Canadian cannabis producer Phoena winds-down business, blames high taxes

April 12, 2023 · MJ Biz Daily

Canadian cannabis producer Phoena Group has been granted creditor protection and is winding down its operations, the company said in court documents.

The Vaughan, Ontario-based company – formerly called CannTrust – said it no longer has the financial footing to continue operating.

As a result, Phoena plans to immediately halt the cultivation of new plants, destroy cannabis inventory not yet released for sale and lay off 87 employees, although upward of 238 of its workers will be affected.

CannTrust was one of the leading cannabis producers in Canada until it became embroiled in a cultivation scandal in 2019, with nearly 600 employees at the time and 19 million Canadian dollars ($14 million) in quarterly sales.

In the initial application under Canada’s Companies Creditors’ Arrangement law (CCAA), Phoena listed many challenges facing the company, including the oversupply of cannabis products in Canada, competition from other producers, over-regulation and excessive taxation.

Geoffrey Morawetz, chief justice of the Ontario Superior Court, issued the order under the CCAA last week at the request of Phoena.

“The applicants have debt in excess of CA$5 million, are insolvent, and are facing a liquidity crisis,” according to the CCAA filing.

Phoena owes roughly CA$1.88 million to the federal government, including:

  • CA$911,893 to the Receiver General for Canada.
  • CA$870,506 to the Canada Revenue Agency.
  • CA$95,799 to Health Canada.

The company also said the industry faced “considerable initial over-exuberance,” resulting in the number of licensees rising from about 100 on the day of legalization in October 2018 to approximately 950 today – a roughly tenfold increase in competition.

Wind-down terms

Darren Karasiuk, a former Aurora Cannabis executive, is leading the wind-down as chief restructuring adviser.

As part of the wind-down, the company’s property in Fenwick, Ontario, is expected to be listed for sale, and inventory and equipment will be liquidated.

“I believe a liquidation and orderly wind-down of the Applicants is in the best interests of the Applicants’ creditors and other stakeholders,” Phoena’s interim CEO, Cornelis Pieter Melissen, said in an affidavit.

Melissen said overregulation has been an issue for the Canadian cannabis industry from the beginning, “and I am aware of a number of otherwise well-run cannabis businesses that have failed, or continue to struggle, due to factors such as excessive taxes, complex regulatory requirements, government delays in licensing, and limitations on dosage size, packaging and marketing.”

“In addition, certain government purchasers/retailers have experienced internal purchasing, distribution and delivery issues, among other problems,” Melissen wrote in the affidavit.

The company’s court filing cited MJBizDaily data showing that Canada’s federally licensed producers destroyed a record 425 million grams (468 tons) of unsold, unpackaged dried cannabis in 2021.

For the fiscal year ended Dec. 31, 2022, Phoena recorded a net loss of CA$24.8 million on sales of CA$13.2 million.

The federal government imposed CA$1.82 million in excise taxes that year, representing almost 14% of the company’s gross revenue.

In the first month of 2023, Phoena said, it lost CA$317,000 on gross sales of CA$1.2 million.

Phoena haunted by CannTrust past

Melissen said Phoena faced several additional challenges stemming from the time it was known as CannTrust.

In September 2019, Health Canada partially suspended CannTrust’s cannabis licenses at its facilities in Vaughan and Fenwick for noncompliance with federal cannabis legislation.

Earlier that summer, Canada’s federal regulator was notified of “unlicensed” growing taking place in several of CannTrust’s cultivation rooms.

Three of the company’s former executives were acquitted of all charges in late-2022 after the case collapsed.

The charges came from a nearly two-year joint investigation by the Ontario Securities Commission (OSC) and Royal Canadian Mounted Police (RCMP) after a whistleblower alerted Canada’s cannabis regulator in 2019 about five “unlicensed” cultivation rooms the company had been operating since 2018.

CannTrust’s licenses were reissued by the federal government on Sept. 14, 2020, and Dec. 15, 2020, respectively.

In 2022, CannTrust Holdings exited court-supervised CCAA proceedings after completing a financing led by Marshall Fields International B.V., which is a subsidiary of Kenzoll B.V., a Netherlands-based private equity investment company.

Marshall was one of the investors that acquired 90% of the equity of CannTrust Equity, which owned CannTrust.

Before its regulatory issues, CannTrust was listed for trading on the Toronto Stock Exchange and the New York Stock Exchange. (Full Story)

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