Let’s review High Tide earnings for the quarter ended July 31, 2021

Hightide quarterly earnings release.

During the quarter they added:

• May 10, 2021, Fab Nutrition: Purchase price $24 million.  Goodwill/Intangibles $28 million or 116% of PP.
• July 6,2021, DHC Supply: Purchase price $12 million.  Goodwill/Intangibles $11 million or 92% of PP.

What we said last Q:

• Sales grew +7%, largely via acquisition as retail was stagnant
• GM decreased but remains second highest on record.
• Opex grew but almost entirely SBC and depreciation.
• Debt has been largely extinguished via equity raises and conversion of convertible debentures.

This Q:

• Sales increase +18% but organic increases are less than half of that.
• GM$’s are increasing but GM% are decreasing.
• Opex is increasing both in $’s and as a % of sales and outpacing GM$’s and %.
• Cash looks adequate and convertible debt has been retired post Q.

Income Statement Drivers and Breakeven Sales: Trend

Sales Table:

US revenue was the story of the quarter, increasing $7.7 million to $11 million, versus +$7.2 million system wide QoQ revenue increases. Canadian sales increased modestly by 1%, while international sales fell 29% or -$0.8 million.

Store count 86 at MDA (+6 QoQ MDA) are all in Canada.  They also have 2 x 49% Joint Ventures, 3 branded stores and 1x 50% JV.

Canadian revenue, which likely has some wholesale embedded, increased 1% QoQ to $34.7 million. Incremental revenue from the META acquisition has flatlined at $15.6 million each of the last two Q’s.

Their sales from same store opened YOY on 25 stores declined 14% on a YoY comparison of the same quarters. Last quarter this was -17% on 27 stores.  If the Ontario stores are removed due to covid restrictions YoY same store sales would have fallen only -7%.

The decrease in YoY Canadian retail is the same as recently reported by Fire & Flower and is worrying.  If revenue remains flat, and retail GM% remains stagnant to down, covering the incremental SGA from new store openings is going to be problematic.   This is likely why both HITI and FAF are pursing incremental on-line, and technology driven revenue streams.

I really do wish they would give same store QoQ as a data point.

Revenue per Acquisition per Quarter:

Retail, which includes online revenue, increase +21% or +$7.2 million to $46 million QoQ.  They added 5 new stores in Q on MDA (but I believe 5 are post Q via acquisition), but also expanded online retail via acquisitions of FABCBD (+$2.3 million in revenue) on May 10, 2021, and DHC (+$1.2 million in revenue) on July 6, 2021. Smoke Cartel had a full Q and their revenue increased $1.4 million. Accordingly, $3.9 million of the $7.2 million in revenue increase was due to acquisitions in the Q or having a full Q of the acquisitions. Next Q DHC will have 65 more days of revenue, while FABCBD will have 10 additional days.

Organic growth was $3.3 million from the one new store and existing operations (which included adding 8 stores in Q2), good for +8% growth.

Wholesale saw a decrease -28% -$0.7 million with sales of $1.8 million.  Wholesale has been a bit of a roller coaster the last four Q’s.   

Revenue by Geographic Market from MDA:

I have seen this highlighted “break” for a few quarters, and I think I have it figured out. The “Total revenue” of $46.3 million is solely Retail Revenue and excludes wholesale of $1.8 million and a small amount of corporate revenue. Strange they call it “Total revenue”.  This implies that the difference between Canada revenue highlighted above is wholesale of $0.7 million.

Revenue Per Store:

In this calculation we use ONLY the HITI Canadian revenue. (NOTE: We moved this Q to using simply Canadian revenue and not retail revenue which included US online retail, as all stores are in Canada. This figure may include wholesale revenue. We have adjusted all Q’s above.)

Revenue per store decreased to $404 thousand or -6% in the Q as covid restrictions did not allow for instore shopping in Ontario.   The trend line across all three peers is concerning. Quite the difference between Canada and US states on store revenue with the top MSOs all greater than USD 2.0 million a quarter. Gravitational pull of increased competition.

As they list stores as at date of MDA, the five stores from Saskatchewan acquired post Q are skewing results.

Income Statement Drivers and Breakeven Sales: Peers

HITI takes the top spot over FAF.    

Gross Margin %: Trend and Peer

GM% is dropping across FAF and HITI, worrisome as SGA costs of new stores are essentially being paid for by increase revenue from other jurisdictions.

Gross Margin Table:

Absolute GM was $16.7 million a $1.7 million increase over the previous Q, but fell 2%, for second successive quarter, to 35%.   Wholesale GM fell -7% to 25%, which is lowest of the five quarters above.  This could be due to a different cost base of Smoke Cartel. Retail margin fell 2% to 35% which is tied for the worst percentage over the past five quarters.

SGA & SBC as % of Sales: Trend

Selling expense increased by $1.2 million to $1.4 million. A large increase.  Not sure if it includes the rebranding of stores in this, or it is a function of the acquisitions to online platform.  MDA and presser make no mention. Not sure if this is a one time event or not.

Overall G&A increased in the Q by $3.6 million to $13.3 million QoQ.  Salaries increased +$1.1 million to $7.3 million and remain 17% of sales. G&A line item increased $2.2 million to $5.3 million. I wonder how much of that is corporate salaries. You can impute corporate overhead at $3.8 million per Q, an increase of $0.2 million QoQ. They do indicate they had increased costs from NASDAQ listing and getting directors and officers insurance.  Some of these costs will fall off (listing) but some will now be embedded as a permanent function going forward as NASDAQ compliance is a step up.

SGA totaled $14.7 million for the Q, a $4.7 million increase QoQ. Note: Acquisitions/Transaction costs are buried in Finance and Other costs in Other income/Expenses, so that is not the reason.

SBC was minimal at $0.5 million versus a $1.5 million the previous Q.

Depreciation was $8.3 million, an increase from Q2 which was $7.7 million. The new stores and the acquisitions in quarter and full quarter being the reasons.

Total Opex was $23.9 million versus $19.5 million last Q.  I note that corporate overhead in Opex averaged $1 million per Q during the fiscal 2020 but jumped to $3.1 million last Q and $3.5 million this Q.  I would hope to see some trimming as the new acquisition are integrated.

Interestingly, HITI tracks the synergies they forecasted at acquisition in their MDA.

They have exceeded the overall target but SGA and overhead remain below target.

SGA per Store:

SGA per store increased 37% amount to $171 thousand.  This includes corporate overhead and non-brick and mortar overhead.

As they list stores as at date of MDA, the five stores from Saskatchewan acquired post Q are skewing results.

SGA & SBC as % of Sales: Peer

These are very similar across the board.

+Net Operating Profit:

High Tide evidenced negative NOP for the Q of -$7.3 million this has grown since Q1 of -$2.0 million.  The increase in GM$ $1.7 million was offset by Opex increases listed above.  GM$’s growth is not keeping up with Opex$ growth, and that is troubling. 

Other Income aggregated $5.7 million vs expenses of $7.9 million last Q, items of note:

• Finance costs of $3.0 million vs $3.7 million last Q. As mentioned, they include transaction costs in this item. The transaction cost for the Q was $1.9 million versus $0.9 million last Q.
• Revaluation of derivative liability was an income of $5.9 million versus expense $4.0 million last Q. These are largely warrant driven and as stock price fell in the Q they recorded a gain.
• They had a gain of $3.0 million on disposal of Halo shares from Kush Bar transaction.

Taxes were $0.3 million.

Net income was -$1.7 million versus -$12.3 million last Q, the swing in revaluation of derivative liability, coupled with the gain on Halo share sales, were the major contributors.

Net Income Per Q from Acquisitions:

I am not sure if the Net Income figure includes any G/I now expensed quarterly and any related impairments.  I would assume it does.

Meta continues to be drag on Net Income, but reduced its drag in the Q.  Smoke Cartel reversed from profits to a loss QoQ.  The store acquired is running at a small loss. FAB and DHC are contributing in a positive manner.  Unfortunately, this disclosure will likely drop off after the 4^th Q., as it is for the acquiring fiscal only.

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 +$1.5 million a slide from $4.7 million last Q.  SGA out pacing GM is the issue. Interest cost of $1.1 million are barely covered.

Balance Sheet items of note:

At Q end HITI had $27 million in cash -$3 million QoQ.   Post Q they eliminated the balance of convertible debentures. They have enough cash for several quarters unless they go shopping without simply shares.

Inventory increased $3.2 million to $15 million. $1.7 million was from acquisitions in the Q.  The balance likely to stock the new stores.  That is approximately 45 days’ worth of inventory.

Goodwill and Intangibles increases $32 million to $126 million on the acquisition of FABCBD and DHC.  

Convertible debt at Q end decreased $2.5 million to $10 million, and is reportedly retired post Q.

Derivative liability drops $4.9 million to $10 million as share price fell impacting warrant value and convertible debentures were reduced.

Deferred tax liability increases $3.3 million to $11 million as function of the G/I increase.

Share capital increased $43 million with the acquisitions and $23 million bought deal.  Warrants increase $2.8 million on bought deal.

Subsequent Events:

• August 6, 2021, Purchase a Saskatchewan operation with five stores for $2.7 million
• August 12, 2021, Acquires Dankstop for USD $3.9 million

In closing:

What we said last Q:

A bit of a letdown, but it is expected given the covid operating environment. 

While sales were stubborn, GM did remain at the high end of operating range.  Operating expenses increased, but that is likely more due to 18 extra days of expenses from prior Q acquisitions.

I am interested to see how Raj moves the existing fleet forward from here.  He does not seem to be cooling down on acquisition front with two newly announced subsequent to Q end.

Ontario is expected to increase its store cap from 30 to 75 in September 2021. I would expect Raj to continue to add in Ontario.

This Q:

The Canadian retail landscape remains worrisome.  Saturation in Alberta and Ontario are impacting sales.  They improve sales via acquisitions paid via dilution, but GM$ increases from the increased revenue have been outpaced by OPEX$ increases, which is resulting in a decline in EBITDA. EBITDA is less than 50% of the next best Q in the last five Q’s.

Next Q will have a full Q of the latest acquisitions and almost a full Q of post Q acquisitions. But it will also have a full Q of their SGA.

Ontario did increase store cap, which I expect Raj to lever, the problem remains that saturation has been really bad for new store openings incremental contributions.

The revenue growth engine looks to be the online acquisitions.  We will keep an eye on their contribution as long as disclosure permits.

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.