Delta 9 Announces Closing of Transformative Retail Acquisition, $32 Million Credit Facilities and $10 Million Strategic Financing
Delta 9 Cannabis Inc. (TSX: DN) (OTCQX: DLTNF) (“Delta 9” or “The Company”) is pleased to announce that it has closed a transaction with Uncle Sam’s Cannabis Ltd. (“Uncle Sam”) and Wissam El Annan to acquire all or substantially all of Uncle Sam’s assets relating to the operation of seventeen retail cannabis stores in Alberta (the “Uncle Sam Transaction”). The Company will also be closing it’s previously announced $32 million in credit facilities (the “Credit Facilities”) from Connect First Credit Union Ltd. (“connectFirst”).
To provide additional funding, the Company will also complete a private placement of $10,000,000 in principal amount of senior secured second-lien convertible debentures (the “Sundial Debenture”) by Sundial Growers Inc. (NASDAQ: SNDL) (“Sundial”). The subscription price of $9,600,000 represents an original discount of 4% (the “Offering”). The Sundial Debenture matures on March 30, 2025 (the “Maturity Date”) and bears an interest rate of 10% per annum, subject to increase on the occurrence of certain events as set forth in the Sundial Debenture, payable monthly.
Additional Details of Uncle Sam Transaction:
The acquisition was completed through Delta 9 Cannabis Store Inc. (“Delta 9 Cannabis Store”), a wholly-owned subsidiary of the Company, pursuant to an asset purchase agreement between Delta 9 Cannabis Store, Uncle Sam and Wissam El Annan dated November 1, 2021, as amended by a first amending agreement dated December 20, 2021, a second amending agreement dated February 16, 2022 and a third amending agreement dated March 22, 2022. The seventeen Uncle Sam stores in Alberta operate under the Uncle Sam’s Cannabis and Discounted Cannabis brands.
“We are pleased to have finalized this transaction to grow our market share in the Canadian retail cannabis market with an additional seventeen-store presence,” said John Arbuthnot, CEO of Delta 9. “Delta 9 now has 34 retail cannabis stores in operation across Canada and is positioning as one of the countries largest vertically integrated cannabis retailers. The Company has an aggressive growth strategy to actively acquire cannabis retail stores that will provide meaningful revenue growth and positive adjusted EBITDA.”
The purchase price paid by Delta 9 Cannabis Store relating to the Uncle Sam Transaction was $12,500,000, subject to customary adjustments. $50,000 of the purchase price was satisfied by a cash deposit. The $12,450,000 balance of the purchase price was satisfied in cash on closing. Uncle Sam also received 6,666,667 common shares of the Company (“Common Shares”) at a deemed price of $0.277 per Common Share, representing the 10-day volume weighted average price of the Common Shares on the Toronto Stock Exchange (the “TSX”).
The Uncle Sam’s Cannabis retail cannabis stores have demonstrated significant revenue, EBITDA, and earnings growth over 2020 and 2021. The Company expects the Uncle Sam Transaction to be accretive in 2022 and 2023 before synergies. The acquisition represents an attractive revenue multiple of approximately 0.68x annualized revenue. The combination of the Uncle Sam cannabis stores and Delta 9’s existing store network will make Delta 9 a leading retailer of cannabis products in Canada.
The final closing of the Uncle Sam Transaction remains subject to the approval of the TSX.
Additional Details on the Sundial Debenture
“Sundial is pleased to expand its successful partnership with Delta 9,” said Zach George, Chief Executive Officer of Sundial. “The Sundial Debenture is in line with our core philosophy providing downside protection and cash flow with longer-term strategic upside potential. Delta 9 is a leader in the regions in which they compete, and complementary to our current geographical footprint.”
“Delta 9 is excited to announce this strategic investment from Sundial which allows us to significantly expand our retail network to 34 operating stores across Canada and position Delta 9 as one of Canada’s leading vertically integrated cannabis retailers,” said John Arbuthnot, CEO of Delta 9. “We also look forward to expanding our long-standing commercial partnership with Sundial as we position our respective brands for long-term success in the Canadian market.”
The Sundial Debenture is convertible by Sundial into (“Common Shares”) at a conversion price of $0.35 per Common Share (the “Conversion Price”). If Delta 9 completes an offering of equity securities in the six months from the closing of the Offering at an issuance price that is equal to or less than $0.29 per Common Share, the Conversion Price will be adjusted downward to a share price that is equal to a 20.0% premium to the issuance price of such offering of equity securities provided that, until shareholder approval is obtained by Delta 9, such price is not less than the 5-day volume weighted average trading price of the Common Shares (the “5-Day VWAP”) as of the date of the conversion of the Sundial Debenture (the “Floor Price”).
Delta 9 may, at its option, also convert 100% of the interest accrued and payable for the first quarter ending June 30, 2022 and 50% of the interest accrued and payable for the second quarter ending September 30, 2022 into Common Shares at a price equal to the 5-Day VWAP as to the date of interest payment. During an event of default that is ongoing, Sundial may, at its option, convert 100% of the interest accrued and payable into Common Shares at a price equal to the 5-Day VWAP as to the date of interest payment.
In connection with the Offering, Delta 9 has undertaken to Sundial that it will seek, prior to June 30, 2022, the approval of the shareholders of Delta 9 for: (i) the creation of Sundial as a control person of Delta 9; (ii) the issuance of a number of Common Shares greater than 25% of the current number of issued and outstanding Common Shares (including in connection with the Offering and the closing of the transaction with Uncle Sam); (iii) the issuance of Common Shares in payment of interest on the Sundial Debenture at a 15% discount to the 5-Day VWAP of the Common Shares on the date of issuance; and (iv) the removal of the Floor Price for the conversion of the Sundial Debenture.
The security in respect of the Sundial Debenture will be subordinated in all respects to the security. Delta 9 may redeem the Sundial Debenture, in whole or in part, prior to the Maturity Date, at a redemption price equal to par plus a make-whole amount and all accrued and unpaid interest.
In connection with the Offering, Sundial and Delta 9 entered into a purchase agreement whereby Sundial was granted the right to participate in future debt or equity financings in accordance with Sundial’s pro-rata as-converted ownership in Delta 9, subject to customary limits and exceptions.
Additional Details of the Credit Facilities:
• $23 million commercial mortgage facility (“Facility 1”)
• $5 million acquisition facility (“Facility 2”)
• $4 million authorized overdraft (“Overdraft Facility”)
Facility 1 matures after 5 years and amortizes over a 12-year term. Facility 1 is anticipated to be established in multiple tranches advancing at various times for purposes including: (i) $11.2 million for the repayment of existing long-term debt; and (ii) $11.8 million for the repayment of the $11,800,000 principal amount of 8.5% unsecured convertible debentures of the Company (the “Convertible Debentures”).
“We are excited that this new credit facility improves Delta 9’s financial position, lowers our cost of capital and provides funds for the purchase of the 17 Uncle Sam’s cannabis retail store acquisition,” said John Arbuthnot, CEO of Delta 9. “We are pleased that we have lowered our annualized interest costs and principal debt repayments by $1,020,000 a year. The combined interest rate reductions under Facility 1 represent approximately $550,000 in annualized interest savings and an additional $470,000 in annualized principal repayment. To our knowledge, the new 4.55% fixed interest rate we are paying is among the most competitive rates established by any public cannabis company to date.”
The interest rate under Facility 1 and Facility 2 is a 5-year fixed rate of 4.55% per annum and connectFirst prime plus 1.50% per annum for the Overdraft Facility. The Company used a portion of the Credit Facilities to repay its credit facilities with Canadian Western Bank. The Company expects to repay the Convertible Debentures on the maturity date of July 17, 2022.
ADVISORS
ATB Capital Markets Inc. is acting as financial advisor to Sundial. Dentons Canada LLP is acting as legal advisor to Sundial.
MLT Aikins LLP is acting as legal advisor to Delta 9.
EARLY WARNING
Immediately prior to the Offering, Sundial and its affiliates held no Common Shares. Upon the closing of the Offering, assuming conversion of the Sundial Debenture in full at the Conversion Price, Sundial and its affiliates would exercise control and direction over 21.2% of the issued and outstanding Common Shares (on a partially diluted basis). The Sundial Debenture is being acquired for investment purposes. The terms of the Sundial Debenture provide that Sundial may not convert the Sundial Debenture if the issuance of the Common Shares would result in it holding greater than 19.99% of the Common Shares outstanding, until shareholder approval is obtained by Delta 9. The head office of Sundial is #300, 919 – 11th Avenue SW, Calgary, AB T2R 1P3.
About Delta 9 Cannabis Inc.
Delta 9 Cannabis Inc. is a vertically integrated cannabis company focused on bringing the highest quality cannabis products to market. Delta 9’s wholly-owned subsidiary, Delta 9 Bio-Tech Inc., is a licensed producer of medical and recreational cannabis and operates an 80,000 square foot production facility in Winnipeg, Manitoba, Canada. Delta 9 owns and operates a chain of retail stores under the Delta 9 Cannabis Store brand. Delta 9’s shares trade on the Toronto Stock Exchange under the symbol “DN” and on the OTCQX under the symbol “DLTNF”. For more information, please visit www.delta9.ca.
Disclaimer for Forward-Looking Information
Certain statements in this release are forward-looking statements, which reflect the expectations of management regarding each of Delta 9’s and Sundial’s future business plans and other matters. Forward-looking statements consist of statements that are not purely historical, including any statements regarding beliefs, plans, expectations or intentions regarding the future. Forward looking statements in this news release include statements relating to the approval of the TSX of the Offering. Such statements are subject to risks and uncertainties that may cause actual results, performance or developments to differ materially from those contained in the statements, including Delta 9’s distribution services not being as anticipated, as well as, in respect of Delta 9, all risk factors set forth in the annual information form of Delta 9 dated March 31, 2022 which has been filed on SEDAR and, in respect of Sundial, all risk factors risk identified in Sundial’s filings with the U.S. Securities and Exchange Commission, including those identified in Sundial’s Annual Report on Form 20-F which has been filed on EDGAR. No assurance can be given that any of the events anticipated by the forward-looking statements will occur or, if they do occur, what benefits Delta 9 or Sundial, as applicable, will obtain from them. Readers are urged to consider these factors carefully in evaluating the forward-looking statements contained in this news release and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by these cautionary statements. These forward-looking statements are made as of the date hereof and each of Delta 9 and Sundial disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise, except as required by applicable securities laws.
For more information contact:
Ian Chadsey, VP Corporate Affairs
Delta 9 Cannabis Inc.
Mobile: 204-898-7722
E-mail: ian.chadsey@delta9.ca
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