The Fully Integrated Cannabis Co. That’s bringing THE Highest Quality Products to Market

(Click image to play video)

The Stockhouse cannabis investor audience is familiar with Delta 9 Cannabis Inc. (TSX: DN, OTCMKTS: DLTNF, Forum) from several previous feature articles we’ve produced for the company.

For those of you new to this company:

• Delta 9 Cannabis is a vertically-integrated cannabis company serving the recreational cannabis market in Canada.
• It’s a market leader in Manitoba with 35% market share with 11 retail stores in Canada, with plans for nine more retail stores this year.
• They operate a production facility with 297 Grow Pods that produce in excess of eight-thousand kilograms of cannabis per year and has with licences to sell wholesale to 72 percent of Canada’s population.
• And D9 has sold over 250 grow pods in the U-S and Canada – valued at $11 million in revenue over the last year. Grow pods are 40-foot cube shipping containers retrofitted to be able to cultivate cannabis. These pods are modular, scalable, stackable, and are designed to mitigate the risk of significant crop loss.

Stockhouse Media’s Dave Jackson was joined by Delta 9’s President and CEO John Arbuthnot to discuss the company’s pioneering cannabis business model, its retail store strategy and expansion plans beyond the Prairies, its unique Grow Pod operation, and all of the up-to-date news investors are looking to hear about from Delta 9.

TRANSCRIPT BELOW:

SH: To start off with, can you tell us a little bit about yourself and the history of the company?

JA:Yeah, absolutely. So I am one of the co-founders of Delta 9 from, from way back in 2012. Sowe have certainly been involved in the cannabis space here in Canadafor some time originally on the medical side of the business now, which with much more of the focus to the new recreational use industry here in Canada. 2017 was the real growth year for Delta 9. We raised about $10 million privately throughout the year. We listed our shares on the Toronto venture exchange November 2017. Since that time we've raised about 85 millions. We're a mix of debt and equity to fund the expansion of our three main business segmentsas you noted firstly is the health Canada, licensed cultivation processing and wholesale business. So licensed to produce Delta 9, branded consumer packaged cannabis products and distributing those, as you mentioned, across our six provincial markets currently operating 11 bricks and mortar retail stores across three provincial markets.

As you mentioned, adding to that store chain significantly over the last year and adding significantly into the coming year here in 2021-22, and we operate our infrastructure and business to business segment. We sell our proprietary growing technology. We provide consulting and licensing services. We sell cultivation equipment. So really more the picks and shovels side of the industry, those three verticals all operating under the Delta 9 cannabis umbrella. So giving investors you know, call it diversified exposure to the Canadian and North American cannabis industries Delta 9 shares, as you mentioned now, trade under the symbol DN on the main board Toronto stock exchange.

SH: Delta 9 is one Canada’s pioneering cannabis L-Ps…founded in 2012 and cultivating medical cannabis since 2014. The industry has had its ups & down over the past year or two, but we’re seeing a market rebound now taking place. How is Delta 9 riding this new wave of renewed investor confidence?

JA: Yeah, it'sbeen an interesting ride in, in capital markets. Since we listed in 2017,if I think back to the period 2017, 2018 pre legalization here in Canada there was a lot of hype. It was really all about the rise at that point and speculation towards future valuations. And a lot of that trending at the time became based upon things like funded capacity looking at producers, how much money have they raised, how much capacity would that create? It then trended into things like an international strategy. How are companies looking at international markets and extract strategy, how are companies going to become involved in these derivative or cannabis 2.0 products which have ruled out now in the last 18 months you know, how are companies approaching retail?

So there was a lot of jockeying for position prior to legalization. We then see the 2019-2020 period as the fall we saw, you know, kind of a wave and the news cycle start to change for cannabis here in Canada. We saw missed revenue in earnings expectations, regulatory scandals really a reset in terms of the overall investor expectations for this sector. I think those growing pains for the sector you know, we're not unanticipated by insiders. Andyet it, it really shook investor confidence. We're now seeing some renewed interest. We've seen that I think in the wake of the election cycle, in the U S starting last fall, we've seen that impact cannabis capital markets into early 2021. It's shown a spotlight battle back on the sector both in Canada and in the US it's providing investorsI think that you know, that, that exuberancethat there is still a very large market opportunity. And against that backdrop, we're starting to see Canadian and us companies produce pretty meaningful results, revenue growth starting to pivot to profitability or positive adjusted EBITDA starting is the balance sheets. There's a lot more positive news coming out of cannabis industry operators in the last three, four months than there perhaps was in the call it 12 to 18 months prior to that. AndI think now, as investors are starting to look back at the sector, they're saying, wow, these companies are vastly improved versus what we were used to a few years ago. And, there's now some meat behind the industry and that's starting to fuel that investor confidence that we're seeing.

SH: Can you update our investor audience and your Delta 9 shareholders on all of the new company developments, especially in the wake of COVID-19?

JA:2020 was a, a real growth year and I'll dive into more of the financial details and moments, but you know, to speak more operationally and around COVID. I mean, obviously this has been a challenging year, 2020 across a number of sectors and, and for a number of companies, we were fortunate early on to learn from our governments, both provincially and federally that we would be considered essential. We were able to maintain our operations across all three of our main business segments. Of course thathas come with challenges, challenges around staffing around ensuring that we are maintaining those operations while also maintaining the health and safety of our staff and customers.

So implementing all of those necessary precautionary health measures, the company has really gone to the nth degree to ensure that while we're operating, we're operating responsibly through that, you know, against the backdrop of that pandemic, then 2020 became I think a real pivotal year for the company. Weincreased revenues over 64% and I'll go through again, the finer details on the financials. We more than doubled our retail store counts. We hit milestones, critical milestones across virtually every business segment that we had and that, you know, against a backdrop in March, April, May, June last year of a very uncertain capital markets environment and still at times a challenging cannabis market. So I think again, against the backdrop of those challenges, Delta 9 has done very well in terms of advancing our business throughout 2020.

SH: I reported recently on Delta 9 opening its 11th cannabis retail store in Winnipeg. Congratulations on the landmark. (pause) Can you talk about the company’s retail store strategy and if you plan to expand beyond the Prairies and across Canada?

JA:Yeah, absolutely. So, looking at retail, I meanthe year 2020 with four operating stores we exited the year 2020 with nine operating stores. As you mentioned, we've now added a 10th and 11th store. So far in 2020, we actually have the opening of our 12th store planned for next week. So the company continuing to add very quickly to that overall store count we've done that through a mix of organic store build-outs. So building stores from scratch, signing leases, selecting locations, we've also done that through mergers and acquisitions. So selecting targets with stores that are already licensed already operating, and then rolling those in rebranding, the stores relaunching them under the Delta nine brand. We see opportunities in both strategies. We very much liked being able to target our own high traffic locations looking for good location partners.

We also see huge opportunity for consolidation in Canadian cannabis, retail. It's still a very fragmented marketand no one retailer really controlling dominant market share. And there there's a huge opportunity in my mind for expansion plan. Moving forward for us is to continue to add to that store count again, organic store builds consolidation M and A focus over the upcoming year and really continue to build the distribution for our, our cultivation and wholesale business and driving product direct to the end consumer through retail. I think retail has been a shining star for us over the last few years, and we'll certainly continue to play a large part in that growth strategy moving forward.

SH: Can you talk about how your B2B Grow Pod business is doing, and what the plans are going forward in the U.S.?

JA: Yeah, absolutely. So, you knowwe've done a lot of work over the last few years to cultivatethat B2B, that infrastructure business, the more picks and shovels side of the industry providing essentially cannabis industry entrepreneurs are already existing operators with a turnkey platformto expand their businesses. Our grow pods, you know, effectively offer, as you mentioned, modular, scalable stackable solutions for cultivation, nursery vegetative stage growth, finishing processing laboratory. We built custom solutions for dozens of cannabis operators across Canada. And now starting to look into the U S. Significant growth over the last few years, in terms of, of just top line revenue, number of pods delivered, et cetera, those key metrics for that business. But I think interesting or perhaps most interesting for investors, this is a business segment that we can actually push international as a main board TSX listed company we're required to maintain compliance with federal law that includes in the United States.

And that means that we cannot touch the plant. So we can't analysts, we can't sell cannabis. There are a number of things that we cannot do to participate in the upside even the burgeoning state by state cannabis or changes in cannabis laws of we're seeing in the United States. But one thing we can do is sell infrastructure, and that means our grow pods. We built out facilities last year in Michigan and Maine. So starting to push the marketing and Salesforce down into the U S we're now going full swing into that pivot.With COVID restrictions starting to lighten we're anticipating borders will start to open up into the midwayor into the fall this year that will allow us to start to push down to, to trade shows to industry events. We're actually hiring out right now, a dedicated Salesforce.

We're in the midst of looking to open a showroom that is US-based and have boots on the ground in the United States. What I anticipate seeing here is a massive wave of construction of facilities across the US as we lead into federal legalization of cannabis in the U S over perhaps the next two to four years. So there will be a huge infrastructureboom that picks and shovels side of the industry asthe side of the industry that benefits from that boom and we're here to participate as an operator with a proven track record already having built out hundreds of thousands of square feet of state-of-the-art cultivation and cannabis processing facilities to date.


SH: You just released “record year-over-year and sequential revenue” for Q4 2020. Can you elaborate on some of these positive numbers for our investor audience?

JA: Yeah, so I'll run through the year end results. First company released a year
end 2020 results showing 52 million in top line revenue. That was up 64% year over year from 32 million in the previous year to give investors a breakdown by segments, our retail segments, again led the way with 32.2 million in top line revenue, that was 110% growth per year. Our cannabis wholesale business was up 24% year over year to about 12 million. And our B2B segment was up 38% to 8.6 million for last year. So again, strong growth across all three business segments through COVID-19. We also saw significant growth in gross profit able to increase gross profit over 100% to 17.8 million last year, gross profitability also improved from 27 to 34%. So we're not only selling more product, we're doing it more profit, less our operations, most notably for investors for investors, the company has now been adjusted EBITDA positive and four out of our last five quarters for the full year, last year, 3.8 million in positive adjusted EBITDA.

And we would note as well, 1.5 million in cash flow from operations through the year. So it's good to have a Canadian cannabis industry operator producing positive EBITDA and positive cashflow from operations is quite unique in the space. And we want investors to note those key financial metrics for the company. Q4, as you mentioned, was a record quarter for us, a record top-line revenue about 14.2 million. That was up 34% year over year up about 8% sequentially from the third quarter last year, gross profit remains strong at 4.4 million and 1.9 million in adjusted EBITDA for just the fourth quarter last year. We also exited the year with a strong balance sheet, strong cash position, 23 million in working capital on 75 million in assets. So the company continues to maintain a strong financial position, and we continue to demonstrate significant growth across those businesses.

SH: Moving into 2021, the company looks set for strong growth this year. How are you placed to meet this increase in demand?

JA: Yes. We look at the Canadian markets in general, and I think there's been significant positive takeaways from 2020. We look at the stats Canada figures for 2020. We see about 2.5, 2.6 billion in Canadian cannabis retail sales for 2020 up significantly from the pre and yet statistics, Canada estimates, the Canadian cannabis retail market at between six and 10 billion. So there is still room for this market here in Canada to see a compounded annual growth rate of, you know, I call it high double digits for a number of years into the future before the market reaches called peak saturation. I think we're seeing that in terms of new consumers coming in from the black market, new consumers coming in from, you know, frankly new consumers who, who would not have previously consumed cannabis products starting to come in and try cannabis products in the legal market.
So I, I think the takeaway for investors here should be that there has been significant progress in terms of the growth of the Canadian legal industry taking market share from the black market. There will continue to be significant progress for a number of years here, and that that will lead into then international opportunities. So, you know, what can Delta 9 do? I think we're incredibly well positioned to participate in the upside in the Canadian market. We've demonstrated that track record and would note as well that our business model whether it be cultivation using our modular grow pods, whether it be retail, whether it be our B2B infrastructure business, those businesses can be taken to any jurisdiction in the world, operate very similarly, produce very similar products sell those products to end consumers and create value up and down the value chain and participate in upside in the picks and shovels side. So I think the company very well poised for growth in the coming year.

SH: I have to mention your stock has had a very nice bump in late March…adding about 20 percent in share value. What can you tell our investor audience regarding the current valuation of your stock and why you think it’s still a good buy right now?

JA: Yeah, absolutely. So, you know,we've seen and participated in some of the rally in cannabis shares. So far in 2021, not quite to the extent of some of our industry peers eh, late March and advanced of the earnings came out. We actually had a third analyst initiate coverage on the stock. I think some of that leading to some of the bumps that we saw on the 24th, 25th of March last month so nice to see, you know, not only additional analyst coverage on stock, but also, you know, investors starting to recognize that, that there there's value thereand seeing some upside I continue to feel that the company is very undervalued that there is significant room for investors getting in a current levels to see upside. We currently trade at one of the lowest multiples to enterprise value to revenue, enterprise valueto EBITDA against many of our peer competitors in the Canadian landscape with market caps, less than 500 million.

It's when you start to get into the large cap companies, that those multiples even increase further. So I think when you benchmark us versus our peers there, there is still significant room for upside for investors. You're seeing that companies with positive EBITDA are starting to become a more highly valued. Weonly need to look at the Supreme canopy announcements on the acquisition today, Supreme showing their first quarters of positive adjusted EBITDA in recent quarters and receiving a 66% premium to their share price on the canopy takeout. So, you know, it's those companies that are doing well that are demonstrating profitability that are going to see the highest multiples in terms of their valuation as we move forward. Investors absolutely should be paying attention to the bottom line as well as growth metrics as they look to assess their investments in the cannabis space.

SH: Can you discuss the long-term strategy for the company moving into 2021 and beyond, and what retail and institutional investors should be looking out for?

JA: Absolutely. So we look to push on growth in this year and beyond in three main leavers. So firstly, we're now maximizing the utility of our existing cultivation assets. We're continuing to drive efficiencies there. So it really, for us, it's continuing to develop new products continue to bring those products to market through our wholesale channels across our six Canadian provincial markets. Again, really maximize the revenue from our cultivation and wholesale businesses on retail. Again, it's that mixed strategy of organic store builds and M&A that will continue to drive distribution and revenue growth through our retail chains and on B2B it's that successful us pivot and international pivot. That's going to start to reflect, and I think a renewed growth curve for our, our infrastructure and B2B segment through 2021 and beyond. So I think all of those components certainly will play intoto further top-line growth and into really taking Delta nine to the next level over the coming years.

SH: And finally, John, if there’s anything I’ve overlooked, the floor is all yours.

JA: You know I would just like to point investors to our investor section of our webpage https://invest.delta9.ca/, check out our main webpage at https://www.delta9.ca/ and just cruise around. You'll get a good look and feel for who the company is. All of our investor materials are available on that investor websites of financials management, discussion analysis, as well as our investor presentations and fact sheets. And please do reach out to the company with any questions to investor relations. We're just inbounds for our call centers. We're more than happy to answer any questions you might have. Of course, you'd do your due diligence, and we can send you to field at Delta 9 is a great investment opportunity for investors in the cannabis space.


For regular updates, visit www.invest.delta9.ca.

FULL DISCLOSURE: Delta 9 Cannabis Inc. is a paid client of Stockhouse Publishing.