Court File and Parties

Court File No.: CV-23-00699872-00CL Date: 2023-05-26 Superior Court of Justice – Ontario Commercial List

In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended And in the Matter of a Plan of Compromise or Arrangement of Chalice Brands Ltd.

Before: Kimmel J.

Counsel: Shawn Irving, Marc Wasserman, Kathryn Esaw, Fabian Suárez-Amaya, for Chalice Brands Ltd. Jeremy Bornstein, Counsel for KSV Restructuring Inc., the Proposed Monitor

Heard: May 23, 2023

Endorsement (CCAA - initial order)

[1] Chalice Brands Ltd. brings this application for an Initial Order under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). Having been satisfied that the preconditions were met, I signed the Initial Order on May 23, 2023 with a brief endorsement and reasons to follow. These are my reasons.

Background – The Chalice Group and its Current Liquidity Crisis

[2] Chalice Brands Ltd. (“Chalice” or the “Applicant”) is the ultimate parent company of the Chalice Group, a vertically integrated group of cannabis companies operating primarily in Oregon’s regulated adult-use market. The Chalice Group operates a farm-to-table cannabis business. They grow, process, distribute and sell their own cannabis and cannabis products.

[3] Chalice is incorporated and headquartered in Ontario.

[4] The Ontario Securities Commission issued a cease-trade order on May 6, 2022 (“CTO”) after Chalice missed its 2021 annual filing deadline. Prior to the CTO, Chalice’s common shares traded on the Canadian Securities Exchange (“CSE”) as well as over the counter on the OTCQX®.

[5] Chalice’s assets are comprised of cash and its direct and indirect ownership of the remaining entities in the Chalice Group. Chalice has five bank accounts in Canada. Chalice is the 100 percent owner of Greenpoint Holdings Inc. (“Greenpoint Holdings”), a Delaware company. Greenpoint Holdings is the 100 percent owner of each operating company in the Chalice Group.

[6] All entities in the Chalice Group, other than Chalice, are United States based direct and indirect subsidiaries of Chalice with no assets in Canada (the “Non-Filing Affiliates”). Most of the operating entities are in Oregon.

[7] The Chalice Group has twenty-one active bank accounts in the United States. The Chalice Group leases certain properties in Oregon, including its 16 retail stores, 3 production facilities and its cultivation location. Chalice has guaranteed some of those leases.

[8] The Chalice Group does not own any real property in Canada or the United States.

[9] The Chalice Group holds 32 regulatory licenses in Oregon related to producing, processing, wholesaling and retailing cannabis and cannabis products. While all these licenses are in good standing, four are on temporary closure status under the licensing regime. In Nevada, the Chalice Group holds four licenses related to cultivation and product manufacturing of medical marijuana. All four licenses are in good standing but are currently inactive.

[10] The Chalice Group has 134 full-time employees and 37 part-time employees, all of whom work in the United States. All employees of the Chalice Group are employed and paid by one of Chalice’s subsidiaries, Greenpoint Workforce, Inc. (“Greenpoint Workforce”).

[11] Employee retention tax credits are an important asset of the Chalice Group. In 2020, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, among other things, created a new employee retention tax credit (“ERTCs”). The ERTCs are a refundable tax credit created to encourage employers to keep their employees on the payroll during the months in 2020 affected by the pandemic.

[12] To date, Greenpoint Workforce has received $2,700,000 worth of ERTCs. Greenpoint Workforce anticipates receiving another $2,300,000 of ERTCs in the near future.

[13] The Chalice Group’s most recent financial statements are its unaudited, consolidated financial statements as at December 31, 2021. These statements disclosed that its liabilities exceeded its assets and that it had a net loss of almost $17 million. The evidentiary record indicates that its financial situation has deteriorated since 2021.

[14] The current financial circumstances of the Chalice Group appear to be the result of its premature pursuit of an expansion plan. Anticipating that cannabis would be legalized on a Federal level in the United States, in 2021, the Chalice Group undertook an acquisition-based strategy, taking on debt to acquire retail stores and production facilities in Oregon to support its vertical integration. However, Federal deregulation did not occur.

[15] In the meantime, capital investments in the cannabis industry have become more difficult to secure and Chalice’s inability to finalize its 2021 (and subsequently, its 2022) audited financial statements and the subsisting CTO prevent the Chalice Group from raising funds through issuing securities. This, combined with supply chain issues, inflation, oversupply in the retail cannabis market driving retail prices down and detrimental tax treatment of controlled substances in the United States have reduced the Chalice Group’s gross margins, profitability and cash flows.

[16] Chalice’s primary assets are inter-company receivables from the Non-Filing Affiliates. Its principal liabilities consist of outstanding debt obligations under three notes and two series of unsecured debentures with an aggregate outstanding principal of $10,259,297 (USD). Four of its subsidiaries also have funded debt obligations of $8,864,616 (USD). Chalice and certain of the Non-Filing Affiliates are alleged to be, or are, in default under their respective debt obligations.

[17] These circumstances have led to the urgent liquidity crisis that the Chalice Group now faces. Chalice and its operating subsidiaries are unable to satisfy their obligations as they come due. The Chalice Group cannot pay its trade creditors, its landlords or its employees. At present, the Chalice Group owes approximately $6 million in trade payables, including over $1 million in missed rent.

[18] Of immediate concern is that:

a. One of the lenders has threatened to move forward with nonjudicial foreclosure on the collateral and has written directly to the Oregon’s cannabis regulator (the “OLCC”) advising that they were purportedly taking steps to foreclose on assets of the Chalice Group and seeking approval for temporary authority to operate five of the Chalice Group’s cannabis licenses; and

b. Chalice’s subsidiaries have also fallen behind on making lease payments to certain of their landlords, which may entitle the landlords to declare a default under the lease and lock them out. This, in turn, would put the Chalice Group’s store-based cannabis licenses at risk since, in Oregon, cannabis licenses are specific to a particular retail location. Therefore, the licenses risk being suspended or terminated if the retail location ceases operating.

[19] Chalice and its subsidiaries (the Non-Filing Affiliates) need “breathing space” from their creditors to pursue a going-concern sale. Chalice seeks to extend the benefit of the CCAA stay in this proceeding to its Non-Filing Affiliates, all of which are integral to the operations of the Chalice Group. If proceedings were taken against the Non-Filing Affiliates, it would be highly detrimental to the Chalice Group’s ability to achieve a going-concern solution.

[20] Chalice has prepared a Cash Flow Forecast for the period from the week ending May 22, 2023 to the week ending August 18, 2023 (the “Period”). It indicates that Chalice requires $1,030,000 cash flow to meet anticipated obligations during the Period. Chalice’s ability to do so is based on it having already received, or receiving, partial repayments of intercompany loans owing to it using proceeds from the recent ERTCs received by Greenpoint Workforce. Based on this Cash Flow Forecast, Chalice is not expecting to require a debtor-in-possession facility. Chalice intends to use these funds, in addition to certain other anticipated receipts, to fund Chalice’s operations during this CCAA proceeding.

[21] KSV Restructuring Inc. is the proposed monitor (the “Proposed Monitor” or “KSV”). The Proposed Monitor’s pre-filing report reflects its understanding that, aside from Chalice, Greenpoint Workforce’s only other creditors are three bridge lenders (the “Bridge Lenders”) that advanced Greenpoint Workforce approximately $831,250 in aggregate loans (together the “Bridge Loans”) to fund working capital requirements until it received the ERTCs from the Internal Revenue Service. The Proposed Monitor further reports, based on discussions with Scott Secord, the Chief Restructuring Officer (“CRO”), that the Chalice Group intends to repay the Bridge Lenders during the CCAA proceeding. The receipts in the Cash Flow Forecast represent the repayment of the intercompany debt from the anticipated receipt of the second round of ERTC payments less the repayment of the Bridge Loans.

The Planned Oregon Receivership – the Intended Co-ordinated Going Concern Solution

[22] Since cannabis has not been legalized Federally in the United States, the Chalice Group is unable to seek protection under the U.S. Bankruptcy Code, irrespective of its compliance with state cannabis laws. As such, concurrently with the filing of this Application, proceedings were commenced in Oregon to place certain Non-Filing Affiliates which are formed or have assets in Oregon (the “Oregon Subsidiaries”) into state receivership (the “Oregon Receivership”). Should the Oregon Subsidiaries be placed in receivership, there shall be an automatic stay of proceedings against those entities and their property in Oregon; however, there was no such stay as of May 23, 2023 when the Initial CCAA Order was granted.

[23] Chalice seeks to have the CCAA stay of proceedings extended to all the Non-Filing Affiliates, with a carve-out for the Oregon receivership proceedings and the potential for a parallel stay in that jurisdiction. Subsidiaries in other states, such as Delaware, California and Nevada, will remain subject to the CCAA proceedings.

[24] It is intended that Chalice, together with the CRO and the proposed Monitor, will work in a coordinated manner with the receiver appointed in Oregon (the “Oregon Receiver”) to conduct a sales process to achieve a going concern solution.

Issues

[25] The following issues raised by the relief sought are whether:

a. The Applicant meets the criteria for CCAA protection;

b. The CCAA stay should be extended to the Non-Filing Affiliates; and

c. The Administration Charge should be granted.

Analysis

Is the Applicant Eligible for CCAA Protection?

[26] Section 9(1) of the CCAA provides that an application under the CCAA may be made to the court that has jurisdiction in the province where the debtor company has its “head office or chief place of business.” The CCAA applies to a “debtor company” or “affiliated debtor companies” where the total claims against the debtor or its affiliates exceeds $5 million.

[27] Chalice is incorporated in Ontario, with assets in Ontario (its bank accounts and shareholdings) and with total claims against it exceeding $5 million.

[28] Chalice is in default under various secured debt obligations and does not have sufficient liquidity to make payments on unsecured debentures when the next interest payments come due on June 30, 2023. Given the CTO and the lack of interest in the capital markets for cannabis companies, Chalice’s only immediate sources of funds are its subsidiaries. Those subsidiaries are struggling to pay retail landlords and employees.

[29] Chalice has established that it is unable to meet its obligations as they become due and that it has ceased paying its current obligations in the ordinary course of business. It is an “insolvent person” within the meaning of s. 2 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) and under the expanded concept of insolvency accepted by this court in Stelco Inc. (Re) (2004), 48 C.B.R. (4th) 299 (Ont. S.C.), leave to appeal to ONCA ref’d, 2004 CarswellOnt 2936, leave to appeal to SCC ref’d, [2004] S.C.C.A. No. 336.

[30] Chalice fits within the definition of a debtor company under s. 2 of the CCAA and is eligible to make this application under the CCAA.

[31] Under s. 11.7 of the CCAA, when an Initial Order is made in respect of a CCAA debtor company, the court shall at the same time appoint a monitor. Chalice proposes to have KSV appointed as the monitor. KSV has consented to act as such.

[32] KSV is a “trustee” within the meaning of subsection 2(1) of the BIA, it is established and qualified and has consented to act as monitor. KSV’s involvement as the court-appointed monitor will lend stability and assurance to the Chalice Group’s stakeholders. KSV is not subject to any of the restrictions set out in s. 11.7(2) of the CCAA.

Should the Stay of Proceedings be Extended to the Non-Filing Affiliates?

[33] Section 11.02(1) of the CCAA permits this court to grant an initial stay of up to 10 days on an application for an initial order, provided the applicant establishes that such a stay is appropriate and that the applicant has acted with due diligence and in good faith (s. 11.02(3)(a-b)). The primary purpose of the CCAA stay is to maintain the status quo for a period while the debtor company consults with its stakeholders with a view to continuing its operations for the benefit of its creditors.

[34] I am satisfied that the Applicant requires a stay of proceedings in order to provide it with the breathing room necessary to obtain the required funding to continue operations while pursuing various restructuring options.

[35] Chalice seeks to extend the stay of proceedings to the Non-Filing Affiliates. The court’s authority to grant such an order is derived from the broad jurisdiction under s. 11 and 11.02(1) of the CCAA to make an initial order on any terms that the court may impose. The court has, on other occasions, extended the initial stay of proceedings to non-applicants, including foreign non-applicant affiliates. See for example, Re Tamerlane Ventures Inc., 2013 ONSC 5461, 6 C.B.R. (6th) 328, at para. 2; Re Target Canada Co., 2015 ONSC 303, 22 C.B.R. (6th) 323; Re Nordstrom Canada Retail, Inc., 2023 ONSC 1422, at para. 42; In the matter of a plan of compromise or arrangement of Lydian Group, Court File No. CV-19-00633392-00CL (SCJ: Toronto, Commercial List) Order of Morawetz J. (Initial Order) dated December 23, 2019, at paras. 2, 10.

[36] Further, in proceedings under Part IV of the CCAA, this court routinely extends a CCAA stay over non-applicants subject to foreign main insolvency proceedings. See for example, In the matter of Hollander Sleep Products, LLC, CV-19-620484-00CL (SCJ: Toronto, Commercial List) Order of Hainey J. (Initial Recognition Order) dated May 23, 2019, at para. 4; In the matter of Brooks Brothers Group, Inc., Court File No. CV-20-00647463-00CL (SCJ: Toronto, Commercial List) Order of Hainey J. (Initial Recognition Order) dated September 14, 2020, at para. 4.

[37] It has been held to be just and reasonable to extend a stay of proceedings to non-applicant affiliates when:

a. The applicant and its subsidiaries are “highly integrated … and indispensable to the Applicants’ business and restructuring… Failure to [extend the stay] would undermine the intent of the stay.” See Re Imperial Tobacco Canada Limited, et al, 2019 ONSC 1684, 68 C.B.R. (6th) 322, at para. 12);

b. Without the benefit of a stay, the Non-Filing Affiliates would “run out of liquidity before the time that would reasonably be required to implement a restructuring.” See Re Urbancorp Toronto Management Inc., 2016 ONSC 3288, 37 C.B.R. (6th) 44, at para. 44.

[38] The Proposed Monitor explains that the extension of the stay over the Non-Filing Affiliates is critical to the stabilization of the Chalice Group’s operation and ensuring a co-ordinated restructuring process, for a variety of reasons, including:

a. The vertically integrated nature of the Chalice Group’s business, in which most key decision making is done through the Canadian parent company;

b. Greenpoint Workforce acts as the only employer within the Chalice Group and funds payroll;

c. The Non-Filing Affiliates hold the cannabis licences, operate the cultivation and production facilities and operate the sixteen retail stores;

d. Certain creditor and landlord-driven enforcement action is being pursued against certain Non-Filing Affiliates that may put the licences at risk; and

e. If enforcement steps are taken against the Non-Filing Affiliates, it is expected to materially destroy value and negatively impact a going-concern sale of the Chalice Group’s assets or business.

[39] These are among the factors described in Re JTI-Macdonald Corp., 2019 ONSC 1625 at para. 15, as well as factors identified in the other case law cited above, that exist in this case in support of the extension of the stay to the Non-Filing Affiliates. The Applicant summarizes these factors in their factum as follows:

a. The business and operations of the Non-Filing Affiliates are significantly intertwined with those of the Applicant. The Chalice Group operates as a vertically integrated business and most key decision-making is done through the Applicant.

b. Not extending the stay to the Non-Filing Affiliates could jeopardize the success of a potential going concern sale of the business. Creditors are already pursuing enforcement action against the Non-Filing Affiliates that may put the Chalice Group’s cannabis licenses at risk.

c. Failure of the restructuring would be more detrimental than extending the stay to the Non-Filing Affiliates. Enforcement action against the Non-Filing Affiliates, in Canada or elsewhere, would be detrimental to the Applicant’s efforts to pursue a going concern sale of the Chalice Group and would undermine a process that would otherwise benefit the stakeholders of the Chalice Group as a whole.

d. The Non-Filing Affiliates will run out of liquidity before this proceeding can be completed. The Non-Filing Affiliates do not have enough cash to maintain regular operations, and cannot even independently fund the proposed Oregon Receivership.

e. The balance of convenience favours extending the stay. Extending the CCAA stay, concurrent with the stay of proceedings pursuant to the Oregon Receivership, will protect the Applicant’s creditors by protecting the investment in its subsidiaries, as well as the stakeholders including employees, suppliers, customers, and lenders.

f. The Proposed Monitor supports extending the stay to the Non-Filing Affiliates.

[40] Federal laws in the United States have precluded Chalice from pursuing a coordinated U.S. Bankruptcy Code proceeding. Any stay granted pursuant to the Oregon Receivership may not have effect beyond Oregon. In the circumstances, where protection under the U.S. Bankruptcy Code is not available to the Chalice Group, extending the CCAA stay to the Non-Filing Affiliates is the best option to achieve the breathing space necessary to preserve the value of the Chalice Group while efforts are co-ordinated between the Monitor, the CRO and the Oregon Receiver in the Oregon Receivership (if granted) for a going concern transaction.

[41] No authority was cited for the precise situation in this case, of the CCAA stay being extended over Non-Filing Applicants that include some entities over which it is expected that a stay may be granted in another jurisdiction (the Oregon Receivership). However, it is not expected to be a conflicting or competing stay, but rather one that will be complementary and utilized in the co-ordinated efforts of the Monitor, the CRO and the Oregon Receiver.

[42] The commencement of a CCAA proceeding to address the significant issues the Chalice Group faces represents the only realistic path forward at this time. An inability to restructure in a coordinated, court-supervised manner would be potentially disastrous for many stakeholders of the Chalice Group, including the employees and creditors of Chalice and its Non-Filing Affiliates.

Should the Administration Charge be Granted?

[43] The proposed Initial Order creates a first-ranking Administration Charge of $400,000 CAD over Chalice’s assets to secure the fees and expenses disbursements of the Proposed Monitor and its counsel and of Chalice’s counsel. The services of these advisors are critical to the Applicant’s ability to restructure. The Chalice Group requires the expertise of these professionals who will have distinct roles in the cross-border restructuring efforts of the Chalice Group. The Proposed Monitor has reviewed the Administration Charge and considers it to be reasonable and appropriate in the circumstances given the anticipated services to be provided by the professionals involved.

[44] The Cash Flow Forecast anticipates professional fees payable as of June 2, 2023 of $300,000, with a similar monthly amount payable in early July and August. The initial anticipated payment of professional fees reflects the fact that pre-filing efforts have been undertaken to organize a co-ordinated restructuring plan which have brought the Applicants to the point they are in the current proceedings. The court expects that the payment of any professional fees will be subject to the usual review requirements in CCAA proceedings.

[45] Section 11.52 of the CCAA gives this court the jurisdiction to grant a charge for the fees and expenses of financial, legal and other advisors or experts. Such charge can rank in priority to the claims of existing secured creditors. I am satisfied that the Administration Charge is necessary in the circumstances, is appropriately sized given the nature and complexity of the proceeding and should be granted.

The Initial Order and the Comeback Hearing

[46] Chalice has worked with its advisors and the Proposed Monitor to limit the relief sought on this initial application to only the relief that is reasonably necessary in the circumstances for the continued operation of its businesses within the initial stay period. I am satisfied that the requested relief is necessary for the immediate stabilization of Chalice’s businesses and to protect it and the interests of its various stakeholders. Additional authorizations must be addressed at the comeback hearing.

[47] For the foregoing reasons the Initial Order was granted on May 23, 2023.

[48] The “come back” hearing shall take place before me on June 1, 2023 at 2:00 p.m. on Zoom.

Kimmel J. Date: May 26, 2023