It’s encouraging to see incremental raises able to get done in the legal cannabis sector at this point in time. And in the value chain – Retail in Canada has been relatively more able to access capital as the market continues to mature.

Fire & Flower has been on our radar for some time. The option Couche-Tard bought on taking a controlling interest proffered a contingent backstop – and not only if $FAF gets past the swimsuit competition…..first, they’ll have to get to the pageant itself in late summer 2021.

Green Acre Capital walked right past the shelf facility $FAF created in early August 2019. Apparently Green Acre had little interest in buying financing that was ‘in-stock’, and instead made a custom order. In that order: all monies lent are secured (despite the use of the phrase ‘debenture’); an initial term of 15 months, which may automatically extend (contingent upon capital structure at that time),

So the lenders wrote their terms, shortened the 2 year leash, nested a two year $0.50 anytime conversion after 4 months (it’s an American option, rather than the point-in-time European-like default that most debentures possess), and secured their lending.

$FAF has the option to pay interest by adding the amount to the debentures, which, is a heck of an option for them to have. Not so much for existing shareholders though – the dilution this brings on it’s own, let alone another $2MM/yr in $0.50 conversions going out the door – isn’t elegant. But it has been a hallmark of CEO Trevor Fencott even prior to the Couche-Tard deal coming online last fall.

$FAF states up front that proceeds may be used for debt extinguishment – $FAF has a ~=$27MM liability coming due in June – cash would’ve been tight in the absence of this raise. As it stands, their aggregate optionality if struck would now create a company with some 425MM shares o/s – that has not shown profitable operations and sports one of the lowest margins in retail.

Given the Ontario slow-motion retail basket-weaving class – and now COVID – if it all feels like simply waiting for another couple of quarters to go by until we see what their operating state will eventually be: it should. Because that’s exactly what the result of this is.

While much of their travails have not been their fault per se, it would be nice to see something in terms of what their target operating state actually has to be to become a viable operating entity. Sadly, this is endemic across Canadian retailers at the moment, because nobody is saying. It could be because of competitive concerns, perhaps the fluidity of cross-national regulatory regimes builds in uncertainty, or perhaps because they simply don’t really know. Pessimistically, I believe it’s the latter.

In any case, this raise – while buying time to get to their ‘unknown’ target operating state – sucks for the retail investor because of its’ dilutive capacity. And all that investor gets in return is another few quarters of waiting. It isn’t too much to ask what $FAF wants to be when they grow up, or how many shares they’ll have outstanding when they do. CEO Trevor Fencott would be wise to get in front of this sooner than later.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $FAF.