A creditor of Delta 9 Cannabis has declared that the Winnipeg cannabis company is in default of its financing agreement and has demanded immediate payment of a $10 million convertible debenture financing.
The financing was closed in spring 2022 and pays Calgary-based SNDL Inc. (formerly Sundial Inc.) 10 per cent annual interest. It is not due to be paid back until March 2025.
Delta 9 CEO John Arbuthnot said his company does not believe it is in default and that it is up to date on all its principal and interest payments.
SNDL Inc. alleges that “Delta 9 is in default of certain obligations”.
A spokesperson for SNDL was unavailable for comment.
While Arbuthnot says the company is current in all its payments to SNDL and that it has paid down about $7 million worth of debt to various creditors since 2022, the company continues to be unable to gain any traction in the markets despite its history of profitability, including during the first quarter of 2024.
After going public in April 2016 with a stock price of around 20 cents and spiking up to $3.25 in November 2017, Delta 9’s stock has floundered since then. It has been trading at around two cents since January.
As such, the company announced on Friday its board has formed a special committee to “examine various potential strategic transactions for Delta 9, which may include, without limitation, mergers, acquisitions, asset sales or financings.”
Such an initiative often means the company is looking to find a buyer, but Arbuthnot said there are many potential options.
“Delta 9 has been an acquirer and may very well continue to be,” he said. “All option are on the table.”
Arbuthnot is under no illusions about the future of small cap cannabis companies in Canada.
“Our viewpoint, as it has been for the last 24 months, is that the cannabis industry in Canada needs to continue to consolidate,” he said. “Companies need to push towards profitability and we will end up with a smaller number of players, but an industry that is healthy and sustainably profitable. We are looking to find our position in that end game.”
Frederico Gomes, an analyst with ATB Capital Markets does not cover Delta 9, but shares that sentiment.
In a research report on the sector published in February, Gomes compared cannabis and tobacco industries.
“Cannabis and tobacco products are derived from a commoditized natural plant, attract repeat purchases conducive to brand loyalty and demand inelasticity, and face burdensome regulations and taxes,” he wrote.
“These characteristics make it hard for smaller players to compete.”
In an interview with the Free Press he said, “I don’t cover Delta 9 but obviously it has been in a tough situation for a while and that’s clear from the fact that its board has formed a committee to search for M&A (mergers and acquisition) opportunities or a sale or something like that.
“The entire sector has seen that. There are (Companies’ Creditors Arrangement Act) and bankruptcies happening. It has been a tough environment for small Canadian cannabis companies.”
Gomes does cover SNDL Inc, and said it was not surprising to him that it sent Delta 9 a demand letter.
“I can’t say it’s entirely unexpected,” said Gomes.
He said the company has provided credit to other small cannabis companies and has gone on to seize some assets.
“The strategy is they provide credit, receive a good yield and if something happens they have the opportunity to seize some of the assets,” he said.
While Delta 9 may be current on all its payments, Gomes points out there are financial terms on such convertible debentures that typically include covenants, for instance, that the company maintain a certain ratio between debt to EBITDA or a minimum cash balance.
“Some of them could be up to interpretation and I don’t know the details but it’s not just principal and interest payments that need to be up to date,” he said.
Arbuthnot said it’s not clear what will happen next with the SNDL demand but he said Delta 9’s intentions are to continue to pursue whatever avenues are available to maximize value for the company’s shareholders and stakeholders.
“We believe we have created one of the most attractive and profitable networks of retail cannabis stores across Western Canada with significant underlying value, and we have a very attractive low cost cultivation asset here in Manitoba which leverages this province’s low cost, green hydroelectricity,” he said.
“We are highly confident in the value of the sum of the parts.”
Martin Cash
Reporter
Martin Cash has been writing a column and business news at the Free Press since 1989. Over those years he’s written through a number of business cycles and the rise and fall (and rise) in fortunes of many local businesses.
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