Auxly Cannabis (TSXV: XLY) is facing some hiccups when it comes to securing its debts owed by 2368523 Ontario Limited, who is doing business as Curative Cannabis. The Deep Dive reported last month that the issuer had made the move to foreclose on the assets of the corporation, following a default on secured debt in favour of Auxly Cannabis.
While a judge certified that Curative can enter receivership last month, as it turns out, the two parties currently in control of the late stage applicant, Mr. David Shpilt and Mr. Scott Fitzgerald, have objected to the foreclosure of the assets. The objection is primarily focused on the assets included in the foreclosure reportedly exceeding the value of the debt held by Auxly.
The case, at best, is a prime example of what the cannabis sector as a whole will likely experience in the coming months and years as capital continues to run thin despite many operators not yet running cash flow positive businesses. Discrepancies between book value, i.e. the cost of the facility as per the balance sheet, and the actual value of the asset, which is typically much less, will undoubtedly cause pressure points between investors, debtors, and lenders. The reality however is that the assets are only worth what someone is willing to pay.
In the case of Curative Cannabis, Mr. Shpilt and Mr. Fitzgerald are contending that their shares in the Corporation, along with the other secured assets, are worth more than the currently outstanding $17,556,506.91 owed to Auxly Cannabis. The money currently owed is in relation to construction costs for Curative’s Chatham, Ontario facility, interest owed, and professional fees that were agreed to under an agreement between the two parties. The amount owed is continuously rising as well, as Auxly has continued to pay associated construction fees for the facility so as to ensure the value of the asset does not decrease.
Further complicating the issue, is that another party has stepped in, indicating that they have priority over that of Auxly’s debt thanks to a loan agreement entered into previously with Curative Cannabis and its principals. The loans, entered into in October 2018 and January 2019, are for a combined $1.3 million. Those loans, for the purpose of Curative, were secured by personal property owned by Schpilt and Fitzgerald, as well as property owned by Curative
Auxly for its part is looking to foreclose on the combined 95 shares owned by Mr. Shpilt and Mr. Fitzgerald, which the firm already has in its possession. The shares were provided to Auxly as collateral for all amounts owing as part of the agreements signed earlier this year. The issuer claims that it has first ranking over other debt as a result of holding those shares from the corporation.
Curative Cannabis on the other hand has yet to raise the required funding to cover the debt owed to Auxly despite its best objections.
The hearing for the motion related to the current status of assets was adjourned to November 18, 2019.
Auxly Cannabis is currently trading at $0.71 on the TSX Venture Exchange.
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.
