VANCOUVER— A B.C. grocery-delivery and software company has been granted creditor protection as it struggles with the impact of the COVID-19 pandemic and the turbulence in capital markets.

Burnaby-based Freshlocal operates Spud.ca, an online grocery-delivery service active in several cities in B.C. and Alberta. Its software arm, FoodX, offers grocers a logistics platform to help manage inventory and supply chain, with clients including the French retailing giant Carrefour, which has used it to expand its e-commerce offerings.

“Absent the relief sought … the Freshlocal Group will be unable to fund payroll and will be forced to cease operations,” reads an affidavit from its chief financial officer Monika Russell, filed in the Supreme Court of British Columbia earlier this month. It employs 703 hourly workers and 242 salaried staff across its brands, according to court filings.

The company, which went public on the Toronto Stock Exchange via a reverse takeover in April 2021, said in an emailed statement to The Logic that its “businesses … will continue to operate uninterrupted” through the creditor-protection process.

Freshlocal owes more than $18 million in both short- and long-term debt to creditors, including Silicon Valley Bank and Export Development Canada. This week, a judge granted it a 10-day stay of bankruptcy proceedings and access to a $2.5-million loan to fund its operations temporarily, including about $1.75 million in biweekly payroll obligations. The company told the court it was starting a sale and investment solicitation process immediately as part of a restructuring.

Like other retailers, Freshlocal saw a massive boost in demand for online shopping and delivery as COVID-19 started to spread throughout Canada in early 2020. But that demand has softened as governments have eased pandemic restrictions and as vaccination rates have risen, the company said in court documents. The pandemic also increased its staffing costs in the face of high absenteeism as COVID-19 case counts soared. 

Spud brings in the majority of Freshlocal’s revenue—about 65 per cent of $133 million in its last fiscal year, ended Oct. 2, 2021. But its capital-intensive tech division failed to produce a return on investment. FoodX “requires significant investment” that it doesn’t offset with the money it brings in, the company said in its filing, and needs “continuous access to investor financing.” However, it believes the division, which is still in its early stages, is “a high-potential business and driver of future growth.”

E-commerce, especially for fresh food, is a logistically complicated and expensive endeavour. Canada’s Big Three grocers—Loblaw, Empire and Metro—have taken different approaches to their online offerings, but have each funnelled hundreds of millions into technology, like building warehouses equipped with robotics.

Until recently, Freshlocal was able to raise money through borrowing, grants and the capital markets; in December, it announced it had raised nearly $14 million via private placement.

According to court documents, Freshlocal attempted to avoid filing for protection under the Companies’ Creditors Arrangement Act (CCAA) in part by securing a $7-million loan from a group including Ayal Capital Advisors Fund LP. It was, however, “unable to negotiate any additional funding” under an option allowing it to borrow a further $3 million.

“Given the market conditions, the company was unable to obtain further bridge financing,” Freshlocal said in a statement announcing it had entered CCAA proceedings. Economic uncertainty stemming from the war in Ukraine and rising inflation has slowed venture capital dealmaking and prompted write-downs of private-company valuations.

The company has now “nearly exhausted its current cash reserves,” according to court documents. Freshlocal “believes that there is no reasonable prospect that its financial condition will improve without addressing its significant debts and operational matters through court-supervised restructuring proceedings.”

On May 26, the court will hear Freshlocal’s request to extend the stay.