The first Canadian cannabis company to have its licenses suspended by Health Canada is on the verge of being sliced up and sold off in pieces, amid a messy proxy fight pitting early investors against new management.
Ascent Industries Corp., which received creditor protection last week, is contemplating bids from several investors and licensed cannabis producers (LPs) for its Canadian assets, according to an affidavit sworn by the company’s interim chief executive officer as part of the creditor protection proceedings. The deadline for offers was last Thursday, and a deal could be announced early this week.
Ascent has been in turmoil since Health Canada suspended its licenses in September. Over the past three months, attempts to sell the company have been interrupted by a shareholder battle that has drawn in high profile lawyers, investment bankers, and even the CEO of Aurora Cannabis Inc., Canada’s second-largest LP. At stake are the assets and intellectual property of a well-known black market cannabis firm, which made an unsuccessful bid to transition into the legal market.
The latest efforts to sell the company come after Ascent defaulted on a $7-million mortgage in mid-February. Management, led by interim CEO Blair Jordan, the former head of investment banking at Echelon Wealth Partners, is trying to find a buyer for Ascent’s British Columbia properties as soon as possible, and has arranged a $2-million loan to keep the company afloat for several more weeks while a deal is hammered out.
Any quick transaction, however, could face opposition from activist shareholders, who control around 45 per cent of the company and have strongly warned against moves to sell without their consent.
Ascent’s core asset is Agrima Botanicals Corp., a cannabis grower in Maple Ridge, B.C., which was well known in the illicit market for producing TOKO-brand vaporizers. Founded in 2013, Agrima spent four years trying to secure approval from Health Canada to grow cannabis legally. It finally got the go-ahead in late 2017, after agreeing to cease all black market activity.
Things went sideways in September, when Health Canada inspectors found records allegedly showing that Agrima continued selling into the black market after receiving its legal licenses.
“Agrima made false or misleading statements to Health Canada and its inspectors on multiple occasions,” wrote Todd Cain, head of Health Canada’s cannabis licensing division, in a letter sent to Ascent on Sept. 26, which was entered into public record alongside Mr. Jordan’s affidavit. “The documents found at your site link Agrima to processing of unauthorized cannabis concentrates and cannabis vape products that can be found on online cannabis dispensaries.”
In mid-November, Health Canada moved to permanently revoke Ascent’s licenses – a first in the history of the young legal cannabis industry. (The proceedings are continuing, although the Feb. 20 deadline for comments from Ascent has passed).
Ascent’s stock dropped more than 60 per cent and, on Nov. 21, the company announced the resignations of Philip Campbell, Reid Parr and James Poelzer, the company’s co-founders and core management team. Mr. Jordan, Ascent’s chief financial officer who had joined the company in early 2018, was appointed interim-CEO. Thirty-six staff, roughly a third of the company’s Canadian workforce, were laid off.
Over the next three months, Mr. Jordan and his team, aided by Clarus Securities Inc. as financial adviser, tried selling off Ascent’s assets in order to pay loans that were coming due.
“Based on the valuation assessment, including the fact that traditional debt financing was not viable at the that time, the Special Committee decided to pursue a formal sales and investment solicitation process,” Mr. Jordan wrote in the affidavit.
In mid-December, the company received 22 “notices of interest” from would-be buyers, according to Mr. Jordan, four of which the company deemed credible. Ascent settled on an offer from Gulf Bridge Ltd., a company domiciled in the Cayman Islands, which offered an infusion of working capital, and offered to refinance Ascent’s two mortgages, taking over as creditor for a consolidated $7-million mortgage.
“We anticipated closing the Potential Transaction on or before February 22, 2019," Mr. Jordan wrote. “However, on February 8, 2019, Gulf Bridge advised me that it would not proceed with the Potential Transaction. This was a surprise to me because our negotiations had been progressing well.”
According to Mr. Jordan, Gulf Bridge terminated its offer following a press release on Feb. 4 from a group of Ascent shareholders, who said they had pooled their shares into a voting block, “to more effectively exercise the rights of the Concerned Shareholders.” The group said it controlled roughly 45 per cent of Ascent’s total shares and represented a number of Ascent’s early investors, including the company’s co-founders and Terry Booth, the CEO of Aurora Cannabis. (The co-founders, Mr. Campbell, Mr. Parr and Mr. Poelzer, have since sold their shares to another member of the activist group.)
“Gulf Bridge’s representative advised that, in light of recent press releases, Gulf Bridge was concerned that the Potential Transaction could be impacted by a shareholder dispute,” Mr. Jordan wrote.
On the same day as the press release, Desmond Balakrishnan a lawyer with McMillan LLP representing the activists, sent a letter to Ascent’s board and management, demanding they "desist from undertaking any fundamental transaction, elect members of the Board and immediately hold a shareholders meeting so that the shareholders can deliberate and make decisions about the future of the Corporation.”
Mr. Balakrishnan, a high-profile lawyer in the cannabis space, has close ties to Aurora, having counselled the company on most of its financing and M&A activity over the past two years. He also sits on the Investment Advisory Committee of Aurora’s U.S. spin-off, Australis Capital.
Aurora itself has ties with Ascent that go beyond investments by Mr. Booth. Last June, the companies signed a large supply agreement, which would have seen Ascent supply Aurora with up to 20,000 kilograms of dried cannabis flower and up to 6,000 kilograms of trim a year, grown in a large greenhouse that Ascent is in the process of acquiring in Pitt Meadows, B.C.
The agreement “is effectively terminated due to the change in the company’s status as a licensed producer,” said Heather MacGregor, Aurora’s director of communications.
“Aurora does not comment on its business opportunities until they are fully negotiated,” she added, in response to a question about whether Aurora was bidding on Ascent’s assets.
Since the Gulf Bridge deal fell apart a month ago, Ascent has been scrambling to close a new transaction. The company has entertained numerous bids, according to an affidavit sworn by Karim Lalani, Ascent’s chief legal officer, including one that Mr. Lalani believes was supported by the activist shareholders. However, the bid did not included sufficient working capital to keep the company afloat short-term, according to Mr. Lalani, and Ascent’s management dismissed an offer from the activist group to provide their own working capital, calling the offer “not certain and unviable.”
Messages requesting comment from several of the key activist shareholders were not returned.
Things were further complicated in February when Ascent received notice from officials in Nevada that the company’s Las Vegas-based subsidiary was also having its license suspended for allegedly “operating outside the scope” of its license.
In late February, Ascent lined up a $2-million bridge loan from Pillar Capital Corp. and applied for creditor protection, mainly from Gulf Bridge, which called its $7-million mortgage in mid-February after Ascent defaulted on a payment. On Feb. 27, the company issued another call for bids from would-be buyers, with a deadline of March 7.
“Ascent intends to review the bids submitted, in consultation with the proposed monitor [Ernst & Young] and Clarus, and work quickly to conclude a transaction with the party (or parties) selected,” wrote Mr. Jordan.