Canadian cannabis insolvencies persist in 2023 amid industry woes

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(This story has been updated to reflect the status of Red White & Bloom’s acquisition of Aleafia Health.)

Financially distressed cannabis companies continued to seek refuge in Canadian insolvency law in 2023, although such insolvency filings under one statute declined from 2022.

This year’s cannabis insolvencies included big names such as retailer Fire & Flower and producer Aleafia Health, highlighting the industrywide struggle to keep operating in the face of low marijuana prices, high taxes and trouble accessing new funding.

Seven of the 57 filings under the Companies’ Creditors Arrangement Act (CCAA) through Dec. 15, 2023, or about 12%, involved marijuana companies or cannabis-related entities.

That represents a decline from 2022, when more than a third of all businesses filing for CCAA had some involvement in cannabis.

Other troubled cannabis companies used a different Canadian insolvency statute, the Bankruptcy and Insolvency Act.

Insolvent Canadian marijuana companies typically have in common “a legacy of huge capital expenditures to build a facility and get licensed,” said Trina Fraser, a cannabis commercial lawyer and a partner with Brazeau Seller Law in Ottawa.

“A lot of that was equity-financed, not debt, but in some cases there’s a debt that has to be serviced that they’re having trouble servicing, (and) certainly a timeline to profitability that was not anticipated,” Fraser added.

‘We couldn’t make a go of it’

The CCAA allows insolvent Canadian companies to apply for a court order to keep creditors at bay while the company restructures its debts or seeks a buyer or new financing.

In the cannabis sector, a number of CCAA cases have featured a debtor-in-possession loan from a would-be buyer, who puts in a stalking-horse bid to buy the insolvent company or some of its assets.

Notable Canadian cannabis CCAA filings in 2023 included:

Other CCAA filings involving marijuana companies and cannabis-related entities this past year included:

  • Chalice Brands, a Canadian company with cannabis assets in Oregon.
  • Investment company Plant-Based Investment Corp., previously known as Cannabis Growth Opportunity Corp.
  • Capcium, which created softgel capsules for the cannabis industry and other sectors.
  • Beverage company BioSteel Sports Nutrition, owned by cannabis company Canopy Growth Corp.

The CCAA is available only to Canadian companies with debts exceeding 5 million Canadian dollars (roughly $3.7 million).

An insolvency attorney previously told MJBizDaily that the CCAA is typically used for larger companies with more complex restructuring cases.

Some other Canadian cannabis players have turned to a different corporate insolvency statute, the Bankruptcy and Insolvency Act (BIA).

Privately held cannabis grower Ogen is one of them: The Calgary, Alberta-based company closed in November, affecting nearly 90 employees.

Ogen President Darren Brisebois described the company as “a very efficient organization. We sold every gram that we produced.”

Still, “we couldn’t make a go of it, particularly with the pricing compression,” he told MJBizDaily.

“As the revenue per gram decreases, your percentage of excise tax on sales actually increases.

“You add that on top of property tax and regulatory fees and Health Canada fees, (provincial wholesaler Alberta Gaming, Liquor and Cannabis) fees – I mean, we were paying 40% to 45% right off the top to government agencies,” he said.

“It got to a point where it was impossible.”

Privately held cannabis producer Tantalus Labs, based in Maple Ridge, British Columbia, also filed under the BIA in 2023.

“The reason why we were unable to continue to operate our business is simply that (neither) our business nor any business can afford to pay what amounted to a 35% total (excise) tax rate coming off of our top-line revenue,” said Tantalus founder Dan Sutton, who had been an outspoken critic of Canada’s cannabis excise tax regime.

“It’s as simple as that.”

The Tantalus brand and its remaining inventory were ultimately bought by Newfoundland marijuana producer Atlantic Cultivation.

Debts to government a key challenge

For struggling cannabis companies, excise tax owed to the Canadian government is “often the precipitant of the insolvency proceedings,” cannabis lawyer Fraser said.

As MJBizDaily has previously reported, the Canada Revenue Agency (CRA) tax authority and federal cannabis regulator Health Canada (which charges companies regulatory fees) tend to be major creditors for insolvent marijuana companies.

Unlike owing money to private-sector creditors, marijuana companies that owe government agencies risk losing the licenses they need to do business.

Some companies “just cannot access the cash to deal with these liabilities that are overdue, and they push them off as long as they possibly can, and when the point comes where you can’t push them off any longer, that’s when the house of cards folds,” Fraser said.

She expects to see more Canadian cannabis insolvencies in 2024 but said the exact number of insolvencies largely depends “on how aggressively CRA and Health Canada approach arrears in excise duty and regulatory fees and whether we get any reform.”

However, one cannabis company’s calamity can be another operator’s windfall.

Fraser has represented cannabis companies acquiring insolvent companies or certain assets.

“It could be the real property, it could be a lease of a facility, it could be equipment, it could be cannabis inventory, it could be intellectual property,” she said.

At one time, cannabis companies that wanted to sell facilities and licenses could usually find a buyer, Fraser said, but that’s no longer the case.

“We’re at the point where there’s a lot of sites on the market. … And there’s lots of sites available for sale that aren’t finding buyers for one reason or another,” she said.

“They may just sit dormant and ultimately close their doors and voluntarily relinquish their licenses, and it may never turn into an insolvency proceeding per se, because a lot of them were never operational.

“But to the extent that they were operational and there are liabilities that have to be dealt with – if they don’t find a buyer, if they don’t have access to capital, at some point, it’s over.”

Solomon Israel can be reached at solomon.israel@mjbizdaily.com.