Delta 9 Cannabis Inc (TSE:DN) is putting investors on notice by proving that a cannabis company can separate itself from the pack and be consistently successful.
In the process of delivering its third consecutive profitable quarter, the Winnipeg-based diversified company exceeded expectations once again with revenue of C$13 million during its second-quarter 2020 and net profits of C$1.7 million after analysts pegged revenue estimates at $10.6 million.
The results follow on from a stellar first quarter where Delta 9 company reported revenues of C$11.8 million and positive net income of $2.9 million on the back of its multi-layered business model that allows the company to operate its retail, wholesale and B2B divisions simultaneously.
READ: Delta 9 Cannabis joins short list of profitable cannabis companies by staying true to its model
Notably, the company does not have any retail stores in Canada’s three largest provinces. Instead, Delta 9 is strategically focused on its core markets of Manitoba, Saskatchewan and Alberta where the company owns seven storefronts.
Clearly the strategy is working for them, with larger orders on the retail front increasing revenues by 40% sequentially quarter over quarter. Second-quarter revenues were also boosted by a steady delivery of its unique ‘grow pods’ - modular shipping containers that ensure consistency and quality in production – to eager US and Canadian customers. This new business unit has generated over $12 million of revenue over the last 12 months.
While its wholesale division was weaker due to bottlenecks in getting product out amid the coronavirus pandemic - such as keeping socially distanced at its operations - Delta 9 CEO John Arbuthnot told Proactive that the team is now able to move bulk packaging through the facility and into finished containers easily with its newly installed automated bottling equipment. It should set the division up for success in the third quarter, according to the boss.
At a time when so many of Delta 9’s peers are struggling to turn even one quarter of profit, how is a small firm based in the middle of Canada managing to deliver such successful results?
Profitability comes from a mix of factors, according to Arbuthnot, and attitudes are shifting throughout the sector over the last 18 to 24 months.
“Gone are the days of growth for growth’s sake,” Arbuthnot told Proactive. “Many of our competitors looked at the Canadian space and saw an opportunity to get very big, very fast. Unfortunately, there was a lot more effort and cost towards building out the infrastructure behind a lot of these companies – employees, assets – versus examining if growth was appropriate or near-term revenue and profit could be obtained. What happens if these things don’t roll out as we see them or as quickly as we think they’ll happen?”
Nearly two years on from legalization, Canada has quickly gone to oversupply in the wholesale market without seeing retail stores open as quickly as the industry and the public alike anticipated, a fact that has certainly hurt the bottom line for many cannabis companies. Delta 9 took a slower growth strategy to the retail rollout – and it is paying off.
Arbuthnot attributes his company’s success in part to a more metered growth approach that allowed revenue to grow exponentially while maintaining its cost structure.
“As we’re throwing more effort towards topline revenue, we are also focused on the bottom line, allowing us to reach that inflection point of profitability much quicker than our competitors,” the CEO said. “We haven’t had to go back and raise additional capital numerous times this past 12 months and instead worked with the funds we have to operationalize our assets and focus on producing positive outcomes from an EBITDA and earnings perspective.”
That thinking is starting to permeate throughout the industry, if this earnings season is anything to go by. A series of positive results from companies like Curaleaf, Trulieve and even Canopy Growth indicate that momentum might be returning, slowly, to the cannabis sector. And yet some of these major players aren’t even turning a profit, while Delta 9 is trading at around C$0.60 a share with a valuation hovering around $50 million. What’s holding the stock price back?
“If I had to point to a positive it would be that it seems that over the year the market seems to be appreciating that Delta 9’s performance is stronger than our peer group,” Arbuthnot said.
“At the same time I would concede that we do trade at one of the lowest multiples to trailing revenue, earnings, etcetera. We need to show the market that we can grow revenues and earnings over the long term. There’s certainly more work to do.”
For Delta 9, success continues to be about driving topline growth and growing its bottom line to hit a critical mass where it can reach more relevancy from a capital markets standpoint. Arbuthnot believes the inflection point may come when the firm starts to break through the $100 to $200 million market cap range, attracting the interest of institutional investors.
The firm is on pace for revenue of about $50 million this year, according to Arbuthnot. “We have a good sense of how to continue to build organically through acquisitions and retail to build critical mass to a point where, realistically, we can eclipse $100 million in topline revenue and have a hard eye on profitability. At that point, we’ve reached a point where institutional investors can look at that and say, there’s an attractive company, and particularly if we’re undervalued, it can cause a breakout.”
It isn’t just in the hands of Delta 9, though. There are a few headwinds in the cannabis sector right now that could prove to be a boon for the industry at large. One is in the form of consolidation, which many, including Arbuthnot, believe is coming. The CEO plans to be in the acquisition mix.
“Acquisitions will form a part of our expansion strategy,” Arbuthnot said. “There’s more opportunities emerging for consolidation with distressed assets in the market, which poses an opportunity for strong operators.”
US 'green rush'
Another catalyst that could drive momentum is a potential “green rush” in the US, which investors are watching closely now that Kamala Harris is on the ticket with presidential candidate Joe Biden.
Whether there is legalization or not, the US still represents a significant opportunity for Delta 9 as states expand their own legislation, giving the firm opportunities to sell infrastructure and, effectively, expertise.
Arbuthnot believes the US is about to be thrown into expansion mode. “We’ve seen in Canada how quickly the market can move. To the US’s benefit, they’ve seen Canada do it already. We’d look state by state to see where we can invest and where can we plant our flag for a production or retail opportunity. We would definitely move quickly if and when – and I think it’s when – there is a more favourable landscape.”
For now, Canada is keeping the company busy, with plans to open 12 stores in Manitoba, including seven store builds over the next 12 to 24 months. Arbuthnot is not ruling out a retail presence in Ontario but its focus remains on Manitoba, Saskatchewan and Alberta.
The company did, however, sign an agreement with the Ontario Cannabis Store to sell Delta 9 products online. “Bringing our brand into Ontario means we now have our products in front of 60% of the (Canadian) populace,” Arbuthnot explained. “It lays the groundwork to expand our wholesale business into the back half of the year, which is our most profitable sector.”
There are more positive takeaways from this earnings season than anything the industry has seen since legalization, and Delta 9 is emerging as a success story.
“We’re starting to feel an ease – I don’t want to call it a tailwind yet – but there’s definitely more momentum in the market,” Arbuthnot said. “We have a pretty good sense that the Canadian and global cannabis market is here to stay and we’re just looking for our piece of the pie.”
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