High Tide ($HITI) has been active in the past while, acquiring META Cannabis and more recently, an online head shop in the states. Basking in the glow of a recent share price advance, CEO Raj Grover appears ready to take on the world (at least with paper), and keep momentum going via further acquisitions.

I’ve had a soft spot for $HITI, and one of the reasons why was laid out in our first structure:

“Show me an outfit that’s demonstrated not only how to survive, but expand and go public, all while selling packages of rolling papers out of the most remote retail locations in strip malls for this long? To myself: That’s someone who knows retail”

That smaller dollar value of transactions….the cash, small or large that walks in and deposits itself in the register….is what retail is all about. I understand the ultra-lounges and sexy whole-tree wall thing. I also understand that the bulk of all dollar transactions are done in places far less glamorous, and far less attention getting.

From our last structure, I remain curious about international uplift; about accessory sales increases due to META’s on-boarding, and US sales specifically. Let’s see how the humble retailer – who began selling packs of smokes and rolling papers out of strip malls – is making out in the rough and tumble world of being a publicly listed cannabis retailer.

To the financials!

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• Cash steady…over $7MM. Inventory and A/R down about $2MM. Rest of assets and liabilities largely flat.
• I’ll go into revenue below. GoBlue has likely had a fulsome look.
• $HITI’s franchises brought in $964k in fee revenue. This implies a higher franchise fee than $ISH is levying, and a reason I’m not bullish on the concept. Owning stores is where revenue and self-determination is, not renting out the name.
• Cash management has been held within the guardrails. We don’t see $META’s addition here – nor it’s impact on margins. I expect next quarter will see a degradation in margin, and expansion of overhead initially.
• I expect they’ll be 2-3 quarters digesting the stores, and I’m not sure the market has this priced in yet.

Some of the best disclosure anywhere in the sector. Man, saying that never gets old.

We get a pretty good look at YoY figures, as $HITI’s business hasn’t really changed much in that period, but simply grown. The ‘new’ area has been in data analytics, with revenue up to $2.185MM from $953k. Of $50MM increase in revenue, $44MM is from weed, and $6MM in accessory sales to the US:

I’ve discussed their international and US revenue before, and how much I believe it’s the key to their future growth. Despite increasing sales over the year, Q4’s momentum is showing some signs of slowing down. While there were no new stores added in the quarter, there was incremental growth in weed sales (good), but a hard drop in US sales (accessories). International (in Grasscity) appears to be gaining little traction. All said and done – I believe the US and beyond is the only real path of supporting the share price for this company.

There’s an odd break in the reporting of US and international sales in the chart above, and the table below. There’s a difference in total sales and segmentation……although I can back into the numbers using estimated inter-company eliminations and corporate overhead by thumb-nailing it (but haven’t reconciled, perhaps GoBlue has¹).

This table reveals that Raj has hit a critical mass in reporting break even net income (in terms of Canadian retail). In fact, it looks just like ‘plain ol’ retail‘. That’s not a bad thing, but valuation of companies in the cannabis sector are largely discordant with more traditional modes of commerce. Natch. It’s at a premium because its’ emerging, and ultimate RoR’s and profitability levels are far from being locked in like mature industries.

As of writing – including the bought deal and Smoke Cartel acquisition, 131MM in warrants and 9.3MM options (both all in the money) – there’s a total of ~=530MM shares fully diluted, implying a market cap of $400MM. That’s a huge premium placed on a company doing what these guys currently are, hence, the priced in expectations of growth.

That leaves incremental asset additions (in stores), and international. Regarding more stores, they *should* perform better due to in-system support and sales-cycle standardization. Raj has been ruthless in corporate overhead a well, trimming $8MM from it YoY – despite supporting more than double the stores. Good. That’s the cost that build-outs attract, and what learning curves/efficiencies beat back.

We’ve seen some companies struggle to contain overhead, in cases of both revenue expansion and declines. $HITI’s hasn’t. But, there is going to be some point of how far Raj is going to be able to go in Canada. Price pressures are emergent in Alberta, as low cost operator Alcanna takes it’s ‘no-frills’ concept to a volume based approach. There’s reason to believe that they will replicate that in other provinces as well.

That leaves international. And for now, results are looking pretty flat.

$HITI is coming back for an AMA on our Reddit channel on March 10th concerning merger and acquisitions (followed by Hexo on March 24th). I’ve got a few questions already prepared for Raj, and I encourage you to engage him as well if interested.

I closed out my entire position on $HITI – all north of $1. This was because I saw that share value being worth more than the assets. I had accumulated to a sub $.20 average, because I saw the assets worth more than the share value.

The big question for me is whether Raj can grow international: that’s where an appropriate return relative to risk will occur in my eyes. And any position taken on $HITI now would be speculative that Smoke Cartel and existing Grass City assets will catch, and that the US revenue will grow with some sort of regularity (I can’t really get a handle on what is existing in the US – and will be asking in the AMA). On Smoke Cartel, I assume the purchase was for relative value – that the earnings and assets are what they are worth. For Raj to lever those assets, they’ll need ramp hard for him to extract value from the buy. I can’t yet see what he got for shareholders’ $11MM, I need to for valuation. But I do know that the $11MM they paid for Grasscity has done little. And $META’s going to add a lot of non-paying passengers to $HIIT’s boat, at least initially.

For those reasons…..for now…….I’m going to sit on my hands.

<As a sidebar, $HITI’s shares being issued for Smoke Cartel are notionally valued at ~=$0.35 – at the time the deal was done – thus the share price advance since the buy will see almost double the equity value ascribed to the purchase price being issued for the acquisition. Share price volatility is very much a dual-edged sword>

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 no position in $HITI

1 – In case the reader is unaware – I never read GoBlue’s material before I post my own. It’s my own way of ‘checking my work’ as it were. Although ‘never’ is as big a word as ‘always’, and there’s been 2 exceptions to this (that I can recall). They’ve been concerning Canopy Growth ($CGC)…..where I needed to reference information for my own use. I trust his product and output unequivocally.