Delta-9 just released its best quarterly results turning a profit.

Delta-9 CEO John Arbuthnot
Delta 9 CEO John Arbuthnot.

With Cannabis being declared an essential service during the COVID-19 pandemic we spoke with CEO John Arbuthnot to find out how he is protecting both his employees and the bottom line.

By Andrew Shaw, Publisher of Cannabis Daily – See Delta-9 Q4 & Year End Results Press Release.

AS [00:00:55] I just saw your most recent quarterly press release and had the chance to look at your highlights for the current term, but also I looked a little deeper at the company story – your vertical integration, especially your grow pods, and your farm to table holistic business approach, you’re doing some great things.

So perhaps you want to jump right into the results?

I mean, most notably, the company achieved its first quarterly profit from operations in its history during the fourth quarter of 2019.

First of all, cheers and bravo. Perhaps talk about how much pain it’s taken to get there?

JA [00:01:40] It’s taken a little longer than it did when we first started the business seven years ago to turn to profitability. It is a major milestone for the company and provides a lot of very positive takeaways from the year end. The fourth quarter revenue results are the most significant in the company’s history on a quarterly basis, particularly in context of the cannabis space where very few reporting issuers have been able to make that statement.

AS [00:02:27] Yes. And it’s true that a lot of the reporting issuers are also running out of cash flow which is dramatic, there’s been a lot of movement, a lot of bubbling around in terms of consolidation activity. We been tracking the fundamentals since all the major LP started to record revenues. We’ve been watching who’s recording how much dollars per gram, and your KPI fundamentals which you guys so clearly provide in your IR disclosure, are great.

But clearly, what’s going on in the industry, it’s the race to black ink – Like any sort of bubble or burst moment in the market, that’s where it’s got to go. But I look a little deeper at your information and I see on your investor fact sheet on your web site you have a really good visualization of your consolidated financial statement and net loss reductions over successive quarters.

And it really shows prudent financial management how your revenues are ramping and your costs and losses have been steadily decreasing. You know, it’s all the right moves.

It’s just a shame you’re in a vacuum right now in the industry where people’s ears are just tuned out. I’m happy that I was able to reach you today and bring some profile onto this.

You know, it’s a very, very strong achievement here. I’m looking at a press release most current from March 19 on year end 2019 results. Record operating revenues are up 315%  across the board, retail revenue is up 390%. Wholesale revenue up 336%. Business to business revenue up 574%.

Of course, when charting new revenues, when coming out from zero to anything will usually start as a huge percentage change – but we’re talking real dollars here… with record operating revenues of $31.8 million and climbing. How much of this is attributable to your move to retail?

JA [00:04:15] Our retail segment with over $15 million in top line revenue for 2019 has become more and more significant for us.

It speaks to our vertical integration strategy.

There are a number of benefits to retail, beyond the significant growth in the top line. It’s driving demand for Delta9 products in the market, giving us control over that direct to consumer sales force.

Most importantly, it’s giving us live feedback data and analytics on who are our core consumer demographic.

We see what products they are buying? Which product categories are becoming more important and what is the best price to sell the products?

I think retail is a very important part of our business strategy, it will be a large part of our expansion strategy moving into the future.

AS [00:05:38] That makes tons of sense. I mean, yeah, I guess there would be quite a competitive intelligence advantage when you’re operating your own retail environment with multiple suppliers in that same environment. You’re watching your products sell next to other products and see who’s buying what. That must also be a pretty good intelligence gathering machine?

JA [00:05:57] I had almost discounted the benefit of the data collection and analytics in Canadian retail prior to legalization which was more intended to serve as a method of increasing distribution, but we more and more are finding out just how important the function is.

We are able to compare ourselves to the competition and see how we are doing and benchmark ourselves against the best and biggest, to ensure that our product offering is competitive not only in our stores, but across the rest of Canada from a distribution standpoint as well.

We currently have four retail stores, all focused in the province of Manitoba. We have a fifth store that is fully built in Manitoba, simply pending the issuance of the license. We have two stores in the province of Alberta that are also pending the issuance of a license in that market.

The company does plan to open up to twelve additional stores through the end of 2021. We envision a chain of Delta 9 branded retail stores, if you will, operating across western and central Canada.

AS [00:07:30] Yes. Now, in terms of the Ontario market, are you lining up behind the push to see the Ontario stores ramp up, are also you looking east?

JA [00:07:49] The challenge is that there are certain restrictions with LP’s around vertical integration in that market. For Delta 9 to participate in that market, we need to consider a quasi-franchise model, which, can be a difficult business model to work with.

It comes with a host of challenges especially with execution. In Manitoba where we have direct control over our store buildout and operations, we have everything firmly under our control. I think you can see from our financial statements we’re a management team that’s very execution focused.

There is a lot of uncertainty, particularly in the Ontario market, where timeline and execution have had a very rough rollout. We will take our time and find the right partners before we expand into the retail Ontario market. Our focus is to expand across the prairie provinces, Manitoba, Saskatchewan, Alberta, all provinces that allow for full vertical integration, direct ownership and control of the retail operations. It is a large enough market with several million people across those three provinces to allow us to have a big impact, create strong top line growth and really hone our retail strategy.

We want to get the business to a point where that quasi-franchise model starts to make sense for markets like Ontario, BC which will then start to become a little bit more of a focal point.

AS [00:09:28] I see. So, when more certainty develops in those marketplaces you can then roll-out the vertically integrated strategy.

It’s clear to me that when the market is a restricted price product, to make profit is being as lean a supply chain as possible, having as much control over your process of quality. That’s why I was questioning the retail play  as obviously a good move.

It makes sense that you’re working in a favorable territory, you can take a big bite or the market and keep it running efficiently using your model, as opposed to folding yourself into a pretzel, trying to fit into a different restrictive environment.

So, kudos on the management discipline. What comes to mind is like Irving Oil, out East they kind of own the eastern provinces. You never see the brand in the west but, you know, you go to that one territory and they are literally the gas station on every corner.

JA [00:10:15] When we look to the U.S. markets prior to legalization you saw the big companies operating in select markets likely participating in all aspects of the market from producer, retail and extractor which gave them control over it.

The supply chain gave them control over that push from a distribution player to get their product to the market, to see top line growth.

I think that’s what’s particularly important in a relatively new industry like the cannabis industry, where, these long-standing distribution relationships are just not there to be able to control your bottom line. Having that retail segment helps things out a lot. I often draw the parallel to the oil and gas sector where in a situation of uncertainty and volatility on pricing, we knew that the price of oil and gas can be high in an oil shortage environment can very quickly become compressed in an oversupply environment.

It is an excellent strategy to be a vertically integrated company that is not only a pump jack, but also refinery and a pipeline and a gas station. This is how they control the supply chain and find value by being flexible in light of market volatility.

I think it’s very important for an uncertain sector to control as much of the value chain where possible to weather price fluctuations.

AS [00:12:04] And it’s already clearly showing up in your business performance, which is where the validation comes in. As you know, with the right call, because look where we are now, you wanted to see people able to turn a corner showing black ink in probably the deepest trough the industry can and will likely ever see. And that’s, you know, where fortune favors the brave to a certain degree. You guys certainly have a brave business plan and it looks like it starts at your grow operation, with Grow Pods, is that your unique proprietary and patented tech – the grow pod’s as a device?

JA [00:12:38] Yes, absolutely. To me, brand building, goes far beyond trying to create a strong capital markets present and then going out and trying to find celebrity endorsements. Brand building is about creating good products, creating that brand awareness with the consumer where they can count on high quality products being delivered to the consumer with a strong value proposition.

For us, the foundation of that was our grow pods. It took, five years of learning and making mistakes on the cultivation side of our business before we even design these grow pods.

It was really the culmination of many years of trying different cultivation methodologies and ideologies to arrive at a point where we could produce a high quality standardized output product and we could create this modular, scalable, stackable production platform that became quite easy to manage from a standardized manufacturing perspective.

Now we get a lot of questions on why we do this model versus the greenhouses. I think the proof is on the results.

First thing, we’re seeing massive greenhouses across Canada being shuttered. They’re inefficient and ineffective. They’re producing far too much biomass of a product quality that is simply not there to put into a consumer-packaged product.

We’re seeing the efficiencies from the grow pods as our cost per gram is reaching sub $1 per gram on production costs. In our fourth quarter last year our cost per gram was $0.91 cents.

We’re now one of the top five producers in Canada in terms of cost per gram with a high-quality, high THC product. That is the way we are mitigating risk to our business with a low-cost product and high-quality production. This is our strategy to combat any oversupply situation that develops, which is resulting in margin compression for a lot of other producers

AS [00:14:54] Yeah, Delta-9 isn’t another ‘acres under glass’ story because you know, there’s a whole bunch of inefficiencies in that method as you pointed out. Everyone knows you can grow cannabis in a box provided you have nutrients, water flow, et cetera, plus – you can control gasses like CO2 pumping in – all kinds of things like that right? I expect because grow pods are closed contained unit must also have benefits of mold and mildew control from unit to unit – I expect it is also extremely excellent system in that regard?

JA [00:15:25] Yes. It’s not only a focus on quality it’s a built-in risk mitigation strategy. As anyone who has been growing Cannabis knows that as much as we try and treat this like a manufacturing facility it is an agricultural crop that is susceptible to disease contamination.

By growing cannabis in small, compartmentalized areas not only gives us a high level of control of the quality parameter, but in the instance of contamination, we can quarantine those areas, cut the crop down, start over again, and the loss effect on our business is quite negligible.

So, it’s compartmentalization of risk factors that I think was lost in a lot of these massive greenhouse areas where frankly, if something goes wrong, it goes wrong across the entire facility.

AS [00:16:12] Yes, I remember some crop failure images, last year there were cannabis greenhouses images that popped up on the internet. Certainly, there’s a risk in having a greenhouse biosphere where everything is in constant contact with everything else. Clearly that’s a business risk.

Especially with the current situation of COVID-19 it’s a stark example of how diseases can spread from life form to life form, you know, among those sort of similar species where clearly you guys have an advantage of compartmentalization, which I love.

Quite frankly, the use of modular shipping containers as the base frame for your gear is just so smart. And again, you’re using the vertical square footprint of the space that you have under a roof. That’s maximizing your space.

It also looks like your land package in Manitoba’s got some room for expansion to… I was watching your corporate video and it shows what you’ve got in terms of buildings on site now, and what your vision is like for facilities expansion. So, you clearly got some really good room for growth here. You plan on just building up this super-compound in Winnipeg? Is that the goal?

JA [00:17:18] Yes, in terms of growth right now, we’re currently operating in an 80,000 square foot placement facility that is fully licensed by Health Canada. We have 297 of these modular grow pods that give us an annual capacity of about 8,500 kilos.

So, in today’s wholesale pricing that will generate about $25-$35 million dollars in value, but from there the sky’s the limit. We have 47 acres of land to expand out on. We actually have another preexisting building, about 55,000 square feet, which we are currently in the process of expanding our Health Canada license perimeter to encompass that additional square footage.

We’re also in the process of acquiring a license for our automated and purpose-built bottling facility and this will fully automate our packaging, labeling and tax stamping functions for up to 25,000 kilos a year in dried flower. This will drive our costs down.

We always have an eye on the big picture for expansion. We could have up to 15 modular expansion buildings with up to 1500 original pods, which would take our annualized capacity to about 60,000 kilos per year. But of course, considering the more recent downturn in the capital markets, from a cannabis perspective as well, the near-term volatility around the current health crisis we will see when we move ahead on any of these longer-term expansion projects. We’re going to continue to keep our heads down and work towards making our three bossiness profitable.

I want to continue to see growth across our three main business segments and really create that core focus on these core operating businesses before we look to expand the picture.

AS [00:19:19] It seems that just in terms of the overall blueprint of what your business plan looks like when it’s operating, it’s clear you’ve got a modular mindset.

So, I expect you can certainly clone this current footprint, put it right next to it, and do double the scale and double the money, double the revenue. So, I mean, you’ve certainly got a system that seems to be paying off as you’re moving forward it’s clear now.

I wanted to ask a quick question on COVID-19 which is sort of the topic of the day – since cannabis has been chosen as an essential service, how has it been affecting your factory operation?

Of course, you guys are health focused, usually covered in masks and gloves in your clean spaces…. so how has COVID-19 affected your production so far?

JA [00:20:06] There has been no disruption to our business today. Both the production, distribution, the retail and the B2B operations, they are all continuing to operate at least to-date through this crisis.

We’ve increased the number of sanitization stations within the facility, for people to be exercising good hand-washing, sanitizing or sterilizing their gloves.

In our grow facility we have always uses facemasks, hairnets, scrubs, which are laundered daily onsite, all of those are available for our production staff and really ensuring that we’re limiting the number of people operating in any area at any given time and practicing that safe distance.

Our safety protocols are increased over-and-above what the governments are asking for across the board. We’ve been quite proactive for a number of weeks in our retail stores implementing escalating safety precautions to protect our customers and staff.

We have closed the functionality of our sensory bars, really preventing that closed customer staff interaction again to mitigate risk.

We’re ensuring that customers are at least eight feet apart in our exit lineups, making sure again, they are complying with safe distance practices.

In the last week or so, we’ve installed plexi-glass protective shields at our checkout for all of our staff. Again, to make sure that those safe distances are being kept.

We are acting very quickly to ensure that we’re following all of the advice of our provincial and federal health officials. It has been announced that Cannabis is an essential service in Manitoba.

AS [00:22:13] Now, is there anything you’d like to add to this or anything I didn’t ask about, that you would like folks who read this to get a chance to hear from you about?

JA [00:22:32] I think the big thing for us is highlighting the value proposition for Dellta-9 ‘s equity relative to the current share price. We talk to a lot of investors who have exposure to some of the big LP’s. They’re quite a bit underwater on their positions, or their entry point.

You know, they’re considering ‘Do I throw more into an Aurora or a Canopy or Cronos to dollar cost average myself down so hopefully when prices start to rise, I could potentially see a profit?’

You know, I think the counterpoint to that is to highlight that Delta-9 has been performing well and delivering great financial results.

There are cannabis companies that have over promised and under delivered. There is a real upside potential for a company like Delta 9 when investors move back in the bull market territory, and really start to take an appreciation of companies that are focusing on execution and producing profits.

AS [00:23:53] Most excellent. That’s fantastic, and that’s certainly part of the emphasis that the mid-tier producers like yourself, these organizations that sort of live in the middle of the sandwich often get overlooked. I mean, there’s clearly a shakeout happening in the top 50.

You can see it in the numbers, you can see it reports. You see it in the cash crunch, all that stuff. And I think in regard to Delta 9, you’ve got all the fundamentals in place. You’re turning the corner and you can reliably map where your revenue is coming from. And as you identified, you’ve got diversified revenue sources.

So, you can weather more of a storm than a single sort of single myopic player in the industry. So, kudos to each of those steps. And also, your current results are fantastic.

JA [00:24:39] Thank you very much for taking the time for the interview on the call. If there are any further questions that you think of outside of what we’ve covered, please don’t hesitate to reach out.

 

FOR MORE INFORMATION VISIT DELTA9.CA

Delta-9 CEO Interview

 

Leave a comment