Delta 9 seeks creditor protection Manitoba’s largest cannabis producer pitches court plan to settle debt, sell assets By: Martin Cash Posted: 5:37 PM CDT Tuesday, Jul. 16, 2024

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This article was published 16/07/2024 (752 days ago), so information in it may no longer be current.

Delta 9 Cannabis Inc. has filed for creditor protection with the courts, under looming threat its lender might be making a move to seize the Winnipeg-based company’s assets.

Late Monday, Delta 9 filed a proposal under the Companies’ Creditors Arrangement Act (CCAA) that would see a white knight — Toronto-based FIKA Company – acquire all 41 of its retail locations in Manitoba, Saskatchewan and Alberta, and its distribution business, in exchange for paying off roughly $40 million in debt owed to Calgary-based SNDL Inc.

The proposal, which still has to be approved by the courts, also includes FIKA issuing $2 million worth of shares to Delta 9’s shareholders, as well as $4 million in shares to its unsecured creditors. Delta 9 has about $15 million worth of unsecured debt to suppliers.

The proposal also imagines a sales process to be managed by the court-appointed monitor, Alvarez & Marsal, to find a buyer for Delta 9’s unprofitable cannabis production operation.

The company — Manitoba’s largest in the sector, producing medical and recreational cannabis, with wholesale and retail sales channels — has sought an initial stay of proceedings that lasts until the middle of next week, when it will seek an extension of the protection.

On Tuesday, John Arbuthnot, founder and CEO of Delta 9, said there will be no immediate material change in operations.

“The company is not bankrupt and we will continue to operate in the normal course of business,” he said.

Creditor protection was sought, Arbuthnot said because of “aggressive” actions taken by SNDL, in the form of demand notices on a $10-million convertible debenture made in late May and the recent acquisition of $28.1 million long-term debt Delta 9 had owed Connect First and Servus Credit Union Ltd.

SNDL promptly demanded repayment of that debt, again claiming that terms of the loan were in default, company officials said.

Although Delta 9 had produced more profitable quarters than most publicly traded cannabis companies in Canada, the market continues to be over-balanced with too much supply, observers said.

Delta 9’s shares were down to one penny on Monday, giving it a market cap of about $3.5 million, despite the fact the company was generating revenue of more than $70 million per year.

Because of that low share price and a few consecutive quarters of losses, Delta 9 no longer had the capacity to raise any more capital.

In an interview, Arbuthnot said the CCAA process will generate about $55 million in value for the company’s stakeholders. “This is an outcome that maximizes value for everyone in what is otherwise a difficult situation.”

“The company is not bankrupt and we will continue to operate in the normal course of business.”–John Arbuthnot, founder and CEO of Delta 9

It’s also a process that will allow the company to move forward in the ordinary course and flesh out other elements of the CCAA plan over the next few months.

“In light of the aggressive actions from SNDL … it has been all hands on deck to put together this plan and get it to a point where it is ready for execution,” Arbuthnot said.

FIKA was founded in 2020, and has acquired other cannabis retailers — including some out of CCAA protection. It now has 144 retail stores under a variety of brands including FIKA Cannabis, Friendly Stranger and Fire & Flower, but currently has no locations in Manitoba.

As of January, Delta 9 had 12 stores under its brand name in Winnipeg alone.

FIKA officials were unavailable for comment Tuesday.

The proposal is still in its early stages and none of the features have yet to receive full court approval.

Frederico Gomes, an analyst with ATB Capital Markets who covers SNDL Inc., said it is it still possible SNDL might outbid FIKA for Delta 9’s retail locations.

“After SNDL bought the debt from third party last week, it seemed pretty clear to us that SNDL was interested in seizing or acquiring the assets of Delta 9, specifically just the retail portfolio of 41 stores,” said Gomes. “In our view, that was the most likely outcome, as of last week.”

Gomes said it will depend on the terms and conditions of FIKA’s repayment to SNDL as to how the plan might proceed.

“Are they are going to try to repay that in full or maybe try to come to a different arrangement with SNDL? And would SNDL accept it? Or maybe SNDL would try to outbid FIKA?” Gomes said. “That is all uncertain. We don’t know.”

Delta 9 is not alone among Canadian cannabis companies when it comes to financial woe.

Investors have been burned over the years and “it’s fair to say it is a very negative market sentiment around Canadian cannabis because of the track record,” Gomes said.

“Many investors have exited the space and we have seen lots of value destruction in the past with the shares of some big names trading at less than one per cent.”

While Gomes said he was not familiar with Delta 9’s production operation, many producers have closed production facilities in the recent past, including SNDL.

To others in the Manitoba cannabis space, Delta 9’s struggles are not a pleasant sight.

Sharon Clark, spokeswoman for the Retail Cannabis Council of Manitoba, said: “To see Delta 9 filing for creditor protection is certainly disheartening as a cannabis industry pioneer and Manitoba’s largest producer.”

martin.cash@freepress.mb.ca