Supreme Cannabis Announces Financial Results for Q3 2021

Beena Goldenberg, President and CEO of Supreme Cannabis, commented:

“The third quarter of 2021 was marked by significant headwinds across the industry due to nationwide lockdowns and restrictions associated with COVID-19 that resulted in softness in the market which impacted our recreational revenue. At the same time regulatory changes delayed our international medical shipments. Despite these challenges, Supreme Cannabis navigated a tumultuous quarter and continued to offer high-quality, compelling products to customers and exercise disciplined cost control across the business, delivering our third consecutive quarter of positive adjusted EBITDA. We will continue to work through and adapt to these challenges as we continue on our path to sustainable profitability.”

Ms. Goldenberg continued, “Supreme Cannabis increased its market penetration and maintained its market share position as a top-10 Canadian LP, with 7ACRES a top-5 player in Pre-Rolls and the number-one Pax vape during the third quarter. This continues to demonstrate that our brands are resonating with customers.”

Ms. Goldenberg concluded, “Subsequent to quarter-end, we entered into an agreement with Canopy that maximizes shareholder value and offers a compelling future for the Company. This is a testament to the strength of the company we have built, and I am proud of our high-quality, sought-after brands and products. I believe that this opportunity represents the right move for Supreme Cannabis for the long-term and the best way forward for the Company to realize its strategic objective of creating a premier cannabis CPG company. Not only does this deal give our shareholders a compelling premium and significant value creation opportunities through continued ownership in shares of Canopy, we are also able to pair our operational efficiency and high-quality products with Canopy’s scale, brand offering, and considerable sales and marketing platform. This deal also allows Supreme Cannabis’ shareholders to gain exposure to Canopy’s U.S. CBD business, conditional positioning for continued US market expansion as well as an opportunity to be invested in one of the world’s leading Cannabis LPs.”

Select Financial and Operational Results.

Revenue

Recreational net revenue declined slightly to $11.7 million, a decrease of 8% quarter-over-quarter due to lower volumes. This was due to an industry-wide slowdown in recreational sales caused by the renewed lockdown measures initiated across Canadian provinces related to the COVID-19 pandemic.

Wholesale net revenue was $1.9 million, down 67% due to delays caused by regulatory changes in the Company’s international medical markets, which the Company continues to adapt to and address, and due to lower wholesale inventory to monetize during the quarter.

Combined, the overall net revenue for Q3 2021 was $13.6 million, down from $18.3 million in Q2 2021.

Gross Margin

In Q3 2021, Adjusted Gross Margin was 35% compared to 49% in Q2 2021, due to higher production costs from rebalancing production and demand and investments in supply chain.

Adjusted EBITDA

The Company generated a positive Adjusted EBITDA of $0.5 million compared to an Adjusted EBITDA of $3.6 million in Q2 2021 due to lower revenues and higher production costs while maintaining disciplined control of operating expenses.

Balance Sheet, Liquidity and Cash Flow from Operations

Supreme Cannabis ended the quarter with a total cash balance of $65.5 million and a working capital surplus of $42.2 million.

The Company took steps to significantly reinforce its balance sheet in Q3 2021, completing two unit offerings.

On January 29, 2021, the Company closed an overnight marketed public offering of 121,049,000 units (the “Units”) at a price of $0.19 per Unit. Total net proceeds to the Company were $21.3 million, including the full exercise of the over-allotment option granted to the underwriters. Each Unit was comprised of one Supreme Cannabis Share and one half of one Supreme Cannabis Share purchase warrant of the Company (each full Supreme Cannabis Share purchase warrant, a “Warrant”). Each Warrant is exercisable to acquire one Supreme Cannabis Share (a “Warrant Share”) until January 29, 2024 at an exercise price of $0.23 per Warrant Share, subject to adjustment in certain events.

On February 19, 2021, the Company offered 83,490,000 units of the Company (the “Bought Deal Units”) at a price of $0.31 per Bought Deal Unit. Total net proceeds to the Company were $24.0 million, including the full exercise of the over-allotment option granted to the underwriters. Each Bought Deal Unit was comprised of one Supreme Cannabis Share and one half of one Supreme Cannabis Share purchase warrant of the Company (each full Supreme Cannabis Share purchase warrant, a “Bought Deal Warrant”). Each Bought Deal Warrant is exercisable to acquire one Supreme Cannabis Share (a “Bought Deal Warrant Share”) until February 19, 2024 at an exercise price of $0.40 per Warrant Share, subject to adjustment in certain events.

The Company also issued 2,420,980 and 5,009,400 broker warrants in connection with the Units and Bought Deal Units, respectively. The net proceeds from the offering of Units and Bought Deal Units are being used to fund growth initiatives, as a reserve for strategic opportunities, and for working capital and general corporate purposes.

On March 3, 2021, the Company established a new at-the-market equity (“ATM”) program that allows the Company to issue and sell up to $30.0 million worth of Supreme Cannabis Shares from treasury, from time to time. There have been no Supreme Cannabis Shares issued under the new ATM program.

As at March 31, 2021, the Company was not in compliance with the covenants under the agreement (the “Credit Agreement”) with its lenders in respect of a three-year term credit facility initially announced on November 15, 2019 (the “Credit Facility”). Subsequent to March 31, 2021, the Company secured a waiver for its financial covenant related to minimum earnings before interest, taxes, depreciation and amortization, as defined in the Credit Agreement. As such, the Company is not obligated to repay the borrowings under the Credit Facility on demand.

Operating and Capital Expenditures

In Q3 2021, the cost realignment efforts taken in the second half of fiscal 2020 continued to benefit the Company. Operating expenses in Q3 2021 declined by 14% over the previous quarter to $7.3 million, primarily driven by lower professional fees, lower salaries and wages due to the prior period having one-time severance costs, and $0.2 million higher recoveries related to previously written-off bad debts. The Company continues to consolidate and streamline its shared services, facilities, and production expenses.

The Company’s capital expenditures in Q3 2021 decreased to $0.1 million, down quarter-over-quarter from $0.3 million. With the completion of construction projects at the Company’s Kincardine, Ontario (“Kincardine Facility”) and Langley, British Columbia (“Langley Facility”) 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.

Brand and Product Developments in Q3 2021.

Supreme Cannabis introduced 9 new products to the market during Q3 2021:

7ACRES

• 3.5g Whole Flower Wappa 49

Blissco

• 0.5g 510 Pūr Cloud CBD Vape
• 0.5g 510 Pūr Cloud CBD Vape Kit

Hiway

• 2g Hash – SQDC specific
• 28g Whole Flower AAA Hybrid
• 1g 510 Fire OG THC Vape
• 2x1g Pre-Rolls (British Columbia specific)

Sugarleaf

• Strawberry Peach flavoured THC Gummies

Truverra

• 30mL CBD Oil

Subsequent to quarter end, the Company launched three SKUs:

• 7ACRES Craft Collective 3.5g Whole Flower Black Cherry Punch
• 7ACRES Craft Collective 3.5g Whole Flower Kush Cookies
• 7ACRES 3.5g Whole Flower Papaya

Distribution.

Overall, Supreme Cannabis shipped 26% less product on a gram equivalent basis in Q3 2021 compared to Q2 2021. The provinces of Quebec, Alberta, Ontario and British Columbia generated the majority of the Company’s sales.

Distribution to the recreational market of dried cannabis products on a gram equivalent basis was 6% lower in Q3 2021 compared to Q2 2021.

Despite recreational sales continuing to be impacted by market conditions, the Company’s existing and new products continue to be gain traction and are well received by the recreational cannabis consumer. The Company continues to monitor its sales and marketing efforts in light of the restrictions put in place for COVID-19 and will optimize its in-store marketing and spend accordingly.

The Company also expanded its international medical cannabis customers and completed its first shipment of medical cannabis to Australia in a private label transaction in January 2021.

Operations.

The Company continues to make incremental improvements at its Kincardine Facility and Langley Facility to enhance production, processing, and operating efficiency.

At the Kincardine Facility, the Company is working to optimize growing conditions, launching a series of trials including a pruning trial, to increase canopy density and yield, a fertigation trial to address plant health, yield and flushing, and trialling pre-roll kief mixing to increase potency.

The Kincardine Facility introduced some new processing and packaging capabilities during the third quarter, including a pre-roll autocone machine, which arrived on site during the quarter and is running daily to hit production targets. As a result, 1g Hiway Pre-Rolls are now being produced at the Kincardine Facility. Also, the transition of 3.5g flower offerings from the 6oz jar to the 4.2oz jar has been completed in Alberta, Ontario, and New Brunswick, resulting in a 15% increase in labour efficiency. This transition started in late February and has delivered $50,000 in packaging cost savings by quarter-end.

At the Langley Facility, the Company’s continuous improvement program continues to deliver positive results. The carbon filtration project has been successful at improving the overall quality of winterized oils that will be turned into distillate. They are improving distillation efficiency using temperatures and pressures to drive 3-fold improvement of yield. The Company also continues to see a 7% increase in distillate potency.

Proposed Transaction with Canopy Growth Corporation.

Subsequent to quarter-end, the Company entered into a definitive arrangement agreement (the “Arrangement Agreement”) under which Canopy will acquire all of the Supreme Cannabis Shares (the “Transaction”).

Under the terms of the Arrangement Agreement, Supreme Cannabis shareholders will receive 0.01165872 of a Canopy common share (the “Exchange Ratio”) and $0.0001 in cash in exchange for each Supreme Cannabis Share held. The Transaction provides Supreme Cannabis shareholders with a premium per Supreme Cannabis Share of approximately 66% based on the closing prices of the Supreme Cannabis Shares and Canopy common shares on the Toronto Stock Exchange as of April 7, 2021, the date immediately preceding the announcement of the Transaction.

The Transaction is subject to customary closing conditions, including, but not limited to, (a) obtaining the required approvals of the Company’s shareholders at a special meeting of Supreme Cannabis shareholders to be held on June 10, 2021, (b) obtaining a final order from the Ontario Superior Court of Justice approving the Transaction, (c) the absence of any injunction or similar restraint prohibiting or making illegal the consummation of the Transaction, (d) the required regulatory approvals having been obtained, (e) no material adverse effect having occurred, (f) subject to certain materiality exceptions, the accuracy of the representations and warranties of each party contained in the Arrangement Agreement and (g) the performance in all material respects by each party of its obligations under the Arrangement Agreement. The Transaction is expected to close in June 2021 following the receipt of the required shareholder, regulatory and court approvals.

The Transaction is expected to provide several benefits to both Canopy and Supreme Cannabis shareholders. Supreme Cannabis shareholders will benefit from Canopy’s strengthened brand portfolio, including one of Canada’s leading premium brands, 7ACRES. Brand growth is anticipated with distribution supported by Canopy’s robust sales and distribution network as well as superior consumer insights and R&D capabilities. In addition to receiving a market premium, Supreme Cannabis shareholders will also benefit from exposure to Canopy’s US CBD business and conditional positioning for continued exposure to the US market expansion. Further value will be derived through the scalable Kincardine Facility, which has a demonstrated record of producing high-quality flower at low cost.

Third Quarter 2021 Results Conference Call and Webcast.

The Company will host a conference call to discuss its third quarter fiscal 2021 results at 8:00 AM Eastern on Friday, May 14, 2021. Interested parties can join the call by dialling 647-427-7450 or 1-888-231-8191. The conference ID number is 1509877. The call can also be accessed through the following webcast link https://bit.ly/3egbED4.

A recording of the conference call will be available for replay two hours after the call’s completion. To access the recording, please dial 416-849-0833 or 1-888-859-2056 and the replay code 1509877. The recording will be available until June 14, 2021.

About Supreme Cannabis.

The Supreme Cannabis Company, Inc., (TSX: FIRE) (OTCQX: SPRWF) (FRA: 53S1), is a global diversified portfolio of distinct cannabis companies, products and brands. Since 2014, the Company has emerged as one of the world’s most premium producers of recreational, wholesale and medical cannabis products.

Supreme Cannabis’ portfolio of brands caters to diverse consumer and patient experiences, with brands and products that address recreational, wellness, medical and new consumer preferences. The Company’s recreational brand portfolio includes 7ACRES, Blissco, 7ACRES Craft Collective, Sugarleaf and Hiway. Supreme Cannabis addresses national and international medical cannabis opportunities through its Truverra brand.

Supreme Cannabis’ brands are backed by a focused suite of world-class operating assets that serve key functions in the value chain, including scaled cultivation, value-add processing, automated packaging and product testing and R&D. Follow the Company on Instagram, Twitter, Facebook, LinkedIn and YouTube.

We simply grow better.

Forward-Looking Information.

Certain statements made in this press release may constitute “forward-looking information”, “future oriented financial information” or “financial outlooks” (collectively, “forward-looking information”) within the meaning of applicable securities laws. Forward-looking information may relate to anticipated events or results including, but not limited to: progressing  towards becoming a premium cannabis CPG company; expected capital expenditures for the remainder of fiscal 2021; offering of additional products through the Medical Cannabis by Shoppers online sales platform; the implementation of the pre-roll autocone machine in the coming months at the Kincardine Facility; the Company’s ability to grow near-term revenue and reach sustainable profitability; the Company’s focus on cost containment and ability to execute on all planned initiatives; the timing and outcome of the Transaction; the anticipated benefits of the Transaction; the estimated potential synergies as a result of the Transaction; the anticipated timing of the Supreme Cannabis special meeting of shareholders and the closing of the Transaction; the satisfaction or waiver of the closing conditions set out in the arrangement agreement, including receipt of all regulatory approvals; and other statements that are not historical facts. Particularly, information regarding our expectations of future results, targets, performance achievements, prospects or opportunities is forward-looking information. Often, but not always, forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “plan”, “could”, “should”, “would”, “outlook”, “forecast”, “anticipate”, “foresee”, “continue” or the negative of these terms or variations of them or similar terminology. Forward-looking information is current as of the date it is made and is based on reasonable estimates and assumptions made by us at the relevant time in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable in the circumstances. To the extent any forward-looking information in this press release constitutes “future oriented financial information” or “financial outlooks”, within the meaning of applicable securities laws, the purpose of such information being provided is to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. However, we do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada. There can be no assurance that such estimates and assumptions will prove to be correct.

Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking information as discussed in the “Risk Factors” section of the Company’s Annual Information Form dated September 24, 2020 (“AIF”). A copy of the AIF and the Company’s other publicly filed documents can be accessed under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. The Company cautions that the list of risk factors and uncertainties described in the AIF is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information.

Non-GAAP Measures and Additional Subtotals. 

This news release contains certain financial performance measures that are not recognized or defined under IFRS (“Non-GAAP Measures”) including, but not limited to, “Adjusted EBITDA” and “Adjusted Gross Margin”. As a result, this data may not be comparable to data presented by other cannabis companies. For an explanation and reconciliation of these measures to related comparable financial information presented in the Financial Statements prepared in accordance with IFRS, please refer to the “Results of Operations” section in the MD&A. The Company believes that these Non-GAAP Measures are useful indicators of operating performance and are specifically used by management to assess the financial and operational performance of the Company.

The Company defines Adjusted EBITDA as net income (loss) excluding amortization of property plant and equipment & intangible assets, share based payments, restructuring charges, impairment of inventory in production costs, fair value changes on growth of biological assets, realized fair value changes on inventory sold or impaired, net finance expenses, gain on settlement of convertible debentures, loss on modification of debt, gain on settlement of contract, gain or loss on disposal of property plant and equipment, unrealized and realized gains or losses on investments and income taxes.

The Company defines Adjusted Gross Margin as gross margin excluding inventory impairment, fair value changes on growth of biological assets and realized fair value changes on inventory sold or impaired.

The Company presents additional subtotals in its Financial Statements prepared in accordance with IFRS. The additional subtotals include, but not limited to, gross margin, excluding fair value items in its statements of comprehensive loss (“Additional Subtotals”). The Company defines gross margin, excluding fair value items as the gross margin before recording fair value changes on growth of biological assets and realized fair value changes on inventory sold or impaired. More information on changes in fair value of biological assets can be found in “Changes in fair value of biological assets” section of the MD&A.

Non-GAAP Measures and Additional Subtotals should be considered together with other financial information prepared in accordance with IFRS to enable investors to evaluate the Company’s operating results, underlying performance and prospects in a manner similar to Supreme Cannabis’ management. Accordingly, these Non-GAAP Measures and Additional Subtotals are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.