Emerging Craft Cannabis Leader Readies to Accelerate Growth

The Canadian craft cannabis sector remains one of the country’s hottest - which is good news for both consumers and investors in the space.

Take Alberta-based Sugarbud Craft Growers Corp. (TSX-V: SUGR, OTCQB: SBUDF, Forum), for example. Sugarbud is a consumer-driven, craft cannabis company - focused on delivering high-quality, genetically diverse, cannabis products.

As a rapidly emerging brand leader in the Craft Cannabis segment, Sugarbud is now well-positioned to accelerate its growth into 2022. Since launching products in late-2020, Sugarbud has established a track-record of delivering consistent, exceptional product quality within a controlled supply-chain and efficient operating model. Coupled with nationwide distribution and its recent receipt of a Cannabis 2.0 licence (one of a handful of craft cannabis companies to obtain one), the future looks very bright indeed for Sugarbud.

Craft cannabis is not a niche and craft producers are capturing market share

The legalization of cannabis in Canada has seen its fair share of ups and downs over the past 3 years. However, counter to the overall volatility, one segment of the industry continues to gain market share: Craft Cannabis. This is evidenced by the seven largest licensed producers posting a 12% aggregate decline in the most recently report quarterly net sales, when compared to the same quarter in 2020 [1], while the cannabis industry is on-pace for annual growth of 40% in 2021 [2].

Consumer trend towards craft cannabis highlights brand loyalty opportunity

The shift to craft cannabis is based on a consumer value proposition that includes cannabis genetics, cannabinoid profile, product quality and price. These fundamental factors are the basis for brand loyalty, which drives recurring sales, growth and ultimately shareholder value. This is the critical differentiating factor between craft cannabis brands, with stickier loyalty, and volume-driven, commodity-like, cannabis brands that are highly price-elastic. This differentiation also allows craft cannabis brands to rely on product characteristics to protect price and profit margin.

Operational controls are critical to consistency and profit margin

The opportunity to build craft cannabis brand loyalty hinges on superior product quality and consistency - that is where Sugarbud’s competitive advantage lies. With a disciplined commitment to consumer satisfaction throughout the organization, Sugarbud has developed and optimized its cultivation and product development techniques. Sugarbud has invested the time and capital to efficiently control the entire supply chain from seed-to-sale in order to deliver the consistency that consumers expect.

Companies like Sugarbud are at the forefront of the craft cannabis shift, and consumers and savvy investors have started taking note.

"We understand that in order to truly change the narrative on legal cannabis in Canada, we must earn a place in our consumers’ daily lives. We also recognize that our consumers have many different interests, diverse hobbies, busy jobs and are pursuing all kinds of ways to enrich their everyday experiences. Consequently, we have set a high bar for ourselves and spend a lot of time making sure that what we produce not only meets, but surpasses, consumer expectations," notes Sugarbud President and CEO John Kondrosky.

"Cannabis is a very complex plant and by nature it presents consumers with a dizzying variety of genetic composition, form and expression. Our view is that the Canadian market is only just starting to grasp the true potential of cannabis products. Consumer preferences will continue to evolve over time as they learn - and ultimately - demand more from the products they buy. Sugarbud has, from the very start, believed that the focus on singular product attributes, such as potency, does a disservice to consumers. As the market continues to mature, Sugarbud believes that a relentless pursuit and commitment to total value and consumer satisfaction across multiple product attributes and consumer preferences is the more prudent pathway towards a sustainable, profitable business and ultimately, long-term shareholder value," explains Mr. Kondrosky.

Sugarbud Q3 2021 Highlights

Sugarbud recently announced its Q3 2021 financial results on November 15th; a record quarter for grams shipped, net revenue, gross profit and yield per gram – testament to the time and effort the Company has put into establishing a consumer-driven, efficient operating model. Sugarbud’s Craft Cannabis Collection sales to key markets including – Alberta, British Columbia, Ontario and Québec – have begun to rapidly accelerate.

• Record Total Grams Shipped | The Company shipped a record total of 156,703 grams of dried cannabis in Q3 2021. Net grams invoiced and sold in Q3 2021 were 135,073g - representing a quarter over quarter sequential increase of 160% (135,073g - Q3 2021 vs. 51,929g - Q2 2021).
• Record Net Revenue | Net revenue for Q3 2021 was a record $554,231 – more than double the prior quarter revenue of $252,177.
• Strong Quarterly Gross Profit | Despite continued industry-wide price compression, Sugarbud continues to gain leverage on gross margin through a very disciplined approach to product pricing, internal cost control and operating efficiency. Gross profit before fair market value adjustments in Q3 2021 was $231,930 vs. $57,397 in Q2 2021. Year to date the Company maintains a healthy gross profit margin of 31%.
• Cost Control and Operational Stability | Sugarbud recorded 249,703g of harvested dried cannabis and an average yield of 122g/plant in Q3, 2021. The Company’s focused and disciplined approach to efficient and high-quality cultivation continues to gain momentum. Sugarbud continues to keep general overhead well under control despite doubling net revenue.
• Improved Genetic Strength and Cultivation Outcomes | Sugarbud successfully crossed the 30% potency barrier for the first time on a commercial batch whilst maintaining critical total quality attributes such as high terpene profiles – a delicate balancing act that sets Sugarbud’s cultivation and post-harvest processing techniques apart. The Company’s first commercial 30%+ strain - GMO Cookies - will launch in select markets in Q4 2021.
• Cannabis 2.0 Sales License Received | Sugarbud received approval from Health Canada for its amended license permitting the sale of cannabis extract, edible and topical products in Q3 2021. Sugarbud is now amongst a handful of craft cannabis LPs able to directly sell both its dried flower and expanded portfolio of Craft Cannabis 2.0 products to all authorized provincial and territorial distributors/retailers as well as registered medical patients nationwide. Sugarbud has built up a strong inventory of Cannabis 2.0 work-in-progress and anticipates launching its first Cannabis 2.0 products under this new license in late Q4 2021.
• Expanded Distribution and Reach | During Q3 2021, the Company established a clear route to market in Canada’s second most populous province, Québec – via a Sales, Marketing and Distribution Agreement (the “Québec Supply Agreement”) with ROSE LifeScience Inc. (“ROSE”). Under the terms of the Québec Supply Agreement, first shipments to ROSE occurred in August 2021. Sugarbud’s launch of its dry flower products under ROSE’s “ELEKT” cannabis brand has been well-received to date - with replenishment orders following in September and October.

Together with the Québec Supply Agreement, the Company has rapidly and effectively established a critical core distribution network from which to leverage future growth in under 12 months from the commencement of revenue-generating operations. Sugarbud products are now available to recreational consumers across 7 provinces and territories – encompassing over 95% of the established Canadian retail network – and to registered medical patients nationwide.

• Portfolio Expansion - Rosin Launch Update | Development of the Company’s first flower rosin extract was completed during Q3 2021, and the Company remains on track for a Q4 2021 launch of its first solventless extract product - which is derived from Sugarbud’s popular Krypto Chronic #2 cultivar.

“It takes time to build a strong brand identity and sustainable business. In our first 12-months of commercial operations, we believe that our focus on delighting the consumer whilst establishing an efficient, demand-driven operating model, will ultimately pay dividends for investors. Our view is that the pathway to long-term shareholder value is primarily through sustainable consumer adoption of our premium brands, rather than scale and size alone. Based on the feedback received from our retail partners, our commitment to exceptional cannabis and total value for the consumer is most definitely resonating coast-to-coast. We are rapidly establishing a strong brand identity and reputation as a leader in the Craft Cannabis space, and we believe that our results to date have us well-positioned to continue to expand our market share and accelerate profitable revenue growth in our key markets into 2022 and beyond,” concluded Mr. Kondrosky.

Investment summary moving forward

Operationally the Company has the existing capacity to achieve its current business objectives for the balance of 2021 and 2022.

The Company does, however, recognize that to be a leader in the craft cannabis segment some reasonable amount of scale will be required. Consequently, Sugarbud maintains an agile and scalable operating model and has several facility build-out options which it can quickly deploy as market demand requires.

The Company also continues to actively review opportunities to expand its scale and reach to consumers through inorganic M&A driven means.

Critical Go-Forward Operating Priorities and Catalysts for Growth

To fully realize significant growth opportunities and continue to expand market share in the back half of 2021 and into 2022, Sugarbud will continue to leverage existing operational capacity and expand commercial capacity for growth by:

• Building upon Sugarbud's rapidly growing connection to its retail partners and consumers - increase the penetration and adoption of its products in current target markets.
• Expanding the size and penetration of the Company’s product portfolio within major markets including Alberta, British Columbia, Ontario and Québec.
• Leveraging the quality of its exceptional dried flower portfolio to expand into complimentary cannabis 2.0 products; such as high-terpene, full-spectrum and live resin vapes, solventless extracted inhalable concentrates and extracts such as dry sift rosins and hashish.

• Continuing to build product excellence around its genetic portfolio and investing in targeted new product and portfolio development to accelerate growth.

• Continuing to maintain and adhere to strong financial discipline and operating controls that management believes will continue to deliver superior operating results. Instead of focusing on rapid expansion and scale-up, the Company continues to approach future scale using a self-sustaining revenue first model - that both places a priority on a healthy balance sheet and supports controlled future expansion.

Summary

Legal recreational cannabis is here to stay, but it is still early days. Sugarbud is playing the long game and believes the key to success and shareholder value is exceptional, balanced cannabis products that truly delight consumers, pure and simple
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To be a leader in the craft cannabis space, Sugarbud will continue to focus on driving an efficient and accretive operating model, thoughtful geographic expansion, focused product leadership and a relentless commitment to consumer satisfaction.

While the Craft Cannabis segment is still in its infancy, consumer-oriented craft cannabis brands like Sugarbud will continue to gain momentum and market share. Investors in the Craft Cannabis segment would be well advised to consider getting in early and ride the wave in order to truly reap the benefits.


FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.