Let us review Fire and Flower earnings for the quarter ended May 1, 2021.

The misuse of “Fiscal” remains: from MDA

• The fiscal year of the Company consists of a fifty-two or fifty-three week period ending on the Saturday closest to January 31, which is January 29, 2022 (“FY 2021”) and January 30, 2021 (“FY 2020”), for the current and prior year period presented in this MD&A, respectively.

Year end is in 2022, therefore Fiscal 2022 is this year.

Open up the financials and MDA and follow along.

Income Statement Drivers and Breakeven Sales: Trend

This Q:

Total stores as per Q end 79, +6 from last Q

• Alberta 40
• Sask 9 +2 QoQ
• MB 1
• YK 1
• ON 29 +4 QoQ

Total stores as per MDA date 83, +4 (+4 accessory stores) from last MDA.

• Alberta 40
• Sask 9
• MB 2 +1 QoQ
• YK 1
• ON 29 +1 QoQ
• BC 2 +2 QoQ

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

Despite increased store count, and contribution from Friendly Stranger for the entire Q (versus 2 months last Q), Revenue increased by only $0.9 million +2% to $44 million

• Retail sales were $33.6 million an increase of $3.2 million +1%
• Wholesale revenue increase by $0.8 million to $7.6 million +9% and
• Digital revenue was $2.8 million a decrease of 7% -$2.8 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 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 a decrease in revenue per Q. Per store revenue decreased from $522k in the previous Q to $439k or -19%.   Covid restrictions likely hampered sales in Ontario for the Q.

They trail both HITI and CGC.

From MDA:

• Same-store sales increase of 18% for forty-five (45) stores in operation during comparable period in Q1 2020 (May 2, 2020: -22% for fourteen (14) stores in operation in Q1 2019).

This has reduced from 46% across 41 YoY stores in Q4F2020.  We will keep an eye for sales velocity slowing.

Income Statement Drivers and Breakeven Sales: Peers

FAF remains in the lead from a sales perspective. 

Gross Margin %: Trend and Peer

GM was stable to 38% aggregating $16.5 million in GM, an increase of $0.1 million. 

• Cannabis GM was 34% at $11.4 million versus 34% at $11.2 million the previous Q.
• Wholesale had a 27% GM at $2.1 million versus the last Q at 28 and $2.0%, and
• Digital development is 108% for GM of $4.0 million a decrease from $4.2 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.

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

Marketing was $0.9 million versus $1.0 million the last quarter.  The preceding two Q’s this was under $0.2 million.  A little more advertising for Ontario market would be my guess.

G&A was $13.7 million a $1.3 million increase QoQ and increased slightly to 31% of sales QoQ.  Subcategories of expenses were collapsed at year end, and I cannot untangle them this Q.

Corporate Opex, which is included in SGA, was $1.5 million down from $3.0 million last Q.  Acquisition related decreases was likely the contributor.

SBC stable at $0.5 million for the Q.

Depreciation increased QoQ to $4.3 million +$0.9 million, as they acquired depreciable assets for entire Q.

Acquisition costs were $0.4 million versus $1.2 million the prior Q.  I keep acquisition costs in Opex as they occur in virtually every Q and will likely continue.

Total Opex was $19.9 million or 45% of sales versus $18.6 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 decreased to $191k from $212k QoQ or -11%.  Corporate overhead and acquisition costs dropping in the Q is the main reason.

SGA & SBC as % of Sales: Peer

FAF trails HITI on these metrics.

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 20% in incremental sales to hit +NOP.

NOP for the Q was negative $3.3 million a slide from -$2.2 million last Q. GM was flat and Opex increased.

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

• -$54 million loss on revaluation of derivative liability versus last Q -$2.4 million.  Largely warrant driven.
• Finance costs $3.3 million a decrease from $4.1 million. Debentures paid down in preceding Q were the reason. The debentures were largely retired in Q.

Taxes of $0.6 million versus $0.8 million last Q.

Net Income:

Net income for the Q was negative $62 million versus -$11 million last Q.   Loss on derivative liability is the biggest contributor.

EBITDA:

My EBITDA is different than theirs.  They back out $0.4 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 Q2F 2022), so I am treating them as operational expenses

EBITDA improved from -$0.1 million 1 +$1.5 million last Q.  The small GM increase was partially aided by decrease in QoQ acquisition costs. 

This is their second positive EBITDA in last three 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.

Balance Sheet Items of Note:

Cash increased by $2 million to $33 million. During 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%;

Debentures were largely repaid and reduced by $29 million

Long Term Derivative Liability decreased to $48 million from $66 million. The debenture side is pretty well gone and all that is left is ATD warrants.

Share capital increased $112 million to $292 million QoQ via ATM and convertible debenture swap to equity.

Conclusion:

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.

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.