I’ve been writing concerning the Chalice receivership course of since late Could, when Chalice Brands Ltd. (OTCMKTS: CHALF) filed an Oregon Circuit Courtroom criticism. In that Oregon lawsuit, Chalice introduced claims towards 5 native subsidiaries to drive them into receivership, claiming some $35 million owed. The lawsuit was orchestrated with a parallel Canadian continuing. Up north, Chalice and its associates obtained safety from collectors whereas the corporate makes an attempt to reorganize with out submitting chapter.
I haven’t been following the Canadian continuing, however issues are coming into focus right here in Oregon. I’ll share two takeaways at present. First, the bid and sale course of exhibits that the marketplace for Oregon hashish companies stays depressed and unattractive, even at steep reductions. Second, the proposed sale of the Oregon subsidiaries’ property gained’t sit properly with many individuals. It’s because the sale is teed up for the cut price basement worth of $3 million, to consumers who may very well be pretty known as Chalice “insiders.”
The marketplace for Oregon hashish property is terribly weak
We didn’t want a Chalice faceplant to know issues have been dangerous. Right here within the Portland workplace, we’ve spent a lot of 2023 serving to shoppers promote, or try and promote, Oregon hashish companies and associated property. This consists of all the things from bare licenses to entire verticals we helped buy within the COVID run-up. There simply aren’t quite a lot of consumers proper now– particularly at scale.
Chalice was a comparatively massive outfit. On the outset of this Receivership, the Chalice subsidiaries held 22 Oregon hashish licenses, together with 16 retail licenses. All 22 licenses stay “energetic” at present, though some aren’t working per OLCC dispensation. As of Could 23, 2023, Chalice subsidiaries additionally owned 4 inactive licenses in Nevada; and a single, energetic California license. A bit extra on these under.
Following the Oregon Receiver’s appointment, he went about advertising the Oregon property energetically, together with the 22 hashish licenses. He obtained simply 4 provides earlier than the bid deadline. (In full disclosure, we characterize one of many bidders, and different events.) Following a interval of negotiation with the excessive bidder (not our consumer), and following what the Receiver has described as in depth creditor negotiation and outreach, he picked a winner. They negotiated some, touchdown at a sale worth of $3 million for all places save three undesirable shops.
In the course of the bid course of, events who have been prepared to signal a nondisclosure settlement gained entry to a knowledge room. Presumably, that information room contained income and different efficiency metrics for the companies at challenge. I didn’t go to the information room and might solely speculate as to the revenues these 22 companies have been producing. I do really feel pretty assured although, in opining that the $3 million sticker worth seems to be like a helluva deal. To wit, Chalice announced the acquisition of simply 4 of the shops on supply for $6.5 million only one yr in the past.
Granted, a few of the Oregon property aren’t working right now. The consumers have additionally agreed to pay money at shut, which bolsters the supply, and would permit the receiver to filter out tax liabilities and a few portion of monies owed to secured collectors. Underneath the draft asset buy settlement I’ve reviewed, the client must also obtain the 5 Nevada licenses (however not the California license), no matter these are value, as a part of the $3 million buy worth. The client wouldn’t be assuming any liabilities.
At this level we must always ask who’s getting screwed right here, if the Courtroom approves this sale. In my opinion, it’s primarily smaller, Oregon hashish companies and third events (e.g. landlords, service suppliers), whom the Chalice subsidiaries owe cash that can by no means be repaid. To wit, the preliminary Grievance within the Oregon litigation alleged that the Chalice subsidiaries “… owe roughly $3.7 million within the mixture in commerce payables…” (ouch) in addition to a “vital quantities of indebtedness to 3rd events” (awfully imprecise).
A second group of deprived events is arguably the shareholders of Chalice Manufacturers– or most of them. It seems the guardian firm won’t ever obtain the $35 million that the subsidiaries allegedly owe to the shareholders’ funding car. At the moment, the corporate’s inventory worth is deservedly in the bathroom at $.0000010 USD, down from a 52-week excessive of $.27 USD. Arms-length buyers took a shower.
So, who’s about to profit? Learn on.
The acquainted faces shopping for Chalice property
The successful bidder is an entity known as APCO LLC, a newly fashioned Delaware entity owned in entire or partly by acquainted events, William Simpson and Gary Zipfel. Many readers might recall that Simpson based Chalice Farms in 2014. He sold to Golden Leaf in 2017 and have become its CEO as a part of that deal. Simpson left or was ousted on the finish of 2018, lengthy earlier than the corporate renamed itself Chalice Manufacturers. Lastly, in January of this yr, Simpson was appointed as Advisor to the Chalice Board. He was described by CEO Jeff Yapp as a “main shareholder” within the announcement.
The opposite APCO proprietor listed as an buy settlement signatory, Gary Zipfel, was appointed to the Board of Administrators of Chalice Manufacturers on the identical time Simpson resurfaced. Like Simpson, Zipfel was additionally described as a “main shareholder.” In Courtroom filings, the Receiver has been cautious to explain APCO as “a great faith-purchaser, in that Purchaser demonstrated honesty actually and honest dealing in negotiating its bid.” Possibly so, at the very least in that sure capability. However, the Receiver has distanced himself, prudently and cautiously, from exercise occurring previous to his appointment. In his August 2 report back to the Oregon Courtroom, for instance, the Receiver wrote:
Previous to the CCAA submitting in Canada, and the initiation of the Receivership in Oregon, the Board of Administrators of Chalice fashioned a Particular Committee to provoke a strategic assessment to find out if there was a possible purchaser of the property of Chalice. The Particular Committee spent a number of weeks actively soliciting consumers for all of its Canadian and U.S. holdings, together with talking with funding bankers to find out if their shoppers had any curiosity in buying Chalice’s property. The Receiver is mostly suggested that these efforts have been fairly strong, and whereas no sale was accomplished throughout this strategic assessment, lots of these events did submit bids and/or full due diligence in the course of the CCAA and Receivership course of.
Attention-grabbing! Events affected by this proposed sale to APCO could also be excited by getting info from Chalice on:
- the run-up to this “strong” outreach course of, beginning with Chalice’s obvious resolution to stop paying vendors earlier than bringing on Simpson and Zipfel, and all through their tenures
- whether or not the Particular Committee solicited provides just for “all of its Canadian and U.S. holdings”, or additionally provided individually the Oregon property headed for APCO
- a abstract of the “many bids” obtained by the Particular Committee, and whether or not any of these bids outclassed the $3m in money that APCO and its house owners now suggest to pay for the Oregon property
- who served on the Particular Committee, and the rationale in refusing any or the entire “many bids”
- why this course of lasted solely “a number of weeks” (an extremely compressed timeline)
- the involvement of Zipfel and Simpson within the providing course of, of their respective capacities as Advisor and Director of the Chalice Board, or in any other case
This may very well be a bunch of smoke with no hearth. I don’t know. Equity additionally requires an acknowledgement that the Chalice insiders’ firm introduced extra cash to the desk than different bidders on this hapless Oregon course of. Nonetheless, I hope that somebody digs into this: proper now it appears like we’re sitting on half a narrative. The proposed sale optics are problematic in that each one of those Chalice property are teed up for switch to Chalice insiders, and for a tune. In the meantime unpaid farmers, landlords and everybody else would take it within the shorts upon Courtroom approval.
We are going to preserve monitoring this one as it really works its approach by means of the Receivership course of. Till then, for earlier posts on Chalice try the next: