A recent acquisition and restructuring deal using Canadian insolvency law demonstrates that even struggling, deeply indebted marijuana producers can be revitalized, an important development at a time when many Canadian cannabis companies are floundering.
Trichome Financial Corp.’s successful stalking horse credit bid for cannabis producer James E. Wagner Cultivation Corp. (JWC) of Ontario might provide a blueprint for such deals in the future.
Through Canada’s Companies’ Creditors Arrangement Act (CCAA) – a federal law meant to help companies restructure and avoid bankruptcy – Trichome’s acquisition of JWC extinguished roughly 19 million Canadian dollars ($14.9 million) of the troubled producer’s liabilities.
The deal shows that such acquisitions can be achieved despite licensing-related complexities.
“Certainly, as more companies file (for creditor protection) and get resolved, it’s becoming easier,” he added.
“But (it is) a complicated, time-consuming and very expensive undertaking.”
Moreover, the JWC acquisition appears to have caught the eye of Israel-based IMC Cannabis Corp., which announced Dec. 30 that it was acquiring Trichome.
Trichome “has done an exceptional job at restructuring JWC into an efficient operator with a curated slate of products for the Canadian adult-use recreational market, which can be further leveraged as a platform for targeted North American consolidation,” said IMC’s chief executive, Oren Shuster, in a news release.
How the deal worked
By March 2020, JWC’s balance sheet showed major problems.
Despite having “a coveted market position with near-term revenue opportunities,” the company had less than CA$20,000 in cash against liabilities of more than CA$23 million, according to a late March funding and acquisition proposal shared by Trichome.
Monthly operating expenses exceeded CA$1.5 million.
“It was a very, very top-down organization and not scalable in any way,” said Howard Steinberg, a Trichome director and CEO of Trichome JWC Acquisition Corp., the subsidiary that acquired JWC.
“Like so many in this industry, they were able to raise a lot of capital very quickly,” he added.
“(It was their) first business venture, (they) didn’t understand what it meant to empower those lower down in the organization and really didn’t understand who (should) fill the particular spots throughout senior management and below.”
JWC filed for creditor protection under the CCAA on April 1, with Trichome providing a debtor-in-possession loan to fund the consensual restructuring and placing a stalking horse bid to acquire the company.
The bid was declared successful in May, and Trichome completed the acquisition by September after obtaining replacement cannabis licenses to keep running the business. Total consideration paid was CA$16 million.
Despite JWC’s challenges, Trichome CEO Ruscetta said the lender saw opportunities in Canada’s growing cannabis market and felt that JWC’s cultivation space “had fundamentally great bones.”
“If we looked at our increasingly positive view of what was happening on the macro side, combined with what we thought were some fairly meaningful but relatively straightforward fixes on the business side, we saw a great opportunity,” he said.
Ruscetta added that stalking horse bids such as Trichome’s for JWC serve to accelerate acquisitions of indebted firms.
“Because typically what would happen is there’s a much longer marketing program, you get into a fight with creditors,” he said.
“This is very clean. That was one of the reasons that we wanted to do it this way.”
License switch arranged with regulator
In Canada, federal cannabis licenses for a given production site are nontransferable, meaning that authorization to operate a cannabis business can’t simply be acquired along with the business itself.
Ruscetta said the biggest delay in completing the acquisition related to obtaining new Health Canada licenses so Trichome could run JWC.
After winning the sales process in May, Trichome’s officers and directors first needed to get security clearances.
Then Trichome could apply for new cultivation and processing licenses to operate the assets it was acquiring.
Collaborating with federal regulator Health Canada, an arrangement was struck in which:
- Trichome JWC Acquisition Corp. was granted new licenses on Aug. 28.
- JWC transferred its regulated assets to Trichome that same day at 11:59 p.m.
- JWC’s licenses were revoked a minute later at midnight.
Cannabis lawyer Trina Fraser, a partner at Ontario-based Brazeau Seller Law who worked with Trichome on the deal, expects to see similar transactions in the future.
“I am working on another one now,” she said.
“The same kind of policy decisions Health Canada made in that deal are being applied again – so we are seeing a position emerge now where there’s a procedure to be followed in these types of asset transactions.”
Fraser added that transactions such as Trichome’s acquisition of JWC are much easier if the deal is friendly.
“If it’s a hostile situation, it makes it more difficult because (it’s) harder for that purchaser to be able to piggyback on the licensing work that the existing license holder did with Health Canada,” she said.
“When you can work closely with the key personnel on the site and you have access to all of the records and the application materials that had been filed previously. … It greatly simplifies the process.”
Still, Fraser acknowledged that not every distressed Canadian cannabis company under creditor protection will find a debtor-in-possession lender and acquirer like JWC did – it depends on what potential a purchaser sees in distressed companies and whether they’re willing to incur the costs of relicensing.
“It can be done,” Fraser said.
“There’s no question, we’ve established that now. It’s not necessarily a very super-simple process.”
Trichome’s plans for JWC
Trichome JWC Acquisition Corp. CEO Howard Steinberg outlined the changes Trichome has been making at JWC since the acquisition.
“We looked at every corner of the organization. We dissected the organizational chart, process flow, developed metrics and really implemented a communication system” between different parts of the company, he said.
Trichome also scaled JWC from about 185 employees to 107, then increased that head count to 125.
“There’s still some work to be done, but now, we’ve got some embedded core values and a strong culture of people working together,” Steinberg said.
JWC has received new purchase orders and revenue has increased since the acquisition, according to a recent corporate update.
Trichome plans to relaunch the JWC brand in early 2021, according to a regulatory filing.
Trichome CEO Ruscetta said the company views JWC “as a platform opportunity.”
“And we actually see a tremendous opportunity to add to that platform, whether it’s other products, whether it’s other brands, whatever the case may be.”
Steinberg added that Trichome is seeking those opportunities “on an equity basis” rather than through lending.
Solomon Israel can be reached at email@example.com