Court orders PWC to take over Bridging Finance after scandal
When MJardin Group Inc. needed new capital to help fund its North American cannabis ambitions, it frequently turned to a familiar financier: Bridging Finance Inc.
The Toronto-based private lender's relationship with the beleaguered cannabis producer plays a major role in the scandal that rocked Bay Street over the past week amid allegations against Bridging Finance of “numerous” legal and regulatory infractions relating to conflicts of interest, misappropriated funds and inadequate disclosure. None of the claims have been proven in court or before the Ontario Securities Commission; however, the severity of the OSC staff’s investigation that’s underway led to PricewaterhouseCoopers Inc. being appointed to manage Bridging Finance’s affairs and the suspension of Chief Executive Officer David Sharpe as the lender’s ultimate designated person late on April 30.
With OSC investigators untangling a complex web of funds that’s alleged to be connected to Sharpe, former short-lived PI Financial owner Gary Ng, and Canadian entrepreneur Sean McCoshen, much of the probe's focus centres on Bridging Finance’s ties to MJardin, a small pot producer with five production facilities in the U.S. and Canada, and its former CEO, Rishi Gautam.
In a sworn affidavit dated Apr. 29, OSC Senior Forensic Accountant Daniel Tourangeau said Gautam told the regulator’s enforcement staff that Sharpe and his wife asked that he accept a $35-million loan secured against MJardin’s assets and then lend the same amount back. The money was allegedly intended to help Bridging buy out a major Bay Street firm (Ninepoint Partners) that was looking to end its ties with the lender in Oct. 2018. According to Tourangeau, the so-called “back-to-back arrangement” was not properly disclosed and OSC staff alleges the $35 million was appropriated from Bridging Finance investment funds.
"I wasn't really in a position to say no," said Gautam, according to the affidavit that details Gautam’s interview with OSC enforcement staff. Sharpe, however, provided testimony that claimed Gautam agreed to facilitate the loan, the affidavit states.
Sharpe and Gautam didn't return requests for comment. A lawyer for Bridging Finance declined to comment.
Bridging Finance's relationship with MJardin dates back to Dec. 2017 when the company established two loan facilities that totalled nearly $30 million. At the time, the pot company said the funds were earmarked to help pay for acquisitions as well as the down payment for a Manitoba cultivation facility and came with a maturity date of Dec. 2019. As well, Graham Marr, a portfolio manager at Bridging Finance, joined MJardin's board of directors.
MJardin was a relatively unique player in the North American cannabis sector. The company operated in the U.S. and Canada and claimed to be a first-class cannabis cultivator with experience dating back to when Colorado legalized recreational cannabis a decade ago. It also established close relationships with several First Nation communities for financial and operational support to set itself apart from the dozens of other Canadian-based pot producers with a distinctive offering to the recreational market.
A few months later in Feb. 2018, MJardin came back to Bridging Finance to increase one of its loans by US$15 million, but didn't provide a reason for needing the additional capital. In return, MJardin provided Bridging Finance with about 1 million common shares in the company. Another loan facility secured against MJardin's assets was created several months after for $90.2 million. That same loan was raised to $96.1 million a month later.
Later in Nov. 2018, its first loan expanded by another $8.1 million so MJardin could acquire a 5.3 per cent stake in California-based cannabis breeder DNA Genetics Inc.
According to Tourangeau’s affidavit, Bridging Finance provided another loan worth $10 million in that same month as MJardin prepared to go public on the Canadian Securities Exchange through a reverse takeover. Gautam told the OSC that he felt forced to take the loan and was left with "a bad taste [in his mouth]". MJardin said the loan was to be used for "working capital and general corporate purposes", but the OSC alleges it was used to pay a fee to McCoshen for providing a "personal guarantee" on an earlier loan the company received from Bridging Finance.
By the end of the year, MJardin owed Bridging Finance almost $140 million, but the company was already experiencing difficulty paying down some of its liabilities to its lender amid a challenging environment for Canada's burgeoning legal cannabis market. As a result of MJardin being unable to settle $9.4 million in liabilities, the company awarded Bridging Finance 1.47 million common shares, according to the company's 2018 year-end filings.
The debt kept piling up in 2019 even after Gautam resigned as CEO and stepped down from the company's board in February.
In a regulatory filing for its first quarter in 2019, MJardin said Bridging Finance amended the terms of its loans to adopt a new structure and interest rate; it also extended their maturity to April 2021. The lender also provided an additional $20 million to MJardin, the company said in that same filing.
At that time, MJardin also began adding a statement in its quarterly filings that attempted to explain its mounting debt load to investors: "Based on its rapid growth, the company relied on loans and equity financings to finance its operations and meet its capital requirements."
By the end of last year, Bridging Finance's loans to MJardin had ballooned to $155.8 million, roughly five times the amount it owed three years earlier. Over that same period, MJardin booked just $64 million in revenue. The company's market valuation currently hovers around $4 million.
In a statement released Monday, MJardin said it is in contact with PwC and "will continue to monitor the situation with Bridging Finance as it develops." Meanwhile, MJardin disclosed on Apr. 30 that Bridging Finance's Marr resigned from his role on the company's board last month. It didn't provide a reason for his departure.