By Vince Sliwoski

I’ve been writing about the Chalice receivership process since late May, when Chalice Brands Ltd. (OTCMKTS: CHALF) filed an Oregon Circuit Court complaint. In that Oregon lawsuit, Chalice brought claims against five local subsidiaries to drive them into receivership, claiming some $35 million owed. The lawsuit was orchestrated with a parallel Canadian proceeding. Up north, Chalice and its affiliates received protection from creditors while the company attempts to reorganize without filing bankruptcy.

I haven’t been following the Canadian proceeding, but things are coming into focus here in Oregon. I’ll share two takeaways today. First, the bid and sale process shows that the market for Oregon cannabis businesses remains depressed and unattractive, even at steep discounts. Second, the proposed sale of the Oregon subsidiaries’ assets won’t sit well with many people. This is because the sale is teed up for the bargain basement price of $3 million, to buyers who could be fairly called Chalice “insiders.”

The market for Oregon cannabis assets is awfully weak

We didn’t need a Chalice faceplant to know things were bad. Here in the Portland office, we’ve spent much of 2023 helping clients sell, or attempt to sell, Oregon cannabis businesses and related assets. This includes everything from naked licenses to whole verticals we helped purchase in the COVID run-up. There just aren’t a lot of buyers right now– especially at scale.

Chalice was a relatively large outfit. At the outset of this Receivership, the Chalice subsidiaries held 22 Oregon cannabis licenses, including 16 retail licenses. All 22 licenses remain “active” today, although some aren’t operating per OLCC dispensation. As of May 23, 2023, Chalice subsidiaries also owned four inactive licenses in Nevada; and a single, active California license. A bit more on those below.

Following the Oregon Receiver’s appointment, he went about marketing the Oregon assets energetically, including the 22 cannabis licenses. He received just four offers before the bid deadline. (In full disclosure, we represent one of the bidders, and other interested parties.) Following a period of negotiation with the high bidder (not our client), and following what the Receiver has described as extensive creditor negotiation and outreach, he picked a winner. They negotiated some, landing at a sale price of $3 million for all locations save three undesirable stores.

During the bid process, interested parties who were willing to sign a nondisclosure agreement gained access to a data room. Presumably, that data room contained revenue and other performance metrics for the businesses at issue. I did not visit the data room and can only speculate as to the revenues these 22 businesses were generating. I do feel fairly confident though, in opining that the $3 million sticker price looks like a helluva deal. To wit, Chalice announced the acquisition of just four of the stores on offer for $6.5 million just one year ago.

Granted, some of the Oregon assets aren’t operating at this time. The buyers have also agreed to pay cash at close, which bolsters the offer, and would allow the receiver to clear out tax liabilities and some portion of monies owed to secured creditors. Under the draft asset purchase agreement I’ve reviewed, the buyer should also receive the five Nevada licenses (but not the California license), whatever those are worth, as part of the $3 million purchase price. The buyer would not be assuming any liabilities.

At this point we should ask who is getting screwed here, if the Court approves this sale. In my view, it’s primarily smaller, Oregon cannabis businesses and third parties (e.g. landlords, service providers), whom the Chalice subsidiaries owe money that will never be repaid. To wit, the initial Complaint in the Oregon litigation alleged that the Chalice subsidiaries “… owe approximately $3.7 million in the aggregate in trade payables…” (ouch) as well as a “significant amounts of indebtedness to third parties” (awfully vague).

A second group of disadvantaged parties is arguably the shareholders of Chalice Brands– or most of them. It appears the parent company will never receive the $35 million that the subsidiaries allegedly owe to the shareholders’ investment vehicle. Today, the company’s stock price is deservedly in the toilet at $.0000010 USD, down from a 52-week high of $.27 USD. Arms-length investors took a bath.

So, who is about to benefit? Read on.

The familiar faces buying Chalice assets

The winning bidder is an entity called APCO LLC, a newly formed Delaware entity owned in whole or in part by familiar parties, William Simpson and Gary Zipfel. Many readers may recall that Simpson founded Chalice Farms in 2014. He sold to Golden Leaf in 2017 and became its CEO as part of that deal. Simpson left or was ousted at the end of 2018, long before the company renamed itself Chalice Brands. Finally, in January of this year, Simpson was appointed as Advisor to the Chalice Board. He was described by CEO Jeff Yapp as a “major shareholder” in the announcement.

The other APCO owner listed as an purchase agreement signatory, Gary Zipfel, was appointed to the Board of Directors of Chalice Brands at the same time Simpson resurfaced. Like Simpson, Zipfel was also described as a “major shareholder.” In Court filings, the Receiver has been careful to describe APCO as “a good faith-purchaser, in that Purchaser demonstrated honesty in fact and fair dealing in negotiating its bid.” Maybe so, at least in that certain capacity. On the other hand, the Receiver has distanced himself, prudently and cautiously, from activity occurring prior to his appointment. In his August 2 report to the Oregon Court, for example, the Receiver wrote:

Prior to the CCAA filing in Canada, and the initiation of the Receivership in Oregon, the Board of Directors of Chalice formed a Special Committee to initiate a strategic review to determine if there was a potential buyer of the assets of Chalice. The Special Committee spent several weeks actively soliciting buyers for all of its Canadian and U.S. holdings, including speaking with investment bankers to determine if their clients had any interest in acquiring Chalice’s assets. The Receiver is generally advised that these efforts were quite robust, and while no sale was completed during this strategic review, many of those interested parties did submit bids and/or complete due diligence during the CCAA and Receivership process.

Interesting! Parties affected by this proposed sale to APCO may be interested in getting information from Chalice on:

• the run-up to this “robust” outreach process, starting with Chalice’s apparent decision to stop paying vendors before bringing on Simpson and Zipfel, and throughout their tenures
• whether the Special Committee solicited offers only for “all of its Canadian and U.S. holdings”, or also offered separately the Oregon assets headed for APCO
• a summary of the “many bids” received by the Special Committee, and whether any of those bids outclassed the $3m in cash that APCO and its owners now propose to pay for the Oregon assets
• who served on the Special Committee, and the rationale in refusing any or all of the “many bids”
• why this process lasted only “several weeks” (an incredibly compressed timeline)
• the involvement of Zipfel and Simpson in the offering process, in their respective capacities as Advisor and Director of the Chalice Board, or otherwise

This could be a bunch of smoke with no fire. I don’t know. Fairness also requires an acknowledgement that the Chalice insiders’ company brought more cash to the table than other bidders in this hapless Oregon process. Still, I hope that someone digs into this: right now it feels like we are sitting on half a story. The proposed sale optics are problematic in that all of these Chalice assets are teed up for transfer to Chalice insiders, and for a song. Meanwhile unpaid farmers, landlords and everyone else would take it in the shorts upon Court approval.

We will keep tracking this one as it works its way through the Receivership process. Until then, for previous posts on Chalice check out the following:

Re-published with the permission of Harris Bricken and The Canna Law Blog