The Voluntary Administration / Deed of Company Arrangement (DOCA) restructure of Tikun, a medicinal cannabis cultivator, can be considered an industry first. This innovative and unique approach, realised by advisory and restructuring practitioners Stephen Earel and Barry Wight, Partners of Cor Cordis, allowed Tikun to successfully navigate a challenging financial situation while preserving its crucial cultivation permits and licenses.
Typically, when a company faces financial distress and enters a Voluntary Administration, there is a risk of losing essential licenses and permits as part of the restructuring process. However, in the case of Tikun, we managed to structure the transaction through a Deed of Company Arrangement, which enabled the sale of shares and, at the same time, ensured the preservation of its valuable cultivation permits and licenses.
By finding a buyer for the distressed business through the DOCA process, Tikun was able to secure the continuation of its operations in the medicinal cannabis industry without any disruptions caused by the loss of licenses.
This successful outcome set a precedent for future restructurings within the medicinal cannabis cultivation sector, providing valuable insights and lessons for other companies facing similar challenges.
Tikun, established in 2016 was one of Australia’s first medicinal cannabis cultivators. Initially, the company operated out of leasehold premises that had previously been used for rose farming. Over the course of 2016 to 2018, the land and infrastructure were repurposed, and additional facilities and infrastructure were added to meet the requirements for obtaining state and federal licenses related to the possession, cultivation, and harvesting of medicinal cannabis.
During its operation, Tikun had two main product lines: a high-THC oil and a CBD oil. These products were derived from the cannabis plants cultivated on their premises. However, the manufacturing process of the cannabis oil was outsourced to a third party.
After completing the necessary regulatory processes and establishing its manufacturing arrangements, Tikun started distributing its products in 2021. The distribution phase marked the point at which Tikun’s medicinal cannabis oils became available to consumers and medical patients in need of these products.
Tikun faced a series of challenges that led to its financial difficulties and eventual closure. The key factors that contributed to Tikun’s problems:
- Limited demand and over supply. Tikun faced a situation where the demand for its products, was not sufficient to match the level of production. This resulted in an overabundance of stock, which the limited distribution network was unable to move efficiently.
- Early entrant risk. Since inception regulatory, market and consumer changes quickly evolved resulting in unplanned and unforeseen disruption and change.
- Withdrawal of financial support. Shareholders withdrew their financial support, which likely exacerbated Tikun’s financial strain and made it difficult to meet operational expenses.
- Limited distribution network. Tikun’s distribution network was inadequate to handle the quantity of stock produced, further hindering revenue generation and market reach.
- Under capitalisation and high expenditure. Tikun was undercapitalised and faced high expenditure, particularly related to wages, rent, and outsourcing manufacturing costs. This financial strain likely affected its ability to sustain operations.
- Reliance on equity funding. Tikun heavily relied on equity funding to finance its operations, burning through a significant amount of share capital and incurring debt in the process once equity funding was exhausted.
- Lack of an established brand. The limited distribution network and poor strategic management likely contributed to Tikun’s brand not being well-established in the market.
- Loss of operational staff. The loss of operational staff through resignations or stand-downs likely impacted Tikun’s ability to continue its day-to-day operations effectively.
Over a 10-month period, several strategies were deployed to secure a successful outcome.
- Preserving non-transferable licenses. The licenses and permits held by Tikun were not transferable, which presented a challenge in preserving and realising these valuable assets during the restructure. Research was conducted to explore possibilities for preserving the licenses and permits necessary for the cultivation, production, possession, and wholesale of medicinal cannabis.
- Deed of Company Arrangement. Based on existing experience, it was determined that a Deed of Company Arrangement process would be the most suitable method to preserve and realise the licenses. This involved the sale of shares to transfer the ownership and control of the business to a new entity while maintaining the licenses and permits under the existing arrangements.
- Dealing with the complexity of a lease-hold operation. A complexity arose when there was no interest in a lease-hold operation. To address this, a creative solution was devised to structure a transaction that included the land and improvements, even though they were not owned by Tikun. The prospective buyer had to secure the use of the land and improvements either through acquisition or lease to comply with the licensing requirements.
- Managing the business and working with key stakeholders. The process involved managing the operations of Tikun as Voluntary Administrators and working closely with the stakeholders during the search for a buyer for the business.
Overall, the successful outcome ensured the continuation of Tikun’s operations in the medicinal cannabis industry, preserving the licenses and permits and allowing the business to thrive under new ownership. The creative and strategic approach taken in this transaction set a precedent for future restructurings within the industry.
With its strengthened position and the prospect of further investment from its new owners, Tikun seems to be well-positioned for future growth and success. An impending rebranding exercise represents a pivotal moment for Tikun as it embarks on its future growth plans.
The successful sale transaction and preservation of Tikun’s operations through the Deed of Company Arrangement not only secured the continuity of the business but also had significant financial implications. The fact that the client had guaranteed approximately $2.5 million of debt meant that, had the business been shut down without a going concern sale of the property, the client would have faced a loss of over $5 million.
By avoiding a shutdown and achieving a going concern sale, the debt that was guaranteed by the client was paid down through the proceeds of the sale transaction. This outcome significantly mitigated the financial risk and potential losses that would have been incurred had the business not been successfully restructured and sold.
The successful restructure and sale not only preserved the licenses and permits for the medicinal cannabis operations but also provided a positive financial outcome for the client, alleviating the burden of the guaranteed debt and preventing a substantial loss that could have arisen in a worst-case scenario. This underscores the importance of the creative and strategic approach taken in this complex transaction and the value it brought not only to the company and its stakeholders but also to the client involved.
Talyor David Lawyers