Delta 9 tries to fend off creditors by selling off retail cannabis stores, seeking creditor protection

Posted on July 16, 2024 by Peggy

The future of a major player in Manitoba’s cannabis industry is in jeopardy.

Delta 9, a locally-run business that became a well-known producer and retailer of recreational cannabis, has obtained an initial order for creditor protection as it faces challenges in an oversaturated cannabis market.

In a bid to withstand its creditors, Delta 9 also agreed to sell the retail and logistic arms of its operations, as well as some debt, to FIKA, an Ontario-based cannabis company operating around 140 stores across Canada.

John Arbuthnot, who co-founded Delta 9 with his father, said his company has dealt with the same challenges afflicting the cannabis industry as a whole, including market saturation and shrinking margins.

“What anyone at the time, three to five years ago, would have said is proper capital allocation is now looking back saying, ‘The math doesn’t add up anymore,'” Arbuthnot, the business’s CEO, said.

In a news release, Delta 9 explained seeking creditor protection became the best option after carefully evaluating the business’ health, ability to pay back the money it owes and the company’s limited ability to obtain more capital, among other facets of the business.

Struggling to pay debt

Creditor protection allows companies facing financial difficulties to restructure their operations in hopes of helping the business rebound.

Another factor in Delta 9’s decision was the actions of Calgary-based SNDL Inc., which purchased Delta 9’s senior debt and last week demanded repayment of $28 million. The Winnipeg company’s news release described SNDL’s tactics as “aggressive.”

Brad Poulos, a cannabis industry expert who’s also a lecturer at Toronto Metropolitan University’s entrepreneurship and strategy department, suggested SNDL tried to position itself to buy Delta 9 and its assets.

Delta 9 has since reached a binding term sheet to sell part of its operations to FIKA, while looking at possible investors or buyers for the production side of its business. Arbuthnot didn’t want his business to be subject to SNDL’s actions.

They are “fortunate today to be announcing this series of transactions, which we feel is a far superior result for our stakeholders than an alternative outcome,” Arbuthnot said.

Three workers wearing masks and blue bonnets inspect cannabis at a production facility. — Delta 9 became the most well-known cannabis brand in Manitoba and eventually set up retail stores across the Prairie provinces. (Jeff Stapleton/CBC)

In 2012, Arbuthnot was a business student at the University of Manitoba when he came up with the idea of producing medical cannabis. The company became the first licensed producer of medical cannabis in Manitoba and the fourth in Canada, according to a Delta 9 biography.

By the time the recreational cannabis market became legal, Delta 9 was operating as a licensed producer and retailer.

The company now operates a 95,000 sq. ft. production facility in east Winnipeg and runs 16 stores in Manitoba and five more between Alberta and Saskatchewan.

While the retail outlets made money, he said the cultivation side of the business became challenging for Delta 9, along with many producers, Arbuthnot said. The company laid off 40 workers and scaled back growing operations early in 2023, but ramped up production by year’s end, the CEO added.

No matter who owns Delta 9’s assets going forward, Arbuthnot is confident in the value of its products and branding.

“I certainly believe that what we’ve built here has staying power and would expect that to survive for years into the future.”

He said he doesn’t anticipate any layoffs at Delta 9 in the near future, but Arbuthnot said he cannot speak to the eventual outcome of the creditor protection process.

FIKA is scheduled to provide Delta 9 with $16 million in interim financing and another $13 million to repay a portion of SNDL’s loans.

Poulos, an expert in the cannabis industry, said he assumes FIKA’s leadership finds at least some of Delta 9’s storefronts attractive.

With further consolidation of retail stores expected, Poulos is expecting a “fight of the giants.”

“It’s going to be very, very difficult for smaller players to hang on until the number of retail locations in Canada has shaken itself to some kind of a natural level.”

A man in a black cap leans over and sniffs a jar of cannabis, held in front of him by a woman behind the counter of a retail store. — A customer takes a sniff of some of the cannabis sold at one of Delta 9’s stores on the first day that recreational cannabis was legalized in 2018. (Lyzaville Sale/CBC)

Manitoba’s cannabis regulator has issued more than 200 retail licences since the legalization of recreational cannabis in 2018.

Poulos said Delta 9 may have hurt itself by attempting to succeed in both the production and sales arms of the cannabis sector.

“The wisdom of the day back seven or eight years ago, when this industry was really nascent, was that you needed to be vertically integrated,” he said, suggesting some companies, including Delta 9, may have extended themselves too far.

Arbuthnot, however, said he believes it was smart to take ownership of multiple stages of the supply chain. He said he’s fortunate Delta 9 decided to enter the retail space too, since it became “highly profitable.”