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GenCanna Global USA, Inc. – Kentucky Hemp Grower Files Chapter 11; Cites Dramatic Decline in CBD Prices and “Lack of Clarity as to the Regulatory Landscape”

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February 6, 2020 − GenCanna Global USA, Inc. and two affiliated Debtors (“GenCanna” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Kentucky, lead case number 20-50133. The Debtors’ filing follows involuntary Chapter 11 petitions filed by creditors on January 24nd; with the Debtors now conceding that they have no grounds to contest those involuntary petitions and consenting “to the entry of an order for relief commencing its chapter 11 case as a voluntary proceeding” [Docket No. 37]. As of writing, however, the Debtors have yet to file their own "voluntary" petitions. 

The Debtors, a vertically integrated agriculture-technology company specializing in the production of hemp rich in CBD (“the best CBD in the world”), are represented by Benesch Friedlander Coplan & Aronoff LLP as local bankruptcy counsel. Further board-authorized engagements include (i) Dentons Bingham Greenebaum LLP as general bankruptcy counsel, (ii) Jefferies LLC as financial advisor, (iii) Huron Consulting Services LLC as operational advisor and (iv) Epiq as claims agent. 

As noted in the Debtors’ declaration in support of the Chapter 11 filings (the “Declaration”) the Debtors have hired and fired several sets of advisors over the course of the last year as financing and sale transactions have foundered, including Cowen and Company LLC (“Cowen,” as investment banker) and Goldman Sachs & Co., LLC (“Goldman Sachs,” as financial advisor).

In a press release announcing the filing, the Debtors advised that “filing will allow GenCanna to continue to operate its business without interruption to customers, vendors, partners and employees while working through a reorganization plan that could include refinancing of the Company’s existing indebtedness, or an alternative restructuring transaction such as a sale.

GenCanna has obtained approximately $10 million in post-petition debtor-in-possession (DIP) financing from its senior lender, which, subject to Court approval, will provide the Company with liquidity to maintain its operations in the ordinary course of business during the Chapter 11 process.

Matty Mangone Miranda, the Debtors’ Chief Executive Officer, added” “While this is certainly not the outcome we desired, the bankruptcy process gives us the ability to move forward in a way that allows us to best continue operations and serve customers as we work through our reorganization, resolve an outstanding legal dispute involving our Western Kentucky facility, navigate an uncertain regulatory environment and adjust our annual operating costs to better match the landscape.

Events Leading to the Chapter 11 Filing

The Declaration describes a company at the messy end of a new and newly-regulated industry and the Debtors’ "tale of woe" includes: (i) an explosion/fire at their Winchester Kentucky Hemp Research Campus (“HRC,” located on nearly 150 agricultural acres formerly used by Philip Morris/Altria); (ii) delays in the construction of a “state-of-the-art hemp” processing facility located in Mayfield, Kentucky (it is unpaid contractors in respect of this facility that filed the involuntary petitions); (iii) an allegedly incompetent (and later "disgruntled") CFO whose poor work quality has apparently led the Debtors’ auditor refuse to resume activity on completing the Debtors’ 2018 audit; (iv) the uncomfortable line that CBD producers straddle between the regulated hemp and regulated (and unregulated) marijuana worlds (see more below on regulation and "reputational risk"); (v) fights with farmers in respect of unpaid fixed-price contracts; and (vi) potential sources of capital unsure of what to make of it all, especially without an auditor willing to vouch for its client. The biggest problem, however, is straightforward, Kentucky bourbon-on-the-rocks economics: dramatic declines in CBD prices and the knock-on effect that those declines have on the ability of the Debtors' to grow their business, pay contractors and secure funding.

The Declaration states: "Beginning in the summer of 2019, pricing in the industry plummeted across all CBD product categories. By the end of the year and through today, bulk product prices in nearly all categories have dropped by as much as 80%. This dramatic plunge in pricing also correlated to the large drop in the public capital markets for cannabis companies in both the US and Canada. This market correction and drop in market values caused further stress on raising new capital, which created working capital difficulties within the industry and company’s ability to pay its suppliers.  The Debtors were caught in the middle of this market correction with both its capital raise process and its reliance on timely payments from its customers. This dramatic deterioration in pricing also had an immediate and corresponding negative impact on Company revenues, and as a result, the Company had difficulty reaching its 2019 business plan as a result of pricing that was about 50% below its expectation. Additionally, as a result of its HRC fire, the Company had difficulty ensuring an adequate level of inventory resulting in missed sales opportunities."

The other major, industry level concern likely to set off alarm bells throughout the industry, is the regulatory environment. The Declaration continues: "While the state of the law and the removal of hemp from the Controlled Substances Act is clear, third parties, especially large food processors and manufacturers, are still hesitant to do business with the Debtors given a lack of clarity as to the regulatory landscape applicable to hemp-derived products. More specifically, lack of policy development by the FDA and confusing signaling have caused large American companies to consider reputational risk ahead of novel product development, in spite of their stated desire to work with the Debtors. National brands are just beginning to engage, with multi-million dollar POs recently achieved. The lack of regulatory clarity has also caused difficulty for cannabis companies to attract capital at competitive rates and left companies with few options."

About the Debtors

GenCanna is a "vertically integrated agriculture-technology company specializing in the production of hemp rich in CBD. Founded in 2014, as an inaugural member of the Kentucky Department of Agriculture's Industrial Hemp Pilot Program, the company is a longstanding industry pioneer. GenCanna works closely with state universities, consumer protection agencies and other regulatory bodies driving key industry language and legislation. Consistent extraction methods and innovative processing technologies ensure GenCanna production processes exceed all regulatory standards for FDA registered and inspected food production facilities (learn more at https://gencanna.com/compliance/). The GenCanna Production Platform assures standardized, repeatable quality from farm to finished product."

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The post GenCanna Global USA, Inc. – Kentucky Hemp Grower Files Chapter 11; Cites Dramatic Decline in CBD Prices and “Lack of Clarity as to the Regulatory Landscape” appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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