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The Seed-to-Sale Cannabis Co. Offering Real Growth Value & Opportunity

Dave Jackson Dave Jackson, Stockhouse
2 Comments| April 6, 2022

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Stockhouse investors are likely familiar with one of the most recognizable names in the Canadian retail cannabis space – Delta 9 Cannabis Inc. (DN) (TSX.DN, OTCQB: DLTNF, Forum). But the company is much more than just stores. Delta 9 is a fully vertically-integrated cannabis company not only operating a vast chain of recreational cannabis stores in Manitoba, Alberta, and Saskatchewan, but also sells cannabis products through its wholesale channels along with cannabis grow pods to other businesses.

The company's subsidiary, Delta 9 Bio-Tech Inc., is a licensed producer (LP) of medical and recreational cannabis and operates an 80-thousand square foot cultivation, processing, and wholesale operations facility in Winnipeg.

Stockhouse Media’s Dave Jackson was joined, once again, by Delta 9’s President and CEO John Arbuthnot to get our investor audience up-to-date on all things Delta 9 Cannabis.


(CLICK IMAGE TO PLAY VIDEO)

TRANSCRIPT BELOW:

SH: Well, it appears that you have been busy over the last six months with all of the transactions that were recently announced. John, can you update our Stockhouse audience on the latest company happenings since we last connected in August?

JA: Yeah. Thanks Dave. So the last 12 months for us have really been focused around expansion of our retail chain. We're seeing that as a huge opportunity for the company to continue to rapidly expand revenues and profitability in the Canadian space. So as we opened last year 2021, the company only had in the area of 9 or 10 operating stores we scaled that significantly through the end of 2021 exited the year with 16 operating stores. We've added another one so far here in 2022 up to date and some significant announcements yesterday in connection with our year-end financials, which I know we'll go through in a little bit more detail here.

SH: John, you’ve just reported your financials for Q4 2021. Can you update us on some of the highlights?

JA: Yeah, so yesterday the company announcing year end and Q4 numbers for 2021, showing for the full year 62 million in top line revenue up about 20% year over year. So another record with the company in terms of top line revenue and very healthy revenue growth. Across our three business segments, retail revenues up 25% year over year to 40 million wholesale revenues up 57% to 18 million last year. So very strong growth in our cannabis wholesale segment and our B2B revenues did decline 40% but still certainly material at 5 million. So again, showing healthy growth in top line, really with that diversified revenue strategy. The company is showing a little bit north of 2 million in adjusted EBITDA for the year, this is our second full calendar year of positive adjusted EBITDA. So certainly look to emphasize for investors that the company is one of the few in the Canadian space that is demonstrating profitability in terms of just the Q4 numbers alone, 17 million in top line revenue of record quarter, in terms of quarterly revenue for the company. So strong Q4 numbers and ninth consecutive quarter of positive adjusted EBITDA for the company.

SH: Congrats on the 17 Uncle Sam Store acquisitions. Can you provide a high-level overview of this transaction for our audience?

Click to enlargeJA: So three material transactions also announced yesterday concurrent to our release of financials and the first one we'll run through here is the acquisition of 17 additional cannabis retail stores. The Uncle Sam's cannabis stores based in Alberta. This transaction effectively doubles our retail store chain overnight. Now 34 operating stores across central Canada, making us effectively a top five retailer nationally by revenue. So company now a material player in terms of the overall retail side of the business what we saw in the Uncle Sam's transaction was the opportunity to grow revenues significantly through that acquisition and an acquisition that was demonstratively accretive. We acquired the Uncle Sam's assets for about 0.68 times revenues. I think a healthy revenue multiple that we can onboard that revenue and those stores demonstrating two years sequential, positive adjust to EBITDA and net income. So very strong asset. Again, that we're looking to onboard there, of course, this not only adds additional retail revenues and profits for the company but with that vertically integrated strategy allows us to push more volume of our product now through these new stores in that key market of Alberta for us.

SH: And how does this transaction benefit the rest of your Delta 9 business units?
JA: Yeah, and that's really where we look at that vertical integration play. When you look at sales of Delta 9, products in Delta 9 stores, we actually make up about 25% market share. So huge opportunity here to get in, take our market share in these stores from %3, %4, 5% up to %15, %20, 25%. and that's where you really see the sell through the improvement in the wholesale business. We've seen over the last two years that as we've scaled our retail, our wholesale business also follows. So that's really when we look at say the us market, the large MSOs that have created profitable business models, that's really what we're replicating here in the Canadian market.

SH: Congrats on the First Connect credit facility! Can you provide an overview of the credit facility and why did you switch from your long-time relationship with (Canadian) Western Bank to do business with First Connect?

JA: Yeah, so Delta 9 is one of the few Canadian cannabis companies that has access to conventional lending facilities. What we announced yesterday was a $32 million credit facility with connect first credit union out of Alberta. It replaced all of our existing bank debt with Canadian Western bank. It allocated $11.2 million for replacement of long-term debt. It allocated $11.8 million for repayment of the company's convertible to ventures, which matures this July. So ensuring for investors that there is a takeout plan for those ventures later this year, allocating $5 million towards retail acquisitions, again, announced yesterday and allocating an additional $4 million in working capital. So really helping the company shore up the balance sheet, providing a very attractive interest rate at 4.55%, locking that in for the next five years. In aggregate what this does to our balance sheet in terms of restructuring is it saves the company approximately $1 million a year in principle and interest payments through these various tranches of commercial mortgage. So very attractive refinancing option for the company.

SH: Also, kudos on bringing on a bigtime strategic investor to Delta 9 – a $10 million investment by the company in industry giant Sundial Growers Inc. (NASDAQ: SNDL). John, can you provide an overview of this transaction and what’s the benefit of something like this for company shareholders and potential investors?

JA: So final transaction, again, material transaction announced yesterday is the $10 million strategic investment by sundial growers in the form of a second lean convertible debenture. Essentially what this means, obviously we're aligning ourselves with Sundial as another vertically integrated industry giant with their recent acquisition of Spirit Leaf and Alcan announced yesterday, Sundial's business model obviously mirrors ours in terms of vertical integration. We sell products through their branded stores. They sell product through ours. We have a longstanding commercial relationship with Sundial. We really see this as positioning ourselves with a large strategic and institutional investor. Obviously, we feel there will be an expansion of our commercial relationship with Sundial on the back of this as well.

SH: Can you discuss your two to three-year growth strategy for Delta 9 shareholders specifically?

JA: I think what investors can take away from a lot of these catalysts we've announced here in the last day is that retail roll up and retail expansion is our real strategic focus for us. We see a huge opportunity in the Canadian landscape for a retail roll up. We see a fragmented industry. We see an industry that's ripe for consolidation. As we continue to reach scale, there will be efficiencies in terms of profitability whether that be smaller, 2, 3, 4, 5 store acquisitions, whether that be 10, 15, 20 store acquisitions, we're really looking to position Delta 9 as the consolidator, as the acquirer in the Canadian space and I think we have the strategy and we've shown our track record of execution to release our financials. So company will look to get aggressive on the back of this, continue to demonstrate that growth profile.

SH: Recently in the news, there appears to be some strong movement among U.S. federal lawmakers to decriminalize cannabis and pass the Banking Act. What are your views on when cannabis will be legal at the federal level in the US marketplace?

JA: Yeah, so nice to finally see some movement at the federal level in the United States around US legalization to criminalization and the safe banking acts. So what we're hoping to see here would be some of material progress in the next coming months in terms of advancing those types of bills. Obviously, the goal here over the next, whether it be 1, 2, 3, 5 years, is to see outright legalization in the United States and I think there's an opportunity here to leverage what we've learned from the Canadian market the do’s and don'ts, all eyeballs were on Canada initially on federal legalization as the US starts to take these steps. It represents a huge opportunity for companies such as ourselves who have proofed out a business model in a very difficult Canadian market environment. Take that down to the US into markets where we see opportunities. So we're obviously positioning with a keen eye on moving our business down south when that opportunity arises and I think all eyes are on the United States in the next few weeks as these bills start to advance.

SH: And finally, John, if there’s anything I’ve overlooked, please feel free to elaborate.

JA: No, I think we would just emphasize for investors, please do your due diligence. All of our materials are available on our website, Delta9.ca and invest.delta9.ca. please reach out to the company for investor materials, to chat with investor relations, et cetera.

For regular updates, visit www.delta9.ca.


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


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Comments

Great job on buying Uncle Sams love the name . Hope it’s protected in the USA . Would be a great market strategy.
(102)
April 6, 2022

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