Financials released (PR) Supreme Cannabis Announces Q2 2020 Financial Results and Updated Plan for Accelerated Revenue Growth
Thursday, February 13, 2020, 4:30 PM ET
-- 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, Feb. 13, 2020 /PRNewswire/ - 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," 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% 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
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 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 (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.
Operations.
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.
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