Echelon Wealth Partners analyst Matthew Pallotta is staying bullish on Fire & Flower Holdings (Fire and Flower Stock Quote, Chart, News TSX:FAF) after the cannabis retailer announced the forced conversion of some of its convertible debentures.
In an update to clients on Tuesday, Pallotta maintained his “Speculative Buy” rating and $2.10 price target, which at press time represented a projected 12-month return of 166 per cent.
Edmonton-based Fire and Flower on Tuesday said it has agreed with debtholders to amended terms of its 8.0 per cent unsecured debentures due July 31, 2020, to allow for a forced conversion into common shares at the initial conversion price of $1.15 per share, at about 17.4 million shares in total.
The move will prevent further dilution of equity holders in the company, with the outstanding interest to also be paid in shares at the last closing price, per the terms of the debentures, with the interest savings to the company estimated at about $800,000 as a result of the early conversion.
“Fire & Flower has forced the conversion of debentures to eliminate the interest payments associated with such debentures and the removal of these liabilities from the Company's balance sheet further strengthens Fire & Flower's financial position,” said the company statement.
Pallotta says his model for FAF had already assumed a conversion price of $1.15 per share, and thus, the conversion is already figured into his estimates.
The analyst notes Fire & Flower also has convertible debentures due June 26, 2020, for $27.2 million but the company’s current cash balance isn’t enough to both fund its growth plans and pay back the principal amount of these debentures. And with the conversion feature here currently out of the money, the company has a number of possibles options to pursue.
“We believe the most likely scenarios are as follows,” said Pallotta. “The Company may attempt to renegotiate conversion price of the debentures to a level that is lower than $1.20/shr, dependent on the market at that time; Look to pay down the maturing debentures with proceeds from the issuance of new securities, preferably secured debt (assuming sufficient capital is available at reasonable terms); or Alimentation Couche Tard and the Company may decide to mutually agree on the early conversion of the
Couche Tard debentures, allowing Couche Tard to exercise its Tranche A Warrants, for proceeds of $42.9 million, which the Company may then use in part to repay the debentures.”
The analyst said renegotiation remains an option, even at the risk of additional dilution, as the company is likely to want to preserve cash rather than pay down the maturing debentures.
Nevertheless, the third option is a possibility, says Pallotta, and a potential boon for the stock.
“While quite speculative, we also note the possibility that Couche Tard electing to convert its debentures and exercise its Tranche A warrants ahead of the maturity date for the June 2020 convertible debentures could see the stock reprice meaningfully higher (Tranche A warrants are exercised at $1.40), which could put the June 2020 convertible instruments in the money,” Pallotta says.
The analyst hasn’t made changes to his forecast, still calling for fiscal 2020 revenue and adjusted EBITDA of $144.0 million and $5.1 million, respectively.