SNDL's 'Aggressive' Loan-To-Own Strategy Forces Delta 9 Cannabis Co. To Seek CCAA Protection
Delta 9 Cannabis Inc. (OTC:DLTNF) reported Monday that it had obtained an initial order for creditor protection from the Court of King's Bench of Alberta under the Companies Creditors Arrangement Act (CCAA).
The Initial order provides for a 10-day stay of creditor claims and proceedings concerning Delta 9 and its subsidiaries, Delta 9 Logistics Inc., Delta 9 Bio-Tech Inc., Delta 9 Lifestyle Cannabis Clinic Inc. and Delta 9 Cannabis Store Inc.
The company's board of directors opted for the move after reviewing the following:
- The cash and liquidity position of the company
- The amount of debt of the company and its inability to repay such debt over the next twelve months, including payments to suppliers and trade creditors
- The limited ability of the company to raise further capital
- All available alternatives to an application for creditor protection
Read Also: Delta 9 Cannabis’ Q1 Revenue Drops Slightly YoY, Gross Profit Grows 10%
SDNL's Aggressive Loan-To-Own Strategy
The Winnipeg-based company said the "aggressive actions by the company's creditors, namely demand notices by SNDL Inc. on May 21st and July 12th, as well as SNDL Inc.'s recent acquisition of all the Company's senior secured debt, also played a material role in the decision to seek creditor protection."
SNDL Inc. (NASDAQ:SNDL) said earlier this month that it had wrapped up the acquisition of the principal indebtedness of Delta 9 Cannabis from Connect First and Servus Credit Union Ltd. The purchase price was CA$28,138,284 ($20.6 million) under a purchase and sale of indebtedness agreement dated July 5, 2024. With the move, SNDL has become Delta 9's senior secured creditor with a priority security interest in all of the assets of Delta 9 and certain Delta 9 subsidiaries.
SNDL's demand letter Delta 9 received in May sought the repayment of its 10% Senior Secured second lien convertible debentures, amounting to approximately $10 million.
As highlighted by Benzinga's Javier Hasse who referred to a recent newsletter from Viridian Capital Advisors, this aggressive approach "involves acquiring secured debt from cannabis companies, pressuring them into bankruptcy and then using their debt holdings to bid for ownership of these companies' assets."
SDNL also made headlines on Tuesday, announcing its restructuring project alongside the consolidation of its cannabis segments into a single unit under the leadership of Tyler Robson.
Term Sheet Deal
Simultaneously, the company announced a binding term sheet deal under which 2759054 Ontario Inc. – operating as The FIKA Company – agreed to act as plan sponsor to the CCAA proceedings.
FIKA proposed to acquire the cannabis retail store business and the logistics and distribution business of Delta 9, while facilitating a sale and investment solicitation process for the assets of the licensed cannabis production business of the company, in exchange for equity of FIKA and the satisfaction of certain secured debt of Delta 9.
FIKA agreed to take part and fund the costs of the CCAA proceedings through interim financing of up to $16 million, as well as to present one or more plans of compromise or arrangements to the creditors of Delta 9 and its subsidiaries to effect the acquisition transaction through the CCAA proceedings.
Delta 9 can use the sum to fund the costs of the CCAA proceedings and to repay the secured obligations owing to SNDL.
In addition to the interim financing – in accordance with the term sheet and its approval – FIKA proposed to:
- Issue voting common shares in its capital to Delta 9's shareholders with an aggregate value of $2 million;
- Make an aggregate of $4 million in sponsor shares available to creditors electing to convert their debt into sponsor shares;
- Repay roughly $27,868,284 of additional secured debt of Delta 9 and its subsidiaries to SNDL, which were recently acquired by SNDL from Connect First and Servus Credit Union Ltd.
- Fund any increase to the IF loan, if necessary, to cover the costs of the CCAA proceedings; and
- Fund the plan, including a distribution to unsecured creditors of at least $750,000.
"We are pleased to have entered into the Plan Sponsor Term Sheet with FIKA in a series of transactions which we believe will maximize value for our stakeholders, shareholders, and creditors," John Arbuthnot, CEO of Delta 9, said. "We look forward to working with FIKA through the restructuring process to unlock the value of Delta 9's assets for stakeholders, and to create the next chapter of growth for Delta 9."
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