Supreme Cannabis Releases 2020 Q2 Results

The Supreme Cannabis Co. [stock_market_widget type="inline" template="generic" color="default" assets="FIRE.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] released Q2 2020 results and showed investors they are facing the same challenges as other LPs. Amid a tough stretch for the Canadian cannabis industry, it appears even premium producers are feeling the pressure from the oversupplied market.

The Takeaways

These results can be summed up by the fact that management rescinded revenue and EBITDA guidance for their 2020 fiscal year. While this was largely expected given the industry downturn, it won’t bode well for FIRE’s share price.

While we still believe Supreme has the right strategy for the cannabis market (focusing on high-end premium products) they need to pair this with solid economics.

Unfortunately, Supreme was hit hard by decreasing wholesale and retail sales prices, driving down total revenues despite increased sales volume.

One positive for Supreme is the increase in total recreational sales ($5.7 million compared to $5.2 million). As they continue their transition away from wholesale, this should help bolster margins, which took a hit this quarter due to changes in inventory on their balance sheet.

In terms of liquidity, Supreme appears better positioned than many, holding $55 million of cash and restricted cash on the balance sheet with an additional $15 million to draw on their credit facility.

Notably, inventory increased over 50% to $42.5 million on the quarter. This could be due to the packaging backlog associated with the new processing equipment being commissioned at 7ACRES. Investors should watch this to ensure it decreases as they fully transition to recreational sales.

While G&A per gram stayed flat on the quarter, it should decrease with their recently announced 15% headcount reduction.

Looking at the most important metric in the cannabis industry, liquidity, Supreme appears better positioned than many. They hold $55 million of cash and restricted cash on the balance sheet with an additional $15 million to draw on their credit facility.

While it’s unclear how much CapEx spend is remaining to complete their new processing and packaging facilities, they have stated they are fully funded.

Operational Review

Quarter over quarter Supreme’s revenues fell 21% to $9.06 million on the back of decreasing wholesale total sales. Notably, total retail sales increased from approximately $5.2 million to $5.7 million.

Overall this translated into a 34% decrease in total revenue per gram to $3.80 from $5.80 as they sold approximately 2,365 kg in the quarter. This represented a 20% increase QoQ, signifying that falling pricing is severely impacting revenues and margins.

Specifically, gross margins took the biggest hit, decreasing by 63% to $2.6 million, negatively impacting EBITDA and their bottom line. This was partially due to changes in realized fair value based on lower than anticipated selling prices.

Operating expenses increased 19%, with G&A per gram staying at $5.90 despite increased sales volumes. Moving forward, their reduction in the workforce should result in decreased operating expenses.

The net result for the quarter is an EBITDA loss of $11.3 million, with a net loss of $15.4 million. Supreme’s cash balance remains at $48.7 million with a cash burn from operations of $23.7 million in the quarter.

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Supreme was 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 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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