Fire & Flower Holdings Corp. (TSX: FAF) (OTCQX: FFLWF) has filed for granted creditor protection because of high losses every year since operations started.
Due to intense competition from the legal and illegal market as well as high operational costs, the company decided to file for protection under the Companies’ Creditors Arrangement Act (CCAA).
The company said on Tuesday it has been actively seeking additional financing to support its operations. On May 26, Fire & Flower enlisted a financial advisor to explore strategic options, including various financing alternatives.
To finance the CCAA proceedings and meet short-term working capital needs, the Fire & Flower Group has entered into a facility agreement with 2707031 Ontario Inc., an affiliate of Alimentation Couche-Tard Inc. (TSE: ATD).
The lender has agreed to provide a loan of $9.8 million and it will be available under certain conditions.
The initial order includes a stay of proceedings for the Fire & Flower Group, approval of the loan and the appointment of FTI Consulting Canada Inc. as the group’s monitor. This order will enable the group to work with the monitor to streamline its operations and conduct a court-supervised sales process.
Despite the current challenges, the company’s board of directors and management will continue to oversee the day-to-day operations under the general supervision of the monitor.
However, it is expected that the Toronto Stock Exchange will put the company under delisting review. The outcome of this review is uncertain at this time.
$200M in losses since 2018
In the application to the CCAA, CEO Stephane Trudel mentioned that the company has been running at a deficit since 2018. Recently, the company experienced operating losses of $83.4 million in the fiscal year ending December 2022. Trudel attributed these losses to regulatory constraints and margin pressure.
Overall, the company has incurred cumulative losses exceeding $200 million since 2018.
Furthermore, the company’s available cash has been steadily diminishing over the years. As of March 31, the company’s current liabilities amounted to over $50.8 million, while its current assets, including a mere $8.2 million in cash, totalled $38 million. Trudel noted that the cash position has further deteriorated since then.
Roughly half of the company’s total liabilities are associated with leases for retail stores, some of which were unprofitable due to the government’s denial of cannabis sale licenses. These stores were subsequently sublet for alternative purposes. The company intends to reduce costs by eliminating these non-profitable leased stores, referred to as “dead leases.”
Since 2021, the company has relied primarily on warrants and debt financing from its largest shareholder, ACT Investor, a subsidiary of Alimentation Couche-Tard, for external investment.
Trudel mentioned that in April, discussions were held with competitors and financial institutions regarding potential funding or acquisitions, but these attempts were unsuccessful.
Downfall attributed to competition, high operational costs
Trudel attributed Fire & Flower’s downfall to the proliferation of retail cannabis stores, the illicit market and provincial operators. He said that retailers were unaware that numerous cannabis retailers would be in close proximity to their stores. Additionally, retailers face competition from the illicit market, which sells cannabis products that do not comply with the strict regulations of the Cannabis Act.
The company is seeking a stay on its liabilities until Sept. 1 and requests permission to secure additional debtor loans for the purpose of restructuring.
The cannabis retailer operates 91 stores across Canada that employ 774 people. It also runs a distribution service, digital platforms and other software products related to the industry. It owns Pineapple Express Delivery Inc., Hifyre Inc. and Friendly Stranger Holdings Corp.
Other cannabis retailers have filed for creditor protection this year such as Dutch Love which was recently acquired by SNDL Inc. (NASDAQ: SNDL). Under the agreement, SNDL paid 1.5 million in cash to Lightbox Express (dba Dutch Love) and 3.3 million in common shares for a total of $7.8 million.