Turning A New Leaf: First Going Concern Sale Of An Insolvent Cannabis Producer – Cannabis & Hemp

This article was originally published in National Insolvency


On August 28, 2020, James E. Wagner Cultivation Corporation
(together with its corporate group, JWC) and Trichome Financial
Corp. (together with its purchaser designee, Trichome) closed a
transaction for the “going concern” sale of substantially
all of JWC’s assets to Trichome in court-supervised proceedings
under the Companies’ Creditors Arrangement Act
(CCAA)1. This marked a significant event for both the
cannabis industry and Canadian law: it was the first time that
regulated cannabis assets were monetized by way of an asset sale
within insolvency proceedings.

By establishing an insolvency and regulatory practice allowing
for such going concern asset sales, the JWC-Trichome transaction
addresses a gap in the Cannabis Act2 and its
regulations and contributes to the development of a more mature
financial and legal framework for cannabis businesses and their
lenders, ultimately facilitating the orderly development of the
legal cannabis industry.

Unique challenges

The cannabis industry operates in a challenging regulatory
environment. Distressed cannabis businesses and their creditors
must contend with the Cannabis Act, which does not
contemplate procedures for secured creditors or others—in an
insolvency context or otherwise—to take possession of a
debtor’s regulated cannabis assets. Contrast this to other
regulated industries such as telecommunications, alcohol, oil and
gas and pharmaceuticals where such mechanisms exist. In this
regard, there is a legislative gap in the Cannabis

This challenge stems from the requirement that cannabis
businesses obtain and maintain a valid licence (or licences) from
Health Canada in order to engage in the activities required to
operate3. In the context of an insolvency-driven asset
sale, this means a purchaser company must first become licensed in
order to acquire a vendor’s cannabis assets, and both the
vendor and the purchaser must hold valid licences at the time of
closing to effect a transfer of regulated cannabis assets. This
presents two obstacles that typically preclude a purchaser from
acquiring a vendor’s cannabis business as a going concern in an
insolvency context.

First, as a precondition to obtaining a Health Canada licence,
certain individuals associated with the licensee corporation,
including its directors, officers and key personnel, must obtain
security clearances4. These security clearances include
criminal record checks conducted by the RCMP, which can take
anywhere from a few months to over a year to complete. The purchase
and sale of cannabis assets cannot be completed unless and until
each of the purchaser company’s directors and officers have
obtained the requisite security clearance.

Second, the Cannabis Act does not contemplate or permit
the transfer or assignment of Health Canada licences. This becomes
problematic in the context of an asset sale, as licences are issued
to a particular licensee for specific premises, and no two
licensees may control the same premises which are the subject of
their licences at the same time. As a result, there was no
established mechanism prior to the JWC-Trichome transaction to
effect the going concern sale of a cannabis business by way of an
asset purchase agreement. This issue often forced undesirable and
inefficient solutions, such as the destruction of the debtor’s
valuable cannabis inventory5.

The JWC-Trichome transaction

The company

JWC was a publicly-listed, vertically-integrated cannabis
company which specialized in growing, cultivating and marketing
premium aeroponically-grown cannabis to both medical and
recreational markets in Canada. JWC’s capital structure
consisted of its secured debt (which included a senior-ranking
credit facility with Trichome, as lender), unsecured debt and
common shares.

As a result of its negative cash flow and significant capital
expenditures relating to an expansion of its production facilities,
JWC foresaw that it would shortly become unable to meet its
liabilities as they became due. Accordingly, JWC and Trichome
entered into discussions to implement a consensual restructuring
under the CCAA that would inject liquidity into JWC’s
operations, smooth its troubled balance sheet and allow its
business to emerge as a going concern.

The CCAA proceedings

Following its application to the Commercial List (the Court),
JWC obtained a CCAA initial order on April 1, 2020 (the Initial
Order). KSV Kofman Inc. was appointed as Monitor in the
proceedings, and Trichome acted as DIP lender. The DIP financing
provided JWC with the liquidity necessary to continue operations
without disruption and to fund the CCAA proceedings.

Trichome entered into a stalking horse agreement with JWC (the
Stalking Horse Agreement), which provided, among other things, for:
a) the purchase and sale to Trichome of substantially all of
JWC’s assets; including its existing cannabis inventory and the
premises used to cultivate cannabis (i.e., the sale of JWC’s
business as a going concern); and b) the establishment of a sale
and investment solicitation process (the SISP) for JWC’s
assets. The Court approved both the Stalking Horse Agreement and
the SISP by way of an order entered April 9, 2020, following
JWC’s comeback hearing.

Over the course of the 45-day SISP, 26 interested parties
executed confidentiality agreements with JWC and numerous of those
parties conducted extensive due diligence on its business and
assets. At the conclusion of the SISP, the Stalking Horse Agreement
was declared the winning bid, Trichome was declared the successful
bidder and the parties obtained an approval and vesting order from
the Court on June 2, 2020.

The Stalking Horse Agreement

The purchase price paid by Trichome for JWC’s assets was an
estimated $16 million, comprised of Trichome’s credit bid of
its pre-filing debt, Trichome’s assumption of certain JWC
obligations and a closing cash payment. The assumed obligations
included Trichome’s DIP facility, most of JWC’s operational
contracts (including the leases for its production facilities) and
cure costs in respect of certain contracts.

Among the assets purchased by Trichome under the Stalking Horse
Agreement were: 1) JWC’s cannabis production
facilities—being two facilities located in Kitchener, Ontario
with operational areas of 15,000 sq. ft. and 99,000 sq. ft.,
respectively— capable of a combined annual cultivation
capacity of approximately 7,000 kilograms of premium cannabis (as
of the date of the Stalking Horse Agreement); (2) JWC’s
proprietary aeroponics system for growing premium cannabis,
including the patents and trademarks in respect thereof; (3) the
JWC brand, including its various trademarks; and (4) the JWC
cannabis inventory, including seeds, plants, fresh and dried
cannabis, a variety of “cannabis 2.0” products and other
miscellaneous assets.

The licensing process

Closing was conditional upon Trichome obtaining the replacement
Health Canada licences necessary to acquire and operate JWC’s
regulated cannabis assets and business. Two licences were required
to operate the purchased business: a standard processing and
cultivation licence, and a standard processing, cultivation and
sale for medical purposes licence. There were two primary
challenges to obtaining these licences.

First, Trichome’s purchaser designee could not obtain its
licences until its proposed directors and officers, and the
directors and officers of its parent corporation, obtained their
security clearances from the RCMP. This process took approximately
three and a half months to complete, resulting in a two-month delay
to the closing. During this time period, JWC’s proceedings
under the CCAA continued and Trichome financed JWC’s operations
under an amended DIP facility.

Second, the Cannabis Act does not provide a mechanism
for the transfer of Health Canada licences, nor does it allow for
the simultaneous licensure of two licensees in respect of the same
premises. In order to overcome this challenge, the parties worked
in close collaboration with Health Canada staff from the onset of
the transaction through to its closing. The result of this
collaboration was a back-to-back licensing arrangement, whereby
Health Canada authorized the following three events:

  1. Health Canada granted to Trichome new
    licences which became effective on August 28, 2020;

  2. JWC transferred the regulated
    cannabis assets to Trichome, under a separate bill of sale from the
    non-cannabis assets, at 11:59 p.m. on August 28, being the moment
    before the stroke of midnight; and

  3. Health Canada revoked JWC’s
    licences on August 29 at 12:00 a.m. through a pre-authorized

As a result of this stroke-of-midnight timing, Trichome obtained
ownership of the assets and control of the premises at the precise
moment before JWC’s licences were revoked; from Health
Canada’s perspective, there was neither simultaneous licensure
nor a licensure gap in respect of the premises and regulated
assets. Thus, on August 28, 2020 at 11:59 p.m., the deal was

Takeaways and recommendations

The JWC-Trichome transaction demonstrates that court-supervised
going concern sales of distressed or insolvent cannabis companies
are viable means of monetizing and acquiring regulated cannabis
assets. By doing so, it contributes to a financial and legal
environment which is conducive to the development of the cannabis
industry and ultimately furthers Parliament’s stated policy
goal of eliminating the illicit market for cannabis. This is
particularly important given the capital-intensive nature of the
industry and the leading role played by secured debt financing in
its growth.

However, regardless of this improved environment, potential
suitors and distressed cannabis businesses alike must remain
proactive in order to be competitive during future going-concern
sales within insolvency proceedings.

Among the factors considered when assessing offers to acquire
assets in this context are the anticipated closing timelines and
the risks of a derailed closing. Prospective purchasers of cannabis
assets who already hold the necessary security clearances gain a
competitive advantage, as they can potentially obtain the licence
on an expedited basis. There is also certainty that their security
clearances will not be rejected. If, on the other hand, a
prospective purchaser does not have the necessary clearances, it
should determine who will act as the directors and officers of the
licensed entity and its parent companies and begin the process of
obtaining these clearances as far in advance as possible of any

Finally, because the Cannabis Act doesn’t codify
procedures for secured creditors or others to take possession of
regulated assets in the context of an insolvency (or otherwise),
collaboration and effective communication with Health Canada are
the keys to a smooth licensing process. Both the distressed
cannabis business and potential purchaser should work through
established relationships with Health Canada early in the
transaction process to develop an approach to licensing that
addresses all of Health Canada’s requirements and fits the
context of a particular transaction.


1. RSC 1985, c C-36.

2. SC 2018, c 16.

3. Cannabis producers must also obtain licenses from the
Canada Revenue Agency and applicable provincial

4. Cannabis Regulations, SOR/2018-144, s

5. See, e.g., Pure Global Cannabis Inc. et al,
, Amended and Restated Initial Order of Hainey J., dated
April 3, 2020 (Ont Sup Ct J (Commercial List)), Court File No.
CV-20-00638503-00CL, where the Court granted an Order requiring
that the applicants, among other things, arrange for the lawful
disposal or destruction of their cannabis or cannabis products in
consultation with the CRA and Health Canada.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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