Trichome Financial's wholly-owned subsidiary, Trichome JWC Acquisition, received licensure from Health Canada and closed the acquisition of substantially all of the assets of James E. Wagner Cultivation Corporation on August 28, 2020, free and clear of legacy liabilities. The Acquisition was made in connection with James E. Wagner Cultivation Corporation's consensual restructuring proposal with Trichome Financial under the Companies' Creditors Arrangement Act (the "CCAA") that was previously authorized by the Ontario Superior Court of Justice (Commercial List) on June 2, 2020. The Assets were purchased for total consideration of $16 million by way of set-off of Trichome Financial's pre-filing debt and assumption of its debtor-in-possession ("DIP") financing, and will be used by TJAC to continue to produce premium cannabis offerings under the JWC brand.
"The closing of the Acquisition is a transformational opportunity for Trichome Financial. It comes at what we believe to be an inflection point for the Canadian cannabis industry, with increasing monthly recreational sales due to greater retail store openings intersecting with rationalizing cannabis supply, particularly of premium quality, given industry-wide capital constraints. The financial and operational restructuring of the business over the last five months positions JWC to be amongst a select group of Canadian cannabis businesses that will thrive in the coming years. We estimate that the processes we have implemented will generate between $12 million to $14 million of EBITDA once the business is operating at full capacity," said Michael Ruscetta, CEO of Trichome Financial. "This has been an incredible team effort by many talented individuals working for a common purpose. There are many people to thank for their hard work and commitment to success, but none more so than the dedicated employees of JWC. While there is much more to do, I am confident that our team possesses the right mix of skills, expertise and passion to succeed."
Summary of Assets Acquired
TJAC is fully licensed to operate the acquired Assets. Based in Kitchener, Ontario, the Assets include 114,000 square feet of licensed space in two facilities capable of producing approximately 7,000 kilograms per year of premium cannabis. TJAC, operating the JWC business, is one of a small percentage of licensed producers holding a complete set of Health Canada licenses, enabling it to produce and sell both dried flower products as well as extract products. The Assets are fully built out, require nominal capital expenditures for growth, and have operated without interruption during the CCAA proceedings. Finally, TJAC extended employment agreements to 107 people, the vast majority of whom were previously employed by James E. Wagner Cultivation Corporation. The Assets are estimated to be valued at approximately $19 million on a preliminary basis, subject to audit confirmation.
Summary of Restructuring
Since April 9, 2020, Trichome Financial has overseen an exhaustive financial and operational restructuring of the JWC business. Howard Steinberg, Chief Restructuring Officer and a director of Trichome Financial, led a team of internal and external resources that has systematically rebuilt every functional aspect of the business in a unified approach with an overriding objective to position JWC for commercial success in the Canadian cannabis industry. The following is a summary of the accomplishments to date:
Management: The senior management team has been replaced and augmented in order to align functional roles with specific expertise. Howard Steinberg has led the organizational design and ushered in a collaborative, analytically driven approach to managing the business. Howard has been appointed the CEO of TJAC.
Balance Sheet: Approximately $19 million of James E. Wagner Cultivation Corporation's third-party liabilities were extinguished as a result of the CCAA proceedings and acquisition by TJAC, resulting in substantial cash interest savings.
Cost Structure: Full-time equivalent staffing has been reduced by approximately 40%, from 185 at its peak to 107 upon closing, resulting in annual cost savings of approximately $3 million. Excess vacant space in the building is currently being offered for sublet, which we expect would result in an additional $1 million per year of expense control if completed. Finally, management is anticipating additional material savings from enhanced expense oversight and efficient purchasing of consumable and capital supplies.
Operations & cultivation: With key hires in operations and cultivation, significant progress has been made scheduling production, reducing cycle times and improving plant health. All of these improvements will result in enhanced labour and facility productivity while ensuring production levels and end market demand are in balance.
Sales & marketing: Putting the customer at the apex of the JWC organization is a key priority under Trichome Financial's ownership. To that end, key investments are being made in internal sales and marketing capabilities, brand rejuvenation, and data analytics to ensure that we are constantly meeting the needs and desires of an ever-shifting marketplace.
Product strategy: As part of TJAC's licensure, JWC's genetics bank has been materially upgraded and will offer customers a wider selection of highly coveted strains. It is expected that some of these new strains will be available on shelves by the end of Q1 2021. Finally, product development that meets the needs of customers is central to the strategy going forward. Many new products are being assessed and tested, including hash, which we anticipate will hit the shelves before the end of 2020.
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