Supreme Cannabis financial and operating results for the third quarter.
The Supreme Cannabis Company, Inc. (TSX:FIRE) today announced its financial and operating results for the three and nine months ended March 31, 2020.
In our third quarter, we made significant progress towards our goal of improving the Company's cost structure while creating opportunities for near-term revenue growth.Colin Moore Interim President and CEO
"Although much of this progress is not reflected in our Q3 financial results, we did begin to see the early impacts of our rightsizing and revenue generation efforts," said Colin Moore who recently served as interim President and CEO of Supreme Cannabis. "Excluding restructuring charges, we reduced our operating expenses by 23% quarter-over-quarter and improved our speed to market introducing 10 new SKUs since the beginning of the calendar year 2020. We expect to continue to see improvements to our cost structure as we realize further production efficiencies at our completed facilities and anticipate improved recreational sales with our enhanced product portfolio. In my current short-term role as an advisor to our new CEO, Beena Goldenberg, and in my position as a director, I look forward to supporting the Company as it continues to progress toward near-term profitability."
As previously announced on April 27, 2020, Beena Goldenberg, former CEO of Hain-Celestial Canada, a leading organic and natural products company, was appointed as the Company's new President and CEO to drive Supreme Cannabis' long-term profitable growth as a premium cannabis CPG company.
"In my short time with the Company, I have quickly come to appreciate our distinct advantages and near-term opportunities; we have completed infrastructure at the cusp of being optimized, a curated portfolio of brands that are gaining traction through an advanced distribution strategy and a high-quality offering of products that is growing every day," said Beena Goldenberg, President and CEO of Supreme Cannabis. "In the remainder of fiscal 2020 and in fiscal 2021, I will implement and quickly action changes that capitalize on these existing advantages and create opportunities to showcase our strengths. I see a clear path to increased revenue generation and profitable growth that will benefit our investors, consumers and employees."
Select Financial and Operational Results
Gross Revenue increased year-over-year from $10.3 million in Q3 2019 to $11.0 million in Q3 2020 and increased quarter-over-quarter from $10.3 million in Q2 2020. Net revenue decreased marginally year-over-year from $10.0 million in Q3 2019 to $9.7 million in Q3 2020 and increased quarter-over-quarter from $9.1 million in Q2 2020. In Q3 2020, net revenue was impacted by actual and expected sales discounts and return provisions of $1.3 million, compared to $0.5 million in Q2 2020. The year-over-year decrease in net revenue was partially offset by an approximately 245% increase in revenues from recreational cannabis sales during the three months ended March 31, 2020.
In Q3 2020, recreational net revenue reached $5.7 million, remaining flat quarter-over-quarter. Quarter-over-quarter, a 26% increase in recreational sales volumes was offset by a 20% decrease to the recreational average selling price from $5.39 per gram in Q2 2020 to $4.32 per gram in Q3 2020. In the quarter, the Company's recreational average selling price was impacted by the introduction of new cannabis products at lower price points that address new consumer segments, as well as planned price reductions to cannabis flower products in certain Canadian Provinces as the recreational market competition matures. Lower priced products introduced under new brands like sugarleaf, utilize cannabis inputs that are not designated for 7ACRES branded products and thus drive incremental revenue.
In Q3 2020, wholesale net revenue reached $4.0 million and accounted for 41% of net revenue compared to 37% in Q2 2020. The Company's medical cannabis export to Israel under the Truverra brand is included in the wholesale sales segment and accounted for the quarter-over-quarter increase in wholesale revenue. Despite market-wide wholesale price compression, Supreme Cannabis continued to achieve favourable wholesale average pricing of $3.36 per gram in Q3 2020, a quarter-over-quarter increase from $3.26 in Q2 2020. While Supreme Cannabis advances its transition to a CPG focused business, given delays to the cannabis retail rollout in Canada, the Company will continue to opportunistically supplement recreational sales with attractive domestic wholesale and international medical transactions.
Adjusted EBITDA decreased quarter-over-quarter from $(10.4) million in Q2 2020 to $(11.7) million in Q3 2020 and was down year-over-year from $(1.6) million. Quarter over quarter, Adjusted EBITDA was impacted by $2.1 million in one‐time restructuring costs primarily related to severance payments made as part of the Company's reduction to headcount. As previously announced on February 11, 2020, the Company implemented a new operating structure, including staff reductions, to drive efficiencies and support long-term, profitable growth. In Q3 2020, Adjusted EBITDA was also impacted by a quarter-over-quarter increase in production costs from $(6.4) million to $(11.2) million. Production costs included $5.0 million in impairment charges related to inventory write-downs, primarily consisting of trim.
Balance Sheet, Liquidity and Cash Flow from Operations
Supreme Cannabis ended the quarter with a total cash balance of $23.1 million and $35.0 million of undrawn capacity of the Company's $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. Subsequent to quarter-end, the Company announced that it had established an at-the-market equity program that allows the Company to issue and sell up to C$9,750,000 of common shares in the capital of the Company from the treasury to the public, from time to time, at the Company's discretion. The ATM Program is designed to provide the Company with additional financing flexibility should it be required in the future.
In Q3 2020, the Company's operating expenses, excluding restructuring charges, decreased to $15.3 million from $19.8 million in Q2 2020. The cost efficiencies were driven by a decrease in wages and benefits of 30%, decrease in facility costs of 12%, decrease in sales, marketing and business development expense of 63%, decrease in professional fees of 22% and decrease in general and administrative expenses of 17%. These planned cost reductions are as a result of the realigned and rightsized operating model implemented in Q3 2020 and are expected to be more fully reflected in Q4 2020. The Company continues to realize efficiencies and retain its focus on cost savings and near‐term revenue growth.
Cash outflows for capital expenditures in the quarter were $2.3 million, compared to $11.9 million in Q2 2020. Capital expenditures included the completion of construction projects on the Company's Blissco and 7ACRES facilities, additions to CPG equipment and ongoing minor retrofitting to the 7ACRES Facility. Capital expenditures for the remainder of fiscal 2020 and fiscal 2021 are expected to be minimal and focused on productivity enhancements justified by near-term cash flow returns.
Impairment of Intangible Assets
During the quarter the Company made revisions to its strategic plan and carried out certain restructuring actions. These factors combined with a decline in the market capitalization of the Company led to the Company performing an impairment review of its businesses as at March 31, 2020. Based on this review, the Company recognized a total non-cash impairment of assets of $57.5 million, primarily consisting of impairment to goodwill and intangible assets that were recognized as part of the BlissCo and Truverra acquisitions on July 11, 2019, and August 13, 2019, respectively. The impairment was primarily driven by slower than expected development of the recreational cannabis market in Canada that has resulted in slower than anticipated growth in sales of the Company. Further, the assumptions used by management to value goodwill that arose on the BlissCo and Truverra acquisitions have been revised as market conditions rapidly evolve and the Company's plans for the respective assets has changed.
Based on this review, the Company determined that no impairment charges were required on the Company's core cultivation asset. The 7ACRES Site continues to hold its value as a premium cultivation asset in Canada. The Company will continue to closely monitor market conditions and assess the carrying value of its assets, which could result in additional impairment or reversal of prior impairment charges.
In Q3 2020, the Company's 440,000 square foot premium cultivation facility received final licensing approval from Health Canada for multiple secure storage, processing and grow rooms, becoming one of the only premium indoor cultivation facilities in Canada completely constructed and fully licensed. In March 2020, the 7ACRES Facility received final licencing approval for 30,000 square feet of cultivation space, bringing total flowering, vegetation and propagation space to 280,000 square feet. In Q3 2020, the 7ACRES Facility brought a second automated bottling line into production, increasing total packaging capacity to a maximum of 24,000 containers per day. The 7ACRES Facility's current bottling capacity sufficiently addresses its current cultivation capacity.
In addition to the licensing of cultivation space, in Q3 2020, the 7ACRES Facility received licensing approvals on processing spaces, allowing for the Company to begin scaling concentrate and pre-roll production internally. In Q3 2020, the 7ACRES Facility's laboratory also received licensing approval, allowing for the Company to expand its internal analytical capabilities and allocate additional space to Supreme Cannabis' genetics business, Cambium Plant Sciences. Cambium will operate its genetics practice out of 7ACRES' laboratory and test new potential strains from dedicated cultivation space within 7ACRES.
In Q2 2020, Supreme Cannabis completed construction on its 12,000 square foot extraction facility in Langley, British Columbia, In March 2020, Blissco's state-of-the-art extraction facility received Health Canada approval on final licensing amendments. Included in this newly licensed space is additional secure storage space which allows for Supreme Cannabis to accelerate its growing production plan for the Blissco Facility and conduct all extraction in-house.
In addition to the Company's completed and active facilities, Supreme Cannabis is currently awaiting additional Health Canada licensing on its facility in Scarborough, Ontario, licensed under Canadian Clinical Cannabinoids Inc. and its processing and packaging centre in Kitchener, Ontario.
Products and Brands
In Q3 2020, 7ACRES' high-quality dried flower products continued to account for the majority of the Company's recreational cannabis sales. Cannabis flower products are expected to continue to drive revenue for the Company with incremental sales coming from a diverse portfolio of products offered at every key price point. During the quarter and subsequent to quarter-end, the Company introduced new products that built on 7ACRES' strong position in the premium cannabis flower category and entered new product categories that continued to expand the Company's portfolio beyond flower.
In Q3 2020, Supreme Cannabis further established its new brand, sugarleaf with the introduction of its second pre-roll strain. Subsequent to quarter-end, the Company launched sugarleaf's 1:5 oil, consisting of 1-part THC to 5-parts CBD. This in-demand product was quickly brought to market, utilizing in-house oil extraction and formulation expertise at the Blissco Facility. The introduction of sugarleaf's 1:5 oil builds on Supreme Cannabis' position in the CBD oil category; the Company's Blissco Brand addresses demand at a higher price point with its full-spectrum CBD oil product, Pūr Dew.
Subsequent to quarter-end, the 7ACRES brand launched its first pre-roll products, introducing Sensi Star and Jack Haze whole-flower pre-rolls in a two by 0.5-gram format. Supreme Cannabis' brand portfolio now addresses both the premium and mid-tier price segments with its 7ACRES and sugarleaf pre-rolls. To meet strong demand for pre-roll products, the Company expects to launch two additional whole-flower 7ACRES pre-roll strains prior to fiscal year-end.
Subsequent to quarter-end, 7ACRES also launched its highly anticipated 7ACRES PAX Era pods. The Indica and Sativa 0.5-gram Pax Era vaporizer cartridges represent Supreme Cannabis' first cannabis 2.0 products. In order to produce this product in-house at the Company's Blissco Facility, market-entry was delayed by one quarter. As previously announced, further delays were experienced in relation to COVID-19, resulting in a Q4 2020 product launch. In-house production allows for the Company to produce a differentiated high-quality product that can be introduced at a competitive price point.
In addition to introducing new product formats, subsequent to quarter-end, Supreme Cannabis launched a brand extension focused on enhancing the Company's core cannabis flower offerings. As announced on April 28, 2020, the Company launched 7ACRES Craft Collective, a brand extension that brings together some of the most sought-after cultivars from the country's most talented craft producers. The first products launched under 7ACRES Craft Collective are available in 3.5-gram whole flower formats and include Pink Kush in British Columbia and Wild Berry OG and Kush Cake in Ontario.
At the end of Q3 2020, Supreme Cannabis had shipped 22 SKUs to the Canadian market, as of today, the Company has increased its product offerings to over 30 SKUs. In the remainder of FY2020 and in FY2021, as part of its accelerated revenue strategy, the Company expects to introduce additional 1.0 and 2.0 products under its recreational cannabis brands.
In Q3 2020, Supreme Cannabis enhanced distribution of its recreational brands with their entrance into additional Canadian provinces. The Company's sugarleaf brand expanded distribution to Québec and Manitoba and subsequent to quarter-end, entered Saskatchewan and British Columbia, achieving brand distribution in six provinces. Supreme Cannabis' Blissco brand entered Saskatchewan in the quarter, and subsequent to quarter-end, Blissco branded products also became available in Ontario, also expanding its brand presence to six provinces.
As previously announced, at the end of Q2 2020, 7ACRES branded products successfully entered the Québec market, expanding distribution to 10 provinces. In Q3 2020, the brand experienced strong growth in Québec; with only three SKUs available in the market, Québec accounted for approximately 30% of recreational sales revenue. In Q4 2020 and fiscal 2021, the Company will continue to increase its breadth of offerings in this province. In the first half of Q4 2020, Québec remained a strong market; however, COVID-19 impacts on consumer demand and provincial purchasing patterns have varied across Canada and continue to evolve as many provinces shift to click and collect model.
As the Company expands its brands into additional provinces and grows its portfolio of recreational brands and products, it benefits from an enhanced national retail sales strategy and partnership with Humble & Fume Inc. This innovative sales model will help the Company achieve comprehensive Canadian retail distribution. In Q3 2020, humble+fume began strategic market audits across Canada, identifying retail locations to support expanded brand distribution for Supreme Cannabis and furthering opportunities for the Company to increase its number of product listings.
Given current limitations related to COVID-19, humble+fume sales efforts are restricted to virtual and telecommunications. Unlike cannabis products, accessory items are purchased directly from humble+fume, allowing its sales team to remain in continuous contact with the 85% of retailers they are currently distributing to. In Q4 2020, with market audit results in-hand, humble+fume will begin its proactive sales efforts focused on increasing distribution and penetration of Supreme Cannabis' brands and products.
In addition to these sales efforts, humble+fume is offering Supreme Cannabis' fire.io education platform to budtenders and cannabis retail store managers across the country. Supreme Cannabis is also offering this platform to provincial cannabis boards to further enhance their knowledge. Fire.IO is an interactive online platform designed to educate and engage the retail community on further enhancing their cannabis knowledge, as well as making them more intimately aware of Supreme Cannabis' products and brands. As of today, over 280 budtenders and retail store managers across Canada are on the platform.
As previously announced, Supreme Cannabis' international medical brand Truverra completed its first export of medical cannabis to Israel at the end of Q3 2020. Supreme Cannabis partnered with Breath of Life International Ltd., Israel's largest and leading producer of medical cannabis and cannabis products, to offer Truverra-branded premium medical cannabis to patients in Israel.
As the Company focuses on its Canadian business, it continues to pursue capital-light international opportunities. This initial transaction builds Truverra's international medical brand and creates opportunities for future international medical sales to Israel and other medical cannabis markets. In addition to Truverra's international medical business, the brand continues to operate in the UK through Truverra's CBD e-commerce business.
The Company continues to remain 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 enhanced offering of new high-quality brands and products at every price segment.
The potential impacts of the COVID-19 pandemic on Supreme Cannabis' business and the cannabis industry are still unclear; however, the Company continues to take all steps necessary to ensure its employees remain safe, its operations run as smooth as possible, potential business disruptions are minimized and its fiscal 2020 objectives remain achievable. The Company confirms the following outlook for the remainder of fiscal 2020, which was previously announced on February 13, 2020:
- 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
- Fully funded to execute on all planned initiatives.
To learn more about Supreme Cannabis, visit the company HQ here.
Disclaimer: Past performance is not an indicator of future performance.
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