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In the calm before the $ACB/$CGC earnings releases over the next two days, let’s circle back to YSS Corp….a relatively quiet retailing chain. Despite claiming to have 17 stores in operation as of today, they aren’t in the news much. Being islanded in Alberta is probably one reason. Having some incomplete financial statements and packing an unknown amount of leverage might be another.
I crapped all over these guys last time we looked at them, for reasons that are pretty clear. The benefit of the doubt can always be addressed by operational execution and profitability though – and now that they have another 3 months of business under their financial reporting belts, let’s look at whats been happening. Here’s hoping their statements (particularly Note 8) aren’t again presented like being written in felt pen on a wet cocktail napkin.
To the financials!
- Cash at $10MM, receivables and inventory negligible.
- $3.3MM in revenue, gross margin at 32%, off 4% from the previous quarter.
- SG&A higher than margin generated by some $400k. The scale and texture of this shop appears lean operationally.
- SBC of $450k. Hard to back into where this is coming from, let’s check into Note 8 again……
- Woot! Look at that…Note 8 now details stock options, and they now have their own table. We find out they’re packing 5.4MM of them at $0.355. Continual improvement right?
- Nope. Shifted into Note 9 are the ‘Warrants & Performance Warrants’. They’re priceless apparently, and were granted to “the management team and board and certain additional subscribers identified by the management team”. 2.1MM of them with 4 year tenors to themselves, and another 1.9MM of them at $0.30 to ‘advisors’.
- These latter ones (at a 1.5:1 ratio) effectively brings them to the money at a $0.20 share price. 30MM more warrants aren’t itemized, nor priced, nor apparently exist now. And Note 8 doesn’t provide a price schedule on the options. More on this below.
- Back to inventory, they now include a schedule that breaks out cannabis from accessories, but didn’t last fins. It’s gone up in total from $800k to $1.2MM. They had 13 stores in operation as of these financials (up from 10 previous).
- With inventory at $90k-$100k/store, and individual store sales around $250k, it means a lean shop with two turns per month. It can be challenging to back into this with new stores coming online and not presenting a full quarter’s sales, but we’re early enough on here to see it.
Ok. Jesus that was painful, even given how thin these statements are.
I spent some time trying to back into the $450k in SBC they reported in the quarter, and I ran into some <ahem> challenges. From June’s financials:
And from September’s:
Note the absence of the warrants in the QoQ reporting. According to the MD&A:
So. Some 33MM in unpriced warrants either vanished, or, they weren’t there to begin with. The SBC comes from the options, which, are only offered up with an average exercise price. Yet the SBC recorded means a chunk of the vested ones are deep in the money. How many at how much? They don’t say.
Now, I’m not auguring here about a half a million, as much as how many shares and warrants and options exist is kinda important. Just like the optionality that management has loaded into the capital structure. As mentioned last time: it looks like crappy accounting. I suspect the year end (and attendant audit) will clear up much of this, and provide investors with a lay of the land. Their CFO is from the energy industry (yeah, apparently only in acquisitions), which, pretty much would explain it. As a guess, they probably came cheap.
The business aspect of this outfit is the concentration they have in Alberta, and whether or not they’ll be able to break out. They’ve moving into Saskatchewan (Swift Current) by a pick up of what looks like a distressed head shop that was going under. Given the appearance of YSS and capital spends so far, they run extremely lean.
No mention of ‘industry leading’ consumer data or pricing strategies (or anything) other than a cash register and a smile. Given the focus other retailers (and LP’s) on such, these guys are somewhat anomalous in the space. Perhaps they keep the information extremely close, perhaps it’s left to the store level.
At the bottom of it, this is a no-flash/no-bang bricks and mortar operator that isn’t terribly far off from a critical mass of stores financially. That said, competition in Alberta (some with flash & bang) from larger outfits will likely stress all marginal locations in the province, and these guys are currently landlocked. With $10MM in the bank – they should be able to get more up and running before needing cash. They claim $400k to open a store (from the investor deck, I had to go there due to the paucity of information in their financials), and $1.5MM a year in corporate overhead……they are indeed lean compared to multi-store competitors.
Ontario isn’t mentioned, nor is British Columbia except in passing in the MD&A, although the investor deck says an Ontario entry is in view. The deck also contains a ‘capitalization table’ that does present strikes on warrants and options (and some additional ‘legacy’ warrants as well), but again, it’s in summary only. Since the deck was issued a couple of days ago, a raise is highly probable.
What is here is a collection of ex-energy people who decided to go into dope, and grabbed a restauranteur along the way to run the place. And packing a CFO who’s sporting a ‘Trainee’ badge on their chest.
Until there is some sort of rigour around financial reporting….I wouldn’t go near this thing. The year end for them will likely be costly, and could be for investors as well. At this point – it’s a guess.
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 $YSS
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