Decibel’s Record Financial Results Reflect Strength of Craft Cannabis Market
April 26th, 2021
App, Exclusive, News, Top Story
A few years ago, as companies prepared for legalization of adult-use cannabis in Canada, there was a lot of talk about the eventual commodification of flower due to overproduction. The thinking was that price would be the driving factor in determining market success, but it hasn’t really played out that way to this point. Yes, the supply of cannabis flower generally exceeds the current demand for a variety of reasons. But several smaller craft producers have been thriving, a trend highlighted by recent acquisitions in the industry as larger companies seek out successful premium brands that have resonated with consumers.
One craft producer, Decibel Cannabis Company Inc. (TSXV: DB) (OTCQB: DBCCF) has been aggressively expanding over the last couple of quarters to meet strong and increasing demand for its premium Qwest Family of Brands. Beyond flower cultivation, the company also operates its own processing and extraction facility focused on derivative products, along with several retail outlets under the Prairie Records moniker. Despite its rapid expansion, a focus on running an efficient bottom-line oriented business has yielded excellent financial results that make the company stand out from the crowd.
Strong Revenues and a Healthy Bottom Line
Decibel recently reported financials for both Q4 2020 and for the full year. A review of the results reads like a greatest-hits for the company. Q4 net revenue grew 51% over the prior quarter, and net revenue for 2020 increased 380% over the prior year. Decibel recorded its second consecutive quarter of positive adjusted EBITDA, with the $1.1m in Q4 representing a 28% increase over the $860k from Q3. For the full year, the company posted a positive adjusted EBITDA of $1.5m.
Source: Decibel Investor Presentation April 2021
Q4 2020 was the first full quarter of derivative product sales as the company launched 22 vape and concentrate products in British Columbia, Alberta, Saskatchewan, and Ontario. The products quickly met with success, achieving a 22% market share in concentrates and 9% market share in vapes across those provinces in January 2021.
All of this was achieved while also expanding production capacity with the licensing and opening of a new cultivation facility, Thunderchild Cultivation in Saskatchewan, in January 2021. The new location increased flower capacity from 1,800kg/year to over 9,000kg/year, allowing Decibel to meet growing demand while still keeping things small enough to maintain the company’s commitment to ultra-premium craft cannabis production.
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Decibel was also able to rearrange its debt with non-dilutive financing that allows the company more flexibility over the coming years to implement its growth strategies. The team at Decibel runs a tight ship, focused on two pillars of the business: commitment to high quality, and management with a keen eye on the bottom line.
The Market Loves Successful Craft Brands
A couple of recent acquisitions (one completed, the other definitively agreed to) by Canopy Growth Corp. (TSX: WEED) (NASDAQ: CGC) highlight the value of high-performing craft brands. First, Canopy completed the acquisition of leading Ontario-based premium brand Ace Valley. According to Canopy President and Chief Product Officer, “The team at Ace Valley has built a premium cannabis brand, with an impressive consumer following and we’re excited to deploy the full distribution power of Canopy Growth to expand the brand to consumers across Canada. Ace Valley’s complimentary consumer positioning fits perfectly into Canopy Growth’s strategy of building authentic brands that truly resonate with consumers.”
The bigger deal, not yet completed, was announced a week later as Canopy agreed to acquire The Supreme Cannabis Company, Inc. (TSX: FIRE) (OTCQX: SPRWF) (FRA: 53S1) for an approximate value of $435 million. The first benefit mentioned in the press release: “Notably, following completion of the acquisition, Canopy will possess a strengthened brand portfolio including one of Canada’s leading premium brands, 7ACRES. Brand growth is anticipated with distribution supported by Canopy’s robust sales and distribution network as well as superior consumer insights and R&D capabilities.”
The evidence indicates there is plenty of value in developing a premium brand that resonates with consumers on a basis of quality rather than low price. Industry giants like Canopy may not be able to effectively build their own raft of premium brands as easily as they can acquire smaller successful brands and plug them into larger distribution, sales, and marketing networks. Acquisitions are certainly not the only endgame for craft producers, however, deals like these point to the value of focusing on quality as a differentiating factor.
That focus on quality is exactly what has been driving Decibel’s success. The company’s Qwest flower products regularly command some of the highest prices on the market. The below chart is based on pricing data from Alberta in October, 2020. You’ll notice two Qwest brands residing in the top five.
Source: Decibel Investor Presentation April 2021
Decibel’s combination of in-demand ultra-premium flower products, newly launched and high-performing derivative products, and retail stores that act as product development and consumer feedback labs bode well for the company. Look for continued growth over the coming quarters as production levels hit 100% and distribution expands while Decibel maintains its commitment to running a bottom-line-oriented business.
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