PODCAST: Delta 9 Cannabis CEO John Arbuthnot on their Unique Growing Method

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Delta 9 Cannabis Inc. (CVE:NINE) (OTCMKTS:VRNDF) (FRA:V5D1) is one of the first Health Canada licensed producers and distributors of medical cannabis products. CEO John Arbuthnot talks about their production facility in Manitoba, as well as their unique growing method in retrofitted shipping containers.

TRANSCRIPT:

James West:     John, thanks for joining us today.

John Arbuthnot:     Thank you for having me.

James West:     John, let’s start with an overview: what does Delta 9 do, and what differentiates it from others in its sector?

John Arbuthnot:     Well, we are Delta 9 Cannabis. We’re a Health Canada licensed producer/distributor of medical cannabis products currently. We’ve been licensed under Canada’s MMPR and ACMPR programs since 2013, so we are one of the earlier licensed producers…

James West:     You were the fourth, if I’m not mistaken.

John Arbuthnot:     The fourth, yeah. We’ve been through the Health Canada system for quite some time now.

James West:     Well, that’s great. Okay, and so what does Delta 9 – is it a greenhouse operation, indoor operation?

John Arbuthnot:     We currently operate out of an 80,000 square foot production facility here in Winnipeg, Manitoba. We are entirely indoor or warehouse, and a little bit unique in terms of our production style. We are entirely hydroponic in terms of our actual output production, so we essentially remove the soil medium, deliver the plant nutrients right to the rooting system. If we do it right, we’re able to achieve accelerated growth rates and an increased yield.

As well as our facility design is very unique. We grow in what we call Delta 9 grow pods, which are effectively retrofitted shipping containers. We take a standard, 40-foot-high shipping container, install our own customized wall panels, coat the entire interior with epoxy, which gives us hospital-grade cleanable surfaces. We then install electrical, lighting and HVAC systems and security, and what we’re left with is a modular, scalable, now stackable unit, which is compliant with all of Health Canada’s ACMPR regulations.

James West:     Interesting! Okay, so what is the nature of your patient base? Are you focused on any particular segment, or is your audience sort of across Canada, or are they Manitoba-centric?

John Arbuthnot:     We’re currently distributing to about 2,200 patients across Canada. Now, about half of those are located here in our home province of Manitoba, so we are very focused on our home province here. In terms of market share in our own backyard, we have about 33 percent of the overall patient base here in Manitoba; actually, a little bit upwards of that. So we are big fish in our own pond, here.

James West:     Sure, okay. How many patients is that, roughly?

John Arbuthnot:     About 1,100 patients here locally.

James West:     Okay, great. So you took, you got your license initially in 2013, but it’s taken you till November of this year to become a publicly traded company. Why did you wait so long?

John Arbuthnot:     Well, you know, we walked through, I want to say the growing pains of the sector, the learning curve, as it were. We have, over the last three years, completely changed our room design from our original rather rudimentary room style over to the new, state-of-the-art grow pod system. We’ve changed from growing geoponically grown, I’ll call them plants or very large plants, to growing the hydroponic sea of green. We’ve had to test our systems, re-test, recreate those under compliance with Health Canada’s regulations. So I want to say operationally we’ve been again, climbing that learning curve, working out all of our systems.

We now have in place systems that are modular and scalable, that have a low capital cost and allow us to really expand out here, I think, at an exponential growth curve over the next few years.

James West:     Okay. And so, what is your growth strategy at this point in terms of square footage and kilograms of output?

John Arbuthnot:     We’re currently producing in the area of 1,000 kilos on an annualized basis; we are still fairly small. We’re only producing right now in 15 of our modular grow pods. Now, each pod costs us about $40,000 to retrofit from the base container to plugged in and growing in our facility, and each pod is able to output between 30 and 32.5 kilos on an annualized basis when we achieve five crops per year, which means that each container is able to output between $150,000 and $300,000 per year, whether we’re talking wholesale or retail. So we feel there’s a very attractive return on capital proposition for our investor base.

Now, our plan over the next two years here, through the end of 2019, is to build out 600 of these grow pods, investing in the area of $24 million in our Winnipeg-based facility here. Once we’ve achieved 600 grow pods in production, we’re producing in the area of 17,500 kilos per year, which from a dollar value perspective would be between $90 million and $170 million per year.

James West:     Hmm. Okay. Do you have a sense of what your cost per gram of production is at this point?

John Arbuthnot:     Currently, our last few crops, on a cost attribution basis, we’re looking at costs between $2.25 and $2.50 per gram. Now, as we expand out the pod system to be in the area of 40 to 50 grow pods, we feel that we can knock that price to the ground down to more in the area of $1.25 per gram.

James West:     Okay, interesting. Do you have a sense of what your yield per square foot is annually, in your entire operation?

John Arbuthnot:     Yeah. Yield per square foot annually would be in the area of, right now, of around 200 grams.

James West:     Okay.

John Arbuthnot:     So I know there are some facilities out there that are exceeding that. Now, where we really become competitive is our capital cost to deploy that square footage. You have to factor in as well that we can also now two-tier and three-tier our warehouse on a mezzanine level basis, so we are able to take advantage of that vertical farm component with these container pods. So when you factor in vertical farming, we actually push that output per square foot really quite above what some of these comparable facilities are creating.

James West:     Right. I’m curious as to the HVAC strategy in a stack of three shipping containers in your entire space. Is that going to be a concern? Do you have that capacity ready to go and engineered into that equation?

John Arbuthnot:     Yeah. So the $40,000 pod cost does account for the supporting infrastructure, and that would be the electrical and HVAC-supporting infrastructure. But the real unique part about these grow pods is that they are all independent from an HVAC standpoint. So there’s no communal HVAC system where we’re having to manage all of these pods on one system. And the real benefit there becomes compartmentalization of risk. The big risk to growing an open greenhouse facility or a chained HVAC system is that if there is an instance of contamination, whether that be a dust storm or mold or bugs, that infestation is able to spread throughout the facility and may cause a crop loss in the area of tens of millions of dollars.

James West:     Sure.

John Arbuthnot:     When we compartmentalize our risk, our entire value at risk in any one container at any given time is in the tens of thousands of dollars. So we’re able to very effectively manage that risk because of the, again, modular and independent nature of these grow pods. So we feel again it’s not only an attractive return on capital proposition, it’s also a risk mitigation strategy for us moving forward.

James West:     That’s interesting. That’s kind of different. How many different products do you sell currently to your patient base?

John Arbuthnot:     Well, we’re currently producing about 20 different varieties of cannabis, ranging from your very high THC to your higher CBD products and very little THC. At any given time, we have in the area of a dozen of those products available for sale through our customer service centre and our online store, and we’re currently sitting on a seed bank of about 60 different varieties, which we will be launching over the next few months, with an eye of expanding out our product capacity fairly substantially over the next six to eight months through legalization.

James West:     Now, it sounds like you’re one of the few growers in Manitoba, and with the Federal recreational strategy being more or less mandated to be under the control of the provinces, I imagine that you’re sitting in quite an advantageous position to capitalize on the advent of recreational marijuana come July 1st.

John Arbuthnot:     Yeah. We’ve been working with the Province of Manitoba very closely on this file for the last number of years. We are enthusiastic that they have taken the position that they are going to open up the retail sale component to private businesses. We’ve announced in the last few weeks that we are collaborating with Canopy Growth Corporation on our approach to the Manitoba market; we will be collaborating on supply, on distribution and on retail expansion. The Manitoba government has given us until December 22nd to submit a formal RFP to the government; our intent will be to open up to 12 stores, either jointly owned and operated or independently owned and operated, and branded, with Canopy Growth, by July 1st of next year.

James West:     Interesting. Okay, John, well, let’s leave it there for now. That’s a great introduction to the Delta 9. I’m going to come back to you in a couple of quarters’ time and see how you’re making out. Thank you for your time today.

John Arbuthnot:     James, thank you very much.

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