Delta 9 announces first-ever layoffs

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This article was published 08/01/2023 (619 days ago), so information in it may no longer be current.

Delta 9 Cannabis — one of the few cannabis companies in the country generating operating profits as recently as a year ago — announced layoffs and a cost-cutting program Monday morning.

The company will be laying off about 40 people from its cultivation operations and reducing production by about 40 per cent.

There will also be pay cuts across a number of executive positions and cuts to board compensation payments.

The measures are a result of ongoing over-supply and continuous price reductions throughout the industry, as well as Delta 9’s own slumping financial performance.

Its average selling price per gram decreased by 40 per cent between the fourth quarter of 2021 — the last quarter that the company produced positive earnings before interest, taxes, depreciation and amortization (EBITDA) — and the third quarter of 2022.

The company saw its financial performance slide last year. Delta 9 posted sales of $15.7 million but an operating lost of $1.7 million in the third quarter of 2022.

John Arbuthnot, the CEO of the Winnipeg-licensed cannabis producer, said the cost-cutting measures — including reducing executive and board compensation, and reducing public company and investor relation costs — will generate about $3 million to $4 million in savings over the course of the year.

Delta 9 has been committed to a strategy of vertical integration — the company produces, distributes and retails the product. Arbuthnot said its bulk wholesale sales operation has been hit with increasing price cuts because of the oversupply of product across the country.

“Twelve months ago, we could sell into the bulk market at a profit,” Arbuthnot said last week.

Those bulk sales would be processed by other companies into extracts for edibles or other derivatives, used for pre-rolls or repackaged.

“We are at a point now where, yes, we could continue to over-produce and sell out at a gross margin loss,” he said. “But obviously, in these market conditions, it is no longer prudent to do so and hope for price stability to come back into the market, at least in the near term.”

Arbuthnot said the 40 layoffs are considered temporary, and the cost-cutting measures are being framed at pushing the company toward near-term profitability — or at least positive cash flow.

“Given the market environment we are operating in, it is a right-sizing undertaking alongside the cost-cutting initiatives,” he said.

The equity market pressures felt by the cannabis sector have been “unrelenting,” he said.

For example, Tilray Brands Inc. — with sales of US$628.37 million in fiscal 2022 and a market cap of US $1.68 billion — saw its share price fall 60 per cent in the last year. Delta 9’s share price has fallen 79 per cent in the last year.

Delta 9’s shares closed Friday at $0.065. It went public in November 2017 at $0.65 and traded as high as $2 per share shortly after.

“We continue to get the sentiment from investors that cannabis companies need to demonstrate that there is a near-term path to profitability,” Arbuthnot said.

The company’s profitable retail operations will not be affected by the cost-cutting. Delta 9 opened its 40th store last week and continues to be bullish on its retail strategy, with a number of opportunities in the pipeline for further store openings.

Arbuthnot figures a reduction in money-losing bulk wholesale sales will mean that average wholesale revenues will remain about the same and will focus on wholesale sales into the consumer packaged goods segment — branded Delta 9 products sold by other retailers.

The pressures on the industry in general is such that there is now intense competition, with several hundred other suppliers with materially similar products.

“It is difficult for us to differentiate and market our products and our brands due to federal government marketing restrictions,” Arbuthnot said.

The company has 450 employees. These will be its first layoffs since being founded in 2001.

“A business mentor of mine once told me you have to make the tough decisions or they will get made for you,” Arbuthnot said. “I guess she was right.”

martin.cash@freepress.mb.ca