The decision to file for creditor protection under the CCAA – akin to bankruptcy proceedings in the U.S. – comes in response to recent financial struggles, complicated by a cancelled acquisition proposal by Red White & Bloom Brands Inc. (CSE: RWB) (OTC: RWBYF), which was officially sacked on July 14, a month after the deal was announced.
The acquisition would have reportedly saved both businesses $10 million annually while increasing the revenue profile of the new entity by 41%. However, the deal hinged on Aleafia shareholder approval for a specific convertible debt settlement of $6 million, but more than a third of Aleafia’s shareholders rejected the proposal.
The company has faced financial concerns for a while, with a cumulative deficit of more than $500 million and a net loss of $34 million for its latest fiscal year ending March 31. The cancelled acquisition just added to the woes.
Aleafia is now in violation of its senior secured loan agreement and faces demands from RWB to settle its debt. Those pressures combined with general challenges in the cannabis sector have forced Aleafia to seek court-approved protection to deal with its debts.
The Ontario Superior Court of Justice’s initial order grants Aleafia and its array of Canadian subsidiaries a stay of proceedings. The court also approved debtor-in-possession (DIP) financing and appointed a consulting firm to oversee the process.
Aleafia Group anticipates using the DIP loan of $6.6 million, provided by RWB, to maintain operations during the restructure. The measures offer Aleafia the time and stability to evaluate potential restructuring transactions and maximize asset value for creditors and stakeholders’ benefit, it said. This process could potentially involve selling most or all of the business under the court’s supervision.
As a part of the process, Aleafia plans to initiate a sale and investment solicitation process for its business and assets following the initial order. The SISP will be administered by the consulting group, with the company’s assistance.
The process could lead to a halt of trading Aleafia’s shares on the Toronto Stock Exchange and a subsequent review of the corporation’s listing status.