Fire & Flower Holdings Corp. FAF-T, one of Canada’s largest cannabis retailers, has filed for creditor protection after substantial losses every year since starting operations, citing high operational costs and intense competition from the legal industry and the illegal market.
The cannabis retailer, which operates 91 stores across Canada and employs 774 people, has applied for protection under the Companies’ Creditors Arrangement Act, and obtained a $9.8-million debtor-in-possession loan from an existing stakeholder, a subsidiary of Alimentation Couche-Tard Inc. ATD-T, to pay off current liabilities while it attempts to restructure.
The company operates retail stores, a distribution service, and various digital platforms and software products related to the cannabis industry. It also owns a number of other brands, including Pineapple Express Delivery Inc., Hifyre Inc. and Friendly Stranger Holdings Corp.
Fire & Flower’s CCAA filing is the latest in a series of major cannabis industry setbacks, including layoffs and bankruptcy claims, as companies fight to attract customers in an oversupplied market and struggle to raise capital to pay back debt.
Of all the bankruptcy claims through CCAA last year, 40 per cent were by companies in the cannabis industry, said Ranjeev Dhillon, who co-leads the cannabis group at law firm McCarthy Tétrault.
“We’ve also seen companies go through insolvency a couple of times now, which shows how challenging the industry is given the regulatory landscape, high taxes and price compression on products,” Mr. Dhillon said.
Earlier this year, cannabis producer Canopy Growth Corp. rocked the industry when it said it was laying off 800 workers and shutting down its Smith Falls, Ont., headquarters. More job losses are anticipated in the year to come, said George Smitherman, president of the Cannabis Council of Canada.
“After five years in a sector where there has been no return for investors, these kinds of events should come as no surprise,” Mr. Smitherman said.
In an affidavit submitted as part of the application under the CCAA, Fire & Flower chief executive officer Stephane Trudel said the company had been operating at a loss since 2018. Most recently, Fire & Flower suffered operating losses of $83.4-million in the year ended Dec. 31, 2022. He said the losses were driven by regulatory restrictions and pressure to margins. The company has suffered combined losses of more than $200-million since 2018.
Fire & Flower’s cash position has also been dwindling for years. As of March 31, the company had more than $50.8-million in current liabilities compared with $38-million in current assets, including just $8.2-million in cash – a position that has since deteriorated further, Mr. Trudel said.
About half of Fire & Flower’s total liabilities are tied to leases for stores, some of which never turned a profit because they were not granted cannabis sale licences by governments, and which have been sublet for other purposes. The company intends to slim down its costs by dropping these “dead lease” stores.
Since 2021, Fire & Flower’s exclusive source of outside investment has been through the exercise of warrants and debt financing by its largest shareholder, Couche-Tard subsidiary ACT Investor. In April, the company had discussions with competitors and financial institutions about potential funding or being acquired, but was not successful, he said.
In a statement, Couche-Tard said the debtor-in-possession loan will help Fire & Flower continue to operate day to day during the CCAA proceedings, but did not respond to a question about whether it would consider acquiring the business if restructuring fails.
“As always, we remain committed to our stakeholders and will provide further updates as appropriate,” said Couche-Tard spokesperson Amine Ndamama.
Mr. Trudel pointed to the abundance of retail cannabis stores, the illicit market and provincial operators – from whom all legal cannabis retailers must buy their products with a markup – as fuelling Fire & Flower’s downfall.
“The retailers were unaware that many of its retail stores would have several other cannabis retailers within close proximity,” he said. “Retailers also have to compete with the illicit market that continues to sell cannabis products that do not comply with the strict regulations of the Cannabis Act.”
The company is asking that its liabilities be stayed until Sept. 1, and that it be allowed to take out more debtor loans to restructure.
High Tide Inc., Fire & Flower’s largest retail competitor, has also posted net losses every year since 2018. While High Tide’s revenue increased 97 per cent to $356.9-million for the year ended Oct. 31, 2022, its operational expenses increased by 110 per cent and its loss from operations increased 287 per cent, leaving the company with a $70-million loss.
“Our goal is to generate free cash flow from our operations by the end of this calendar year and continue to grow responsibly in this very challenging and hypercompetitive retail environment,” High Tide CEO Raj Grover said.
He added that the company has no meaningful debt maturities until Dec. 31, 2024, and is in late-stage discussions to obtain more non-dilutive debt from its senior lender, an Alberta-based credit union.