Let us review Fire and Flower earnings for the quarter ended January 30, 2021.

FAF quarterly earnings release. In the release they repeatedly reference this fiscal as “Fiscal 2020”.  Folks, when your year end is 2021 it if Fiscal 2021.  Their CFO and IR department are asleep at the switch.  This is not the first time they have done this.

Open up the financials and MDA and follow along.

Income Statement Drivers and Breakeven Sales: Trend

This Q:

Total stores as per Q end 73, +19 from last Q as they acquired Friendly Stranger and a couple addiitonal

• Alberta 40
• Sask 7
• MB 1
• YK 1
• ON 24 +19

Total stores as per MDA date 80, +7 (+4 accessory stores) from last MDA.

• Alberta 40
• Sask 9 +2 since last MDA
• MB 1
• YK 1
• ON 29 +5 since last MDA

Molly has covered FAF adding stores: Three additional Ontario stores (closed November 1 and Dec 6, 2020), and the Friendly Stranger fleet (closed Dec 1, 2020). This rolled into this Q revenue.

• The numbered company went for a total of some $961k ($750k+(248k*.85)); Busboy’s 2 stores coming in at an average of $1. 3MM each (($700k+(2.2MM*.85))/2).
• Barely coming 2 weeks after announcing the last shopping trip he took, the Friendly Stranger acquisition appears to be more expensive on a per store basis – with a total of some $25MM being paid for (what I can gather) 6 operational stores (not all carrying cannabis currently), as well as 4 planned and authorized locations to open by the end of this quarter.

Revenue increased by $10 million +31% to $43 million.  Friendly Stranger closed Dec 1, 2020 and only contributed for two months of the quarter.

• Retail sales were $33 million an increase of $6.7 million +25%
• Wholesale revenue increase by $1.9 million to $7.0 million +37% and
• Digital revenue was $3.1 million an increase of 110% +$1.5 million.

Wholesale revenue is “Open Fields” a distributor in the province of Saskatchewan.

Digital is their Hifyre their digital retail and analytics platform.  Growth in this category is good to see as there are little CoGS associated.

Revenue Per Store: Peer & Trend

What this metric does is take the retail cannabis revenue for FAF and others, and divides that amount by the average number of stores they have open for the Q.  This attempts to capture the average revenue per average number of stores per Q. The metric is not perfect, as it can be skewed by how early or late in a Q the stores open. But until someone discloses existing store versus new store revenue, we have to create a metric.

On this basis FAF in the Q had an increase in revenue per Q. Per store revenue increased from $505k in the previous Q to $522k or +3%.   Those Ontario stores are dragging the average up.  If we see an inflection, we will start thinking about saturation as we did in Alberta.

They trail both HITI and CGC, but we will see if a full Q next Q from the newly acquired stores can gain some ground.

From MDA:

• Same-store sales is the comparison of sales of the Company’s stores that are open at the beginning of the period and have been operating for more than a year. The Company has twenty-nine and nine stores with operations throughout the thirteen and fifty-two weeks of Q4 2020 and Q4 2019, respectively. For the twenty-nine stores, sales grew 37.1% for the thirteen weeks ended January 30, 2021 compared to the thirteen weeks ended February 1, 2020. The growth level of same-store sales is attributable to improved merchandise planning and assortment, multiple purchase modalities such as in-store, curb-side pick up, delivery and kiosk, customer engagement attributable to the Spark Perks™ membership base, and the selling of cannabis 2.0 products which offset the impact of increased market competition. During the fifty-two weeks ended January 30, 2021, same-store sales decreased 18.6% compared to the fifty-two weeks ended February 1, 2020. This was primarily due to limited competition in Alberta for the first half of fiscal year 2019.

Income Statement Drivers and Breakeven Sales: Peers

FAF remains in the lead from a sales perspective. 

Gross Margin %: Trend and Peer

GM improved to 38% aggregating $16.4 million in GM, an increase of $4.9 million. 

• Cannabis GM was 34% at $11.2 million versus 32.4% at $8.6 million the previous Q.
• Wholesale had a 28% GM at $2.0 million versus the last Q at 30%, and
• Digital development is 104% for GM of $4.2 million an increase from $2.6 million QoQ.

SGA & SBC as % of Sales: Trend

Note: To keep peer comparable consistent, I moved Asset Impairment, gain on remeasurement of lease liability, and restructuring to Other Income and Expenses.

A nice downward progression across all expense segments over the past 5 Q’s.

Marketing was $1.0 million versus $0.2 million the last three quarters.  We will see if this is acquisition driven and if it will drop next Q.

G&A was $12.4 million a $2.8 million increase QoQ and was stable at 29% of sales QoQ.  Subcategories of expenses were collapsed at year end and I can not untangle them.

SBC reduced marginally to $0.5 million for the Q.

Depreciation increased QoQ to $3.4 million +$0.5 million, as they acquired depreciable assets.

Acquisition costs were $1.2 million versus $0.8 million the prior Q.

Total Opex was $19 million or 43% of sales versus $14 million and 43% of sales the prior Q. 

SGA per Store: Peer and Trend

What this metric does is take the retail cannabis SGA for FAF and others, and divides that amount by the average number of stores they have open for the Q.  This attempts to capture the average SGA per average number of stores per Q. The metric is not perfect, as it can be skewed by how early or late in a Q the stores open.  But until someone discloses existing store versus new store revenue, we have to create a metric.

SGA per store increased to $212k from $187k QoQ or +13%.  The Ontario stores likely carry higher rent and wages.

SGA & SBC as % of Sales: Peer

FAF trails HITI on all of these metrics. We will see what happens after we load in acquisitions for a full Q.

Net Operating Profit:

This would be existing store sales, as the metric is derived from existing SGA and more stores would mean more SGA.

FAF would need 13% in incremental sales to hit +NOP.

NOP for the Q was negative $2.1 million a slight improvement for -$2.6 million last Q. The bump in GM and was offset by increase in OPEX are the reasons.

Other Income and Expenses: Aggregated -$8 million this Q versus -$22 million last Q

• Finance costs $4.1 million a decrease of $2.0 million. Debentures paid down in preceding Q were the reason. The debentures were largely retired post Q.
• -$2.4 million gain on revaluation of derivative liability, versus last Q +$34 million. 
• loss on extinguishment and re evaluation of debentures versus -$54 million last Q
• +$2.1 million for remeasurement of lease liability versus NIL this Q. 
• Aggregate of -$2.7 million for impairments and restructuring costs this Q.  Nil last Q.

Taxes of $0.8 million versus $1.2 million last Q.

Net Income:

Net income for the Q was negative $11 million versus -$26 million last Q.   

EBITDA:

My EBITDA is different than theirs.  They back out $1.8 million acquisition expense and $0.4 million in Professional fees related to acquisitions.  They will be in the acquisition business for a while longer (they are acquiring more in Q1F 2022), so I am treating them as operational expenses.  They have a small difference in their monthly Lease Liability Payments than I do as well, as I use YTD less previous YTD.  They might have had an adjustment that moved last Q’s around.

EBITDA slid to -$0.1 million from +$0.4 million last Q.  The GM increase was partially offset by an increase in cash Opex being the drivers.  

The good news is with the reduction in debentures they will have little interest expense going forward.

Sales to Breakeven EBITDA:

This would be existing store sales, as the metric is derived from existing SGA and more stores would mean more SGA.

FAF was -EBITDA this Q, and they only require 1% of sales to get back to breakeven.

Balance Sheet Items of Note:

Cash increased by $5.9 million to $30.6 million. Post Q…

• Completed a $15 million, low cost, at-the-market equity distribution offering which further strengthened the Company’s balance sheet and positions Fire & Flower for future growth;
• Announced planned $53 million debt-to-equity conversion which significantly improved the Company’s balance sheet and further reduced interest costs. Circle K owner, Alimentation Couche-Tard’s debenture conversion was $23.6 million, which will bring their equity stake to 19.9%;

PPE and Right of Use Assets increased a combined $17.1 million to $84 million with acquisition of Friendly Stranger and others.

Intangibles and goodwill increased a combined $33 million to $73 million with the acquisitions.

Long Term Derivative Liability increased to $66 million from $45 million. This should get retired by debenture payout.

All in all, a progress Q.

• Sales increased on the backs of acquisition and with a full three months next Q they should enjoy continued growth from Q4F21 acquisitions and the other new stores they onboarded.
• GM as % of sales increased 3% and $4.9 million.  GM$’s should increase next Q.
• Opex increased $4.5 million QoQ but a chunk of that is transactionally driven.
• Interest expense is still eating into operations at 25% of GM$’s, but should reduce with conversion of debentures.

They have diluted existing shareholders to get to where they are now (post Q).  It will be interesting to see if going forward we will see accretion for shareholders.

I am still bearish on Canadian cannabis retail, the new store contributions in Ontario may make me revisit that after seeing if GM on sales added are outpacing expenses and they can start generating cash versus the need to raise and restructure.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in FAF and will not start one in the next five days.