In our last Structure on Supreme ($FIRE), we mused if asset sales might be in their future, and hopeful that sales increases would continue under the ‘All-Things-CPG’ command of CEO Beena Goldenberg. We’ve documented her journey so far at the helm of $FIRE: she’s gone and done some of the heavy financial lifting that was required to right this ship.

This company is interesting to me, in that they present a decent asset platform and demonstrated capability in growing dope. By all rights and measures, they *should* be in good shape. If only sector overbuild and slow retail rollout across 3 major markets and margin confiscation by government and advertising restrictions hadn’t occurred…..$FIRE would be a pretty good position.

Well, all of that did occur. And $FIRE is one of what I characterize as ‘mid-tiers’: companies that are pretty much front-to-back, but lack the capital depth of the $CRONs and $WEEDs, or the sell-through prowess of an $APHA or a $VFF (via PureSun Farm). I’d put $WMD and $XLY and perhaps $ALEF in this category as well. The only thing that’s going to really bring value around to them is sales growth and margin and market share.

Like so many in-sector as well, $FIRE suffers from a high cost of capital – installed during build through optionality in capital raises during headier days – yet their current state condition was a result of the general incompetence and lack of vision of the 2 previous CEOs. Beena had a real job in front of her. She established an ATM Shelf last spring that was met with a collective yawn by incremental investors, did some of the requisite heavy lifting with creditors, tacked hard to address capital shortfalls, and just recently was able to bring in a $20MM gross raise a couple of weeks ago on an ‘overnighter’.

As we predicted in our last structure – expecting that raises would be somewhat ‘predatory’ in terms of cost – the overnight raise came with a cash fee of 6% of gross proceeds, 2% of the total shares issued in ‘broker warrants’ (a free 3 year option at $0.19(!) immediately going live), an over-allotment option that grants shares at below the price of the raise….and….warrants at a 7 cent discount to the value I derive for them ($0.11). And…. the option to strike them in any which way they like…an option unto itself:

The totality of the past year has seen $FIRE dilute the living shit out of existing shareholders…..with share count over the year increasing from 358MM to today’s 650MM. If you owned this a year ago, you now own about 60% of what you had held. And it’s all been driven by $FIRE getting their capital structure under control. I think Beena’s demonstrated capability in taming that tiger (for now). Operations are now able to be the focus, and will have to demonstrate that there’s enough horsepower in them to pull this frame.

I see $FIRE as a proverbial canary in the mid-tier coal mine. Let’s take a look how $FIRE’s quarter ending December 31, 2020 went.

To the financials!

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• Sales up – definitely signs of life. From $11.8MM to $18.3MM QoQ. Good. Margin at 45%.
• Margin looks even better removing the impact from inventory impairments, which is 52% (Q prior was 58%). $685k came through in impairments in this quarter. Aged inventory and lower selling price are blamed.
• Snap. The word ‘segment’ does not appear in the financials, anywhere. But, sales increases are attributed to a $5MM increase in recreational, and a $1.2MM increase in combined medical and wholesale transactions. More below.
• $FIRE suggests margin would have been higher, but that costs of scaling and product mix are not yet optimized. They focus heavily on attributing the growth to now presenting ‘consumer focused’ cannabis products…a teaser that previous offerings weren’t for the benefit of the market, but of the whims of the producer. This is a relatively common theme across companies in the space.
• After all, there was little formalized data to drive initial product offerings. Now that there is, these outfits now have a scope on their rifle to better sight in customer wallets. I see it simply as industry maturation. I expect we’ll see positive and equally negative outcomes by producers in hydrocarbon extracts, edibles, and in vape performance…across flavour/sizing/effects/cost.
• Finance cost was $2.3MM this quarter, down $2MM from $4.3MM prior. That reprice helped. It didn’t help professional fees though, which were up $400k QoQ to more than $1MM. Lawyers aren’t cheap, nor likely was debt-renegotiation.
• $FIRE has been active in option issuance, adding 5MM at $0.16 over the quarter. 5 year tenors look to be the new normal. In a little over a year, 20MM have expired worthless as share price has nosedived.
• The RSUs looks to be $FIRE’s preferred compensation vehicle, some 4MM of them were issued and struck (at market). Compare this with only 1.3MM prior quarter. share price accretion is good for those being paid in paper…and really…cash conservation has probably been forefront in the CEO’s mind.
• Another 12MM of the RSUs have been issued in the first 6 months of this fiscal year. PSUs and DSUs – created under previous regimes look to be wound down with cancellations and no further issuances. The totality of RSU issuance has flattened out share based compensation, halving it YoY, and settling in around $400k/q.
• Not much in total at ~=$1.6MM per year of SBC (relatively speaking) – but it does speak to housekeeping done after the frat boys vacated the place. Share price accretion will see this value rise. Executives and director compensation make up about half the annual total now.
• Accounts receivable has swollen from $7MM to $12MM reflecting their increase in sales. Looks like someone stuck them with about $440k in bum debt from a sale early last spring. Potential credit losses will be a useful metric go forward. ‘Cash Only’ has been seen around the sector, and I expect it will only intensify.
• Someone finally lit up their ATM facility in January, picking up 20MM shares at $0.19, for proceeds of $4.3MM.
• With that and the overnight raise on January 26th, they’re going to have about $35MM. They ended calendar 2020 with $20MM (flat QoQ). So, they more runway now, and in a far better overall condition than they were 2 quarters ago. More below.

Ok.

Even without calling it segmentation, they provide a disaggregation of revenue. Mostly improved QoQ on almost every metric. What it does reveal is that they don’t have much in terms of a presence in extracts in their sales mix, and that they’re losing ground in that segment. They were able to increase their selling price per gram in both categories:

Last time, I mused that they might ultimately sell their Langley facility. The only mention I can find is that they’re continuing to ‘optimize’ production there and at Kincardine. I will stick to that prediction in the absence of significant increases in oil sales/plant utilization. They did purchase $2MM of wholesale cannabis in the quarter from someone. Perhaps to plug a hole in production, or more likely, acquire volumes for their ‘craft’ offering. My understanding is that it’s from $GTEC.

Regarding their current cash position and convertible load, Beena’s done a ton of the important work on their capital structure. That she was able to at strike up a raise (full uptake) is a positive sign, albeit expensive. The growth in revenue QoQ bodes well, and my impression from these financials is that much of what’s needed to take place in capital structure has been accomplished, even if being dear to shareholders. $FIRE was in a pretty dark place several quarters ago. And while it’s not a whole lot brighter, it’s at least gone from a 20 watt to a 40 watt bulb.

I chalk that up largely to having an adult at the helm. Readers will know of my general disdain for chronics hot-boxing their own shop with prima facie self-dealing and gratuitous compensation. It’s given the sector a black eye – needless but for simple greed and a lack of relative ethics. I labour on the point, because not only are scarce dollars of capital (or even when not scarce like a couple of years ago) are shot on folly – $FIRE’s activities of the past 12 months have had to focus almost exclusively on clean up, with shareholders getting the bill. It’s a great example of how long it can take to clean up after bad choices, and bad management.

There’s a few more items, but this is the core of it. The relative ‘slowdown’ of cannabis sales velocity in Canada is going to test the quality of sales gains being able to continue. From $FIRE’s perspective, if they can replicate the growth shown this quarter, that would be very good. I suspect a repeat of this quarter is more likely, due to increasing craft availability. That would still be somewhat ‘good’ – inasmuch as these sales levels and margins are showing some brand stickiness and loyalty.

These are largely positive financials, yet, they still remain quite a ways from where they need to be. The amount of cash they’ve set themselves up with is likely in anticipation of developing and producing more of those ‘consumer focused’ products. Beena’s priority now is likely to diversify the company away from reliance on flower, and into more CPG SKUS.

Watch next financials (or two) for movements in this regard, and a ramp in extracted product. $FIRE’s continued growth lays within this.

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 $FIRE.