The scandal-plagued cannabis company once known as CannTrust Holdings Inc. QCNTT has been granted creditor protection again and will wind down, affecting 238 employees.
Ontario Superior Court Chief Justice Geoffrey Morawetz issued the order under the Companies Creditors’ Arrangement Act at the request of Vaughan, Ont.-based Phoena Holdings Inc. and affiliated entities just 55 weeks after it emerged from creditor protection.
At that time, CannTrust, as it was previously named, was looking to rebound under chief executive officer Greg Guyatt after a tumultuous three years that saw the company overcome by legal and regulatory issues and its stock delisted from the Toronto and New York stock exchanges. It secured $16.7-million, led by a unit of Dutch private equity firm Kenzoil BV, during its first round under CCAA and pledged to win back customers and diversify.
But Phoena brought in just $13.2-million in revenue in 2022 while losing $24.8-million. It then lost $317,000 on $1.2-million in revenue in January, according to court filings. Mr. Guyatt resigned in February. Phoena has $77-million in liabilities and has not made any of its required payments on a $22.5-million revolving credit facility since November.
Phoena “has been unable to revive the business and generate a profit” since emerging from CCAA and “no longer has the wherewithal to continue to try to do so” as investors are unwilling to fund further losses, the company said in its application to the court. In an affidavit, interim CEO and Kenzoil founder Cornelis Pieter Melissen said: “I believe a liquidation and orderly wind-down of the applications is in the best interests of the applicants’ creditors and other stakeholders.”
This is the latest trouble to hit the cannabis sector, which has seen early investor enthusiasm after the legalization of the drug by Ottawa five years ago replaced by agony. A glut of product and retail outlets have led to a fall in prices, a crash in cannabis stocks and an industry shakeout that saw 14 companies file for creditor protection in Canada last year. Licensed marijuana producers destroyed 468 tonnes of unsold, unpackaged cannabis in 2021, MJBIzDaily reported last year.
Phoena plans to immediately terminate 87 employees at its greenhouse in Fenwick, Ont., and complete a deal to transfer its lease of another facility to cannabis company Pinnrz. Industry veteran Darren Karasiuk has been appointed to lead the wind-down.
CannTrust was an early success of Canada’s cannabis industry, even predating legalization of recreational use in 2018. By early 2019 its products were used by 68,000 registered patients and prescribed by more than 2,500 physicians.
The company’s troubles started with a surprise facility inspection by Health Canada in June, 2019, when the regulator discovered alleged unlicensed growing taking place in several rooms. The regulator suspended its licence, the Ontario Securities Commission began investigating and the board fired CEO Peter Aceto. Chairman Eric Paul was ordered to step down and director Mark Litwin resigned.
The OSC charged Mr. Litwin and Mr. Paul with insider trading and accused the ex-chairman and CEO of issuing a false prospectus. CannTrust filed for creditor protection in March, 2020.
Over the next two years the business restructured, had its licence reinstated and settled investor class action lawsuits for $50-million. Last December, the OSC’s case against the three former CannTrust officials collapsed early in the trial after a star witness, CannTrust’s former compliance manager, walked back earlier testimony, saying he had mistakenly referred to growing rooms as unlicensed when the whole facility was licensed but awaiting ministerial approval. At worst, the missing approval meant the operation was non-compliant, but not doing anything illegal, he testified. The OSC withdrew charges and an Ontario judge acquitted the former officials.