Ms. Beena Goldenberg reports
SUPREME CANNABIS ANNOUNCES FINANCIAL RESULTS FOR Q1 2021
The Supreme Cannabis Company Inc. has released its financial and operating results for the three months ended Sept. 30, 2020.
- Positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $300,000;
24-per-cent net revenue growth quarter over quarter;
- 45 active retail SKUs (stock-keeping units), with presence in all 10 provinces;
- Completed the third shipment of medical cannabis to Israel through its Truverra brand;
Maintains a strong liquidity position, including a cash balance of $20.4-million.
Subsequent to quarter-end:
- Entered into a supply agreement with Medical Cannabis by Shoppers Inc., a subsidiary of Shoppers Drug Mart Inc., to offer Truverra-branded medical cannabis products through the Medical Cannabis by Shoppers on-line sales platform accessible to patients across Canada.
Supreme Cannabis's management discussion and analysis (MD&A) and condensed interim consolidated financial statements for the three months ended Sept. 30, 2020 (Q1 2021), along with all previous public filings of the company, may be found on SEDAR. All figures are in Canadian dollars.
Beena Goldenberg, president and chief executive officer of Supreme Cannabis, commented:
"In the first quarter of fiscal 2021, we made solid progress towards our goal of transforming Supreme Cannabis into a premium cannabis CPG company. We continued to execute on our strategy of accelerating revenue and controlling our costs, which led to sequential growth in consolidated net revenue of 24 per cent. Recreational net revenue grew slightly compared to the fourth quarter of 2020, due largely to higher sales volumes, offset by lower average selling prices. Despite an initial drop in recreational sales volumes in July due to stockouts as a result of fulfilment and supply chain growth challenges, we built steady month-over-month improvement in August and September as our sales partnership with Humble & Fume Inc. gained traction. This strong momentum led to September, 2020, being Supreme Cannabis's highest month on record for recreational sales. We exercised good cost control across the organization and benefited from a full quarter of cost savings from the measures taken to rightsize the business in the second half of fiscal 2020. This resulted in Supreme Cannabis generating a slightly positive adjusted EBITDA of $300,000."
Ms. Goldenberg concluded: "Supreme Cannabis's performance in the first quarter of fiscal 2021 demonstrates that our strategy is working. While the first quarter of 2021 was a consistent improvement, we understand that more work is needed to become a sustainably profitable business. We will continue to efficiently focus our resources on driving near-term revenue growth in the recreational market. We are well positioned to increase our market share with compelling brands and high-quality products at several points of value and preference. We have increased our sales and marketing efforts in the recreational segment during the quarter. Our partnership with Humble & Fume Inc. has enabled Supreme Cannabis to secure 2,258 new listings during the quarter. We expect the expanded listings to set us up for further recreational revenue growth."
SELECT FINANCIAL AND OPERATIONAL RESULTS
Three months ended
Sept. 30, 2020 June 30, 2020
(in thousands of dollars)
Gross revenue $ 13,977 $ 10,855
Net revenue 11,867 9,532
Gross margin, excluding fair value items (2,153) (8,246)
Gross margin (11,340) (11,544)
Operating expenses 6,547 15,886
Impairment of assets - 3,414
Net income (loss) 29,768 (33,252)
Net comprehensive income (loss) 29,768 (33,806)
Adjusted EBITDA 266 (4,167)
Cash 20,366 28,419
Overall net revenue increased 24 per cent to $11.9-million in Q1 2021 from $9.5-million in Q4 2020.
Recreational net revenue rose to $7.5-million, an increase of 3 per cent quarter over quarter as a result of existing and new products continuing to be well received by the recreational cannabis consumer. In particular, 7ACRES Craft Collective and cannabis extracts, which include oils, vapes and concentrates, contributed a growing portion of the recreational sales in the quarter.
Wholesale net revenue, which includes the company's sales in the international medical cannabis segment, in Q1 2021 was $4.4-million, up 92 per cent quarter over quarter, with a 14-per-cent increase in average selling price, driven by a higher contribution from domestic flower. Wholesale volumes grew by 69 per cent as the company continues to forge longer-term relationships in the domestic market. The growth was also driven by a 25-per-cent increase in international medical sales, with the company strengthening its relationship with Breath of Life International Ltd., Israel's largest and leading producer of medical cannabis. The company plans to add additional medical partners in various international jurisdictions.
In Q1 2021, the gross margin, excluding fair value items, included impairment charges of $8.4-million recorded in production costs. Excluding the impact of impairment charges recorded in production costs, gross margin, excluding fair value items, increased to 53 per cent in Q1 2021, compared with 41 per cent for Q4 2020, mainly due to a realization of cost optimization initiatives the company initiated in the second half of fiscal 2020.
The company generated a positive adjusted EBITDA of $300,000, compared with an adjusted EBITDA loss of $4.2-million in Q4 2020, due to an increase in revenue and a higher gross margin, excluding fair value items and the impact of impairment charges.
Balance sheet, liquidity and cash flow from operations
Supreme Cannabis ended the quarter with a total cash balance of $20.4-million and a working capital surplus of $48.1-million.
During the first quarter of fiscal 2021, the company significantly strengthened its balance sheet by refinancing its convertible debentures and amending its three-year term credit facility consisting of a term loan and a revolving credit facility. As a result, there are no debt maturities for two years (excluding customary principal amortization payments) and the carrying value of total debt was reduced by approximately $71.0-million on the day of the transaction related to the convertible debt extinguishment. Furthermore, expected cash interest expense was significantly reduced due to the reduction in the principal amount of the convertible debentures and the credit facility. The amended credit facility defers the financial covenants related to leverage and the fixed charge coverage ratio by 12 months until Q3 2022.
Operating and capital expenditures
In Q1 2021, the cost realignment efforts resulted in the company achieving a $9.3-million or 59-per-cent decrease in operating expenses, compared with the three months ended June 30, 2020. Operating expenses for the three months ended Sept. 30, 2020, benefited from a recovery of $1.5-million related to share-based payments, primarily driven by a recovery of $2.1-million for the cancellation and forfeiture of 10.9 million stock options. The company has executed on its cost rationalization activities, which have led to significant operating expense cost reductions since the start of its efforts during the third quarter of fiscal 2020. The efforts included reduction in staffing levels across all facilities and shared services, the consolidation and streamlining of the company's facilities and production processes, and the curtailment of avoidable expenses.
In addition to reducing its operating expenses, the company's capital expenditures in Q1 2021 decreased to $400,000, down 61 per cent quarter over quarter. With the completion of construction projects at the company's Kincardine, Ont., and Langley, B.C., facilities, capital expenditures for the remainder of fiscal 2021 are expected to be minimal and will be focused on productivity enhancements justified by near-term cash flow returns.
Brand and product developments in Q1 2021.
Supreme Cannabis introduced 10 new SKUs to the market in Q1 2021:
7Acres Craft Collective 3.5-gram Whole Flower Pink Kush;
7Acres Craft Collective 3.5-gram Whole Flower Ice Cream Cake;
- Sugarleaf 0.5-gram Boost Sativa 510 Vape Cart (first 510 format launched for all brands);
Sugarleaf three times 0.5-gram prerolls of Jean Guy (new size format);
- Sugarleaf three times 0.5-gram prerolls of Jack Haze (new size format);
- Sugarleaf three times 0.5-gram prerolls of White Widow (new size format);
- Sugarleaf three times 0.5-gram prerolls of Sensi Star (new size format);
Sugarleaf seven-gram Bloom Milled Cannabis;
- Sugarleaf 3.5-gram Bloom Milled Cannabis;
Hiway two-gram Hiway Hash.
Over all, Supreme Cannabis shipped 44 per cent more product in Q1 2020, compared with Q4 2020. The provinces of Quebec, Alberta, Ontario and British Columbia generated the majority of the company's sales.
Distribution to the recreational market on a gram equivalent basis was 17 per cent higher in Q1 2020, s compared with Q4 2020.
Key to growing Supreme Cannabis's presence across Canada is the company's sales agency agreement with Humble & Fume. Through this partnership, Humble & Fume is deploying a team of sales professionals that will drive distribution, brand advocacy and budtender education for all Supreme Cannabis brands at the store level. Since tracking commenced in April, 2020, until the end of September, 2020, Humble & Fume has created over 3,500 new listings for Supreme Cannabis products, including 2,258 new listings in the first quarter of 2021. In the first quarter of 2021, 232 new stores started carrying the company's products.
In the first quarter of 2021, as many COVID-19 restrictions were lifted and retail stores reopened, Humble & Fume representatives resumed engaging directly with operators and supporting new retail store openings. This allowed further opportunities for promotions, new product introductions, staff training and adding new retail outlets.
Subsequent to quarter-end, the company entered into a supply agreement with Medical Cannabis by Shoppers, a subsidiary of Shoppers Drug Mart, to offer Truverra-branded medical cannabis products through the Medical Cannabis by Shoppers on-line sales platform accessible to patients across Canada. Under this agreement, Canadian patients will be able to order Truverra dried flower, prerolls and full-spectrum CBD (cannabidiol) oil. Included in the offering is the Jean Guy strain, which is a tribute to the legendary variety offered by the Montreal Compassion Club.
The company continues to make incremental improvements at its core facilities in Kincardine, Ont., and Langley, B.C., to enhance production, processing and operating efficiency.
The Kincardine facility implemented several changes with solid success:
In August, the facility completed its fuel conversion from propane to natural gas, which is expected to deliver $1.5-million in annual savings.
Bottled flower containers at the facility have been optimized to address shelf presence and reduce the cost of procurement, and are expected to deliver savings of over $1.0-million annually.
- The facility also optimized its boiler systems, resulting in significantly more consistent climate control.
Subsequent to the quarter-end, the company's processing licence for the Kincardine facility was amended by Health Canada on Oct. 29 to authorize the commercial sale of cannabis products in the cannabis extracts class of cannabis. The company also received a research licence at the Kincardine facility on Nov. 12.
The continuous improvement program at the Langley facility continues to yield positive results. A key focus has been on improving conversion yields through first-pass extraction and distillation, and further enhancing quality in these processes.
The company remains confident in its ability to grow near-term revenue and reach sustainable profitability based on its accelerated transformation into a premium cannabis CPG company, its streamlined and rightsized operating structure, and its enhanced offering of new high-quality brands:
The company has a robust and growing product line that addresses consumers' needs at a variety of price points and form factors.
The company has efficient and effective coast-to-coast sales coverage with the Humble & Fume sales partnership.
- The company has substantially completed the rightsizing of its operating structure with the right teams in place to deliver against objectives efficiently.
- Supreme Cannabis remains focused on cost containment and is fully financed to execute on all planned initiatives.
First quarter 2021 earnings conference call and webcast
The company will host a conference call to discuss its first quarter fiscal 2021 results at 8 a.m. Eastern Time on Tuesday, Nov. 17, 2020. Interested parties can join the call by dialling 416-764-8659 or 1-888-664-6392. The conference ID number is 67218125. A webcast will also be available.
A recording of the conference call will be available for replay two hours after the completion of the call. To access the recording, please dial 416-764-8677 or 1-888-390-0541 and the replay code 218125. The recording will be available until Thursday, Dec. 17, 2020.
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 most premium producers of recreational, wholesale and medical cannabis products.
Supreme Cannabis's portfolio of brands caters to diverse consumer and patient experiences, with brands and products that address recreational, wellness, medical and new consumer preferences. The company's recreational brand portfolio includes 7Acres, Blissco, 7Acres Craft Collective, Sugarleaf and Hiway. Supreme Cannabis addresses national and international medical cannabis opportunities through its premium Truverra brand.
Supreme Cannabis's 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, automated packaging and product testing, and research and development.
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