Let us review Fire and Flower earnings for the quarter ended July 31, 2021.

They continue to misuse “fiscal”.  They have defined “Fiscal 2021” in MDA to be year ending January 31, 2022, which should be F2022.

Open up the financials and MDA and follow along.

Income Statement Drivers and Breakeven Sales: Trend

This Q:

Total stores directly owned as per Q end 91 (of which 3 are accessory only stores), +3 from last Q

• Alberta 40
• Sask 12
• MB 4 +3 QoQ
• YK 1
• ON 29

They are in process of adding a store via acquisition in Sarnia, Ontario.

Despite increased store count, Revenue decreased by $0.8 million -2% to $43 million

• Retail sales were $31.8 million a decrease of $1.8 million -5.3%. Lowest retail sales since Q3 last fiscal of $26.5 million.  Over the last two Q’s they have added 15 stores and sales are $0.6 million higher.
• Wholesale revenue increase by $0.2 million to $7.8 million +2.2% and
• Digital revenue was $3.7 million an increase of 29% $0.8 million. Highest on record, surpassing $3.1 million in Q4 last fiscal.

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 as there are little CoGS associated.

From MDA:

• The decrease in same‐store sales is attributable to the surge in new store openings, emergence of deep discount retail competition, and the decline in the average unit retail price of products leading to lower average dollar sales.    In Ontario, during Q2 fiscal 2021, the total provincial store count increased by approximately 316 stores or 48% (665 stores as at May 1, 2021 to 981 as at July 31, 2021).

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 a decrease in revenue per Q. Per store revenue decreased from $439 in the previous Q to $379 or -14%, the second consecutive quarterly decline.    

They trail both HITI and CGC.

From MDA:

• Same-store sales decrease of 14% for forty-eight (48) stores in operation during comparable period in Q2 2020  

This is the first negative YoY same store since Q1 last fiscal. Last Q we said to keep an eye on sales velocity.  Last five Q’s of same store YoY increases: 0%, 11%, 46%, 18%, -14%. This is not a good omen.

Income Statement Drivers and Breakeven Sales: Peers

FAF remains in the lead from a sales perspective. 

Gross Margin %: Trend and Peer

GM was down modestly to 37% aggregating $16.2 million in GM, a decrease of $0.3 million. 

• Cannabis GM was 34% at $10.7 million versus 34% at $11.4 million the previous Q. Lowest in last three Q’s
• Wholesale had a 26% GM at $2.0 million versus the last Q at 27% and $2.1 million, and
• Digital development is 94% for GM of $4.9 million an increase from $4.0million QoQ.
• Corporate eliminations were -$1.5 million versus -$0.9 million last Q.

GM % has been very consistent over past three Q’s.

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.

Last five Q’s have established a pretty tight range on these.

Marketing was $0.9 million versus $0.9 million the last quarter.

G&A was $12.2 million a $1.5 million decrease QoQ and decreased to 28% of sales QoQ from 31%.  Salaries and legal and professional fees each decrease $0.6 million, while administrative decrease $0.2 million.  Staffing was likely lighter due to covid click and collect in Ontario.  Less prof fees as acquisitions were quiet, but expect that to increase next Q.

Corporate Opex less eliminations, which is included in SGA, was $1.1 million down from $1.5 million last Q.  Acquisition related decreases was likely the contributor.

SBC increased $0.8 million for the Q to $1.3 million. 

Depreciation decreased QoQ to $4.2 million -$0.1 million.

Acquisition costs were $0.2 million versus $0.4 million the prior Q.  I keep acquisition costs in Opex as they occur in virtually every Q and will likely continue.  That is also why I do not back them out of EBITDA.

Total Opex was $18.8 million or 43% of sales versus $19.9 million and 45% 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 decreased to $155k from $191k QoQ or -19%, second Q in a row of improvement.  Corporate overhead and acquisition costs dropping in the last two Q’s is the main reason.

SGA & SBC as % of Sales: Peer

FAF trails HITI on these metrics. The aggregate G&A is the biggest differentiator.

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 16% in incremental sales to hit +NOP. A tall task as the results slides backwards.

NOP for the Q was negative $2.6 million an improvement from -$3.3 million last Q. GM was relatively flat and Opex$’s decreased $1.1 million.

Other Income and Expenses: Aggregated -$58 million this Q versus -$8 million last Q

• +$25 million gain on revaluation of derivative liability versus last Q -$54 million.  Stock price dropping was the reason.
• Finance costs $1.1 million a decrease from $3.3 million. Debentures paid down in preceding Q were the reason. The debentures were largely retired the prior Q.
• Impairment of $0.8 million on some store leases.

Net Taxes of $1.4 million versus $0.7 million last Q, as less deferred tax recovery last Q than this Q, while income taxes grew $1.0 million.

Net Income:

Net income for the Q was + $19 million versus -$62 million last Q.   Loss on derivative liability flipping to gain is the biggest contributor.

EBITDA:

My EBITDA is different than theirs.  They back out $0.2 million acquisition expense and modest Professional fees related to financing.  They will be in the acquisition business for a while longer (they are acquiring more in Q3F 2022), so I am treating them as operational expenses

EBITDA improved from +$1.5 million to +$2.9 million QoQ.  This was almost all Opex reductions.

This is their third positive EBITDA in last four quarters.

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.

As they are +EBITDA… they require 91% of sales at current GM% and cash Opex to breakeven. No change QoQ.

Balance Sheet Items of Note:

Cash decreased by $3 million to $29 million.

Trade and other receivables grew $2.2 million to $11 million.  No breakdown is provided.  But for a cash business which is retail, the remaining sales were $11.5 million for the Q… seems high.  Might have HST receivables in there too.

inventory increased $1.5 million to $14.5 million.  Not notable.

PPE increased $4 million to $48 million. $5 million is land, the balance is furniture and fixtures, leasehold improvements $35 million, $5 million in computers.  Yeesh… I would hate to try and sell those assets in a distress event (that’s the banker in me talking).

Long Term Derivative Liability decreased to $23 million from $48 million. The debenture side is pretty well gone and all that is left is ATD warrants.

Share capital increased $13 million to $306 million QoQ while shares outstanding more than doubled to 343 million.  ATD is really taking it to FAF shareholders.

Conclusion:

Last Q:

Pretty “meh” quarter.  Sales stagnate. GM unchanged.  Opex steady.

Balance sheet cleanup was biggest changes this Q.  Dilution was absorbed by current shareholders.

With covid restrictions easing and summer season starting to roll… we will see if FAF can start accelerating.

This Q:

No surprise that CEO Fencott went buying assets in US.  Canada is not showing growth.

Aug 4, 2021 they entered into agreements to purchase Wikileaf Technologies and August 26, 2021 PotGuide for an aggregate of $16 million of which USD 4.0 million was cash.  Both expected to close in the present Q. Not sure how much cash flow these will add in near term.

Sales stagnation with increased stores is not a good sign.  Ontario has opened back up, but Delta Variant is kicking Alberta’s ass and Ontario’s opening is precarious.

CEO Fencott leaning on their technology side to be a differentiator.  Maybe they should skinny up corporate SGA some more.

Couche Tarde has been the much better avenue to get C2021 exposure to cannabis retail than FAF. They still hold 201 million warrants.  I am sure Molly will take a peak at this.

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.