The Supreme Cannabis Company, Inc. (SPRWF) Q2 2020 Earnings Conference Call November 17, 2020 8:00 AM ET
Company Participants
Beena Goldenberg - President and Chief Executive Officer
Nikhil Handa - Chief Financial Officer
Conference Call Participants
Graeme Kreindler - Eight Capital
Operator
Good morning, everyone. Welcome to The Supreme Cannabis Company First Quarter 2021 Results Conference Call.
Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Supreme Cannabis' future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Supreme Cannabis' annual information form and other periodic filings and registration statements. You can access these documents at SEDAR's database found at sedar.com.
I'd like to remind everyone that this conference call is being recorded today, Tuesday, November 17, 2020.
I would now like to introduce Ms. Beena Goldenberg, President and Chief Executive Officer of The Supreme Cannabis Company. Please go ahead, Ms. Goldenberg.
Beena Goldenberg
Thank you, operator. Good morning, everyone. And thank you for joining us. On the call with me today is Nikhil Handa, our Chief Financial Officer.
We released our fiscal 2021 first quarter results after market closed yesterday. You can access our news release as well as our complete financial statements and management's discussion and analysis on our website at www.supreme.ca. Our news release, financial statements and MD&A have also been filed on SEDAR.
On today's call, we'll discuss the financial results for the three month period ended September 30, 2020 and provide a general business update. We will then open the call for questions from analysts.
Before I begin, I'd like to say that we are pleased with the financial results in the quarter. With the realignment and restructuring of our business behind us, more of our sales growth and operating efficiencies are being reflected in the bottom line. As a result, we generated a positive adjusted EBITDA of CAD 0.3 million.
In our first public earnings call this past September, we outlined the steps we took to become a leading CPG company in the cannabis sector. The results from the first quarter of fiscal 2021 demonstrated that we are on the right path. In particular, I would like to discuss the progress we have made against the strategy of accelerating the revenues, especially in the recreational segment, as well as the ongoing optimization of our facilities and disciplined cost control.
We are focused on engaging cannabis customers across the recreational market and are working hard to increase our market share by offering compelling brands and high quality products at several price points and form factors. We have made product innovation an integral pillar of what we do and will continue to bring more exciting products to market.
While Nikhil will speak more on the company's financial results later in the call, I wanted to highlight from a strategic standpoint the growth trajectory that we are seeing in our recreational revenues.
Growing our recreational revenue is a major focus for the company and we saw positive trends in the first quarter of 2021. While the quarter-over-quarter recreational net revenue increased 3%, the monthly data tells a much more encouraging story. Despite an initial drop in recreational sales from June to July due to stock-outs as a result of fulfillment and supply chain growth challenges, we posted impressive month over month growth in recreational revenues in the last two months of the quarter, which is more indicative of the traction ou rbrands are gaining in the market and the ramp up of our sales partnership with humble+fume. Specifically, the month of September was the highest month on record for the company's recreational sales.
Our brands continue to perform well and we are well positioned to grow our market share. According to Headset data for Q1, Supreme's brand position ranking was number 10 in the flower market with a 3% share, number 7 in pre-rolls with a 3.4% share, number 5 in oils with a 5.4% share, and number 6 in concentrates with a 4.4% share.
In the quarter, we continued to see growth from our partnership with humble+fume. Through this partnership, humble+fume deploys a team of sales professionals that drive distribution, brand advocacy and budtender education for all Supreme Cannabis brands in store level.
Since April until the end of September of this year, humble+fume created more than 3,500 new listings for Supreme Cannabis products. In Q1 2021, they added 2,258 listings and 232 new stores started carrying Supreme Cannabis products. Overall, we shipped to all 10 provinces in Q1 2021, with 81% of our recreational sales coming from Quebec, Alberta, Ontario and BC.
There continues to be pricing compression in the recreational cannabis sector across all price categories due to increased competition. While we strive to be price competitive to gain market share, we will also ensure that we have a premium positioning and the right product mix to mitigate the pricing pressures as much as possible.
Despite this compression, our 7ACRES brand can still sustain a premium price in the market and perform well. According to Headset, 7ACRES is currently the seventh ranked brand for flower sales in Ontario, while having the highest equivalence price per gram in the top 15 brands list. This is an excellent achievement considering all of the brands ahead of 7ACRES have a minimum CAD 2.13 per gram lower equivalent price and consists solely of high volume LP.
Truverra also continues to be an important member of our brand family. As I mentioned in our last call, in Q1, we made our third shipment of medical cannabis to Breath of Life Pharma in Israel. This is a long-term relationship and we have seen consecutive growth in volume for each shipment. We plan to add additional wholesale medical partners in various international jurisdictions moving forward.
Also, last Thursday, we announced that we have entered into a supply agreement with Shoppers Drug Mart Inc. to offer Truverra branded medical cannabis products through their Medical Cannabis by Shoppers online sales platform. Under this agreement, Canadian patients will be able to order Truverra dry flower, pre-rolls, and full spectrum CBD oil.
Turning now to our operations. With the construction of our facilities complete, we focus on optimization and efficiency this quarter. At our Kincardine facility, the team has been having success at increasing plant yields through adjusting plant density and achieving more consistent climate control as a result of the new natural gas heating system.
The facility also underwent an optimization of its bottled flower containers to reduce the cost of procurement. This optimization is expected to deliver savings of over CAD 1 million annually.
The work in Kincardine is also focused on building out our capability as a premier CPG cannabis company. Included in the feedback we frequently receive from consumers is that they're looking for new strains and new formats. The propagation team at Kincardine has been actively introducing new strains from our genetics library and have several strains lined up to be produced in small scale batches over the course of next year.
Subsequent to quarter-end, the company's processing license for the Kincardine facility was amended by Health Canada in October to authorize commercial sale of cannabis products, the cannabis extract class of cannabis. The company also received a research license at the Kincardine facility in November.
At our Langley facility in British Columbia, the continuous improvement program continues to yield positive results. A key focus has been on improving conversion yields through first pass extraction and distillation and further enhancing quality of these processes.
Like we also developed and produced the sugarleaf THC vape and a stainless steel 510 cartridge which was introduced in August. This month, we plan on introducing a Blissco Pūr clove CBD vape in a ceramic 510 cartridge.
Before I pass the call on to Nikhil, I just wanted to say that I am encouraged by the steady progress we made in our transformation into a premium CPG company.
Supreme has started fiscal 2021 on a solid note with good performance against both of our major strategic imperatives.
Looking ahead, there's a lot to like about Supreme Cannabis. We have a robust and growing product offering that is continuing to gain traction with consumers. And we have efficient, right-sized operating structure.
Now, Nikhil will discuss the financial results for the quarter and then I will return to discuss outlook and take questions. Nikhil?
Nikhil Handa
Thank you, Beena. And good morning, everyone. As Beena mentioned, in the first quarter of 2021, we focused on executing our strategy of growing market share, while optimizing operations with the goal of achieving sustainable profitability.
In Q1 2021, the company's overall net revenue increased by 24% to CAD 11.9 million, compared to CAD 9.5 million in Q4 2020. This was the result of continued growth in recreational cannabis sales, as well as a significant contribution from wholesale and medical international sales.
Recreational net revenue increased to CAD 7.5 million in Q1 2021, up 3% compared to Q4 2020. Recreational sales increased as a result of existing and new products continuing to be well received by the recreational cannabis consumer. In particular, Craft Collective and cannabis extracts, which includes oils, vapes and concentrates, contribute a growing portion of the recreational sales in the quarter.
As it relates to recreational dry cannabis products, volumes increased by 14%. This was partly driven by increased distribution in stores, the breadth of our portfolio of brands at different price points and becoming more competitive on our 7ACRES brand. As a result of this last factor, the average selling price per gram for recreational dry cannabis products declined 19% compared to Q4 2020.
The recreational sales channel accounted for 63% of net sales in Q1. This is a decline from 76% in the previous quarter.
Wholesale and international medical sales volumes were 2,249 kilograms, up 69% compared to Q4, while the average selling price was up 14% from Q4. This increase in kilograms is the result of increased volumes of medical cannabis shipped to Breath of Life Pharma in Israel and increased volumes from existing domestic channels.
The company's gross margin improved quarter-over-quarter. In Q1, we took an impairment charge related to inventory, totaling CAD 8.4 million, which was reflected in the company's production costs. Excluding this impairment charge and other fair value items, the company's gross margin for Q1 2021 was 53% compared to 41% in Q4 2020. Further, excluding an amortization expense of CAD 702,000 included in the company's production costs, the company's cash gross margin was 58% for Q1.
Now looking at our operating expenditures, in Q1 2021, Supreme's operating expenses excluding restructuring charges decreased by 57% to CAD 6.4 million from CAD 14.7 million in Q4 2020. These savings were primarily driven by the recovery of share-based payments and the cancellation of outstanding stock options during the three months ended September 30, 2020 and the inclusion of a CAD 2.2 million bad debt write-off recorded in Q4 2020.
So, apart from these two factors, our operating expenses were relatively flat quarter-over-quarter, with both quarters benefiting from the cost savings due to the realigned and right-sized operating model that has delivered substantial cost savings to the company.
In addition to reducing operating expenditures, capital expenditures decreased to CAD 0.4 million, down 61% compared to Q4 2020. With the completion of construction projects at the company's Kincardine and Langley 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.
A clear indication of the progress we have made in turning the company around is that we've achieved positive EBITDA of CAD 0.3 million in the quarter on an adjusted basis. This increase in EBITDA compared to prior quarters is the result of improved gross margin when you exclude the impact of fair value items and inventory impairments and relatively flat operating expenses on an adjusted basis. We expect to achieve further improvement in adjusted EBITDA by continuing to focus on accelerating near-term revenue growth, with a continued emphasis on our production costs and operating expenses.
Turning to the balance sheet, our balance sheet remains strong. As discussed last quarter, we took action early in Q1 to improve our financial position. As of September 30, 2020, Supreme Cannabis had CAD 20.4 million of unrestricted cash and CAD 18.5 million in current liabilities. The company also had CAD 1.3 million undrawn under its credit facility. This demonstrates that we have the current resources available to settle our current liabilities and we are fully funded to execute on all of our planned initiatives for fiscal 2021.
The company also had CAD 7.7 million remaining in its after-market equity issuance program as at September 30, 2020. This program is designed to provide additional financial flexibility and raise equity in a responsible manner if required. Under the ATM program, in Q1, we issued approximately 1.5 million shares for proceeds of approximately CAD 0.3 million.
We also completed key initiatives that increase our financial flexibility by amending our existing convertible debentures and credit facility. In September, CAD 63.5 million out of the CAD 100 million principal amounts of our convertible debentures were converted to equity by issuing 116.6 million common shares to debenture holders at a significant premium to the share price at that time.
This initiative reduced the company's debt load by CAD 63.5 million and also lowered our expected interest payments by over 50%, freeing up cash to invest in strengthening the business and investing in value generating opportunities.
The maturity date on remaining CAD 36.5 million was moved from October 2021 to September 1, 2025. So, instead of having CAD 100 million coming due in October of next year, we have the lower refinance amount maturing in five years. This refinancing was a crucial step in strengthening the balance sheet of Supreme.
Also in September, the company amended senior secured credit facility. The amendments provided Supreme with a longer runway to execute on its business plans before the credit facility converts to cash flow covenants such as leveraged metrics.
With the refinancing of our convertible debenture and the amendment of our credit facility, Supreme has reduced its overall leverage, reduced its expected cash interest expenses, and has no major maturities for the next two years. Our focus continues to be on maximizing shareholder value. We will take all the steps necessary to ensure the most efficient use of our capital structure to support value creation in the long term.
Thank you. And I'd like to turn the call back to Beena now.
Beena Goldenberg
Thanks, Nikhil. I see a clear path ahead for Supreme, one that will benefit our investors, consumers and employees. And I look forward to updating you throughout the year on our progress.
I also want to thank our shareholders for their support and continued interest in Supreme Cannabis.
This concludes our formal presentation. Thank you. I'd like to open the line for analyst questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from Graeme Kreindler at Eight Capital.
Graeme Kreindler
Just to follow-up on the commentary regarding the cadence of sales within the quarter, could you provide the quarterly run rate sales figure as of September? Or maybe another way, what September's overall contribution was in the quarter to the top line?
Beena Goldenberg
We saw month-over-month improvement after a dip in July, as we talked about, and came out with our strongest sales month in September. So, we're pretty happy with that. We see accelerating revenues coming out of the quarter. And while we're not going to provide any guidance, looking forward, I will say that accelerating our revenues, particularly in the rec segment, is a major focus for us. And we feel pretty confident that we have the traction behind the new listings and new products to get us there.
Graeme Kreindler
Just moving on with respect to the gross margin, which on an adjusted basis was north of 50% in the quarter, improving from 41% in the previous quarter. Was that driven more so by the acceleration seen on the recreational market sales or whether favorable dynamics in the wholesale segment that drove that north of 50%? Thanks.
Beena Goldenberg
Why don't I let Nikhil take this one.
Nikhil Handa
Great question. Maybe just generally, if you look at our production costs, we're obviously well controlled this quarter. Normalized gross margins really benefited from continuous optimization of our facilities and also operating leverage.
On the comment on wholesale versus recreational, we have a similar contribution between both channels. And if you step back and think, we completed construction largely of our facilities roughly two quarters ago. The team has really been focused on optimizing those production processes, which obviously has the benefit of generating ongoing production cost reductions and also quality improvement projects. So, we obviously underwent the larger reorganization earlier this year. But we have an ongoing list of projects that will generate savings, some of which Beena mentioned as a natural gas conversion, but also that will help drive for the quality improvement. So, the gross margin for this quarter was quite high.
And as part of our investments in strengthening our overall processes, we'll likely be adding some additional CPG expertise and some new roles. And so, this will bring down the gross margin below this figure, but it'll still be above last quarter's gross margin percentage.
Operator
Thank you. [Operator Instructions]. There are no further questions. You may proceed.
Beena Goldenberg
Well, thank you, everybody, for participating today. We look forward to discussing our fiscal second quarter results in February. Should you have any follow-up questions, please feel free to reach out to us. And otherwise, have a great day.
Operator
Ladies and gentlemen, this concludes today's conference call. We thank you for participating. And we ask that you please disconnect your lines.
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