Fire & Flower Holdings Corp.

Thank you very much, and thank you all for joining us today for our first quarter 2021 conference call. I'm Trevor Fencott, President and CEO of Fire & Flower.

And joining me today is Judy Adam, our new CFO and Nadia Vattovaz, our Executive VP of Operations and CFO. And earlier today, our company published its operational and financial results for the first quarter ended May 1, 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 begin, I'll remind everyone that Fire & Flower follows a retail calendar with every quarter consisting of 13 weeks. Today, I will be speaking to the first quarter ending May 1, 2021.

Once again, we are extremely pleased to report another quarter a positive adjusted EBITDA of $2.3 million for the first quarter of 2021 compared to an adjusted EBITDA loss of $1.4 million in the first quarter of 2020. As Trevor mentioned earlier, this marks our fourth consecutive quarter a positive adjusted EBITDA.

Our ability to produce another quarter of positive adjusted EBITDA is driven by revenue growth, despite challenging macro headwinds, diligent product selection that drove growth in gross profit, and prudent management of operating expenses. Total revenue for the first quarter of 2021 increased 91% to $44.1 million, compared to $23.1 million in Q1, 2020.

Fire & Flower's total revenue is derived from three primary business segments. The retail channel, which is our network of stores across Alberta, Saskatchewan, Manitoba, Ontario, British Columbia and the Yukon Territory.

The distribution channel through open fields distribution that sells cannabis and cannabis related accessories to both Fire & Flower stores, as well as to external accounts in Saskatchewan. Finally, our digital channel operating through the Hifyre digital retail and analytics platform, which is proprietary to Fire & Flower.

It derives revenues from external clients as a Hifyre IQ data and analytics platform, as well as industry leading targeted digital advertising to the Hifyre reach offering. Of the total $44.1 million revenue in the first quarter of 2021, retail operations generated $33.6 million, open field distribution generated $7.6 million and $2.8 million came from our Hifyre digital platform.

Thank you, Judy. We're pleased to have navigated through the COVID-19 pandemic with minimal disruption.

While we did witness a slowdown in-store purchasing and our retail stores, we saw an opportunity to evolve and expand our consumer reach to our tech driven retail capabilities such as our Spark Perks Fastlane online payment, curbside pickup and Spark Rapid delivery services. Our continued ability to drive deep engagement with our customers by leveraging our best-in-class technology to connect them with the right cannabis products continues to drive our growth and propels our entry into new cannabis markets where there is a critical need for data driven retail to remain competitive and gain market share.

As we continue to identify evolving customer preferences, we remain committed to building upon our multi brander approach to retail. Our acquisition of Friendly Stranger has already proven to capture a wider audience of cannabis users as our Friendly Stranger Happy Dayz and HotBox brands have successfully generated interest from Gen X males and younger smaller market consumers.

Our open field's distribution business remains a key testing ground for private wholesaling, and distribution in Saskatchewan and continues to drive a significant and steady source of revenue for Fire & Flower. As the province opens up to the cannabis retail market, we can achieve additional revenue opportunities through sales to external accounts and can benefit strongly from opportunities for greater wholesale and retail margins.

Finally, our Hifyre platform will continue to fuel our growth and remains the foundation of our success as it powerfully differentiates Fire & Flower from other cannabis retailers. We're seeing a heightened level of demand for usable cannabis data and analysis by producers, finance and market research groups and retailers in emerging markets.

We're pleased to be leading the cannabis market and its valuable end of the cannabis industry and look forward to further leveraging as best-in-class technology to enhance the delivery of omni channel convenience oriented retail as we move ahead and 2021. That concludes this part of our call and I'd like to turn the call over to the operator for questions.

Hi. Good morning.

Congratulations on the quarter. Judy, congratulations on your recent appointment and Nadia and Matthew on your promotions.

Okay, so my first question probably Trevor directed to you is on the Couche-Tard strategy, if I heard you correctly of the initial two co locations you currently have in Alberta is the major development here for the quarter moving forward to expand this throughout Canada. And if I heard that correctly, can you maybe elaborate a little bit about some of the metrics you're looking for between using existing collocations with Circle K?

And any particular market that's more appealing to you than others? Thanks.

Sure, yes, well, I think that it's certainly our intent now, having looked at the pilot program to see if we could scale it, both in Alberta and markets outside of Alberta. So that's sort of the experiment, I think, has been widely viewed as successful sort of internally here.

So now it's about looking at how we could expand it. In terms of the metrics we're using, we need to, we look at it in terms of sort of store like traditional metrics, like revenue per square foot, but also in terms of connectivity to our broader network.

So again, as I've always sort of maintained, Fire & Flower employs a hub, spoke and kind of delivery strategy, which is wrapped together in our digital platform. So connectivity to other nodes in our retail network is also important.

It was part of that kind of evaluation. So stay tuned for announcements on that, but it certainly is our intention to expand the program.

Understood. Okay, thank you.

And moving on here, just maybe as a read-through for the whole Canadian industry here. And maybe, Judy, this might be directed to you, just wondering what the revenue mix was for the quarter when you're looking at 2.0 versus 1.0 products.

A big thesis for the whole sector that I think Fire & Flower would agree to, although I don't want to put words in your mouth, is that for the 2.0 type products, it's going to demand some sort of consumer or in-store consumer experience. So given the recent COVID lockdowns, I'm just trying to understand what number one that revenue mix was.

And as in moving forward are COVID restrictions ease if we're expecting 2.0 product sales to increase. Thanks.

David, what I might do is we've also got Nadia on the line as well, from an operational perspective that might be something that she'd like to answer.

Sure. Thanks, Trevor.

Hi, David, thank you for the question. So I think 2.0 even in the COVID environment continue to see improvement.

And we're pretty excited because we're also seeing larger offerings of 2.0 products, particularly this last quarter in the vape category. So we've seen a pretty strong move from half option to one milliliter options, and which is really been meaningful to cut for the customer.

And I think it's a function of pricing from the LPs as well as a proliferation of options. So COVID hasn't really stopped that and certainly, we're pretty targeted in our approach to how we send information about those products to our customers.

And I think that we're going to see as we move to open more stores, the ability to actually demonstrate the product to those customers certainly will help David, but it hasn't stopped.

Good morning, and thanks for taking my call. On the digital revenue growth in the quarter, it was quite high 250% year-over-year.

But I'm just wondering, what is driving that within the Hifyre? I know there are a few components of that.

And any indication of that revenue stream maturing? Are you still seeing a lot of activity and opportunity for some greater growth?

Thanks for that question. Actually, it's -- the way that we look at it and perhaps the way to look at it from the outside is that Hifyre is a wholly owned tech R&D subsidiary.

So it's not a division. It's not sort of a grouping.

It's a company that's sort of stands on its own in some respects. And it's constantly involved in innovation.

So the first product that it created for us was the Hifyre IQ data and analytics platform. And we saw sort of steady growth in that.

But then we sort of added on another product. And finally, actually, recently, we launched the Hifyre Reach product.

So which is the compliant advertising component to it store as media. So I think the way to look at it is we're going to keep innovating because we have that built-in innovation capability.

And so we don't see a slowing of the growth there because, of course, as one product matures, so there's a limit to the number of data subscriptions, or people in Canada, certainly that would pay for that, we evolve and create another part to our tech platform. So we're going to continually be adding new products to this to keep the growth sustained.

And so like I appreciate that question because I think some people think that it's a homogenous mix. It's not it is some -- it's a series of different products that create digital revenue for us.

Thank you and any long-term goals for this segment, I'm calculating an annual revenue run rate of around $11 million. I think that was up from $4 million from last year, but any broad term goals on what the segment could potentially reach to?

To be quite candid, actually there, the digital part of the business is really not limited in any traditional way, just like all kinds of technology businesses; it's very, very scalable. So as we look into alternative markets, like the US market, as we look into different products that we have currently in development at Hifyre, we don't see the ceiling on this yet, because, again, like any technology platform, it can evolve in so many different ways.

Right. Okay, appreciate that.

And then for the palm store, or Palm Springs store opening, just wondering if that's progressing as planned, if there are any unforeseen challenges. I know the original target was Q2 to have that open?

I think we're getting pretty close to that. And then also, just beyond Palm Springs, do you have any other additional plans for new store openings this year in the US?

Yes, so I mean, on the Palm Springs front, I think we're still tracking to that. There's obviously, always with any regulated environment there is always sort of little hiccups here and there.

And I think that the last that we heard from American Acres, that the sort of signage was getting approved, so that we're at that kind of stage in it. So we do expect that we're on track for the Q2 goal.

In terms of other things, other opportunities, the whole purpose of, sorry of American Acres partnership here is for them to go out and start acquiring and rolling out different assets in the US. So I would expect people to stay tuned for different announcements there.

So until they've completed that we won't announce them. But we -- the whole goal is for them to go out and use this technology and use our brand to expand it in key US markets.

Thank you and good morning and congrats also to Judy, Nadia, and Matthew on your promotions. First question here I just wanted to ask on the quarter, maybe, could you elaborate on what kind of impacts you may have experienced from COVID-19 and the lockdown of stores in certain provinces and how we might expect that to change with lockdowns gradually using across the nation?

That's obviously a great question. And somebody's given a lot of thought to so why don't, I kind of answer 60,000 foot level and then we can get some other color from Nadia and Judy on this.

But I think in general, what we see in the COVID is like people obviously remaining in their home. So foot traffic, slowing down, particularly in Ontario, which has had a very vigorous response and prolonged response.

So it's really been questions a series of stop and start lockdowns in Ontario, which have delayed things like construction is an impact that we've seen. So if you can get a construction crew in for two weeks, and then you can't for another two weeks, and then you start that again, that's obviously a significant detriment.

And again, just the general lack of foot traffic is something in a regulated industry; it's hard to get awareness of a store. So ramp up of a new store is slower in COVID because of course, you don't have foot traffic to drive awareness.

Mathew and Judy, would you have anything to add to that sort of assessment?

Sure. It's Nadia, here.

Thank you for the question. So I think it's really important to remember that in Ontario, there was three days where cannabis retailers were fully closed, which was the first time that that had happened since the beginning of the pandemic, and then certainly it opened to delivery.

The one thing that really provided us insight is we showed same store sales increase over the prior year of 18%. And that was particularly interesting, because you may recall that in last year, for this quarter, we saw the March surge of sales as we just started to go into lockdown as the COVID pandemic hit.

So that was a pretty big quarter to actually from the same store perspective to actually surpass. And so what does that mean for us?

Well, that really means that the ability to reach out to our customer base in a meaningful way to drive those, to continue to drive those sales and to drive that same store sales so significantly, Andrew, I think is a great lesson learned. And so I'm pretty pleased with that.

Yes. Oh, sorry, I would just, it's Judy.

I was just jumping into that. Yes, despite the headwinds that we face in Q1 we were able to deliver revenue growth.

And on the OpEx side, we would have had increases there as result of increased store count, and investment in our corporate infrastructure to drive future growth. But overall, like we're well positioned now with an expanded retail network to deliver a very strong back half and drive further adjusted EBITDA growth, as we see COVID restrictions relax and consumers coming back into the stores.

Thank you, as well, Judy, and my next question here, we've seen some notable acquisitions of some of the more craft oriented brands, by some of the largest cannabis producers here in Canada. Could you speak to what you're seeing on the ground today, with regards to craft brands?

Have you noticed any notable shift in consumer purchasing behavior towards craft brands? And how are you responding to that?

I actually, I think Nadia probably you're the best peak to that with the operational perspective.

Yes, certainly. So I think it's early days for that.

We are excited about it because we are -- we've been working with LPs to drive some pretty interesting options for our customers in terms of promotions, offerings, et cetera. So far, we haven't seen such a meaningful shift in that way.

But I do anticipate us being able to see a little bit more of a proliferation of those craft brands, because there is a market, particularly for Fire & Flower for that type of product. Great.

Great. And just a final question, if I may, before I turn the call over.

Trevor, you're speaking to different aspects of the Hifyre platform and different ways to commercialize that. Could you potentially speak to what proportion of digital revenues in the current quarter were subscription based?

If you're able to disclose that?

Well, those sorts of specifics, I can definitely say that a large portion of it was subscription based. Because remember, as we layer on new products, it takes a while for the ramp up.

So sort of looking at it anecdotally, the most robust product offering we have is Hifyre IQ, which has existed almost since the beginning of legalization, right? That was the first product that Hifyre created in our ecosystem, and then we've only recently layered on Hifyre Reach.

Hi, good morning. Thanks for taking my questions.

And congrats to everybody as well on promotions. A couple, two, three for me.

But the first question I want to ask there was a reference on the MD&A about increased competition in Alberta and in Ontario. I was wondering if you can talk a little bit about that, like how, why this came about.

I mean was it more stores more aggressive pricing by your competitors and how these developing?

Maybe also talk to a 60,000 foot view to this one as well and get some other commentary from Judy and Nadia. But at a high level, we have seen increased store count, certainly in Ontario, a lot of mom and pops opening and developing into a kind of Alberta level saturation.

In Alberta, there continue to be store openings, even in COVID. And we've also seen the emergence of like value product segment retailers.

So that's another form of competition. So there's price competition.

On one part, there's also increased store count competition. And, Nadia, would you have any additional color for that?

Yes, I think it's really a tale of two provinces. So I think that Trevor covered what we're seeing in Alberta from the perspective of both the value offerings as well as new stores.

However, in Ontario, I think it's a little bit like it was a couple years ago for Alberta whereby we're really seeing the proliferation of the cannabis retail environment, in terms of the number of competitors, and new competitors are coming on each week as more licenses are being rolled out. And that's to be expected.

We saw the same thing a couple years ago in Alberta, but we continue to build our base as well. And I think that as we're able to open more stores we'll see the same thing again happen as within Alberta, with us having a large footprint in Ontario.

Great, no, thank you for that. And just a quick follow up.

I mean, would you expect given the normalization more or less that you saw in Alberta? Or sort of some of that attrition in stores would you expect the similar timelines perhaps four to six quarters in Ontario?

Or is it a bit of a different dynamic here than in Alberta?

Well, yes, that's a tough one to opine on because, of course, it's a regulated rollout so really does depend on the ADC in Ontario, how quickly they roll out. I think it's reasonable to look at it and model it on Alberta.

But again, the caveat there is don't -- it's difficult to predict what a government's going to do. What I would actually add to that, though, and instead of thinking about it is sort of remind everyone that we built the company to compete like we built it with the N state in mind.

So with Alberta, what we've seen is very strong performance in COVID, and in a saturated market, and with increased competition, but that's not really that surprising, given that we started the company from scratch with the end goal in mind, we knew there was going to be competition. When there's money involved, there's going to be competition.

And we built it to withstand the apex predators of normal retail. We took best in breed from retail, which is a very aggressive marketplace, and built cannabis, a cannabis retailer with that model in mind.

So we actually welcome competition.

Great, no, thank you. That's a great color, Trevor.

And actually, one more perhaps for you, I was wondering if you can talk a little bit about BC, how do you see expansion there, I mean given you have several kinds of things on the go the US extension, and then the colocation with Couche-Tard. I mean is BC, still kind of a growth target or a wait and see just any color there would be great.

Yes, I mean, we've always liked BC as a market, it's been, I would say, unusually and frustratingly difficult to enter. It's a multi year process for us from a regulatory standpoint, but we are there now.

And we remain committed to the BC market. Its growth is sort of somewhat limited by its eight store caps at the moment.

But BC consumers are good consumers; they're typically consumers that are prepared to pay a little bit more for cannabis. They're largely experience.

So it is a market that we do expect some growth in. We think it is a good market, but it'll have to balance against the realities, the regulatory realities of the province.

Great, no, thank you for that. And that last one, for me G&A expenses, we saw a little bit of an increase this quarter and quarter-over-quarter.

I mean do we expect this is a sort of a new permanent level? Or does it lower a little bit in coming quarters or increase a bit stable?

Any color there?

May be I'll pass it to Judy for her view on that.

Yes. Thank you.

Yes, definitely we did see increase in our products, like I said, I mean, that's really attributable to the increase in store count. But we also made some investments in corporate infrastructure to support future growth.

So OpEx will continue, as we continue to roll up stores, you should expect operating expense to increase but that as well with revenue. But I would say that, yes, I would say that corporate infrastructure it's in a good place now, and fairly stable.

And so maybe not a significant increase there for the rest of the year.

Hi, good morning. Thank you for the questions and congratulations on the promotion.

So first question for me want to continue on with the question on competition. Trevor you talked about how you expect competition within the marketplace.

You see some saturation within Alberta as well some parts of Ontario like Toronto, love to hear about how you think about, how this kind of plays out over time, especially in terms of to bringing some shakeout, maybe a small mom and pops there are a few larger players such as yourself. Some of them may be here about how you think about maybe the retail market for cannabis evolves over the next couple of years and how Fire & Flower is best positioned for that.

Thank you.

Sure, yes. So we think that there is going to be considerable consolidation as you say competition is going to impact I think mom and pops the most significantly, because the thing is the advantages you have at scale with things like combined purchasing power, things like a better sort of assortment planning department, all those kind of larger SG&A pieces are brought to bear and amortized over large numbers of stores was kind of really well.

Well, I think impacted the mom and pops. And I think they'll also be impacted by the value competitors that are coming into the space as well, because mom and pops ability to compete on that is going to be sort of a little bit hiccups.

So I think we're going to see a very tough time for mom and pops in the -- say the immediate term in the short term, particularly as we come out of COVID. This is particularly true in Ontario, where if they are not allowed to come out of COVID, without the ability to do ecommerce, it's going to really impact mom and pops, because the ability to kind of reach your consumer in a green grocer, kind of way, like the four block radius of delivery, is going to really be a significant service impairment for them, I think that we're going to see over the next number of years of barbell formation of strategies where you have basically, you have differentiated brand strategies on the one side, and you have sort of strict value on the other side of the equation, I think that there's probably likely to be a hollowing out of the middle.

But that's normal for any industry. So normal industry, economics and business logic is going to apply, even to the cannabis space.

Whether that's in a year or three or four years, it's inevitable that there's sort of a differentiated brand, a one hybrid of your Starbucks and places that are committed to service models. And customers are expecting a premium there.

And then of course, you've got a value strategy on the other side, which is inevitable in any industry as well, in the middle kind of gets hollowed out. So for us, our early investment in technology is really about driving a brand differentiated strategy.

And it's not that was a very deliberate thing on our part to build this infrastructure. By getting that engagement and its engagement with your customer that's key to driving that strategy.

You have to know your customer better than your competitors do, you have to understand and be able to anticipate their needs, and service them. And you have to provide sort of a superior selection and retail experience.

So that's -- those are the key parts of that kind of strategy. And that's what the Hifyre platform is enabled us to do.

So we're quite excited by the competition.

Okay, great. Thanks for the color.

That's very helpful. And talking about your membership program with Spark Perks 270,000 members today, could you give some color, maybe in terms of how much of your retail revenues are derived from those members?

And they may be her target in terms of how much in revenue you'd like to be derived from that membership base over time? Thank you.

Sure. Yes, I mean, we would like to, obviously, we'd like it to be 100% that would be the best possible result, because we know that Spark Perks members spend significantly more or have a higher lifetime value than non engaged customer.

I believe that we're hovering somewhere around the 50% range in terms of engagement. But, again, that's something that I think that we're going to continue to work on.

And even with the COVID challenge, being unable to kind of reach customers in store, which is a primary way that we sign up Spark for its members, has been a bit of a challenge, but we're going to continue to grow it and again, the goal is 100% I'm not sure we'll get there. But that's the goal.

Thanks. Just a couple more quick ones for me.

First, I just want to hop back to Spark Perks. So Trevor and team you've noticed some steady increases here of the number of members you've been able to sign up 270,000 up to date now.

I am just wondering what the plans are in general just to monetize -- further monetize the Spark Perks members over and above the actual basket size and what you're seeing them purchase next.

Yes, I think part of that though is the basket size and part of it is also unique product offerings, right. What we're able to do with Spark Perks and you're going to definitely want Judy to weigh in on this, sorry Nadia to weigh in this as well from the operational perspective, but it's not just a basket size, it's about understanding your customer deeply, the deep engagement so new product offerings that we could have that are tailored to our customer base, new service offerings, whether in store or outside the store, that can be offered to that base, because we understand them better.

Like educational sort of experiential opportunities. All of those are ways that we can add value to our customers and also monetize them.

So Nadia, I'm not sure if you want to add some additional color to that.

I think you covered it well, Trevor.

Okay, thanks. Well, I guess, my -- that's great.

And it's very much in line with what you've been saying since day one here. My next question is about your competition more on the Hifyre side.

So it was folks like just use an example Headset, for example, in my many conversations with licensed producers in particular, several maybe use Hifyre, others use Headset, I'm just wondering, in your conversations with them. Is it mutually exclusive or one LP use, say Headset or competing data software for that matter versus Hifyre?

And similarly, do you see folks LPs, in particular using a combination of the two? And do you think you can erode some of the business that LPs are giving to some of the other competitors like Headset?

Thanks.

Yes. Okay.

Well, I mean, I think, fundamentally, Headset to us, Headset is a very different offering, right? So Headset, and a lot of the data aggregators are taking to the point of sale data, and packaging it in this kind of delayed fashion, it's reporting on what happened at the Till.

The key thing to understand about Hifyre and the key part of our strategy there is it is necessary to connect it to the retail chain, the actual stores are important to next-gen retailer; the stores are an important source of data. And that connection is the laboratory, the insights in the Till between watching human interaction with products.

So for us, it's not just what happened at the till, which we know it's or like, for example, I use the example of an exclusive $100 grand, wouldn't that be a great idea, it just said that sold would give you point of sale data that would show up in Headset. But it's who bought that, and that we can tie that and attribute that.

So we solve the data attribution problem with the Spark Perks program. So then when you marry those together, it's at that $100 grad was sold to this archetype of customer and that archetype of customer, you may have been off in your estimation of kind of what they wanted, or you may be able to make a better product for them.

That's part of the value of the Hifyre system that sort of data aggregation systems, or reporting systems. One, they're not dynamic.

And two, they don't solve the data attribution problem. So we don't actually see Headset as a real head on competitor for data aggregation and analysis service, but it's backward looking and not sort of proactive and there's no ability to actually run an experiment in it, which you'd be able to get with our Hifyre program.

I'd like to thank everyone for joining us today for our operational results and financial results for the quarter. And we hope you will come in next quarter for the next meeting.

Thank you very much.