I was about to run GTEC Cannabis Co. ($GTEC) – but they’ve joined the (lower) ranks of companies who are press releasing press releases rather than financial statements. Perhaps the delay is administrative…and it’ll be up sometime today The length of time between a press release and the financials are a great ‘tell’ to me about the mind of management. The longer the wait, the lower the mind. We’ll wait and see (EDIT – yep, looks like the financials went up on the 28th, simply timing on SEDAR).

CEO Trevor Fencott’s Fire & Flower ($FAF) – along with High Tide ($HITI) – are one of two retailers trying to build the largest cannabis franchise in Canada. With 80 stores in operation and 32 in ‘development’, $FAF has begun following a ‘multi-banner’ approach to their business model (versus the ‘Canna Cabana’ branding monolith of $HITI). An unfavourable take would be that sterility and corporate blandness of $FAF’s initial storefronts made them chase a differentiation strategy – a brand ‘pivot’ as it were.

A more favourable take is that they’ve always recognized regional differences, and simply adding legacy names to enrich the franchise.

Our last Structure on $FAF noted the expansion of share and store counts. It continues…bullishly up from 67 to today’s 80, and seeing ‘Licenses Pending’ double to 32 QoQ:

$FAF’s share price got a jolt in late January from….I don’t really know. It coincided with a run in $HITI. Perhaps interest was stirred from folks chasing the leader in bulk retail riding renewed interest in the sector. $FAF’s been raising, closing a $15MM ATM program in 2 months. And Couche Tard ($ATD.B) has expressed confidence in the franchise by increasing ownership at a significant discount to free floating shares, perpetually. Hey, that’s what the deal was designed to do 😊.

This year end sees $FAF’s auditors (PWC) unload a preamble on the April 2020 $ADT.B debenture repricing. The disclosure goes on……for 4 pages. This is the header:

I’ve never seen a descriptor like this before in legal cannabis. The interested shareholder should definitely take note. I did an initial valuation on the $ATD.B deal, as well as the reprice. The $ATD.B deal(s) are complex financial structuring, and I see them as being completely for the benefit of Couche-Tard – not for shareholders of $FAF. It’s the reason why I said last time I don’t think $FAF’s a ‘good’ retail investment in legal cannabis. And I received negative feedback about that view.

That view was/is based upon relative choice. All things being equal, I think an investor’s best path is to choose simplicity over complexity. It’s one of the reasons why – when I went looking for exposure in retail – I picked $HITI. I made a boatload on their run, and exited all positions at or above $1. It was a home run. I don’t hold any retail now, believing that now, it’s all overpriced. I’m no genius – I see my gains as benefitting from having exposure to a relatively ‘underpriced’ asset in $HITI, nothing more. Absolute share price just happened to rock n’ roll, and I was at the concert.

My current lack of interest in $FAF as an investment is philosophical: I am not attracted to outfits where more value accretes to corporations than shareholders. To me, that’s the core of the deal that Fencott made with Couche-Tard. It’s also the reason I own Couche-Tard. If there’s going to be an increase in value, $ADT.B is going to get the bulk of it. It doesn’t mean one can’t make money on $FAF’s stock, or that one is ‘wrong’ for owning it. It’s just not my ‘thing’.

Both $HITI and $FAF have backed up from those heady days in early February, equally down about $0.40 from their highs.

Let’s get on it.

To the financials!

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• I see our erstwhile GoBlue has already spread their financials, I’m going to defer to his take on operations, and stick to the capital structure.
• That auditor’s note centres around valuation of the Couche-Tard reprice. The numbers I’ve presented represent the range I saw possible/contingent. As it it, $FAF recognized a $53MM loss on the reprice. I think this value is conservative.
• If asked, I would have booked the loss at $90MM – the delta between my ‘low case’ estimates in valuation of the deal ($191MM – $81MM = $90MM).
• I wasn’t asked.
• The ‘Friendly Stranger’ acquisition also makes an appearance in the auditors notes. The buy – at $25MM – had $18MM of that booked as intangibles. Straightforward enough. The issue the auditors had was whether those intangibles – based upon the notion of converting a bong seller into weed seller would ever be fully realized.
• The auditors have an issue with the aggressiveness of future estimates of ‘excess earnings’ – and haven’t been able to conclude anything per se, since $FAF’s management hasn’t finalized fair value assessment. Yep. 5+ months after they announced the buy, and probably after 2 months of negotiations prior – they <still> can’t give the auditor a fair value everyone can agree on.
• If I was a shareholder, that’s how I’d view this.
• It’s nice to see an auditor step up – and call outfits out on their assumptions. It’s been fast and loose all across the sector – especially around optionality. Now that actual earnings and asset potential is becoming clearer, asset valuation and assumptions around intangibles are bearing more scrutiny (at least here). That’s good for shareholders….really.
• Warrant attributable to Couche Tard now at 200MM+ – up 20MM, and a reflection of their potential ownership potential being kept whole.
• Restructuring charges – initially announced as a provision early in the year (~=200k) looked to be some optimization around storefronts. It had remained constant in this quarter, until now. I can’t get a number on the total, there’s charges littered about the financials. While only $1.5MM came through the income statement, there’s $3MM in ‘leasehold improvements’ written off as ‘restructuring’, as well as some intangibles, and the provision now stands at $2.6MM
• Not material, just noise. Looks like they went down the trail building out the Cannabis Cowboy concept, a side deal thing with $GTEC, and folded 2 stores.
• Interest expense $23MM on the year. That’s for a business that’s break-even operationally (by my adjusted EBITDA).
• Share count has gone from 146MM to 232MM over the year. And that’s from a net cash increase of $16MM via financing activities. Eesh.
• Given the stage they’re at, $FAF looking awfully thin in terms of profitability. Big Daddy Couche knows finance though, and their actions definitely looks ‘long game’ in approach.
• The digital fetish that Fencott’s been pursuing is showing decent enough growth, ending up at $6MM for the year, double year prior. It should, as store count and some licensing is expected to provide it. Broken down, only $2MM of that $6MM came externally. It is traction – immaterial.
• Given corporate has now increased to $6MM – whoopee ding. I’d like to see what’s being spent on dev. I suspect HiFyre will be left fallow, as Couche ports in their IP, but will still carry the nameplate. Data is a backbone spend. I just have a hard time seeing why it’s touted so hard for being so nothing (materially).

Ok. There’s a bit more in here, but the reprice is the centrepiece of these particular financials. The charge reflects what Couche took out – at shareholders’ expense.

They’re showing improvement in several respects, but overall, the company (operationally) strikes me as somewhat middling. Wholesale continuing to expand holds potential for surprise, it’ll be a barometer of how good they are business wise and a gage to watch. Other than that, I struggle to say much more about these financials.

I don’t often venture to talk about share price per se – except in terms of asset valuation. In this case, the structuring and Couche’s options is what’s going to ‘box’ share prices, with a floor of $0.80, and set a rough ‘ceiling’ of $1. Share price prediction is folly, but I view $FAF as much an asset play as it is a company. $FAF holds little interest for myself as a direct investor.

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 holds $ADT.B, but no direct position in $FAF.