Let’s review High Tide earnings for the quarter ended July 31, 2020

Hightide quarterly earnings release

What we said last Q:

Congrats to Raj and his team on achieving +NOP and +EBITDA!  Next milestone would be servicing interest expenses.

These subsequent events could provide further wind in the sails assuming professional fees and startup expenses do not trim the wind:

“Subsequent Events:

• The Company opened a KushBar store in Medicine Hat, Alberta.
• The Company opened four new Canna Cabana retail locations in Ontario: Niagara Falls, Toronto – Parliament, Burlington, and Toronto – Bayview Avenue, bringing the current total to 7 Ontario stores and achieving 9% provincial market share by location as of June 9, 2020.”

This Q:

The subsequent events above did pay off as projected. 

A second Q in a row of +NOP and +EBITDA continues. And their NOP now exceeds their interest expense.

And the newest subsequent event, the acquisition of META, will be interesting to watch unfold.  If Raj and his team can eliminate the $4 million in quarterly corporate overhead at META, while adding the accretive stores … this could get interesting.

Income Statement Drivers and Breakeven Sales: Trend

Sales Table:

Sales increased 19% QoQ as HITI new Ontario stores are rolling out as mentioned above.  Retail increase 15% to $21 million. Wholesale saw a strong +58% increase and is the 4^th Q in a row of increases.  Corporate negligible.

Adult rec cannabis sales accounted for a 75% QoQ increase of $3.6 million. 

The aggregate of Wholesale and Corporate revenue increase $0.9 million.

Revenue Per Store:

In this calculation we use ONLY the HITI Cannabis stores and not wholesale revenue.

Revenue per store increased to $663K million +23% in the Q.  They are leading the other retail Pubcos by a substantial margin. The Ontario stores are likely driving the increase as Ontario has less competition than Alberta.

Income Statement Drivers and Breakeven Sales: Peers

HITI remains in 2^nd place for Cdn publicly traded retail stores trailing FAF.  They should leapfrog them next Q.

Gross Margin %: Trend and Peer

GM in Cannabis retail is very boring.  …. Wait!! Each retailer increased GM during the Q.  Interesting.  I am wondering if Ontario might have better GM’s than Alberta. 

Gross Margin Table:

Absolute GM was $9.2 million a $1.8 million increase over the previous Q.  As per table, Retail cannabis was the driver as retail cannabis GM increased to 40%.

SGA & SBC as % of Sales: Trend

Selling for the Q remained nominal at $0.1 million from $0.2 million QoQ and remained at less than 1% of sales.

G&A decreased last Q to $5.0 million from $5.2 million QoQ.  Salaries increased $0.1 million (with four new stores).

SGA totaled $5.0 million for the Q an increase of $0.3million from $5.3 million last Q. 

SBC was minimal with a negligible change QoQ.

Depreciation was $1.8 million, flat QoQ.

Total Opex was $7.1 million versus $7.3 million last Q.  I note that corporate overhead in Opex was $1.2 million flat QoQ.

SGA per Store:

SGA per store increased a minor amount to $165 thousand. 

SGA & SBC as % of Sales: Peer

HITI is leading peers across the board.

+Net Operating Profit:

High Tide evidenced positive NOP for the Q of $2.1 million after a nominal +NOP last Q.  The increase in GM of $1.8 million coupled with a reduction in Opex of $0.3 million are the reasons.

Other expenses aggregated $2.4 million, items of note:

• Finance costs of $2.7 million vs $2.8 million last Q. Slightly higher than NOP but lower than Adj EBITDA
• Loss on sale of marketable securities of $1.6 million Halo shares
• Gain on extinguishing debenture of $3.6 million

Taxes were $36K.

Net income was $4.2 million versus negative $4.9 million last Q.

Sales Required to reach +EBITDA

Take the above chart with a grain of salt (unless +EBITDA).  As the above would be the amount of sales per EXISTING store necessary at present GM% and OPEX $’s to reach breakeven EBITDA.  In order to increase sales more stores will be required.  Those stores will need more OPEX for staffing, rent, utilities… increasing the OPEX $’s.

HITI EBITDA was +$4.1 million an improvement from $2.0 million last Q.  Sales and GM increase drove that.

EBITDA is greater than interest in the Q.  Next stop, albeit likely with a detour as they absorb Meta, is covering amortized principle.  They did convert their $10.8 million loan to non-interest bearing to 2025 (through sweeteners), so that chunk of interest will drop.

Balance Sheet items of note:

At Q end HITI had $7.0 million in cash flat QoQ.  

From MDA:

• In addition to cash and cash equivalents and non-cash working capital discussed above, the Company secured a credit facility of up to $10,000 from Windsor Capital during the first quarter of 2020. The Company also agreed to sell the assets of KushBar retail cannabis stores to Halo Labs for amended proceeds of $5,700. On July 24, 2020, the Company entered into a debt restructuring agreement for $10,808 of the Company’s outstanding debt held by a key industry investor under an 8.5% senior unsecured convertible debenture issued in December 2018, to an interest free debenture due in 2025. The Company agreed to pay to the key investor certain structured installment payments over a period of over approximately three years, beginning on November 1, 2021. These transactions provide the Company enough liquidity for its working capital needs and to pursue its near-term expansion plan.

They still have $14 million in current portion of convertible debentures that will need to be taken care of.

A very nice Q for High Tide.  Definitely “progress” and this time from some organic stores they opened versus acquisitions.  Sales increase during covid were nice to see, as was a GM at 40%. A meaningful Net Operating Profit and EBITDA greater than interest expense.

Cash remains tight.  Meta has some cash though.  I am interested to see the combined entities balance sheet next Q.

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 HITI and will not start one in the next five days.