The first notable bankruptcy in the cannabis sector appears to have taken place. On September 12, Auxly Cannabis (TSXV: XLY) filed an application with the Superior Court of Ontario to secure the assets of 2368523 Ontario Limited, who has been doing business as Curative Cannabis. Curative is deliquent on secured debts owed to Auxly, and as a result Auxly is looking to take over the secured property.
Auxly Cannabis initially invested in Curative Cannabis back in January of 2019, wherein it acquired a 46% stake in the pre-license firm. Following this, Auxly then entered a long term cannabis purchase and sale agreement, which was a means to fund the final completion of Curative’s facility based in Chatham-Kent, Ontario. The 30,000 square foot facility was due to submit its final evidence package to Health Canada by March 2019 for phase one.
Instead, an amended secured promissory note was entered on April 23, 2019 between Auxly and Curative Cannabis as a means to acquire further funding due to the facility not yet being complete. The firm however has failed to complete the facility as of yet, with the facility remaining only 90% complete. Aucly’s debt, which was secured against all personal property as well as all stakes in the firm held by the Principals of Curative, matured August 5, 2019.
Ten days later, Auxly issued a demand letter. Then on August 29, they issued a Notice of Foreclosure to Curative as they sought to acquire their owed funds. Curative currently owes $16,146,162.66 to the streaming partner, which is inclusive of interest. However, the figure grows with each passing day that the debt is not repaid.
On September 12, 2019, Auxly Cannabis filed for the appointment of Farber & Partners Inc to act as the Receiver on their behalf. Last Thursday, September 19, the Ontario Superior Court of Justice approved the appointment of Farber & Partners, who will now commence acquiring the assets of Curative Cannabis on behalf of Auxly Cannabis.
Within the application, it notes that Auxly Cannabis intends to foreclose on the shares of Curative Cannabis and take control of the debtor. A timeline for the completion of this objective is unknown.
While the action is a positive move for Auxly Cannabis and their shareholders, whom have essentially secured their investment in the late stage applicant, its a warning sign for that of the cannabis sector as a whole. Funding for late stage applicants has all but disappeared, and secured promissory notes and debts mean something – which is a very dangerous situation for many private and public operators alike.
Auxly Cannabis is currently trading at $0.90 per share.
Information for this briefing was found via Sedar, Farber & Partners Inc, and Auxly Cannabis Group Inc. The author is no position in this security and has no affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
