Chalice Receivership Update: Weak Market, Insiders Pounce

I have been writing about the Chalice receivership process since late May when Chalice Brands Ltd. (OTCMKTS: CHALF) filed a complaint with the Oregon Circuit Court. In that Oregon lawsuit, Chalice filed claims against five local subsidiaries to place them under receivership and owed approximately $35 million. The lawsuit was orchestrated with a parallel Canadian proceeding. In the North, Chalice and its subsidiaries have been given bankruptcy protection as the company attempts to bounce back without filing for bankruptcy.

I haven’t followed the Canadian process, but things are coming into focus here in Oregon. I’m going to share two takeaways today. First, the bid and sell process shows that even at deep discounts, the market for Oregon cannabis companies remains weak and unattractive. Second, the proposed sale of the Oregon subsidiaries’ assets won’t go down well with many people. This is because the sale is being made for the bargain price of $3 million to buyers who could rightly be described as Chalice “insiders”.

The Oregon cannabis asset market is terribly weak

We didn’t need a Chalice face transplant to know everything was bad. Here in the Portland office, we have spent much of 2023 assisting clients in selling or attempting to sell Oregon cannabis businesses and related assets. This includes everything from pure licenses to entire industries that we co-purchased in the run-up to COVID. There just aren’t many buyers right now — especially not at scale.

Chalice was a relatively large outfit. At the beginning of this administration, the Chalice subsidiaries held 22 cannabis licenses in Oregon, including 16 retail licenses. All 22 licenses remain “active” today, although some are not operating under the OLCC waiver. As of May 23, 2023, Chalice’s subsidiaries also held four inactive licenses in Nevada; and a single, active California license. A little more on that below.

After the Oregon Receiver appointment, he vigorously pursued the marketing of Oregon’s assets, including the 22 cannabis licenses. Before the offer period expired, he received only four offers. (In full disclosure we represent one of the bidders and other interested parties.) After a period of negotiation with the highest bidder (not our client) and what the liquidator has described as extensive creditor negotiations and outreach, he determined a winner. They negotiated quite a bit and ended up with a sale price of $3 million for all but three unwanted deals.

As part of the bidding process, interested parties willing to sign a non-disclosure agreement were given access to a data room. Presumably, this data room contained sales and other key performance indicators for the companies concerned. I did not visit the data room and can only speculate on the revenue generated by these 22 companies. However, I’m pretty confident that the $3 million sticker price looks like a hell of a deal. Just a year ago, Chalice announced the acquisition of just four of the businesses on offer for $6.5 million.

Admittedly, some of the Oregon facilities are currently not in operation. The buyers have also agreed to pay cash at closing, which strengthens the offer and would allow the liquidator to settle tax liabilities and some of the monies it owes to secured creditors. According to the draft asset purchase agreement I reviewed, as part of the $3 million purchase price, the purchaser should also receive the five Nevada licenses (but not the California license), regardless of their value. The buyer would assume no liability.

At this point we should ask ourselves who is being screwed here if the court approves this sale. In my view, it is primarily smaller Oregon cannabis companies and third parties (e.g. landlords, service providers) that Chalice affiliates owe money that will never be repaid. Namely, the first lawsuit in the Oregon litigation alleged that the Chalice affiliates “… owe approximately $3.7 million in total in trade payables…” (ouch) and “substantial debts to third parties” (awfully vague ).

A second group of disadvantaged parties is arguably Chalice Brands shareholders – or most of them. It appears that the parent company will never receive the $35 million that the subsidiaries allegedly owe to the shareholders’ investment vehicle. Today, the company’s stock price is a deserved $0.0000010 on the toilet compared to a 52-week high of $0.27. Independent investors took a dip.

So who will benefit from this? Continue reading.

The familiar faces buy Chalice assets

The winner is a company called APCO LLC, a newly incorporated Delaware corporation wholly or partially owned by well-known parties William Simpson and Gary Zipfel. As many readers may recall, Simpson founded Chalice Farms in 2014. In 2017, he sold to Golden Leaf and became its CEO as part of the deal. Simpson left or was ousted from the company in late 2018, well before the company changed its name to Chalice Brands. Eventually, in January of that year, Simpson was appointed advisor to the Chalice Board. CEO Jeff Yapp referred to him as a “major shareholder” in the announcement.

The other APCO owner listed as signing the purchase agreement, Gary Zipfel, was appointed to the Chalice Brands board of directors at the same time Simpson reappeared. Like Simpson, Zipfel was described as a “major shareholder”. In the court filings, the liquidator was careful to describe APCO as “a bona fide buyer because the buyer actually displayed honesty and fair dealing in negotiating its offer.” Maybe so, at least in that particular capacity. On the other hand, the liquidator has prudently and cautiously distanced himself from activities that took place prior to his appointment. For example, in his Aug. 2 report to the Oregon court, the bankruptcy trustee wrote:

Prior to the CCAA filing in Canada and the commencement of bankruptcy proceedings in Oregon, Chalice’s board formed a special committee to initiate a strategic review to determine if there was a potential buyer of Chalice’s assets. The Special Committee spent several weeks actively soliciting buyers for all of its Canadian and US holdings, including interviews with investment bankers to determine if their clients were interested in acquiring Chalice’s assets. The bankruptcy trustee is generally told that these efforts have been fairly robust, and while no sale was completed during this strategic review, many of these interested parties have bid and/or conducted due diligence during the CCAA and bankruptcy proceedings.

Interesting! Parties affected by this proposed sale to APCO may be interested in receiving information from Chalice on:

  • leading up to this “robust” outreach process, beginning with Chalice’s apparent decision to stop paying suppliers before Simpson and Zipfel were hired, and throughout their tenure
  • whether the select committee only solicited bids for “all of its Canadian and US interests” or also separately bid for the Oregon assets targeted for APCO
  • a summary of the “many bids” received by the select committee and whether any of those bids exceeded the $3 million in cash that APCO and its owners are now proposing to pay for the Oregon assets
  • who was on the select committee, and the reasons for rejecting some or all of the “many offers”
  • why this process only took “several weeks” (an incredibly compressed time frame)
  • the participation of Zipfel and Simpson in the offering process, in their respective capacities as consultants and directors of the Chalice Board, or otherwise

This could be a puff of smoke with no fire. I don’t know. Fairness also requires acknowledgment that the Chalice insiders’ venture raised more money than other bidders in this ill-fated Oregon lawsuit. Still, I hope someone grapples with this: right now it feels like we’re sitting on half a story. The proposed sale optics are problematic in that all of these Chalice assets are earmarked for transfer to Chalice insiders and for one song. Meanwhile, unpaid farmers, landowners, and anyone else after court approval would foot the bill.

We will continue to monitor this issue as it progresses through the bankruptcy process. Until then, see the previous posts on Chalice for the following:

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