John Arbuthnot, CEO of Delta 9 Cannabis: We want to grow and be profitable at the same time

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Credit: Delta 9

Tell us about the business, the market opportunity and the competition

Founded in 2013, we became the fourth licensed commercial medicinal cannabis grower here in Canada. Our first business is Health Canada licensed cultivation, processing and wholesale distribution using our 95,000 square foot facility here in Winnipeg. Here we cultivate and produce the Delta 9 brand cannabis products, flowers, pre-rolls, adjustable oils, vape products, etc. and then sell them in six provincial markets.

The second business area is retail. We currently operate 12 brick and mortar stores in Manitoba, Saskatchewan, and Alberta. We hope to be able to operate 20 branches by the end of this calendar year.

We call the third industry our B2B segment, in which we sell our proprietary growing platform – our Grow Pod – and offer consulting and licensing services to other cannabis companies. The three segments give Delta 9 one of the most diverse approaches in the Canadian industry.

Last year, the company’s revenue exceeded $ 52 million. So we’ve seen aggressive sales growth here in Canada with legalization. Because we are vertically integrated, we often work with large competitors like Canopy Growth, HEXO, Tilray, etc. All of these are brand partners of Delta 9.

Tell us about your Grow Pods

What makes us really unique on the grow side of the business is how we grow differently from the big open greenhouse, the open field, and even the big indoor plants. We grow in small modular units that we call grow pods. In fact, they are retrofitted shipping containers. They are stackable and we grow on several levels in our plant.

Much of the positioning here revolves around controlling this environment. We can adjust factors like temperature, humidity, light intensity, CO2 saturation – all of these result in a higher quality cannabis product. Our focus is on being in the premium segment and producing highly effective, high quality cannabis flowers with this Grow Pods platform.

We currently have 297 of these Grow Pods licensed and operational in our facility. We also sell these pods to third parties. We have now set up nearly two dozen facilities across North America with a primary focus on Canada in the early development of this B2B business. We have now started to push that to the USA as well. The Grow Pods are relatively cheap from a Capex perspective.

Delta 9 Cannabis Q2 2021 Profit

You are among the few players in the cannabis space who are turning out to be profitable. Why is that?

It was our focus on execution. We have seen continuous sales growth in our three diversified business segments. We also focused on cost control and gross margins. Last year we only had EBITDA of about $ 3.8 million and free cash flow from operations of $ 1.5 million. So not only drive sales growth, but also see that we can make a meaningful contribution to the bottom line.

Our focus is on how to show investors looking for Canadian cannabis companies that we have a track record in terms of profitability.

Do you expect price pressures on cannabis to continue over the next few quarters?

It looks like we’re starting to find some price stability in the industry. I think we have found a sustainable level. Obviously, then, the focus on production costs comes into play, where we need to focus on how to produce cannabis at a lower cost in order to make money at that price level.

On the retail side too, we’ve seen more stores go online and you can see prices go down as products become more available in the wholesale market. Much of it is companies like us that are just trying to compete with this black market. We are competitive in the price, quality of products, and the range of products available in these retail stores. So we’ve tried to do our job to keep the competition going and now you see huge sales are now flowing into our retail stores.

I think similar comments on wholesale. We have found a level of price competition that is competitive with the black market and we have also begun to find stability that we will not see significant downward pressure.

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How do you play the Edibles area?

Our approach to many of these 2.0 product segments has been to wait a bit and see how these markets develop. Finally, try to manufacture these products or sell them under our brand, but to do this by working with white label suppliers.

We currently carry a dried cannabis product. We are in the process of launching a pressed hash product. Our next forays from here will be relaunching our ingestible oils line and our vape line later this year. That works with a third party manufacturer. From there, food and drink come to the fore.

What is your expansion strategy in the US and Canada?

On the cultivation and production side, our plant is fully utilized here. Apart from that, there are still investments in automation and group processes, which in our opinion can increase our system here from currently around 8,500 kg per year to 12,000 kg in the next 12-18 months.

From there, the focus is heavily on retail. We are now in 12 stores and plan to have 20 by the end of this calendar year. A great opportunity for us is to acquire existing operators with a customer base, sales and EBITDA profile.

In the B2B segment, our focus of expansion is now in the USA. We are able to provide our grow pods, attachments and advisory services even before state legalization. That’s why we have dedicated salespeople who work exclusively in the US markets. If legalization is announced, it will add millions of square feet of cultivation capacity and Delta 9 will provide this turnkey platform.

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Should investors expect stocks to be diluted to raise capital?

We want to finance our expansion from cash flow initially. Insiders make up about 40% of total stock ownership so we are very sensitive to dilution. Whenever a dilution comes into play, of course, the proceeds must be used on our part, which are ultimately beneficial to shareholder value.

We’re pretty sensitive about that. That being said, there is tremendous opportunity to expand in Canada and beyond, and we don’t want to miss these opportunities.

(Written by Arjun Vijay)

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