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

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

Delta 9, a locally run businessthat becamea well-known producer and retailer of recreational cannabis, has obtained an initial order for creditor protection as it faceschallenges in an oversaturatedcannabis market.

Well-known player in Manitoba's cannabis industry not immune to challenges hindering industry: CEO

A man wearing a grey suit stands in the doorway of a cannabis drying room.
John Arbuthnot, co-founder of Delta 9, said his company is restructuring its operations, which involves selling off its retail outlets. (Joanne Roberts/CBC)

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

Delta 9, a locally run businessthat becamea well-known producer and retailer of recreational cannabis, has obtained an initial order for creditor protection as it faceschallenges in an oversaturatedcannabis market.

In a bid to withstanditscreditors,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 operatingaround 140 stores across Canada.

John Arbuthnot, who co-founded Delta 9with his father, said his companyhas 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 seekingcreditor protection became the best optionafter carefully evaluatingthe business' health, ability to pay back the money it owes and the company'slimited ability to obtain more capital, among other facets of the business.

Struggling to paydebt

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

Another factor in Delta 9'sdecision was the actions of Calgary-basedSNDLInc., whichpurchased Delta 9's senior debt and last week demanded repayment of $28 million.The Winnipeg company's news release described SNDL'stacticsas"aggressive."

Brad Poulos, a cannabis industry expert who's also a lecturer at Toronto Metropolitan University's entrepreneurship and strategy department, suggested SNDLtried to position itselfto 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 itsbusiness. Arbuthnotdidn't want his business to be subject to SNDL's actions.

We 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,"Arbuthnotsaid.

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 ideaof 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 licensedproducer andretailer.

The company nowoperates a 95,000sq. ft. production facility in east Winnipeg and runs16 stores in Manitoba and five more between Alberta and Saskatchewan.

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

No matter who ownsDelta 9's assets going forward, Arbuthnot is confident in the value of itsproducts andbranding.

"I certainlybelieve that what we've built here has staying power andwould 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 thecreditor 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 furtherconsolidation of retail stores expected, Poulosis expecting a "fight of the giants."

"It's going to bevery, very difficult for smaller players to hang on untilthe 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.

Poulossaid Delta 9 may have hurt itself by attempting to succeed in both theproduction 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 fortunateDelta 9 decided to entertheretail space too, since itbecame "highly profitable."

With files from The Canadian Press