Fire & Flower Holdings Corp.

Thank you very much, and thank you all for joining us today. I'm Trevor Fencott, President and CEO of Fire & Flower.

And with me today on the call is Nadia Vattovaz, our Executive VP of Operations and CFO. Earlier today, our company published its operational and financial results for the fourth quarter and fiscal year 2020, ended January 30th, 2021.

And the results are available on the company's website and on SEDAR.

Thank you, Trevor, and good morning, everyone. I'm happy to provide a financial overview of Fire & Flower and our operations as released to the markets earlier this morning.

To start off, I'd like to remind everyone that Fire & Flower follows the retail calendar, with every quarter consisting of 13 weeks, and each year 52 weeks. I will be speaking both to the 13 weeks ended January 30th, 2021, which is our fourth quarter results, and the 52 weeks ended January 30th, 2021, which are our fiscal 2020 results.

Thanks, Nadia. To conclude our management presentation, I'd like to discuss the continued drivers of our revenue and adjusted EBITDA growth.

As a data-driven cannabis retail company, our focus remains on utilizing our consumer data in the most valuable manner to enhance our customers’ retail experience, which we believe will continue to build a high margin revenue stream in the years ahead. The continued expansion of our retail network in Canada, and soon in the US, offers expanded geodemographic data that enhances our understanding of the overall consumer, to further optimize our product offerings, build meaningful momentum of financial growth in 2021.

As we build out upon our retail expansion, the Hifyre platform will remain a key differentiator and a powerful tool that allows us to connect directly with the customer, and take a segmented, personalized approach to our marketing messaging, through our annual consumer marketing calendar. To more clearly understand how we achieve quarter-over-quarter growth through our Hifyre platform, I'd like to take a brief moment to review this growth engine, and how each end of the platform will continue to drive our success.

Over the last year, we've leveraged our Hifyre platform to further fuel our retail ecosystem through deep digital engagement, to ensure the most valuable customer engagement in the industry. Our primary revenue generator, Hifyre IQ, is the leading data and analytics platform that provides key insights to our external customers.

Hifyre One is a digital infrastructure product that powers our advanced retail operations. Hifyre Reach, which was launched in the third quarter of 2020, provides advanced customer segmentation, half the purchase measurement, and an advanced digital advertising platform.

And finally, Hifyre Spark, houses our Spark Perks program, and provides an advanced recommendation engine to tailor the consumer experience to their individual preferences. This is the way we connect and individuate our customer experience.

Despite seeing a decrease in gross margin as a percent of sales in a year-over-year basis for fiscal 2020, the company's margin dollars increased year-over-year, and we have generally maintained margins, while many licensed producers in the cannabis industry face margin compression. As I noted at the beginning of our call, this is an especially important metric of the growth that we've achieved, and we will continue to focus on it, to measure the continued success of our technology moving forward.

As we've seen a number of pressures in the cannabis market in the past year, retail competition, particularly in several of our provinces, was at risk for margin compression. We strongly believe that the technology that we've deployed, as well as our consumer engagement through Spark Perks member programs, has helped build customer loyalty, thereby being instrumental in preserving our margins in the retail going forward.

We’re leveraging Spark Perks data, and extrapolating that to understand what that means from a geodemographic targeting perspective, so we're able to understand when we enter a new market, which banner makes sense, in which location, and why. Furthermore, we've also seen pricing pressure in products from licensed producers.

Our results speak to the fact that despite price compression on the supply side, our retail channel has been able to maintain its margins. These are very different businesses.

This has been a key tenet of the Fire & Flower business, and certainly Hifyre, which is a high margin business, and contributed to overall margin performance and the growth in membership of the Spark Perks program. As of today, the company has more than 250,000 Spark Perks members that we’ve discussed.

Traditional formats, such as dry flower and pre-rolls, continue to make up the largest share of sales. And we continue to see growth in cannabis 2.0 product formats.

Edibles and beverages are mainly seen as trip passengers or basket builders, because they're usually added on during the customers’ purchase of flower, pre-roll, or vapes. The Spark Perks membership program continues to drive revenue, as foot traffic slowed in fiscal 2020 due to COVID-19.

The company focused on digitally engaging our customers through one of the limited compliant ways to market to customers in this highly regulated industry. Now that we're able to speak with over 250,000 Spark Perks members, we're able to generate high customer lifetime value because of the membership program.

For this large pool of information on customer behavior, we've evolved our merchandise and in-store service model, which has supported stronger same-store sales, stronger margin, and optimized usage of working capital for inventory. As a tech-enabled retailer, we’ll continue to adapt to an ever-evolving cannabis market, and could readily profit from newly rolled out retail locations.

We'll continue to focus on maintaining our positive adjusted EBITDA moving ahead, as we execute on our aggressive growth strategy of driving shareholder value. This concludes the presentation for management today.

And now, we'll move on to the moderated question-and-answer.

Well, thanks. Congrats on the quarter.

Good morning, everybody, and thanks for taking my questions. My first for Trevor and Nadia, I want to go a little high level here with respect to the US and your American Acres partnership.

Beyond kind of what you've said in that PR, is there any sort of updates with a sense of timing or just the overall agreement that you could speak to and how things are coming along with that? Thanks.

Yes, sure. I can provide a little color on that.

So, as we did mention, they are actively working on converting their first location in Palm Springs. And we're told to expect this in the sort of first half of this year, and we're sort of anxiously looking at that project.

But I think it's important to kind of take a step back and look at what this really means. So, the company, American Acres, has essentially been armed with our best-in-breed technology and platform, where we know how to compete.

In fact, the Alberta market is the most competitive market in the world, with one cannabis - licensed cannabis store for every 8,000 people, which is more competitive than Colorado. So we're able to compete and make money in very competitive markets.

So we've given them this sort of - this competitive advantage, to go out with kind of an open license, go out, acquire stores, convert them to Fire & Flower brand stores in anticipation of our market entry. So, we're very excited.

We look forward to many of these additional opportunities, Palm Springs just being the first one. I guess it's a mistake to assume that this is - simply just one store is going to become a Fire & Flower brand store.

That's certainly the first, but the first of what we hope will be many.

Okay. Thanks for that.

And I think, Trevor, in your prepared remarks, you had mentioned that the 2.0 products in this quarter, edibles and beverages, they're more basket builders. I'm wondering given - with COVID and store closures, given - we know 2.0 products require a little bit more education for - especially for new customers.

I'm wondering, do you think that overall revenues from 2.0 products, or even the percentage split, could have been higher, had customers been able to actually go inside brick and mortar stores? Thanks.

Yes, that's an excellent question. I'm going to pass it to Nadia, because she's really plugged into the operational network in that way.

Sure. Thanks, Trevor.

And hi, David. In a nutshell, I think the answer is yes, David.

I think if you - if we were allowed to interact with our customers, and speak about the benefits, and how to consume the edible products, I think that number would have been higher. Having said that, we actually have seen an increase, a substantial increase in edibles as a percent of our sales.

So, and that's really attributed to the increased offering out there from the licensed producers. So, I look forward to the day when we actually can engage with customers and drive that number even further.

Okay, very helpful. And really just, if I can squeeze one more quick one in here, I'm just wondering on your margin side, we know in the Canadian market, for example, January and February are some of the lowest revenue quarters and seen as a whole, but your numbers were very good in this quarter, which encompassed at least one of those months.

So, I'm just wondering, from a gross margin perspective moving forward into the next quarter, April is almost done, so as is almost the quarter, are these stable gross margin levels that you'd advise analysts to look forward to as you move forward? Thanks.

Well, they're definitely a seasonality, but I think, Nadia, again, if you want to take this one on the on the stable gross margin side.

Sure. And what we've seen obviously is the cannabis business is a seasonal business.

And the fourth quarter, for us, which represents November, December, and January, is the largest months for us. And those are the months where we really see huge revenue lift, particularly given our promotions for the holiday events.

In Q1, David, that is the slowest quarter, and that represents February, March, and April. And so - and that really is more of a function of foot traffic, and the actual engagement with the product for this particular season, as opposed to a margin implication.

So, have we done more promotions to entice people into the store - into buying, sorry? Yes, that's true, but from my perspective, and this is how we look at the business, Q1 is slower from a traffic perspective.

Okay, very helpful. Thanks for the color and congrats on the quarter.

I'll hop back in the queue.

Thanks so much, David.

Hi. Good morning, and congrats on the results.

Thanks.

First question here, it’s a great quarter on Hifyre. I'm just wondering if you could speak to the dynamics that may have caused an acceleration in commercialization of that platform, and whether Hifyre IQ continues to be the primary driver of digital revenues.

Sure. Yes.

So we made a conscious decision, once the technology had gone through the proof of concept stage and minimum viable product stage, we view ourselves largely as a tech company, particularly in that part of our business. So, we did agile development, product testing, and you'll notice it's not just one product.

It's actually four different products that we developed, and we continue to develop additional products. So, this is really - we think of it as our R&D, our tech development and innovation arm.

So, we continue to ramp up each of those four, layering on each other, and providing sort of incremental revenue there. So, I would expect - certainly Hifyre IQ is a large part of that revenue, but there are other products that we're developing even now that we expect to commercialize.

So, I think sort of from an outside perspective, I would look at this as our R&D sort of skunkworks, and expect it to continue to be spinning out innovation products, both for use internally in our network, but also externally facing to commercialize. So, we're very, very proud of the team and what they developed, and have obviously set up a robust commercialization part of that business, which we'll continue to look for opportunities externally.

So, proud of the growth, and we expect that growth to continue.

That's great color. And just sticking on Hifyre, for another question, given your comments, I would expect you would expect the platform to continue growing.

I'm just wondering, for the fourth quarter, were all of those revenues recurring revenues, or is there any kind of seasonal or one-time impacts that happened in the quarter?

No. They were largely subscription-based because that's sort of the dominant part of the platform.

There are other pieces. So, as we look at sort of Hifyre Reach and stuff, there will be some differentiation in the revenue mix, and certainly for other products that are in development now.

I wouldn't expect that to always be the case, but that was certainly the dominant focus for that.

That's great. And just a final quick question.

if you could have - if you had any comments on the latest series of lockdowns that's happening in Ontario, do you continue to view these as non-material to - in terms of a financial impact to the business? Were there any changes that - with this most recent lockdown, different than what we've seen in the past?

Yes. I mean, I think that really to the extent the lockdowns stop foot traffic, I mean, it's certainly something that we have to be mindful of.

So, we continue to be able to service our customers through the digital platform and delivery and other sort of services under the Emergency Act in Ontario. But of course that is at the leisure of the interior government.

So, we're functioning just fine at the moment, but again, it really depends on what the emergency order evolves into, or if it evolves. And I would say, matching Nadia’s point, certainly to the extent that foot traffic is being impaired, as weather becomes better, and for seasonality you would expect more foot traffic, to the extent that doesn't materialize because of lockdowns, I think that that could be something we would look at.

But the great news for us, though, is again, because we invested so early in digital, and then we have this 250,000, like that's a quarter of a million consumers that we can directly talk to digitally, have a direct dialogue with each and every one of them, and can service them in alternate ways. So, I think for us, it's going to be a fairly - a comparatively minimalized impact, assuming of course that the lockdowns don't go into more severe stages.

That's very helpful. Thanks for …

And Andrew, it’s Nadia.

Yes, go ahead, Nadia.

Trevor, if I can just add to that. Yes.

If I could just add to that. So, I think we've seen this pattern, and there's an initial blitz as consumers change over, but then there's pickup and the basket sizes tend to go up because as people have to purchase online, they purchase - they tend to purchase in larger quantities, as I mentioned earlier on.

But we, from a technology perspective, tend to take these type of announcements as challenges. So, for example, yesterday we announced two-hour delivery.

So, for us, we actually think that this is a great opportunity to connect with our customers and deliver their product even faster to them.

Thanks for the color, and thanks for taking my questions. Congrats on the quarter.

Good morning, and thanks for taking my call. Nice to see the store-over-store growth in the quarter.

I just had a couple of questions around the co-location strategy. I know it's still early, but are you able to provide any metrics around how that strategy is working versus standalone fast locations?

Sure. Yes, I mean, obviously there's some things that we - that are just between us and Circle K, but I think to - what we can talk about is certainly the size of the co-location and the fact that it's using existing Circle K real estate footprint.

So, that's, I think, commonly misunderstood. I think people may have initially thought, well, it's another location, somehow like another sort of maybe 1,000, 2,000 square foot location.

It's not. These are sort of 600 square foot locations that are using an existing piece of Circle K real estate.

So, it leverages their real estate platform. And the reason I mention that is that will be, of course, one of the indices of success right now.

Obviously we don't speak for Circle K, but if you think about, if you have - if you're a massive retailer with 16,000 locations worldwide, and you can transition parts of your, let's say 2,000 square foot convenience C-store location, if you can transition 600 square feet of that into highly productive revenue per square foot asset, that has to be a win on any metric. And I think that one of the things that we are seeing is that it certainly does outperform traditional metrics.

Like we're seeing cannabis revenue per square foot metrics, which are obviously in the industry, in the retail industry at large, superior to traditional retail in most respects. So, we're certainly seeing that.

I would say we have - from what I can say from our Fire & Flower perspective, we are very pleased with this pilot project, very pleased with the numbers we're seeing come out of it. Although obviously the model is different because we view this as part of our hub and spoke delivery platform, a hub and spoke retail platform, where we have sort of experience stores, which are larger or education-driven, experience-oriented, kind of best of breed, next gen retail.

But then you also have these sort of spoke locations, which might be more conveniently located for people and might be more sort of transactionally focused, because with a 600 square foot store, you have to be a little more transactionally focused. You need to use the technology to manage inventory very carefully, because you're talking about sort of a 70 SKU environment versus a 240 SKU environment, and you need something like Hifyre to power that with sort of its machine learning and what are going to be the most high volume SKUs to stock there.

So from our perspective, it's been very, very successful. I think it's sort of safe to say that just looking at traditional sort of C-store dynamics, and looking at a partner with a large existing portfolio of real estate, you can sort of fairly quickly intuit that it might be attractive to have more of those types of stores in your portfolio.

Does that help?

I appreciate that detail - yes, no, very much so. And I assume at some point, this co-location strategy could be rolled out in the US, or is that still a while away, and in the US, it's primarily building the brand, that's where American Acres first?

Well, I think that one of the broad areas of alignment, so there were two real areas of alignment with Circle K, Couche-Tard, when we went into our deal with them, a strategic arrangement. So, the first was obviously our technology forward platform, which was appealing to them, but the second part, and this is kind of where it fits in, is a shared vision that cannabis at some time horizon, whether it's five or 10 years, but at some time horizon, becomes a convenience-driven product, much like any other kind of product.

So once you competed on price, which I think we're seeing, that's great, then you can compete on product selection. And I think we're at the beginning of that, certainly in Canada.

The US is a little more evolved there, with their fewer marketing restrictions. But then finally, you end up with the, you have to deliver this to the consumer in the way they want to access it, not sort of through government stores and lineups and whatever you wanted - the consumer wants it the way they want it.

So, I think that that was part of our shared vision with Circle K. that was part of our overall alignment, and this hub and spoke vision was something that we sort of shared.

So, I definitely think it's part of both of our aspirations as we kind of go beyond Canada and even beyond the US. Like the goal here is certainly with a partner that's in 25 countries around the world, our shared vision is look, we'll be in every country where cannabis is legal at retail, in the order they come online.

And right now, it just looks like the US is the most close opportunity, but there's going to be other places like Australia. Europe will eventually come online and we'll be ready.

And that's one of the reasons why this partnership works quite well.

Understood. And just on the store network in Canada, the count is at 80, and I believe there's 29 stores in Ontario, which would be at the cap limit until the fall.

Are you still seeing a good opportunity to expand the store network in Canada in total falls and other provinces, either organically or through M&A?

Yes. No, we see a lot of growth still left in Canada for sort of at least two years.

So, there's a lot of wood to chop, so to speak here domestically for the next while. We’ve seen - I don’t think we announced in our results, we talked about sort of starting a location that we're quite proud of, which was a licensing arrangement, which is allowing us to expand our footprint in advance, and getting preparing for September 1 when we can actually acquire it.

But that's a licensing arrangement where we're able to extract the management fees from that sort of store-in-waiting, and queuing it up for a transition, a smooth transition in September. And it's sort of worth mentioning that we've been at this now for a while.

We're becoming, I think, very good at sort of small integrations, boutique sort of licensing or bespoke kind of licensing arrangements that are compliant and to expand our footprint. So, we're continuing to expand even in Ontario.

And I think there's a lot of room we haven't really even touched. Well, we haven't touched BC yet.

So, we’re - we've received a municipal permits, every possible permit you can imagine. So, we're optimistic that that's going to get moving soon, but again, BC is quite slow.

But I would say that if we got to 80 stores, if you look at the delta that we have between 2019 and 2020, we're going to - I think it's reasonable to expect us to continue and even expand that growth trajectory, because there's still a lot of room here in Canada.

That's helpful insight, and thank you for taking my questions.

No problem. Well, thank you.

Hi. Good morning.

Thanks for taking my questions. A couple for me.

The first one, I was wondering if you can talk a little bit on how we should think about operating flat rates at the business as you continue to grow, particularly in the sense that there was say 10 million increase in revenue quarter-over-quarter, but we had a 0.2 million increase in EBITDA. So, just any kind of color on how to view that going forward.

Thanks.

Yes. So, Nadia, I'll let you handle that one.

Yes. So, thank you, Endri.

So, I wouldn't say that the dynamic between the two is indicative completely of going forward. A couple of interesting things happened in the quarter.

We have launched an internal marketing function, and that internal marketing function saw some significant work occur during the quarter, which added about, I'm going to say, an incremental $400,000 of expense during the quarter that we wouldn't be seeing typically quarter-over-quarter. But certainly, the growth that we saw on the expense side, really had to do with new stores primarily.

So I think when you consider those, that's probably a fair way to look at it.

Okay, great. Thank you.

That’s great color. The other one, if you can talk a little bit about the impairment expenses and the restructuring charges you had in the quarter.

Those stores closures, where were they located and whether they were included in your same-store sales growth? And that's it for me.

Thank you.

Sure.

Sure. Nadia, you can speak to the network as well.

Sure. So the restructuring charges primarily had to do with rationalization of the Ontario portfolio, Endri.

There were a few locations that we had in the Ontario portfolio that we decided not to proceed with. And I think it really is also part of our comprehensive view on where we need to be located in Ontario.

On the impairment side, we had some minor charges with respect to impairment on a few of our assets, nothing major in nature, that I would anticipate. With respect to restructuring going forward, I think you're going to see some restructuring charges associated with the Friendly Stranger acquisition, which was fully expected.

Okay, great. Thank you very much.

Good quarter. Thank you.

Hi. Good morning, and thank you for the questions.

First one for me, I'll kind of piggyback off that last one. Just in terms of, where do you guys think - believe the EBITDA margin profile could fall maybe over time, as you guys see yourself both as a retail business and have the digital as well?

Historically, within retail, we kind of think of maybe like a low teens EBITDA margin profile with regular way retail businesses. Do you feel like it might be a little bit different with cannabis, or how do you guys feel like that might evolve?

Thanks.

Yes. I think it's going to be a little different for us.

And I'll let Nadia kind of expand upon that mix.

So, the - it's an interesting question in so far as, the retail business is the - from a volume perspective, is our largest portion of the business. So certainly, the margins associated with that, will be the dominant part of the mix.

Now, we are seeing a little bit of a mixed bag on the margin side as we see some prices come down to the customer. Our pricing is asymmetrical for the most part.

So we anticipate that margins will hold from a Flower perspective. When it comes to 2.0 products, I think that those still - those remain a gross margin builder.

The margins on the tech business are very, very strong. And certainly the larger the mix of the tech business, the better it is from that perspective.

On an EBITDA basis, for EBITDA, it really is about store growth. So we've largely solidified our SG&A and have the team that we need and the infrastructure that we need to move forward.

So really now is about building stores, more stores, building out the network and adding that layer into the business. And that's highly controllable because when you don't build a store, you don't have the associated costs of operating that store.

So, I would expect that you're going to see SG&A stabilize and become a lower part of the overall percentage of sales mix.

Okay, thanks. That's helpful color.

Second question for me is, just going back in terms of the store growth, you guys gave some helpful color in terms of some things you're doing right now in anticipation of the store limit thing lift in the fall. I'm just curious, as you think about that store expansion, obviously we've seen a lot of saturation within certain parts of markets such as Toronto.

So, when you're looking at those incremental stores, can you give us some color in terms of how you're thinking about the best way to maybe develop some type of move or barrier to entry to where you might not have the same issue as we've seen in many markets such as Toronto?

Yes. I mean, that's a great question, and that really speaks to - to backing up a bit, we have a shared services agreement with Circle K.

So we actually leverage their real estate capabilities. It's our strong view, Fire & Flower, that things that we can be best in the world at, we should focus on.

And we know that with Hifyre, we know that with digitally-enabled retail. Things that we can't be the best in the world at, we should find a best-in-breed partner.

And certainly, so for us, building our real estate, the kind of location-selecting capabilities, we just realized, look, we have a massive partner with a lot of expertise here, a lot of data and a tremendous sort of bench strength there. let's leverage that.

So, when we look at new store growth, I think it would surprise a lot of people kind of where we look, because we've got sort of the Hifyre data platform, which allows us, and it links to things like Environics data. So we've got all kinds of information about where our customers are, where our potential customers might be, and layering that onto sort of a Circle K machine, which really has superb analytics on things like traffic patterns and all kinds of the keys, how to put your store in the right location metrics.

They're not always these, I'm going to call them like the kind of the glamour locations. There's ones - locations that are kind of for show, and they they're good for marketing, but they don't deliver bottom line.

And we have been - we've certainly pivoted and are maniacally focused on four wall store metrics. And those are in places that you wouldn't necessarily see.

So like, look, it's nice to have a store in downtown Toronto. It's a big city.

It's a 4 or 5 million person market, but you're not accessing that market just by being in the city. You're getting some exposure instead of brand awareness there.

But we found that other markets and other parts of that urban market actually are extremely financially rewarding. They're just not where you think they are, and you’ve got to dig and be data-driven on that.

So, that just - that's not just Ontario, which is a saturated market, well, sorry, which is - Toronto is a saturated market in some places, but Toronto is a big, big market. So it's not saturated yet.

In places like Alberta, which are arguably more saturated, and probably approaching kind of their limit, I think we're going to see some attrition there from early selection for people who are not maybe as choosy or we’re trying to get up a store quickly, not realizing that competition was inevitable. And by the way, that is our assumption is that competition is inevitable.

There'll be fierce competition for dollars. So, let's choose a store wisely.

Even in Alberta, we continue to build stores and build out our network there, but this is done in a very deliberate way, programmatically using our Circle K partners and that shared services agreement. So, I sort of - I feel the direction of your question, which is certainly there are definitely saturated markets.

If we can compete in them, we will, but we'll do it using a planful approach. But for the most part, a lot of the untapped potential is in places that people are not looking because they're not necessarily good press releases.

Okay, right. Yes, that was helpful detail.

I appreciate that. And best of luck going forward.

All right. Well, I think if there's no more questions, we will end this presentation.

I want to thank everyone for joining us, and I want to congratulate our team. We had a really great quarter and a great year.

So, we look forward to more of these engagements and continuing to grow in 2021. Thank you very much,