Decibel Announces Second Quarter Results with Another Period of Record Net Revenue and Adjusted EBITDA

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Aug 18, 2022, 08:00 ET

CALGARY, AB, Aug. 18, 2022 /PRNewswire/ - Decibel Cannabis Company Inc. (the "Company" or "Decibel") (TSX-V: DB) (OTCQB: DBCCF), a premium cannabis producer, is pleased to announce its second quarter financial results for the three and six month periods ending June 30, 2022.

"Our second quarter results continue to demonstrate that Decibel is on the path we projected in our 2022 operational outlook", said Paul Wilson, Chief Executive Officer of Decibel. "Our New Unique and Innovative product development and revenue generating initiatives have once again produced quarter-over-quarter record performance. This progress has been compounded by our productivity initiatives and record gross profit, now resulting in positive cash flow, putting us on track for another projected milestone."

"With more highlights scheduled for the back half of 2022, Decibel is delivering exactly what we've planned and forecasted to the market, ourselves, and our shareholders."

Financial Highlights

Record Net Revenue: $18.6 million of total net revenue in Q2, with strong sequential growth of 11% over Q1 2022 and 49% over Q2 2021. Net revenue growth was driven by expanded distribution particularly in the Ontario market, the continued launch of new General Admission and Qwest infused products in various provinces and continued growth in demand for derivative products. During the second quarter, net revenue would have been $18.9 million, however $320 of discounts were provided related to discontinued products.
Record Gross Margin Before Fair Value Adjustments: Significant sequential improvement to 41% in Q2, compared to 35% in Q1 2022 and 41% in Q2 2021. The increase was driven by initiatives realized midway through the second quarter, including operational efficiencies, automation equipment commissioned, and sourcing of more cost-effective components related to the manufacturing of cannabis products. The cost engineering initiatives and capital investments impacted the later part of the second quarter, with additional equipment landed early August expected to drive continued sequential margin expansion. The Company achieved its previously stated target of 40 – 45% gross margin ahead of the second half of 2022.
Record Adjusted EBITDA: Record $3.2 million of adjusted EBITDA in Q2, with strong growth of 31% over Q1 2022 and 49% over Q2 2021. This marks Decibel's eighth quarter of consecutive quarterly positive adjusted EBITDA.
Derivative Sales: $13.0 million of net sales in Q2, with strong sequential growth of 25% over Q1 2022 and 128% over Q2 2021. The increase in sale of wholesale extracts is primarily attributable to expanded distribution, the launch of a new infused product line, and continued growth in demand for vapes and concentrates. This demand growth trend is continuing into Q3 2022 with record level demand and distribution for Decibel derivative products.
Flower Sales: $3.4 million of net sales in Q2, a sequential decline of 19% over Q1 2022 and 10% over Q2 2021. During the period, sale of flower products was driven by reduced volumes during planned infrastructure optimization at the Thunderchild Facility.
Record National Market Share³: Achieved 4.5% market share in July 2022, growth of 70% year over year.
Cash Flow from Operations: $1.8 million of cash flow from operations in Q2, a sequential decrease of $1.2 million over Q1 2022 and an improvement of $4.8 million over Q2 2021. This marks Decibel's second consecutive quarter of positive cash flow from operations.
Repayment Convertible Debentures: On May 11, 2022, the Company repaid its 9.5% convertible debentures with the draw-down of a fixed 4.75% $12 million term loan. This extends the maturity date of $12 million of debt by 4 years, avoids approximately 6% of potential shareholder dilution, and results in $0.6 million of annual interest expense savings.

Operating Highlights

New Unique and Innovative

The Company launched or expanded distribution of the following products in the quarter:

Total of 26 products launched in various provinces over the course of Q2 2022
6 General Admission flower and pre-roll products
6 General Admission vape flavours in distillate and live resin formats
9 General Admission and Qwest infused pre-rolls
5 Qwest flower and pre-roll products

Capital Projects

The Company made the following progress on its operational initiatives:

The Plant: Received its Health Canada license May 2, 2022 for Phase 1 of its processing hub expansion. In August 2022, the majority of the automation and other critical equipment was received, which is expected to drive further margin enhancement on Decibel products in the second half of 2022.
Thunderchild: Completed its staged infrastructure optimization to better meet growing demand for Decibel products and enhance product quality and yields. Production volumes are expected to resume full run-rate production by the first half of 2023.

Summary Highlights

		Three months ended		Six months ended
		June 30		June 30
	2022	2021	2022	2021
(thousands of Canadian dollars, except where noted)
Gross sales of flower ^{1, 2}	$4,471	$4,289	$9,950	$8,951
Net sales of flower ^{1, 2}	$3,447	$3,577	$7,692	$7,437

Gross sales of extracts ^{1, 2}	$19,634	$8,742	$35,935	$15,846
Net sales of extracts ^{1, 2}	$12,962	$5,674	$23,308	$11,268

Number of retail stores	6	6	6	6
Retail sales ^{1, 2}	$2,147	$3,189	$4,206	$6,361

Total
Gross revenue	$26,252	$16,220	$50,091	$31,158
Net revenue	$18,556	$12,440	$35,206	$25,066
Gross profit before fair value adjustments	$7,689	$5,095	$13,494	$10,073
Gross margin before fair value adjustments	41 %	41 %	38 %	40 %
Adjusted EBITDA ²	$3,230	$2,149	$5,689	$4,182
Cash flow from operations ³	$1,777	($3,007)	$4,761	($6,121)

¹	In the table above, wholesale inventory transferred to the retail stores and subsequently sold of $188 and $414 for the three and six months, respectively, have been eliminated from retail sales and attributed to wholesale sales of flower and extracts to provide a more accurate depiction of business performance.
²	Non-GAAP financial measure. Refer to "Cautionary Statement Regarding Certain Non-GAAP Measures" for further details.

Link to Decibel's Investor Presentation

Decibel's financial statements for the three and six month periods ending June 30, 2022 ("Financial Statements") and related Management's Discussion & Analysis ("MD&A"), are available under the Company's profile at www.sedar.com. As of June 30, 2022, Decibel was in compliance with all of its financial covenants and expects to remain in compliance for the remainder of its twelve-month forecast period.

³	HiFyre Retail Analytics, Licensed Producer Sales over Time Nationally, July 1, 2022 – July 31, 2022.

About Decibel

Decibel is uncompromising in the process and craftsmanship needed to deliver the highest quality cannabis products and retail experiences. Decibel has three operating production houses along with its wholly owned retail business, Prairie Records. The Qwest Estate in Creston, BC is a licensed and operating 26,000 square foot cultivation space which produces the widely championed, rare cultivar-focused brands Qwest and Qwest Reserve, which are sold in six provinces across Canada. Thunderchild Cultivation, is a licensed and operating 80,000 square foot indoor cultivation facility in Battleford, SK. The Plant, Decibel's extraction facility, in Calgary, AB has 15,000 square feet of Health Canada licensed extraction and product development space. This production house will fuel the growth of our brands Qwest, Qwest Reserve, Blendcraft, and General Admission, into new and innovative product formats like concentrates, vapes, edibles and beyond.

www.decibelcc.com

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Cautionary Statement Regarding Certain Non-GAAP Measures

This press release contains certain financial performance measures that are not recognized or defined under IFRS (termed "Non-GAAP Measures"). As a result, this data may not be comparable to data presented by other licenced producers and cannabis companies. For an explanation of these measures to related comparable financial information presented in the Consolidated Financial Statements prepared in accordance with IFRS, refer to the discussion below. The Company believes that these Non-GAAP Measures are useful indicators of operating performance and are specifically used by management to assess the financial and operational performance of the Company. Accordingly, these Non-GAAP Measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Non-GAAP Financial Measures

Adjusted EBITDA: Adjusted EBITDA is a non-GAAP financial measure that is intended to provide a proxy for the Company's operating cash flow and is widely used by industry analysts to compare Decibel to its competitors and derive expectations of future financial performance of the Company. Adjusted EBITDA increases comparability between comparative companies by eliminating variability resulting from differences in capital structures, management decisions related to resource allocation, and the impact of fair value adjustments on biological assets, inventory, and financial instruments, which may be volatile on a period to period basis. The composition of adjusted EBITDA is as follows:

Adjusted EBITDA
		Three months ended		Six months ended
		June 30		June 30
	2022	2021	2022	2021
(thousands of Canadian dollars)
Net income (loss)	(2,112)	(620)	(6,484)	2,002
Unrealized loss on changes in fair value of biological assets (gain)	(4,181)	(3,181)	(7,431)	(8,355)
Change in fair value of biological assets realized through inventory sold	6,382	1,862	12,334	3,543
Depreciation and amortization	1,022	907	1,819	1,816
Share-based compensation	862	1,156	2,093	1,503
Other loss (income)	(46)	(15)	(53)	(20)
Transaction costs	(1)	-	10	-
Finance costs	808	1,017	1,828	2,006
Foreign exchange loss (gain)	152	36	117	81
Loss on disposal of property, plant, and equipment (gain)	-	-	-	34
Non-cash cost of goods sold¹	255	231	908	431
Other adjustments²	89	227	548	227
Other non-cash costs³	-	529	-	914
Adjusted EBITDA⁴	3,230	2,149	5,689	4,182

¹	Relates to depreciation and amortization included in cost of goods sold, write downs of inventory to net realizable value, and abnormal waste. For the three months ended June 30, 2022, non-cash cost of goods sold was comprised of $255 of depreciation and amortization. For the six months ended June 30, 2022, non-cash cost of goods sold was comprised of $908 of depreciation and amortization.
²	Severance payments of $89 are added back in the Company's Adjusted EBITDA calculation for covenant reporting purposes. For the six months ended June 30, 2022, other adjustments included $303 of severance payments and $245 of air freight charges related to supply chain issues. These amounts are included in SG&A expenses and cost of goods sold in the Company's consolidated statements of income (loss) and comprehensive income (loss).
³	Other non-cash costs relate primarily to the destruction of inventory at the three processing facilities. These amounts are included in cost of good sold in the Company's consolidated statements of income (loss) and comprehensive income (loss).
⁴	Non-GAAP financial measure. Refer to "Cautionary Statement Regarding Certain Non-GAAP Measures" for further details.

Supplementary Financial Measures

Retail Sales: Retail Sales is a measure intended to provide a more accurate depiction of the revenue earned by the Company's retail operations. Inventory transferred directly from the Company's wholesale operations to the Company's retail operations is removed from Retail Revenue as presented in the Company's Consolidated Financial Statements.

Gross Sales of Flower: Gross Sales of Flower is a measure intended to provide a more accurate depiction of gross revenue earned by the Company's wholesale flower operations. Inventory transferred directly from the Company's wholesale flower operations to the Company's retail operations is added to Gross Wholesale Revenue of Flower as found in the Company's Consolidated Financial Statements to arrive at Gross Sales of Flower.

Net Sales of Flower: Net Sales of Flower is a measure intended to provide a more accurate depiction of net revenue earned by the Company's wholesale flower operations. Excise taxes associated with flower sales are subtracted from Gross Sales of Flower to arrive at Net Sales of Flower.

Gross Sales of Extracts: Gross Sales of Extracts is a measure intended to provide a more accurate depiction of gross revenue earned by the Company's wholesale extracts operations. Inventory transferred directly from the Company's wholesale extracts operations to the Company's retail operations is added to Gross Wholesale Revenue of Extracts as found in the Company's Consolidated Financial Statements to arrive at Gross Sales of Extracts.

Net Sales of Extracts: Net Sales of Extracts is a measure intended to provide a more accurate depiction of net revenue earned by the Company's wholesale extracts operations. Excise taxes associated with extracts sales are subtracted from Gross Sales of Extracts to arrive at Net Sales of Extracts.

Forward Looking Information

This news release contains "forward-looking information" and "forward-looking statements" (collectively, "forward-looking statements") within the meaning of the applicable Canadian securities legislation. All statements, other than statements of historical fact, are forward-looking statements and are based on expectations, estimates and projections as at the date of this news release. Any statement that involves discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions, future events or performance (often but not always using phrases such as "expects", or "does not expect", "is expected", "anticipates" or "does not anticipate", "plans", "budget", "scheduled", "forecasts", "estimates", "believes" or "intends" or variations of such words and phrases or stating that certain actions, events or results "may" or "could", "would", "might" or "will" be taken to occur or be achieved) are not statements of historical fact and may be forward-looking statements.

In this news release, forward-looking statements relate to, among other things, the Company's expectations that it is on track with another projected milestone and that more highlights are planned for the back half of 2023; that additional equipment landed early August will drive continued sequential margin expansion; that the Company is ahead of its previously stated target to achieve 40-45% gross margin by the second half of 2022; that the growth in demand for vapes and concentrates will continue into Q3 2022 with record level of demand and distribution for Decibel derivative products; the anticipated benefits to be derived from the staged infrastructure optimization at the Thunderchild Facility; Decibel's expectations that production volumes at the Thunderchild Facility will resume full run-rate production by the first half of 2023; the Company's expectations that it will remain in compliance with all of its financial covenants for the remainder of its twelve-month forecast period; the Company's ability to grow Qwest, Qwest Reserve and Blendcraft brands into new and innovative product formats, variations; and its other business plans and expectations. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this news release. The Company assumes no obligation to update the forward-looking statements of beliefs, opinions, projections, or other factors, should they change, except as required by law.

Forward-looking statements and FOFI (as defined herein) are necessarily based upon a number of estimates and assumptions that, while considered reasonable, are subject to known and unknown risks, uncertainties, and other factors which may cause the actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to: risks relating to delays; regulatory changes and impacts; capital requirements; construction impacts; displacement requirements and unforeseen requirements resulting from the COVID-19 pandemic; the ability to obtain and maintain licences to retail cannabis products; review of the Company's production facilities by Health Canada and maintenance of licences (including any amendments thereto) from Health Canada in respect thereof; future legislative and regulatory developments involving cannabis; inability to access sufficient capital from internal and external sources, and/or inability to access sufficient capital on favourable terms; the labour market generally and the ability to access, hire and retain employees; general business, economic, competitive, political and social uncertainties; timing and completion of construction and expansion of the Company's production facilities and retail locations; the risk that additional equipment landed early August may not drive continued sequential margin expansion; the risk that the Company may not remain in compliance with all of its financial covenants for the remainder of its twelve-month forecast period; and the delay or failure to receive board, regulatory or other approvals, including any approvals of the TSX Venture Exchange, as applicable. Many of these risks and uncertainties and additional risk factors are described in the Corporation's Annual Information Form and Management's Discussion and Analysis for the year ended December 31, 2021, which are available at www.sedar.com.

With respect to forward-looking statements and FOFI contained in this press release, Decibel has made assumptions regarding, but not limited to: Decibel's ability to enter new markets and industry verticals; Decibel's ability to attract, develop and retain key personnel; Decibel's ability to raise additional capital and to execute on its expansion plans; the timelines for new product launches, Decibel's ability to continue investing in infrastructure and implement scalable controls, systems and processes to support its growth; the impact of competition; the changes and trends in Decibel's industry or the global economy; the Company's ability to generate sufficient cash flow from operations and obtain financing, if needed, on acceptable terms or at all; the general economic, financial market, regulatory and political conditions in which the Company operates; the ability of the Company to ship its products and maintain supply chain stability; consumer interest in the Company's products; anticipated and unanticipated costs; government regulation of the Company's activities and products; the timely receipt of any required regulatory approvals; the Company's ability to conduct operations in a safe, efficient and effective manner; the Company's construction plans and timeframe for completion of such plans; and the changes in laws, rules, regulations, and global standards.

Any financial outlook or future oriented financial information (in each case "FOFI") contained in this news release regarding prospective financial position, including, but not limited to: that additional equipment landed in early August will drive continued sequential margin expansion; and that the Company is ahead of its previously stated target to achieve 40-45% gross margin by the second half of 2022, is based on reasonable assumptions about future events, including those described above, based on an assessment by management of the relevant information that is currently available. The actual results will likely vary from the amounts set forth herein and such variations may be material.

Readers are cautioned that the foregoing list of assumptions and risk factors is not exhaustive. The forward-looking statements and FOFI contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements and FOFI included in this news release are made as of the date hereof and Decibel does not undertake any obligation to publicly update such forward-looking statements and FOFI to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

SOURCE Decibel Cannabis Company Inc.