MEC had $23 million in record losses ahead of sale to U.S. investment firm.

As a backlash mounts against the sale of outdoor retail co-operative MEC to a U.S.-based private equity firm, documents newly made public through the creditor-protection process reveal just how dire things were for the retailer leading up to the pandemic and its eventual deal to sell its assets to Kingswood Capital Management.

Results from MEC's fiscal year ended Feb. 23, 2020, show a net loss of $22.7 million, more than 42 per cent higher than its previous record loss reported for the last fiscal.

“A material uncertainty exists that may cast doubt about MEC's ability to continue as a going concern,” wrote auditor KPMG in a note on the results. KPMG pegged its assets at $274.9 million with $230 million in liabilities, a negative cash flow of more than $17 million and a working capital deficiency of about $42 million.

MEC announced Monday that its board had unanimously supported a deal for the co-op to be taken private by California-based Kingswood Capital Management.

It was meant to report its latest financial results at its annual meeting scheduled for this summer. That meeting was postponed to Dec. 10 due to the pandemic, which board chair Judi Richardson told The Logic interfered with MEC's ability to complete its audited report.

After posting record losses for its year ended February 2019, at the time the steepest recorded deficit in its 49-year history, MEC launched a plan it called “Crunch Time” in a bid to return to financial health. While the co-op managed to cut its costs slightly — it reduced its selling and administrative costs from about $180 million to $176 million and cut its investing activity by about $10 million — its mounting losses show those efforts fell short.

A report filed with the Supreme Court of British Columbia shows MEC entered into a credit agreement in August 2017 with RBC as agent and a number of other lenders. The deal gave MEC a secured senior asset-based revolving credit facility that allowed it to borrow $130 million with an option to borrow an additional $20 million. Payment on the loan was coming due on Aug. 3 of this year.

In the months leading up to that date, even before the pandemic, MEC was pursuing new financing options. Its adviser approached 66 potential lenders in February. It opened its books to 46 of them, who signed non-disclosure agreements, and received term sheets from five of them. “Despite the significant efforts to obtain a suitable refinancing source that would allow MEC to meet its financing needs … none of the term sheets received would have achieved that result,” reads the affidavit.

Once the pandemic hit and it was clear new financing wasn't coming, the co-op began soliciting purchase offers. In June, MEC identified 158 potential buyers and received letters of intent from nine of them in July. Richardson told The Logic that bidders included Canadian firms, but would not disclose who they were. The board reviewed the offers over July and August and selected Kingswood on Sept. 4.

The new owner is committed, under the sale agreement, to keep at least 17 of MEC's 22 stores open and retain at least 75 per cent of its active employees in the short term. MEC hasn't disclosed its sale price, but it is enough to “repay the Lenders in full,” according to court documents.

In an interview with The Logic, MEC's incoming CEO Eric Claus said he was committed to maintaining the ethos of the co-op, while tackling the problems that some say created recent financial woes, including a wide range of merchandise that extends beyond the retailer's traditional backcountry expedition offerings.

Like many retailers, MEC's financial performance worsened during the pandemic. It disclosed a $90 million year-over-year drop in sales between March and September, despite an 86 per cent increase in online shopping.

By the time MEC filed for creditor protection this week, it had about $74 million in debt, which its monitor determined it could not repay or refinance by its extended maturity date of Sept. 30. The co-op anticipates it will need another $89 million until the sale to Kingswood is complete, with the expiration date of Nov. 30; its lenders have agreed to provide up to $100 million. The organization is also expecting to get $6.4 million from the federal government through the Canada Emergency Wage Subsidy.

LARRY WONG / POSTMEDIA NEWS MEC, the outdoor recreation retail company, formerly known as Mountain Equipment Co-op, has been sold to Kingsway Capital Management, a private American investment firm, for an undisclosed price.