Why WeedMD sold a cannabis subsidiary for CA$2.5 million after buying it for CA$55 million

Aylmer, Ontario-based WeedMD announced the sale of its Starseed Medicinal subsidiary in Bowmanville, Ontario, for 2.5 million Canadian dollars ($2.1 million) in cash to Final Bell Canada, less than two years after the cannabis producer paid more than CA$50 million to acquire the business.

Included in the deal is a leased 14,850-square-foot indoor facility in Bowmanville, which is licensed by Health Canada for the cultivation, processing and sale of cannabis.

WeedMD said it retained all aspects of Starseed’s medical cannabis business, including the Starseed Medicinal brand, and proceeds of the sale will be used to pay down debt.

“What we did over the course of the last year is we stripped away anything that was of value in the (Starseed) facility,” WeedMD Chief Strategy Officer Jason Alexander told MJBizDaily, adding that the company retains all intellectual property associated with the business and the Starseed medical platform.

“So it’s effectively a shell corporation that just owns a lease and a license,” he said.

The Starseed name will not be transferred to the new owner.

Alexander defended the original transaction, telling MJBizDaily it was prudent in terms of the revenue growth it allowed for WeedMD. That deal closed in December 2019.

“We (were) able to extract significant value out of that Starseed platform and Starseed patients, and that is going to be reflected on our balance sheet and it is going to be reflected in our revenue moving forward,” Alexander said in a phone interview.

Alexander was Starseed’s chief legal officer at the time the company was being acquired by WeedMD.

Part of that value was the 6,000 active patients Starseed brought to WeedMD, he said.

Devalued licenses

The sale demonstrates the extent to which Health Canada’s cannabis-related licenses have fallen in value in recent years.

When WeedMD bought Starseed in 2019, it listed the fair value of the licenses it acquired at CA$15.7 million.

However, a recent regulatory filing put the value of Starseed’s licenses at CA$2.47 million.

The same filing put the value of Starseed’s property, plant and equipment at CA$259,000, substantially lower than the CA$3.4 million it was worth when acquired in 2019.

The decision to consider a sale was made in November 2020, according to the filing, less than one year after the subsidiary was acquired.

Despite the discrepancy between what WeedMD paid for Starseed and what it ultimately sold the subsidiary for, the executive said the deal is a good one for shareholders.

“We are getting two things out of this transaction: We’re getting the CA$2.5 million, but we’re also getting cost reduction,” he said. “We still have the revenue stream of Starseed, the 10,000-plus patients we currently have in the medical channel that we derive very significant revenue from.

“We keep the revenue stream, we keep the contracts, we keep the platform, which is the direct-pay platform we’ve worked with insurance providers and benefit-plan providers. We keep all that. The only thing we are losing is the facility, which was a redundant asset.”

The Bowmanville facility had been costing WeedMD upwards of CA$2 million a year to operate.

It was one of three licensed facilities held by WeedMD. The company closed the Bowmanville facility earlier this year to centralize medical cannabis distribution at its site in Aylmer.

The company still owns a 158-acre property in Strathroy, Ontario, with up to 550,000 square feet of greenhouse space plus up to 100 acres of outdoor cultivation area.

Its 26,000-square-foot indoor facility in Aylmer, specializes in cannabis extraction, processing, product development and fulfillment.

A look at the Starseed deal

According to a regulatory filing, WeedMD’s 2019 purchase of Starseed consisted of assets valued at CA$61.4 million at the time.

Some of those assets were:

  • Cash and cash equivalents (CA$9.3 million fair value)
  • Trade and receivables (CA$5.6 million value)
  • Prepaid expenses and deposits (CA$2 million value)
  • Inventory (CA$3.4 million value)
  • Property, plant and equipment (CA$3.4 million value)
  • Licenses (CA$15.7 million value)
  • Brands (CA$2.2 million value)
  • Customer relationships (CA$1.6 million value)
  • Goodwill (CA$16.1 million value)

Before being folded into WeedMD, Starseed had an operating loss of CA$16 million for the nine months through September 2019.

In the regulatory filing after the Starseed purchase closed, WeedMD said:

“The main factors driving the acquisition were the slower than expected ramp-up of the Canadian legal cannabis market, particularly in the adult-use segment, and the scarcity of capital for Canadian cannabis companies. The acquisition provides WeedMd with access to Starseed’s unique and high-margin medical channel that is built around the sale of high-quality cannabis products to captive customer groups with paid benefits coverage for medical cannabis.”

Alexander said the biggest hurdle to overcome was transferring Starseed’s Health Canada licenses to Final Bell Canada.

“Health Canada does allow for the transfer of licenses so long as the corporate entity doesn’t change, but you have to go through a very lengthy approval process with Health Canada,” he said.

He said it took a few months to get the regulator’s buy-in, which required new security clearances.

“It was quite a complicated, lengthy process, but it can be done. It was not through the expedited pilot project,” he said.

WeedMD shares trade on the TSX Venture Exchange as WMD.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at matt.lamers@mjbizdaily.com.