Fire & Flower Announces Second Quarter 2020 Financial Results

Fire & Flower Holdings Corp. announced its financial and operational results for the thirteen-weeks ended August 1, 2020.

Financial and Operational Highlights for the Thirteen Weeks Ended August 1, 2020.

• Total revenue of $28.6 million at a gross profit of 34.8%, compared to revenue of $11.1 million in Q2-2019 at a gross profit of 36.5% – representing a 158% increase in revenue year-over-year.
• Adjusted EBITDA¹ (loss) of $0.3 million, reduced from $4.8 loss million in Q2-2019 through optimization of the retail store network.
• Completed the final steps required for licensing two cannabis retail store locations in the major urban market of Vancouver, British Columbia.
• Repayment of $28.2 million of debt including the principal amount of 8.0% unsecured convertible debentures and accrued and unpaid interest thereon.
• Entered into an amendment agreement which includes a proposed early exercise of the majority of Alimentation Couche-Tard’s (“ACT”) Series A warrants (through an indirect wholly-owned subsidiary) that, upon exercise, would result in ACT holding an approximate 15% ownership interest and gross proceeds to the Company of approximately $19 million in 2020.
• The proposed extension of the maturity date of the unsecured debentures held by ACT potentially increases operational flexibility.
• Opened two cannabis retail locations co-located with Circle K stores in the province of Alberta.
• Continued to refine the Company’s business practices in response to the COVID-19 public health crisis and maintained continuity of operations through digital engagement with customers and best-in-class in-store safety protocols.

Subsequent Financial and Operational Highlights post August 1, 2020

• Acquired a prominent downtown Toronto cannabis retail store location at the high-traffic intersection of Yonge Street and Gerrard Street, in close proximity to Yonge-Dundas square.
• Launched the Revity CBD™ private label wellness brand driven by consumer insights in the underserved CBD market in the province of Saskatchewan, through the Company’s wholly-owned distribution business, Open Fields Distribution™.
• Hifyre’s Spark Perks™ member program achieved an increase of approximately 45,000 members since the beginning of Q2-2020 and now has more than 145,000 members in the program that typically visit more frequently and transact with higher basket sizes, compared to non-members.
• Continued to realize positive financial and operational results as a result of optimization of the retail store network with a focus on maximizing the number of retail stores delivering positive margin contribution.

“Fire & Flower continues to drive towards delivering positive adjusted  EBITDA and during our second quarter of fiscal 2020, we have made meaningful progress towards this critical goal,” said Trevor Fencott, Chief Executive Officer of Fire & Flower. “We believe the Company is well positioned to expand its footprint in the Ontario market and expects to have access to the necessary capital to support our growth plans. As the cannabis and retail industry continue to adapt to the COVID-19 public health crisis, we will remain on the leading edge of driving consumer engagement in this dynamic environment.”

Selected Summary of Financial Results

(in thousands of dollars, except per share amounts)

NM – Not Meaningful

During the thirteen weeks ended August 1, 2020, the Company generated revenue of $28.6 million including sales of $23.4 million in the Retail channel, $4.3 million in the Distribution channel  and sales of $0.9 million in the Digital Retail and Analytics channel.

Total gross profit for the thirteen weeks ended August 1, 2020 was $10.0 million or 43.8% of revenue with the Retail channel delivering $8.2 million, or 35.1% of net sales, compared to $3.3 million or 34.6% for the thirteen weeks ended August 3, 2019.

For the thirteen weeks ended August 1, 2020, the Company recorded net comprehensive loss of $29.1 million, or net loss per share, and on a fully diluted basis of $0.18. The net comprehensive loss incurred during the quarter was due to gross margin of $10.0 million being more than offset by total expenses of $12.5 million and other expenses of $26.5 million. Other expenses are comprised of losses on the revaluation of derivative liabilities of $18.3 million and finance costs of $8.2 million.

Retail Update

Fire & Flower continues to work towards delivering positive adjusted EBITDA² through a focus on “four-wall retail economics”, the optimization of its retail network and expansion into key provinces such as Ontario and British Columbia. In addition, the Company continues to monitor the COVID-19 public health crisis and adapts its business model to optimally serve customers.

At the end of the thirteen weeks ended August 1, 2020, the Company was operating a total of 51 stores, with 40 stores located in Alberta, 7 stores in Saskatchewan, 2 stores in Ontario, and 1 store in each of Manitoba and Yukon.

Retail revenue for the thirteen weeks ended August 1, 2020 was $23.4 million, an increase of $13.7 million from the prior year and $4.9 million from the previous quarter. The increase in revenue was driven by a larger number of operating retail stores during the quarter.

Gross profit for the thirteen weeks ended August 1, 2020 was $8.2 million, an increase of $4.8 million from the prior year and $0.5 million from the previous quarter. The Company improved its product assortment strategy through a better understanding of its customers and their product preferences in each local market.

During the thirteen weeks ended August 1, 2020, Fire & Flower completed the final stages of the licensing process for two cannabis retail stores in Vancouver, British Columbia and intends to open these stores at the earliest opportunity. Additional stores in the province of British Columbia are awaiting licensing.

Development of retail stores in the province of Ontario has been affected by the slowdown in the issuance of licences and store construction due to the COVID-19 public health crisis. Fire & Flower is awaiting licensing on a number of locations in the province and intends to open these stores once final licensing is complete.

Subsequent to the thirteen weeks ended August 1, 2020, Fire & Flower announced the acquisition of a flagship downtown Toronto store at 378 Yonge Street. This store is currently open and will be transitioned to the Fire & Flower brand in the coming weeks.

During the onset of the COVID-19 public health crisis, Fire & Flower saw meaningful sales with basket sizes increasing as consumers purchased larger volumes of product. The Company is now seeing consumer behaviour return to normal seasonal levels and increased popularity in large format cannabis products, vapes, beverages and edibles.

Open Fields Distribution Update

During the thirteen weeks ended August 1, 2020, Open Fields revenue increased to $4.3 million from $3.9 million in Q1-2020, representing an 10% increase between Q1-2020 and Q2-2020 and a 78.2% increase compared to Q2-2019.The growth is attributed to Open Fields continuing to gain traction as an exclusive supplier of cannabis products from major licensed producers to external accounts throughout the province of Saskatchewan.

In addition to creating an increased margin opportunity in the province, the Distribution channel demonstrates how this supply chain model can be adapted by the Company for use in other jurisdictions where direct wholesale relationships with licensed producers and accessory suppliers are permitted.

Hifyre^TM Digital Retail and Analytics Update

During the thirteen weeks ended August 1, 2020, Hifyre continued to develop and commercialize products within the Digital Retail and Analytics Platform. Products include Spark Perks, a member engagement program, Hifyre ONE, a white-label software service deployed through its strategic agreement with COVA Software Solutions, and Hifyre IQ, an advanced data and analytics platform.

The Spark Perks program has surpassed more than 145,000 members. Program members transact more frequently and spend more per transaction than non-member customers. During the quarter, the platform has provided the Company with an enhanced understanding of its customers which allows the Company to create a tailored customer experience resulting in higher customer lifetime value.

Customers using the Hifyre IQ platform now include the majority of major cannabis licensed producers. Customers also include equity research analysts, consulting firms and investment banks. The platform provides clients with a comprehensive understanding of consumer purchase behaviours in the Canadian adult-use cannabis market.

Adjusted EBITDA for the thirteen weeks ended August 1, 2020 was a $0.3 million loss compared to a $4.8 million loss for the thirteen weeks ended August 3, 2019 and a $2.7 million loss for the thirteen weeks ended May 2, 2020.

Fire & Flower is a leading purpose-built, independent adult-use cannabis retailer poised to capture significant Canadian market share. The Company guides consumers through the complex world of cannabis through education-focused, best-in-class retailing while the Hifyre digital platform connects consumers with cannabis products. The Company’s leadership team combines extensive experience in the cannabis industry with strong capabilities in retail operations.