Here is Supreme’s Earnings Release. Always beware the presser that does not mention QoQ sales deltas!

Here is Molly’s Structure & Current State for June 30, 2020.

What we said last Q:

‘Member when Supreme had $19 million in Q sales and +EBITDA of $3 million in the June 30, 2019 Q?  I wonder how much of that was bulk trim going to extractors?  They didn’t show segment splits until Sept 30, 2019, but I bet it was the majority. (If you wonder why Molly and I hammer disclosure it is for reasons like this.  If investors saw that FIRE’s sales were being generated not from Medical or Adult Use but from wholesale, they would have had a very different view of their investment.)

Inventory is impaired.  With FIRE shaving their nugs, I bet their trim is greater than 35% of harvest.  If that Trim becomes worthless, FIRE has some real problems until they get selling some 2.0 products to absorb the trim byproduct.

Truverra and Blissco goodwill and intangibles get whacked.

Sales continue to stagnate.

But the big issue is the interest expense eclipsing Gross Margin in the Q and YTD. This is ice on their wings.

This Q:

• Sales going backwards, but Adult rec saw a nice +27% +$1.5 million increase QoQ. Only 4 more Q’s of +27% and they will almost reach previous sales record (Stripping wholesale completely)
• GM negative two Q’s in a row
• Interest greater than unimpaired GM, which should improve with $65 million convertible early conversion.

Supreme has a problem many other LP’s have.  They need enough 2.0 sales to absorb trim or else that byproduct will be written off.  They do not break out their Adult rec sales, but given how tight they shave their nugs they need a good chunk of 2.0 sales to absorb trim.

Overview

Income Statement Drivers and Implied Breakeven – Trend

This graph looked so much better six nine twelve months ago.

Sales appear to have stagnated at sub $10 million and have backed up by $0.2 million this Q.

Rec sales were $7.3 million up 27% from last Q.  Wholesale was $2.3 million a decrease of 43% QoQ, while trim was $0.

They had $26 million in Finished Goods to start the Q, so no excuse of lack of product impacting sales.

Fire recently started disclosing average selling price: $5.01/gram adult rec an increase of 16% and $1.71/gram W/S -49%.

Imputed KGs sold was

• Wholesale: 1,330 KGs an increase of +12% from 1,187 KGs QoQ
• Direct Adult Use: 1,449 KGs an increase from 1,323 KGs QoQ or +9.5%
• Total KGs sold was up 2,779 KGs from 2,605 KGs last Q.

Income Statement Drivers and Implied Breakeven – Peers

FIRE is really struggling to generate more sales. A story we are hearing in the majority of Cdn LPs.

Gross Margin: Trend and Peers

GM% fell from negative 15% to negative 87% as a result of an impairment of $10.6 million on the cost side. Without the impairment GM would have been $3.6 million or 38%.  With the impairment GM was -$8.2 million versus -$1.5 million last Q.

They do not disclose Q harvest figures but for F2020 they harvested 35,099 KGs versus 10,039 KGs last year. That would be 8,775 KGS per Q versus their sales this Q of 2,779 KGs or 32% (assuming the harvests were flat QoQ for the fiscal.  This is a sizeable assumption).

What we said last Q:

A look at production costs show wages and benefits increasing as a % of sales to 58% from 37% and facilities and supplies increasing to 28% from 17% QoQ.  This does not bode well.

I keep saying this: Banks do not give a wit about dilution.  Dilution will be the only avenue FIRE will have to raise $.

This Q:

They stripped that data from MDA and fins.

GM net of impairment of $3.6 million was eclipsed by interest expense of $5.2 million for the Q.  They have converted some converts via shares and have restructured their bank debt. This should improve next Q.

Gross Margin: Peers – larger group

The basement is getting crowded with +50% in the basement.

SGA and SBC- Trend

Note: Restructuring charge has been moved to Other Expenses to maintain peer comparisons.

Selling expenses decreased by $0.3 million to $0.7 million. Tough to increase sales while trimming selling expense. But they did it in adult rec this Q.

G&A decreased $0.5 million to $8.0 million and now register at 84% of sales. Wage decreases of $1.2 million and $0.5 million in facilities were offset by increases in G&A of $1.4 million.  

SBC has increased despite share prices lagging and was $4.7 million for the Q an increase of $0.8 million and is now 49% of sales.  That is a crazy figure for how poorly FIRE is performing. That is above GM net of impairment.

OPEX decreased from $15.3 million to $14.7 million QoQ, good for 154% of sales.  

SGA and SBC- Peer

There are some dregs in here.

Implied Breakeven Net Operating Profit divided by Current Q Sales

NOP before IFRS voodoo came in at -$23 million a slide from -$17 million last Q.

We cannot calculate Breakevens with FIRE at a negative GM%.

Other Income and expenses:

• Finance cost of $5.2 million for debt servicing
• Restructuring costs of $1.2 million versus $2.1 million last Q
• Impairment of assets of $3.4 million after $57 million last Q
• Loss of modification of lease of $0.9 million

Taxes were approx. $3.7 million credit to deferred.

Net Income for the Q was negative $32 million versus negative $71 million last Q.

Adj EBITDA: Peer and Trend

Adj EBITDA improved to -$4.2 million from -$9.3 million last Q as GM net of impairment improved $4 million and cash Opex improved $0.8 million.     

And they had to service $5.2 million in interest this Q.  Getting to +EBITDA is a goal but not the destination. 

Implied Breakeven Adj EBITDA divided by Current Q Sales

With a negative GM% this metric cannot be calculated.

What I said last Q:

From MDA Dec/2019 Q:

• “The Company expects fluctuations in Adjusted EBITDA on a quarterly basis and to be Adjusted EBITDA positive within 12 months.”

That would be by Dec 31, 2020.  They went from +EBITDA to looking at 7 Q’s of negative EBITDA. 

I bet they don’t get there.  They need to conjure sales without the wholesale trim market helping them.

This Q:

Same.

Cash vs Debt Service:

Cash increased to $28 million from $23 million QoQ.  They increased their convertible debt by $10 million to fund it.

“Gas in the Tank”

Modest decrease in sales delta and increase in FG of $4.2 million.  They have PLENTY of FG at $30 million.

Accounts Receivable decreased by $5.9 million to $9.0 million QoQ with sales tax receivable being $1.7 million. 

Debt maturities for Bank deal are three years out and the convertible debenture matures October 2021. They reduced the coverts by $63.5 million subsequent to Q end.  So, if they can stay onside with bank covenants the repayment of the debt is not yet a concern.  

The bank EBITDA covenant was extended.

What I said Last Q:

Overall Sales are stagnant.  Production costs are increasing in Cost of Goods Sold. GM is less than Interest expense this past Q and over 9 months YTD. SGA are at $9.5 million.  If they had a 50% GM they would need to double sales to achieve breakeven against SGA alone.  To get to +NOP, which doesn’t include the interest expense anchor, they need 3 times current sales.

Once the ATM runs dry, expect another one to be hung up.  Fire is running on fumes.

This Q:

Sales are stagnant overall but the increase in adult rec of 27% was a bright spot.  The problem is they will need four more Q’s of +27% to get them back to $20 million per Q in sales (assuming no wholesale).

GM is weak and they are harvesting considerably more than their sales.  SGA have been crunched and I do not know how much farther they have to go.  The interest burden has been lightened with the conversion of $63.5 million of debt into shares. 

Cash seems sufficient for several Q’s.

This company is treading water operationally and has been for sometime.  At their present unimpaired 38% GM, which will come under pressure for impairment if they are indeed selling 30% of harvest, they need $10.5 million more in sales to be +EBITDA.   If that does indeed take four quarters to get there that cash pile will look much smaller.

GoBlue

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