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Taking Cannabis from Seed to Sale…the Right Way

Dave Jackson Dave Jackson, Stockhouse
1 Comment| August 26, 2021

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When Stockhouse last connected with Delta 9 Cannabis Inc. (TSX: DN, OTCQB: DLTNF, Forum) and their President and CEO John Arbuthnot back in May, we introduced our audience to a different kind of company that markets its high-quality cannabis products through its wholesale and retail sales channels and sells its cannabis grow pods to other businesses. Today, the company's 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.

In this exclusive video Q&A podcast, Stockhouse Media’s Dave Jackson was happy to be joined, once again, by company President and CEO John Arbuthnot to get company shareholders and investors up-to-date on all things Delta 9.

(Click image to play video)


SH: To start off with, John, can you update our Stockhouse audience on all of the new company happenings since we last connected in April?

JA: Absolutely, so I guess busy first half of the year for Delta 9 obviously reported out now since April our Q1 and Q2 and first half financial results which, obviously, we'll touch on here. Really for us the focus has not changed. We've seen, I would say relative momentum in our cannabis wholesale business. So cultivating, processing, manufacturing, Delta 9 consumer packaged branded cannabis products, distributing those across our provincial markets. Again, really for us it's about finding that momentum, ensuring that we're creating value for provincial boards for individual retailers. Ultimately that end consumers are seeing the value in those consumer packaged Delta 9 products.For us then it's retail, expansionis I would say a principal focus for the company right now. We've opened three bricks and mortar retail stores within calendar 2021.

We continue to focus on expanding our retail chain, improving our online offering. We do offer direct to consumer online sales across two provincial markets, Manitoba and Saskatchewan rolling out things like free shipping initiatives, click and collect all of those very important and expanding that online business. So really that push in retail continues to be a focus, expanding the distribution of Delta 9 branded products direct to end consumers and from there it's our B2B segment. We had seen relative weakness through COVID obviously impacting business investments and business sentiment things like that, which is impacting our picks and shovels and infrastructure business. We've seen now an uptake in that again, we'll touch on the Q2 results but a lot of this reset for us has been aboutexpanding the project pipeline, getting things reengaged in terms of projects that have near term deliveries things like that, as well as shifting to more of a US sales focus.

We see huge opportunity in the US market for grow pod sales, sales of cultivation equipment, providing consulting services as a TSX main board issue where we are prohibited against cannabis touching activities in the United States. Our grow pot segment is something we can push down into the US and advance federal legalization. So hiring that dedicated Salesforce, getting the boots on the ground out there, really cultivating relationships on a state by state basis, really looking for the opportunity. So I'll say it's been a busy first half of the year for the company here in 2021.

SH: John, you’ve just reported record revenues for Q2 2021. Can you update us on how this was accomplished?

JA: The Company reportingfor the three month period ending June 30, a 16.75 million in top line revenue, that is a record for the company up both 30%, 29%, I believe from the same period, the previous year up 27% from the first quarter and 13.2 million for the first quarter of this year. So showing not only sequential but year over year revenue growth obviously very important for us to continue to drive that top line expansion. As we expand our businesses in the Canadian and international space.From a segmentation standpoint, we saw about 5.6 million in cannabis wholesale revenues. So that's distribution again direct to retailers and to provincial distributors across our provincial markets. That is a record for the company. That's up from 4.3 million in the first quarter of this year.Retail revenues came in just above 10 million. That's up from 9.3 million in the first quarter of this year and our B2B segment grow pod deliveries came in at 1.8 million and that's up from just 180,000. So start to see the impact of that renewed focus on the B2B segment and all three business segments contributing meaningful revenue growth quarter over quarter and year over year for the company. So I think very important to highlight for investors just those three main business segments the company has now all contributing to that growth that we've seen here in the second quarter.

SH: You’ve appointed a new Head of Strategy, Corporate Development and Capital Markets. Can you expand on this hiring for our investor audience?

JA: Quick after our Q2 results Monday this week, we announced hiring of Dr. David Kideckel new head EVP of strategy business development capital markets and the rule really is focused around refining the company's business strategy, looking to opportunities in M&A, in international markets, in overall strategy, kind of business modeling, et cetera. David's a premier analyst. He comes to us from ATB where he was managing director institutional equity research for the last three years. One of the most I think well-known equity analysts in the cannabis space obviously well-versed on cannabis. He covers retailers. He covers licensed producers. He knows through his network, I think the who's who in terms of investors, bankers, analysts, et cetera in the cannabis space. So I think he is a very important hire for Delta 9. A big focus here is expanding the capital markets presence including down into the US, so really get the company in front of investors, tell the story position that we feel that the company is undervalued versus some of the larger mid and large cap names in the cannabis space and that there's real value here in Delta 9 given the financial results that we're seeing are very meaningful.

SH: Delta 9 has been keeping busy in 2021. The company has recently announced a Health Canada approval for perimeter expansion and a storage & logistics area. What’s this all about?

JA: I guess early 2020 and against the backdrop of COVID-19 capital markets uncertainty and broader weakness in the Canadian cannabis wholesale market. We did announce that we had paused on any cap ex expansion for our cultivation areas. A real thought here was let's just refine our processes. Let's get more efficient at what we're doing with our existing asset base and indicate to investors we would continue to expand our license perimeter. We actually have 135,000 square feet here of space to sprawl out into. So we do have some excess capacity this expansion for us about 15,000 square feet. It takes our previous license perimeter from 80,000 to 95,000 square feet and much of this expansion is dedicated, as you said, storage and logistics areas. Now delivering on an annualized basis about a hundred thousand cases of consumer packaged cannabis products.

That's well in excess of a million units of Delta 9 branded consumer packaged products per year across our Canadian or various provincial markets that requires space, that requires I'll say an expanded focus then on our internal logistics and supply chains functions. The real goal here is to get better and more efficient at what we do in terms of becoming a key supplier for provincial boards and for retailers across the country, the faster we can fulfill orders the more streamlined our operations can be here, it adds efficiency. It makes us a better supplier. It makes us a go-to source for retailers and provincial boards. So it may not be an aggressive expansion in our overall cultivation capacity or production capacity but it's finding those internal efficiencies that our company has always highlighted. You'll note that in things like our cost per gram where we've invested in automation, we're down to now in 60 cents to 65 cent per gram range. These types of efficiencies from an operations, a lean operation standpoint are a key focus for us in terms of ensuring that we're competitive in the Canadian cannabis market.

SH: Simply put, what separates Delta 9 from the competition and makes your business model so unique?

(Photo courtesy Delta 9 Cannabis Inc.)

JA: For us, I'll say from a high level of that laser focus on operations and execution. We've always put ourselves as operators first. We haven't told the flashiest story from a capital market standpoint, but we've come at the market a little different than a lot of our competition and I would say it's really diversification of revenue that makes us different. You noted in the introduction, we are licensed for cultivation, product manufacturing and wholesale. We're licensed for retail. We do take that vertical integration strategy to the Canadian market. One of a few companies that has really considered a vertical integration strategy and then even further diversified into the grow pod, deliveries, equipment and consulting services business with the more picks and shovels exposure in our B2B segments. So what we've seen in the wake of legalization here in Canada is that it has been a volatile market not only from a capital market standpoint, but in terms of how companies are competing within the sector.

We see a very competitive market environment in cultivation. We see an over-saturation of cannabis products of flower in the market. We see the retail market environment becoming quite competitive. We also see the competitive forces across the sectorh ave had, I'll say, a tough impact on competitors...large and small. It's this diversified revenue strategy that's allowed Delta 9 to be nimble. We serve certain quarters or certain periods where one of our business segments is underperforming but it's very likely that our other business segments are able to continue to expand against that backdrop and what that's created over the last few years is that consistent track record in increasing year over year revenues, we've we listed our shares publicly in 2017. I think that year we produce less than 1 million in annualized revenues. The next year was 7.6 million. The next year was 32 million, last year 2020 was 52 million in top-line revenue. We've been able to consistently increase top line against the backdrop of a challenging market environment and that diversified strategy really sets us apart from our competition.

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

JA: I’ll say the real focus for us is retail expansion. We see the difficulty overall in the Canadian cannabis market, again, over-saturation and cultivation in consumer branded products and aggressive competition from large competitors like Canopy and HEXO and Sundial, et cetera, across the space. So we know that retail and distribution is key. There's a huge opportunity we feel for a consolidation strategy across retail segment. We see as much as there are large public company retailers that are developing substantial chains of stores across the country but there are still thousands of independent one-off or small chain stores operating across the Canadian market. There's a huge opportunity there for consolidation and for a roll-up strategy in retail that takes these independent retailers, rolls them into a larger corporate chain, installs IT systems, HR systems, improve supply chains, improves inventory and category management.

We feel that we can do better than your average independent retail but there's a huge opportunity for us to roll up that retail segment essentially expand our retail revenues, our distribution capacity and that simply improves our wholesale. So that needs to be the first focus is on expanding retail and distribution. From there on the cultivation manufactured products and wholesale side of the business, it is very much now on product developed. A lot of our focus has been on improving THC. A lot of companies are talking about this, we've increased our average THC potency from 15 to 16% early 2020 to closer to 19 to 20% as of our operations currently. So that that's been key for us in terms of driving high quality products through the market.From there its product developments into things like pressed hash, cannabis key for our concentrates lineup, vape pens, ingestible oils, all looking to launch and relaunch under the Delta 9 brand by the end of this year.

That will give us a broad product portfolio, again, put us into virtually every category apart from edibles and drinkables, which may come into the future for the company.The B2B segment, again, we'lljust touch on this US focus and pivot for the company, huge opportunity in advance of federal legalization to participate in some of the upside in the US market. We feel this is going to naturally develop the same way that Canada did. There's excitement around legalization. There's a huge build-out of millions of square feet of cultivation of processing capacity across the US. We can participate in that on the picks and shovels side of the industry, even in advance of federal legalization, once they legalize, Delta 9 has that vertically-integrated business model that will be tried and proven in a very difficult Canadian market and able to take that into the US market as well. So I think that should give investors kind of the forward look in the next few years for us, the expansion of the three business segments and what that may look like again in advanceof a broader opening up of international market opportunities for our company.

SH: Do you have any upcoming conferences that our viewers can attend?

JA: I will be presenting at the SNN conference actually in about a half hour here. I do want the real deep dive into the company can hop onto the SNN conference and see a virtual presentation again an in-depth on the company. We will be starting to get back into live conferences fortunately or hopefully fall here, both domestically and internationally. We would highlight the Benzinga cannabis conference in New York October 13th and 14th, to allow our US-based investors to get in for a face-to-face with the company and management. We will be the following week at MJ biz con in Las Vegas down in the US again, giving investors the opportunity to touch base with company management also giving potentialgrow pod customers, the opportunity to see our infrastructure. We will have grow pods down in Vegas for the conference for people to see exactly how these things function and get an in-person on that B2B segment. So we're pleased to be getting back to some face-to-face meetings and conferences obviously key for the company from an investor awareness and corporate development step.

SH: And finally, John, do you have any plans to expand into the US market and list on the NASDAQ?

JA: Yes, principal focus and we don't want to give investors the idea that there's two broadest strategies here, but again, the real focus immediately is on that grow pod business consulting. We've seen market momentum in markets like Illinois that are opening up, they're developing a craft program there, Montana's starting to show some interest, but we also see interest from more mature markets like Colorado, where people are acquiring facilities. They're seeing the opportunity to invest reinvest in these types of facilities to improve efficiencies and that's where our growth pod model is starting to find traction in the US market. From there does the company considera CBD strategy, direct to consumer online and ciliary product strategy, varying strategies that a Canadian company that does need to maintain federal legality can look at the US market and we can participate in your terms.

So all of those under consideration.We talk then (about) capital markets, I think that needs to play a near-term focus for the capital. We've seen that Canadian cannabis issuers who are listed on a senior US exchange are seeing broader investor exposure, access to capital and when the momentum trade really comes into the cannabis sector, they're seeing the largest lift. So I think the company needs to seriously consider senior US listing obviously all of this against the backdrop of a new hire on capital markets development. The company will be refining that strategy, but a lot of the focus will be on expanding the US-based for investors and expanding that capital markets presence down into the US.

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FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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