PharmHouse is costing Canopy Rivers Inc. (OTC: CNPOF) millions as it works to keep it afloat after the company missed its cash flow goals. The problems have led to a deterioration among the partners causing counterclaims of bad behavior. Canopy Rivers said it will act as a debtor-in-possession lender for PharmHouse and will provide up to $7.2 million in DIP financing. This will allow PharmHouse to continue its day-to-day operations throughout the anticipated restructuring. The Joint Venture Partner (2615975 Ontario Inc.) has indicated that it will not contribute financially to address PharmHouse’s near-term liquidity issues.
Canopy Rivers owns 49% in the joint venture of PharmHouse, which was formed in May 2018. The company partnered with Canopy Growth Corporation (CGC) and TerrAscend Canada Inc. which provided strong support for the company’s significant investment in PharmHouse’s automated production facility, as well as its guarantee of the PharmHouse Credit Facility.
PharmHouse has been granted creditor protection under the Companies’ Creditors Arrangement Act. Ernst & Young Inc. has been appointed by the Court to act as the Monitor of PharmHouse in the CCAA proceedings while PharmHouse explores a restructuring of its business and operations. Canopy Rivers said it views PharmHouse’s decision to seek creditor protection as an important step forward in addressing its liquidity and capital resource concerns.
Canopy Rivers said in August that PharmHouse failed to generate cash flows according to the agreed-upon timeline from the Offtake Agreements and the ultimate timing and receipt of cash flows became uncertain, creating liquidity and capital resource issues at PharmHouse.
Discussions regarding the potential renegotiation of the Offtake Agreements were unsuccessful and led to a significant deterioration in the relationship between the parties. Earlier this week, Canopy Rivers disclosed that the partner 2615975 Ontario Inc. had made a number of allegations against the it, Canopy Growth Corporation, and TerrAscend Corp. and TerrAscend Canada Inc., including claims relating to bad faith, fraud, civil conspiracy, breach of the duty of honesty and good faith in contractual relations and breach of fiduciary duty, and claims relating to PharmHouse’s offtake agreements with Canopy Growth and TerrAscend. Canopy Rivers said it considered the claim to be completely without merit and intended to vigorously defend its position at the appropriate time and in the appropriate forum.
In connection with the Restructuring, Canopy Rivers said it expects to record certain adjustments on its statement of financial position for its upcoming fiscal quarter ending September 30, 2020. In a statement, Canopy Rivers said it expects to record a full impairment charge on its investment in PharmHouse common shares, which had a carrying value of $32.6 million as at June 30, 2020. The carrying value as at June 30, 2020 reflected the cash investment of $11.0 million made by the company in July 2018 and January 2019, the value of non-cash consideration paid to the Joint Venture Partner upon the formation of PharmHouse, and the company’s cumulative share of PharmHouse’s comprehensive loss, as required by International Financial Reporting Standards.
In addition, Canopy Rivers may recognize impairment charges in respect of all or a portion of the balances relating to shareholder loans advanced by Canopy Rivers to PharmHouse, which were recorded at $50.2 million as of June 30, 2020. Furthermore, the company is a guarantor of PharmHouse’s syndicated credit agreement, which provided PharmHouse with a non-revolving credit facility of $90.0 million. If PharmHouse is unable to service its obligations pursuant to the PharmHouse Credit Facility, the company may be required to recognize a financial liability relating to its guarantee.
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