Court File and Parties

COURT FILE NO.: CV-23-697283-00CL DATE: 2023-04-04 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 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 PHOENA HOLDINGS INC., PHOENA INC., ELMCLIFFE INVESTMENTS INC., ELMCLIFFE INVESTMENTS [NO. 2] INC., AND CTI HOLDINGS (OSOYOOS) INC.

BEFORE: Chief Justice G.B. Morawetz

COUNSEL: Gina Rhodes and Kyla Mahar, for the Applicants Rebecca Kennedy and Puya Fesharaki, for Ernst & Young Inc., Monitor Joseph Bellissimo, for Cortland Credit Lending Corporation, the DIP Lender

HEARD: April 4, 2023

Endorsement

[1] At the conclusion of the hearing, I granted the Initial Order with reasons to follow. These are the reasons.

[2] This Application was brought by Phoena Holdings Inc. (“Phoena Holdings”), Phoena Inc. (“Phoena”), Elmcliffe Investments Inc. (“Elmcliffe”), Elmcliffe Investments [No. 2] Inc. (“Elmcliffe Investments No. 2”) and CTI Holdings (Osoyoos) Inc. (“CTI”) (collectively, the “Applicants” or the “Phoena Group”) for an initial order pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985, c-C. 36, as amended (the “CCAA”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Affidavit of Cornelis Melissen sworn April 3, 2023 (the “Melissen Affidavit”) in support of this Application. The Report of Ernst & Young Inc., as proposed monitor, was also filed in support of this Application.

[3] The Applicants seek an Order (the “Initial Order”) which includes the following relief:

(a) Granting an initial stay of proceedings (the “Stay of Proceedings”) until April 14, 2023 (the “Stay Period”);

(b) Appointing Ernst & Young Inc. (“EY”) as Monitor (the “Monitor”);

(c) Appointing Darren Mr. Karasiuk as chief restructuring advisor of the Applicants (the “Chief Restructuring Advisor”);

(d) Granting an Administration Charge in the amount of $200,000 (the “Administration Charge”);

(e) Approving the DIP Term Sheet dated April 3, 2023 between the Applicants and Cortland Credit Lending Corporation (the “DIP Lender” or “Cortland”) for DIP financing (the “DIP Loan”), authorizing borrowings under the DIP Loan in an amount up to $1,200,000 (plus interest, fees and expenses), and granting a charge in favour of the DIP Lender (the “DIP Lender’s Charge”); and

(f) Granting a directors’ charge in favour of the directors and officers of the Applicants in the amount of $450,000 (“Directors’ Charge” and together with the DIP Lender’s Charge and the Administration Charge, the “Priority Charges”).

[4] There was no opposition to the requested relief. The Monitor supported the position of the Applicants.

[5] The Phoena Group is a licenced producer and distributor of cannabis with operations located in Vaughan and Fenwick, Ontario.

[6] The Phoena Group business was purchased by Marshall Fields International B.V. (“Marshall”) in the CannTrust CCAA Proceedings in March 2022. Phoena Holdings previously operated as CannTrust Equity Inc. (“CannTrust Equity”), and Phoena Inc. previously operated as CannTrust Inc.

[7] The Phoena Group has been unable to revive the business and generate a profit since emerging from the CannTrust CCAA Proceedings.

[8] The Applicants have incurred substantial losses since emerging from the CannTrust CCAA Proceedings. The Applicants are in default of the terms of the Cortland Credit Agreement and owe Cortland approximately $18.8 million under the Cortland Facility.

[9] The Phoena Group is insolvent and faces a liquidity crisis. The Applicants’ liquidity has been fully depleted and they cannot maintain operations without additional financing under the proposed DIP Term Sheet.

[10] The Applicants believe a liquidation and orderly wind-down of the Applicants under the CCAA is in the best interests of the Applicants’ creditors and other stakeholders.

[11] The Applicants submit that this realization process under the CCAA will ensure timely and cost-effective realization on assets without damaging the value of the Phoena Group, which could happen with an alternative approach due to the regulated nature of the cannabis industry.

[12] The Phoena Group incurred substantial losses in its fiscal year ended December 31, 2022. For the fiscal year ended December 31, 2022, the Phoena Group had a net loss of $24.8 million based on gross revenue of $13.2 million. For the one-month period ending January 31, 2023, the Phoena Group had a $317,000 loss on gross revenue of $1.2 million. The Phoena Group is not able to meet its obligations as they become due.

[13] The Applicants believe it is necessary to significantly write down the carrying values of certain assets, including inventory, biological assets and right-to-use assets, due to impairment. If such adjustments for impairment were made to the balance sheet, the Applicants’ liabilities would significantly exceed their assets.

[14] The Applicants, with the assistance of the Monitor, plan to solicit bids from professional third-party liquidators in respect of the liquidation of the inventory, equipment and fixtures located in and/or forming part of the Property (the “Liquidation Solicitation Process”), and then select the liquidator that they believe will best assist in maximizing the proceeds from these assets, subject to Court approval.

[15] The Applicants, in consultation with the Monitor, also intend to solicit listing agreements from real estate brokers in respect of the Fenwick Facility and then select the real estate broker that they believe will assist in maximizing the proceeds from the Fenwick Facility, subject to Court approval.

[16] Counsel submits, and I agree, that the Applicants are “debtor companies” within the meaning of the CCAA for the following reasons:

(a) Each of the Applicants was incorporated under the legislature of a province in Canada, and are each a “company” within the meaning of the CCAA;

(b) The Applicants’ debts exceed $5 million dollars. Specifically, the aggregate amount of the Applicants’ liabilities is estimated to be approximately $77 million including approximately $18.8 million owing to Cortland, as first secured creditor; and

(c) The Applicants are insolvent because they are unable to meet their obligations as they become due. Moreover, once necessary write downs are made to the Applicants’ balance sheet, the Applicants’ liabilities would significantly exceed their assets.

[17] The Applicants submit that given their current financial condition and the looming liquidity that they face, the Stay of Proceedings at this time is in the best interests of the Phoena Group and their stakeholders and is both necessary and appropriate as is the form of the Initial Order.

[18] The Applicants further submit that the Stay of Proceedings should be extended to the Phoena Group’s directors and officers so that they may focus on the CCAA proceedings, including the liquidation and orderly wind-down of the Applicants’ business.

[19] I am satisfied that the Stay of Proceedings should be granted.

[20] I am also satisfied that EY should be appointed as Monitor.

[21] On March 31, 2023, the Applicants executed an engagement letter to retain Mr. Karasiuk to act as the Chief Restructuring Advisor and seek Court approval of the appointment so Mr. Karasiuk can oversee and assist the Applicants in these CCAA Proceedings.

[22] Phoena Group is of the view that the engagement of the Chief Restructuring Advisor will assist in the wind-down process to maximize proceeds available for distribution to creditors. The Proposed Monitor supports the appointment of Mr. Karasiuk as Chief Restructuring Advisor.

[23] The appointment of Mr. Karasiuk as Chief Restructuring Advisor is approved.

[24] The Applicants also seek a first-ranking priority Administration Charge over the Applicants’ Property (as defined in the Initial Order) in the maximum amount of $200,000 in favour of the Monitor, counsel to the Monitor, and counsel to the Applicants (collectively, the “Professionals Group”), to secure payment of their professional fees and disbursements, whether incurred before or after the date of the Initial Order.

[25] I am satisfied that the quantum of the proposed Administration Charge is reasonable and necessary and is in line with the nature and size of the Applicants’ business and the involvement required by the Professionals Group. The Administration Charge is approved.

[26] The Applicants also seek approval of the DIP Loan and the second-ranking DIP Lender’s Charge over the Applicants’ Property (as defined in the Initial Order) in favour of the DIP Lender, to secure amounts borrowed by the Applicants under the terms of the DIP Loan.

[27] Section 11.2 of the CCAA allows the Court to grant the DIP Loan and the DIP Lender’s Charge that ranks in priority to the Applicants’ secured creditors, on notice to those secured creditors that would be affected and in an amount that the Court considers appropriate having regard to the Applicants’ Cash Flow Forecast.

[28] When the Phoena Group realized that it had a looming liquidity crisis, it initiated discussions with its senior secured creditor, Cortland, to provide DIP Loan. The Applicants and their counsel negotiated with the DIP Lender and its counsel to settle committed terms for the DIP Loan.

[29] Pursuant to the Cash Flow Forecast, the Applicants will not have sufficient funds to get through the initial Stay Period absent interim financing being approved and the DIP Lender’s Charge being granted by the Court.

[30] Counsel to the Applicants submit that the following additional factors support the approval of the DIP Commitment Letter and the granting of the DIP Lender’s Charge:

(a) The availability of the DIP Loan is contingent on an order of this Court approving same and the DIP Lender’s Charge;

(b) The necessity of the DIP Loan is demonstrated and supported by the Cash Flow Forecast;

(c) In the absence of the DIP Loan, the Applicants will be unable to continue to carry on business. In particular and as indicated in the Cash Flow Forecast, without interim financing, the Applicants will not have sufficient funds to get through the initial Stay Period.

[31] The DIP Term Sheet provides that the interest rate for the DIP Loan is 20% per annum. Notwithstanding the 20% interest rate, the Applicants and the Monitor submit that the interest rate is reasonable in the circumstances. No party objected. I am prepared to approve the DIP Term Sheet and DIP Charge. However, in my view, the approval of a DIP Loan carrying a 20% interest rate is unique to the circumstances of this case. This approval shall have no precedential value.

[32] The Applicants seek a Directors’ Charge on the Applicants’ Property in favour of the Applicants’ current officers and directors in priority to all other charges other than the Administration Charge and the DIP Lender’s Charge, up to a maximum amount of $450,000.

[33] While the Phoena Group’s directors and officers have the benefit of a D&O insurance policy that provides them with coverage for certain claims and liabilities that may arise, these policies contain exclusions and exceptions to such coverage, and is set to expire on April 30, 2023.

[34] The Directors’ Charge is intended to address potential claims that may be brought against directors and officers.

[35] The Applicants and the Monitor are of the view that the quantum of the Directors’ Charge is reasonably necessary at this time to address circumstances that could lead to potential directors’ liability prior to the Comeback Hearing.

[36] In my view, the Directors Charge is necessary at this time and it is approved.

[37] The requested relief is granted and the Initial Order has been signed.

Chief Justice G.B. Morawetz Date: April 4, 2023