Look for Bottom Line Performance in Cannabis Companies
February 22nd, 2021
Exclusive, News, Top Story
Some key features of Decibel Cannabis Company:
- Defining the upper echelon of premium cannabis brands with its own brand, Qwest
- Among the few profitable cannabis companies with growth ahead
- Short supplied with leading flower pricing – adding 4x flower production
- #1 and #3 in vapes and concentrates with 30+ product SKUs to come
The story of cannabis investing has gone through a number of twists and turns over the last several years as the industry exploded onto the scene. Key indicators have evolved from the simple possession of a license through expanded production capacity to next generation products and retail distribution. Where are we now? Well, like almost any business, at some point cannabis companies need to make money, growing top line revenues while managing expenses to create a positive bottom line. All of that infrastructure investment needs to generate a return, and at some point valuations will reflect fundamentals.
One company that flies under the radar a bit but looks to be solidly on that path is Decibel Cannabis Company Inc. (TSXV: DB) (OTCQB: DBCCF). Decibel has operations in three Canadian provinces and its products are distributed in six provinces. The company grows its own cannabis, produces its own derivative products, has a variety of in-house retail brands, and owns several retail outlets of its own. Here we will take a look at the business as it stands now and see where it might be headed.
The Decibel Story
At the end of 2019, Westleaf Inc. merged with We Grow B.C. Ltd to form what is now the Decibel Cannabis Company. Westleaf was publicly traded and featured an award-winning retail chain (Prairie Records), a state-of-the-art extraction and production facility (The Plant), and a cultivation facility that has now been licensed (Thunderchild Cultivation). We Grow was private and featured a cultivation facility (The Qwest Estate), a leading premium cannabis brand (Qwest), an extensive library of craft cannabis genetics, and a healthy bottom line.
The resulting Decibel Cannabis Company combines expertise in cultivation, production, retail, and finance to guide its growth, always with an eye on financial performance. As it evolved through 2020, Decibel cut costs and quietly repositioned its strategy to building competitive advantages in everything genetics influence – flower, vapes, and concentrates. Decibel now has three quarters of reported financial results, with a fourth on the way soon. We can take a look at both top- and bottom-line numbers to get a snapshot.
Decibel’s Q3 results showed an increase of 29% in net revenue over the prior quarter, following a 17% increase in Q2 over Q1. Revenue is on an upswing, with significant increases in production capacity on the near-term horizon poised to push that growth even higher. Importantly, Decibel showed its first positive adjusted EBITDA in Q3 as well, continuing the upward trend shown in the company’s first full year of combined operations.
What makes their Q3 intriguing is their extraction and production facility only received its sales license in July and achieved its first sales in September. While it only contributed a little less than a million in sales for the third quarter, it leaves us looking towards Q4 to see its true performance. While we are left waiting, the company has certainly left some breadcrumbs with its recent press in February. It seems since Q3, Decibel has been quite active, launching over 26 vape and concentrate products across five provinces.
Profitability can be chalked up to increasing revenue along with an approximate 32% reduction in SG&A expenses for the combined company in 2020 when compared to the two separate companies in 2019. This dramatic decrease in expenses comes in spite of opening new Prairie Records retail stores and the commencement of commercial operations at The Plant production facility. The Decibel management team’s commitment to running a lean, efficient operation while providing high quality products isn’t just idle talk.
Decibel’s Products & The Retail Feedback Loop
Decibel views its vertically integrated business model as a huge asset for the company going forward, but maybe not quite in the way you would expect. The Prairie Records stores certainly provide revenue which is not to be discounted. But the value to Decibel’s long-term plan lies more in the way consumer data feeds research and development of new products. The company gains direct insight into customer preferences through its retail outlets, with the ability to test and refine its own products on a smaller scale before committing significant resources to a national rollout of a product which may or may not perform. Decibel doesn’t have to pay for reams of impersonal third-party consumer data when its own employees can conduct far more specific and personal product research.
The strategy seems to be working. Since September 2020, Decibel has launched 26 vape and concentrate products into five provinces. In January, across British Columbia, Alberta, and Saskatchewan, Decibel products hit #1 in concentrate sales and #3 in vape sales. In the first month in Ontario, the company achieved #3 in concentrate sales and #8 in vape sales. Collectively, the company achieved a 22% market share in concentrates and a 9% market share in vapes – not a bad start. However, Decibel looks to keep the engine churning, with plans to launch another ~30 SKUs in the coming quarters, including Qwest branded vapes and concentrates.
Speaking of Qwest, the brand’s flower products are already established in the upper echelon of premium cannabis brands. The company focuses on quality and genetics, aiming to refresh its offerings constantly and create choice for consumers. They have been on the bleeding edge with genetics, hitting as high as 32% THC with their “Kush Mints” flower, bringing unique genetics like “Ex-wife” (certain to have been a hit on Valentine’s day), and adding new strains like “Stuffed French Toast” and “Sunset MAC”. The chart below shows Qwest-branded products as two of the five highest priced brands in Alberta as of October 2020 and their prices have held up since then.
Due to limited production capacity, Qwest flower products are consistently sold out in key markets. It’s a desirable problem to have when compared to the more common story of overproduction and waste across the industry. Still, Decibel would rather keep up with demand and the newly licensed Thunderchild Cultivation facility will greatly increase capacity from 1,800 kg/year to more than 9,000 kg/year. First revenues from Thunderchild are expected to be realized in Q2 2021.
The Bottom Line
Below is a chart showing Net Revenue and Adjusted EBITDA numbers from the most recent reported quarters for five Canadian cannabis companies. These companies were chosen due primarily to positive EBITDA numbers, as a point of comparison.
As a point of reference here are the approximate market caps of the five companies, in Canadian dollars:
- Aphria (TSX: APHA) – $7.7 billion
- Village Farms International (TSX: VFF) – $1.6 billion
- The Supreme Cannabis Company (TSX: FIRE) – $198 million
- GTEC (TSX: DN) – $77 million
- Decibel Cannabis Company (TSXV: DB) – $61 million
Decibel is positioned for major growth over the coming quarters to build further upon its solid foundation. While the company has already achieved profitability in Q3, the Plant facility sets up Q4 for further growth with a full quarter of revenue. And the company expects its 26 recently launched vape and concentrate lines to continue their growth while introducing another 30 SKUs of high margin, high quality cannabis derived products. With Qwest’s unrivaled presence the Thunderchild Cultivation facility will help the company meet existing demand for its premium flower products and allow room for significant growth. Decibel intends to launch anywhere from 6 to 10 new proprietary strains from its extensive library of cannabis genetics this year.
Decibel Cannabis Company looks to be a well-oiled machine that is just getting going in earnest. It deserves a closer look from investors hoping to sort out the wheat from the chaff in the rapidly expanding legal cannabis industry.
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