Supreme Cannabis Releases 2020 Q1 Earnings and Announces Closing of Credit Facility

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The Supreme Cannabis Co. released their fiscal first-quarter results Thursday after market close. While their results were nowhere near the disaster that was Canopy Growth’s earnings, they weren’t winning any awards either (unlike their cannabis).

Our Take

Like many LPs, Supreme’s revenues were down quarter over quarter, falling 40% to $11.4 million. Unlike many LPs, however, Supreme’s revenue suffered, in part, due to a one-time mechanical failure that led to lost production from three grow rooms.

Based on our estimates, this lost production would be equivalent to $6.2 million in additional sales (if it were all sold). This would have left them at $17.7 million on the quarter, down slightly still, but not as bad off as it initially seems.

Notably, management reiterated its revenue guidance of $150-180 million for fiscal 2020. Investors will need to watch revenues next quarter to ensure they are tracking towards their stated goal.

On a positive note, Supreme’s average sale price per gram held relatively steady at $5.80, falling only 5%. While that may not seem overly impressive, larger LPs like Cronos and Tilray saw decreases of 42% and 24%. Further, Supreme’s premium flower has still generated one of the highest revenues per gram among LPs.

Revenue Per Gram

Source: SEDAR Filings, Capital 10X Estimates.

At this time, the company is also in the middle of a transition away from the wholesale flower market. Over the last quarter, they reduced their percentage of wholesale flower sales from 65% to 57%.

At 57%, they still have ample room for further reduction, which means they can improve average sale price or at least mitigate decreases as the price war heats up.

When you consider their first original strain, Jack Haze, is proving to be an award winner, there should be sufficient retail demand for their product.

It’s this ability to produce quality cannabis that will ultimately help bolster Supreme’s performance in the long term. Price compression will hit all LPs, but a producer of premium flower should see less of a reduction compared to the generic conveyor-belt cannabis producers.

Lastly, amid a liquidity crisis in the cannabis industry, Supreme was able to secure a $90 million credit facility. This speaks to the quality of their assets as well as the faith from lenders.

With $36.4 million on the balance sheet and a reiteration of positive EBITDA for fiscal 2020, Supreme should have plenty of cash to carry them to profitability.

Overall, we believe Supreme’s premium status and strong cash position make them one of the better positioned LPs for the dark days still ahead.

Quarterly Review

The revenue decrease was due to a one-time mechanical failure that resulted in lost production from three rooms for the quarter.

On the quarter, Supreme generated $11.4 million of revenue, down 40% from the previous quarter. This was achieved with an average sale price of $5.80 per gram, down 5% from last quarter. Based on these numbers, they sold approximately 1,971 kg of flower in the quarter.

As noted above, the revenue decrease was due to a one-time mechanical failure that resulted in lost production from three rooms for the quarter. The problem has since been fixed, with the rooms replanted in September.

Compared to their peers, Supreme stacks up well in terms of revenue per gram. It will be important to watch all legal producers’ per gram revenue as supply increases and pricing competition heats up.

Revenue Per Gram

Source: SEDAR Filings, Capital 10X Estimates.

Supreme’s cost of goods sold was $4.4 million, or $2.2 per gram. Despite operational challenges, they decreased per gram costs by 12%. This likely stems from increased economies of scale as 7ACRES reaches full capacity.

Compared to their peers, they have the second-lowest production cost per gram.

Cost of Goods Sold Per Gram

Source: SEDAR Filings, Capital 10X Estimates.

Gross profit for the quarter was $7.1 million, or $3.6 per gram. This held steady quarter over quarter and makes them the leader among LPs.

Gross Profit Per Gram

Source: SEDAR Filings, Capital 10X Estimates.

G&A costs increased by 24% to $11.7 million, or $5.9 per gram. This increase can be attributed to the addition of Truverra and Blissco operating costs, now that they are officially a wholly-owned subsidiary.

Compared to their peers, Supreme sits in the middle of the pack on a per-gram basis. Investors should watch for this to decrease as their subsidiaries expand operations and they operate 7ACRES at full capacity with no issues.

G&A Per Gram

Source: SEDAR Filings, Capital 10X Estimates.

The net loss for the quarter was $16.7 million, while they posted an EBITDA loss of $4.6 million.

Looking at liquidity, Supreme consumed $7.7 million of cash through operations and $17.5 million through investing (mainly PPE additions).

With $36.4 million of cash on their balance sheet and the $90 million of cash from the recently closed credit facility, Supreme is in a solid position.

Given they are guiding to positive adjusted EBITDA for fiscal 2020, there little to worry about Supreme’s liquidity situation.

Other Notable Events

Supreme announced the closing of a $90 million credit agreement with BMO. The facility consists of a $70 million term loan and a $20 million revolving credit facility. The credit facility is expected to carry a rate of 5-6% per annum, similar to what’s been seen with other large LPs.

They closed their Blissco acquisition, which is now a wholly-owned subsidiary focused on hemp and cannabis extraction. They currently hold a license and sell adult-use dried cannabis to BC, Alberta, Saskatchewan, and New Brunswick.

Lastly, they closed the Truverra acquisition, which is now a wholly-owned subsidiary focused on emerging cannabis markets in Europe. They have a focus on hemp-derived medicinal products with proven clinical efficacy.

The Supreme Cannabis Co. is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard
Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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