Fire & Flower gets creditor protection

Couche-Tard likely regrets investment, cannabis analyst says

Cannabis retailer Fire & Flower has been granted protection from creditors, the latest sign of trouble in Canada’s legal cannabis industry, and a blow to convenience store giant Alimentation Couche-Tard’s multimillion dollar move into the pot business.

According to court filings, Fire & Flower Holdings Corp. had just $8.1 million in cash on hand as of March 31, against $50.8 million in “current liabilities,” and is looking to sell its remaining assets.

“The applicants are unable or are expected to soon become unable to meet their obligations generally as they become due,” the company said in Ontario Superior Court filings before it was granted protection under the Companies Creditors’ Arrangement Act. The CCAA allows courts to give companies protection from their creditors, allowing them to continue operating while they restructure, as an alternative to declaring bankruptcy. Only companies that owe at least $5 million are eligible.

Fire & Flower is seeking to lay off an unspecified number of employees and get out of leases for several of its 80 stores across the country. Some of Fire & Flower’s stores operate under the Friendly Stranger brand, which it took over in 2020.

At one downtown Toronto location that remained open Tuesday afternoon, a staff member who declined to give their name said they were concerned about the situation.

“We’re kind of in the dark so far, and I need the job,” said the staff member.

“Increased competition and operating costs, margin pressure and regulatory restrictions suffered by the companies and the cannabis industry generally have collectively contributed to significantly lower revenues and higher costs than what the applicants expected their cannabis retail stores would face,” the company said in explaining the reason for its struggles.

The company is proposing U.S.based restructuring firm FTI Consulting be appointed to auction off the company — or parts of it — under a so-called sales and investment solicitation process (SISP).

According to licensed insolvency trustee Bryan Gelman, who isn’t involved in Fire & Flower’s case, an SISP is effectively a last-ditch attempt to find a buyer as an alternative to bankruptcy.

“Someone could come along and buy all the stores. Someone could come along and buy six,” said Gelman, co-founder of Albert Gelman Inc.

“They’re trying to get the highest amount possible. That’s the whole point of an SISP.”

A numbered company controlled by convenience store giant Alimentation Couche-Tard Inc. has given Fire & Flower “debtor in possession” financing of up to $9.8 million so it can continue to operate while CCAA proceedings continue.

That’s just a fraction of what Couche-Tard has invested in Fire & Flower to date.

In 2019, Couche-Tard bought 9.9 per cent of Fire & Flower for approximately $26 million, with an option to take over majority control for $380 million. It’s unclear whether Couche-Tard exercised any or all of its right to buy additional shares.

In an email, a spokesperson for Couche-Tard said the company was aware of the CCAA proceeding.

“We are aware that the Fire & Flower Group has received an order for creditor protection from the Ontario Superior Court of Justice … This loan will help the business continue to operate day to day during the proceedings. As always, we remain committed to our stakeholders and will provide further updates as appropriate,” said the spokesperson.

Fire & Flower is just the latest cannabis company to either file for creditor protection or get out of the retail business.

Last year, retailer Superette filed for creditor protection. In September, Canopy Growth Corp. announced it was getting out of the retail business entirely after selling off its 28 Tokyo Smoke retail locations.

Cannabis industry analyst Chris Damas said Couche-Tard almost certainly regrets getting involved in the industry.

“They’re 100 per cent regretting their move into cannabis. These guys are laser-focused on the convenience stores and gas stations, and Fire & Flower never made a profit,” said Damas, founder of BCMI Research.

Damas says he wasn’t shocked by Fire & Flower’s struggles, saying the majority of the company’s stores were too big, and with expensive leases signed in the early days of legal cannabis.

“I never really liked the Fire & Flower format … It was very much a big-box store look, and cannabis has really gone to a ‘smaller is better’ kind of format. It just doesn’t have the revenues and profits to support a big, standalone building,” said Damas, who nonetheless believes the legal cannabis industry won’t vanish entirely.

“I think we’re getting close to the end of the shakeout in the industry. Cannabis is still a $4 billion a year product. The problem is that there’s unlimited competition,” said Damas.