with a net average selling price of $5.39 per gram.

Adjusted earnings before interest, taxes, depreciation and amortization

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 writedowns resulted in decreased margins. Adjusted EBITDA was also impacted by a quarter-over-quarter increase in operating expenses.

Capital expenditure

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, 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.

Operations

Prior to calendar year-end, on Dec. 21, 2019, all major construction on the company's 440,000-square-foot premium cultivation facility was completed. Since completing construction and optimizing new equipment, Supreme Cannabis has realized greater operational efficiencies, improving its throughput trimming rate by 400 per cent and increasing its packaging capacity by 200 per cent. 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, comprising 21 flowering rooms and four rooms dedicated to vegetation and propagation. With major construction complete, the company has put in submissions for licences 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 on line 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's processing and packaging space. Once necessary processing and packaging capacity is brought on line at the company's facility in Kitchener, Ont., 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, Ont., to serve as a central manufacturing, processing and packaging centre for Supreme Cannabis brands. The company has completed the first phase of construction on the Kitchener facility, which includes a retrofitted multipurpose processing clean room. The company has submitted its application to Health Canada for a cannabis processing licence. This licence will allow Supreme Cannabis to conduct product packaging and value-added processing at the Kitchener facility. In Q4 fiscal 2020, the company expects to begin whole flower packaging and preroll 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, B.C., adding a large-scale, ethanol-based extraction lab that expands on Blissco's existing carbon-dioxide-based extraction capability. In the quarter, Blissco received its cannabis oil sales licence from Health Canada as well as a licence amendment that allows for the sale of cannabis 2.0 products. As previously announced, with this licence amendment and the capacity to produce over seven million tincture bottles annually, Blissco's state-of-the-art extraction facility will process product for 7ACRES's vaporizer partnership with Pax Labs Inc.

As previously announced on Dec. 5, 2019, Supreme Cannabis's genetics business, Cambium Plant Sciences, is operating out of the 7ACRES cultivation facility. The company is no longer proceeding with capital expenditure on the construction of the previously announced Cambium facility. In the quarter, Cambium combined and catalogued Truverra's genetic library, increasing its number of unique strains by 70 per cent. Cambium is testing new strains within the 7ACRES facility and expects to commercialize new strains under the 7ACRES brand prior to year-end.

Products and brands

At the end of Q2 2020, Supreme Cannabis launched Sugarleaf prerolls, 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 preroll 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's position in the CBD oil category, with Blissco's full-spectrum CBD oil, Pur Dew, addressing the premium end of the category.

Through the Sugarleaf brand, the company has seen strong demand for preroll products and intends to bring whole flower prerolls 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 European Union and United Kingdom through its Truverra-branded CBD products. Truverra's e-commerce model, includes distribution on Amazon U.K. and on the Truverra website. 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.

Outlook

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 Sept. 17, 2019, and subsequently confirmed on Nov. 14, 2019. This decision is discussed in further detail under the heading "outlook" in the company's management, discussion and analysis (MD&A) for the second quarter ended Dec. 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 ultrapremium 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 financed to execute on all planned initiatives.

Supreme Cannabis's MD&A and consolidated financial statements for the second quarter ended Dec. 31, 2019, along with all previous public filings of Supreme Cannabis may be found on SEDAR.

About The Supreme Cannabis Company Inc.

The Supreme Cannabis Company 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's portfolio of brands caters to diverse consumer experiences, with brands and products that address recreational, wellness, medicinal and new consumer preferences.

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