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Delta 9 Cannabis Inc (CVE:NINE) CEO on Saskatchewan Private Retail Supply Agreement

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Delta 9 Cannabis Inc (CVE:NINE) (OTCMKTS:VRNDF) (FRA:V5D1) CEO John Arbuthnot shares details of the company’s agreement to supply private retailers in Saskatchewan. Unlike other provinces, Saskatchewan allows LPs to sell directly to retailers and the agreement provides an opportunity for Delta 9 to grow outside of its home province of Manitoba. Delta 9 recently released fiscal guidance ahead of its reporting in April. Arbuthnot explains that for the quarter ending December 31, 2018, Delta 9 is anticipating revenues between $5.3 million and $6.1 million. In January, Delta 9 sold its stake in the Delta-West facility to partner Westleaf Inc (CVE:WL) (OTCMKTS:WSLFF) for 5.9 million shares in Westleaf. Arbuthnot discusses Delta 9’s licensing agreement with NanoSphere Health Sciences Inc (CNSX:NSHS) (OTCMKTS:NSHSF) (FRA:2CG2). Under the terms of the agreement, Delta 9 has an exclusive license to manufacture and sell products made with NanoSphere’s proprietary technology and will start unveiling these products in the next few months.

Transcript:

Narrator: Delta 9 Cannabis, Inc. is a vertically integrated cannabis company based in Winnipeg, Manitoba. Delta 9’s wholly owned subsidiary, Delta 9 Biotech, Inc., is a licensed producer of medical and recreational cannabis and operates an 80,000 square foot production facility.

Delta 9 owns and operates a chain of retail stores under the Delta 9 Cannabis Store brand. Delta 9 intends to have 20 retail stores in operation in Manitoba by 2021. The company has an agreement to supply 2.1 million grams annually to the Manitoba government, in addition to supply agreements with Auxly Cannabis and Canopy Growth.

Delta 9’s shares trade on the TSX Venture Exchange under the symbol NINE.

Howard Glassman:   It’s a pleasure to welcome the CEO of Delta 9 Cannabis Inc., and I just want to make sure, John, because I’m a professional: Arbuthnot? Is that close enough? It would be great if I could hear John, that’d be cool.

Ed Milewski:  We can’t hear John.

Howard Glassman:   That’s all right. John, while we’re trying to get your audio working…

John Arbuthnot:    Is that a little better?

Howard Glassman:   There we go. Hi, John.

Ed Milewski:  There, perfect.

Howard Glassman:   How are you, John?

John Arbuthnot:    I’m very well, how are you?

Howard Glassman:   I’m okay. Arbuthnot?

John Arbuthnot:    Close enough.

Howard Glassman:   Let’s talk about some of the things that have been happening recently with the company. You announced that the Saskatchewan Liquor and Gaming Authority has authorized you guys to supply cannabis directly to the province’s retail and wholesale markets. Let’s talk a little bit about that deal in Saskatchewan. What’s that going to mean for you, what’s that going to mean for the company?

John Arbuthnot:    Yeah, so I mean, a lot of Delta 9’s rollout for the initial stages of legalization was focused on our home province here in Manitoba. A lot of the idea from a distribution standpoint was around market share and market saturation. You know, we were certainly able, I think, to see the early success in that model here in Manitoba, where we enjoy relatively higher market share from both a wholesale and a retail standpoint.

Leveraging the success, I think, of that early take on the market, we’re now pushing west; Saskatchewan is the next stop for us. I think the real benefit of that market is, we get to sell direct to the retailers in the province, and we’re now in a position to be making shipments to retailers across the province of Saskatchewan. As we start to see success in that format, as we expand west, we’ll ultimately look to participate in all markets across Canada.

Howard Glassman:   It’s interesting, the idea that you guys will be shipping directly to retailers. And the retail model is different across the country – just remind me, what are the rules in terms of a retail space in Manitoba and Saskatchewan, and how does that benefit your company?

John Arbuthnot:    Yeah, so slightly different province-over-province, but in Manitoba, we are one of four exclusive licensed retailers. We have four pre-allocated licenses to operate retail stores here in the province of Manitoba, so we do consider ourselves a vertically integrated cannabis company.

In the province of Saskatchewan, slightly different: they had a lottery program that selected, very similar to Ontario, a number of people who would be eligible to open retail stores. There’s been a few dozen stores have rolled out across the province of Saskatchewan, and more are coming online all the time. And the provincial model in Manitoba, very similar to other provinces, requires distribution through a provincial distributor; Saskatchewan, a little different in allowing for direct-to-retailer sales. So, I think, a number of benefits in terms of the flexibility there, allows us to work direct with the retailer who’s actually controlling the messaging to the end consumer.

So you know, obviously the idea here is to get our branded and high-quality products through to the end consumer. I think Saskatchewan is a great platform for that.

Howard Glassman:   Amazing. Let’s talk a little bit about your supply agreements with Auxly and Canopy. Seems like that would be a good fit for you.

John Arbuthnot:    Yeah, so I mean, on top of the provincial based distribution, or distribution into the recreational market and through to the end consumer, we do have a few business arrangements, as well. The first is with Auxly Cannabis, where we look to distribute our products to them on a bulk wholesale basis. A lot of these products are going through to them to become extract products and work through, call it the Auxly business model of touching the upstream, midstream and downstream platforms. So we started to make first shipments on that early this year.

The collaboration with Canopy, slightly different, but similar from a distribution standpoint. We’re distributing direct to Canopy, and really leveraging their sales platform across Western Canada.

Howard Glassman:   Ed, do you have any questions for our friend John?

Ed Milewski:  Yeah. Just remind the viewers, how many shares are outstanding in Delta?

John Arbuthnot:    So Delta 9 right now, about 85 million shares fully outstanding or issued and outstanding; brings our market cap in the area of 140 million to 150 million right now. You know, if I were to point to one thing as a part of the Delta 9 story that’s really going to have an impact for this year, it’s top line revenue growth. We saw Cronos report earnings for Q4 yesterday of around 5.5 million; Delta 9’s now released guidance on our Q4 and our year-ends, which will be released mid-April, but we’re targeting a revenue range of, I believe it’s 5.4 million to 6.4 million. So you know, obviously significant revenues for a company with a market cap of our size, and we look to continue to leverage that success moving forward.

Howard Glassman:   What about your partnership with Westleaf in Alberta for a new production facility? All part of the plans coming up?

John Arbuthnot:    So actually have been some fairly recent developments on that. We had participated in an early investment round with Westleaf on that facility we were calling Delta West. We announced end of January that we had reached an agreement with Westleaf, who is now publicly traded as well, essentially to sell our interest in that extraction facility in exchange for shares – 5.6 million shares in Westleaf’s publicly traded parent company. Frankly, we like the exposure to their retail unit; we like that this kind of diversifies our upside potential as Westleaf begins to execute on all of their business segments.

Howard Glassman:   Yeah. I mean, I just want to, before we get on to the next thing, there really is a couple of things at play, where you supply for other companies, and you supply direct to retail. I think that’s the, especially here in Ontario, that retail model is going to be the one that I think, and I want to know what you think – in terms of an expansion of growth, who knows how many? I mean, there’s a Tim Horton’s on every corner, so who knows how much retail the country will be able to support? Have you thought about that?

John Arbuthnot:    Yeah, and I mean, obviously we talk about ourselves as a vertically integrated cannabis company and all the way through to being a retailer here in Manitoba. We now look to expand that out to Saskatchewan, Alberta and other provinces that will allow for vertically integrated retail. Ontario has been very slow, as we all know; this lottery system has been interesting. I mean, I threw my name in the –

Howard Glassman:   Let’s come back to that lottery system, which is insane. Let’s get back to that. Finish up, John.

John Arbuthnot:    Well, ‘interesting’ was generous. But you know, obviously it’s a slow approach. I think ultimately we’re going to see a little bit more of an open market platform in Ontario. I think it’s very exciting for us, the opportunity of getting into the Ontario market on either an ownership or a franchise basis. You know, we’re now to a point where, from a retail perspective, we have all of the systems, we have the point of sale, the HR back end to be able to expand very quickly on the retail side, and we see a lot of benefits to controlling the retail, controlling the direct-to-consumer marketing and branding elements.

As well, getting that live feedback from the consumers on what products are working, what products are selling, what products are not selling – all of that has a tremendous amount of value for us a production/distribution company.

Howard Glassman:   Have you, at Delta 9, have you thought a lot about what that retail experience is going to be? And before we get to that, I think April 1st is the deadline for Ontario, Ed. You have basically those franchises that were awarded in the lottery, as John and I were just saying, you have until April 1st. There’s a penalty if you don’t open up on the first of April, which is so bizarre because there’s all these people that would have been easily ready to go, and then the lottery system is like Hey, last week you had a farmer’s market at St. James. This week, you’ve got a franchise to sell cannabis.

Ed Milewski:  Yeah, and if you’re not ready by May first, you lose it!

Howard Glassman:   I thought it was April 1st.

Ed Milewski:  No, yeah, you got a month after that. But after you get to May 1, you’re done. Someone else get it.

Howard Glassman:   There were so many qualified people that could have had that, including Delta 9. But back to you, John. So is making the retail experience important? Like, sort of as a demarcation that would, your retail experience different than another’s, do you know what I’m getting at?

John Arbuthnot:    Yeah, absolutely. And you know, just to touch on the Delta 9 take on that, I mean, we wanted to, you know, provide a retail experience that was very similar to walking into any other, you know, Big Box retailer. We wanted it to be well-lit, inviting, with customer service staff that are knowledgeable and passionate about the products that they’re selling. You know, I know everyone likes to use the analogy of, we’re trying to be the Apple store; but realistically, our branding, we’ve kind of taken the overall Delta 9 brand, we’ve mashed up with an Apple store, and that’s very much what you’ll see.

Howard Glassman:   Sweet.

John Arbuthnot:    A lot of our storefronts are larger on the square footage side. We tend to lean between 3,000 and 4,500 square feet, so they are large square footage. We carry the full slate of the ancillary, the value-add products: bongs, vaporizers, things like that, and we try to provide, you know, the best shopping experience that people can have for purchasing cannabis products – very different than, I think, some people’s experiences with the black market dispensaries in Ontario, BC. And really show a public-looking face for the industry that’s very professional, very organized and very legitimate.

Howard Glassman:   I’ve had the pleasure, I’ve been at a few cannabis expos, and I was at one, I think it was either Lift or O Cannabis last year, and I saw a mock-up of a retail space, and I had to laugh, because you know, I’m a – myself and Ed here are 160 years old between each other – we’ve been around a long time.

Ed Milewski:  Yeah. Most of it’s on my side.

Howard Glassman:   Exactly, but when we were younger, forget about the dispensaries; you used to have to buy weed underneath the Gardiner. Now you walk into a place, it looks like a David’s Teas. So when I was at these conferences, I remember saying to a friend of mine, I said what’s coming, whether it’s Delta or anyone else, is a retail experience that we Baby Boomers, and even older, could never have imagined. I love hearing you talk about it that way, because it should be not only demystified, but it should be an experience just like walking into a nice wine store or, you know, a place where you want to get information about a certain vintage. Do you not agree?

John Arbuthnot:    Yeah, and that’s been, you know, the very interesting part from our perspective to see, since legalization, is people walking into the store, and you see their eyes light up, you know? They really are blown away with what they’re seeing the retail context. And you know, again, comparing us to black market, where you know, you’ve got your guy and on a good day he’s got two products, the cheap stuff and the good stuff. You know, you walk into our store this week, we’ve got about 30 different varieties of dried cannabis. We’ve got pre-rolls, we’ve got oils, we got gel caps, we have the full spectrum of products that are available. I think we’ve pushed through some of the early supply issues and are now starting to see a lot more consistency from the market, and you know what? For your average cannabis consumer, I think that’s where we’re going with it.

Howard Glassman:   By the way, speaking of what’s available at Delta 9, do you sell any live resin or shatter? Asking for a friend.

John Arbuthnot:    [laughter] Not just yet, and still looking to see what we’re going to see this fall from the Feds on the rollout of the expanded extracts. But, and you know what, we can’t quite ship to your office in Ontario yet, but we’re working on that. Hopefully some point in the future.

Howard Glassman:   Ed, you got a quick question for John before I let him go?

Ed Milewski:  Yeah, just a quick question: you went public a year and a half ago, or late 2017. How much money did you raise back then?

John Arbuthnot:    Yeah, so we went public last November. We raised 23 million through a bought deal financing in December 2017; last year we raised about another 18.5 million through equity, and we secured a $12 million credit facility through Canadian Western Bank. I believe it’s one of the first full-service credit facilities that includes commercial mortgage, draw-down credit facilities, credit cards, really the full slate of financial services.

Ed Milewski:  With revenues ramping up, you’re well-funded?

John Arbuthnot:    We feel we’re well funded for our expansion plans for this calendar year. We’ve now released our broader expansion plans out into 2022, which includes additional retail stores and ramping up our production capacity to the area of 60,000 kilos a year. So you know, a lot on the horizon for us moving forward.

Howard Glassman:   Just a couple of quick seconds, questions, I should say, John, before we let you know. One is an agreement with Nanosphere Health Sciences to provide their nanotechnology delivery system for cannabis across the country; tell us about that, then I have a question about, and just stand by: John is about to tell us the age he was when he bought his first LP.

John Arbuthnot:    [laughter] So I mean, in terms of your Nanosphere question, you know, it’s, I guess, a proprietary platform for us to take a cannabis extract, to essentially reduce the particle size for the cannabinoids that are in that extract, and in doing so, increase the uptake and increase the efficacy; decrease the overall dosage that’s required. Now, we’re still pretty early stage; the company is in the final throes of getting approval for our own oil-based products for sale. I’m hoping in the next 30 days, pending a Health Canada approval. The Nanosphere products will be a little bit beyond that, but otherwise, in pending some successful bid from a regulatory standpoint, we plan to roll those products out in the next few months, first on the medical side of the market.

But I think the broader implications with this type of technology are, I can increase the efficacy of a drinkable product and make it so that the uptake is similar to an alcoholic beverage as opposed to taking 30 minutes to an hour to see the onset from a cannabis edible. So I think there’s a lot of utility there.

In terms of the age, I admit to being 29 today. I was admittedly 19 years old when I started Delta 9, what seems like decades ago from a cannabis industry perspective.

Howard Glassman:   So you actually had your LP at age 22, according to our research.

John Arbuthnot:    22 was when we actually got the license. I think we raised our first capital when I was 19 or so.

Howard Glassman:   Good for you. Listen, I hope this isn’t the last time we talk, because I gotta tell you this: the retail model is exciting, the nano-dosing model is even more exciting, and when edibles become legal in the fall of this year, I think what you’re going to see – and I’m just going to leave you with this thought – companies like yours and others are going to be able to be more specific in the dosing of edibles, tinctures and health products for people that want to have that. Because right now I think there’s a little bit of nervousness around edibles, because it’s so unpredictable.

John Arbuthnot:    Yeah, and you know, generally I think the feedback we’re getting from consumers is, we’re pretty early in terms of the uptake, or the adoption curve, from consumers. They’re really just trying these initially, but a lot of people – and we actually see that the balanced products, the high CBD products, are the highest in demand. So interesting to see now the consumer demographics that are looking for those types of products, and I think as we expand out these regulations, we start to bring on a whole new slate of consumers that’s looking for this optionality around these other products and delivery systems.

Obviously, huge implications on the medical side, as well.

Howard Glassman:   Well that’s the thing, is I think there’s so much growth in this space, not only for investors but for people that are looking for therapies around getting rid of traditional opioids and pharmaceuticals. John, what a pleasure speaking with you. Thanks for joining me. I hope that wasn’t too, you know, filled with nonsense.

John Arbuthnot:    No, a pleasure as always, and keep your eyes on Delta 9.

Howard Glassman:   Delta 9: one of my favourite planets in the Star Trek universe. Fantastic. Thank you, John.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.