Decibel Announces Third Quarter Results with Record Level Positive Net Income, Adjusted Net Income and Adjusted EBITDA

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Nov 15, 2022, 08:00 ET

CALGARY, AB, Nov. 15, 2022 /PRNewswire/ - Decibel Cannabis Company Inc. (the "Company" or "Decibel") (TSXV:DB) (OTCQB: DBCCF), a premium cannabis producer, is pleased to announce its third quarter financial results for the three and nine month periods ending September 30, 2022.

"Our third quarter results coupled with another record market share month to start the fourth quarter continue to demonstrate our focus in achieving our 2022 operational outlook", said Paul Wilson, CEO of Decibel. "With highly successful recent product launches, the demand we are experiencing has been tremendous and provides opportunity for material growth for Decibel. The continued progress by our productivity initiatives alongside another period of record gross profit position us well to deliver on this demand and drive further profitability, as we track towards a strong fourth quarter to end 2022."

Financial Highlights

Record National Market Share¹: Achieved 5.3% in October 2022 which places Decibel as the 6^th largest LP in Canada by market share.

The Company anticipates sequential net revenue growth to resume in the fourth quarter supported by continued growth in demand (market share) and improved operational capacity to meet demand.
Record 5.3% recreational National Market Share in October driven by gains in vape and pre-roll categories:

#1 company in vape sales with a 14.5% market share
#3 company in pre-roll sales with an 8.4% market share

Net Revenue: $18.3 million of total net sales in Q3, with a sequential decline of 1% over Q2 2022 and an increase of 37% over Q3 2021. The sequential net revenue decline was driven by a higher proportion of derivative sales which receive more punitive excise tax rates, whereas gross sales grew sequentially by 9% over Q2 2022. Net revenue growth over Q3 2021 was driven by expanded distribution, successful launches of new infused products and continued growth in demand for derivative products.
Record Gross Margin Before Fair Value Adjustments: Significant sequential improvement to 52% in Q3, compared to 41% in Q2 2022 and 31% in Q3 2021. The increase was driven by investments made during the summer, including operational efficiencies, automation equipment commissioned, and sourcing of more cost-effective components related to the manufacturing of cannabis products. The Company anticipates there may be future volatility in its gross margin related to price competition and continues to target the upper end of the previously stated target of 40 – 45% gross margin.
Record Adjusted EBITDA: $4.3 million of Adjusted EBITDA in Q3, with strong growth of 32% over Q2 2022 and 139% over Q3 2021. This marks Decibel's ninth quarter of consecutive quarterly positive adjusted EBITDA.
Record Adjusted Net Income: $2.9 million of Adjusted Net Income in Q3, an improvement of $3.0 million over Q2 2022 and $4.9 million over Q3 2021. This marks Decibel's second quarter of positive Adjusted Net Income.
Derivative Sales: $13.7 million of net sales in Q3, with strong sequential growth of 6% over Q2 2022 and 108% over Q3 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 Q4 2022 with record level demand, market share, and distribution for Decibel derivative products.
Flower Sales: $2.3 million of net sales in Q3, a sequential decline of 34% over Q2 2022 and 40% over Q3 2021. The decrease in sales of wholesale flower products was driven by a material proportion of the Thunderchild facility being upgraded during the period to enhance yields and quality. Nearing the end of the quarter, the Company began reserving inventory in preparation for international exports.
Cash Flow & Working Capital: $3.6 million of cash flow from operations in Q3, a sequential increase of $1.8 million over Q2 2022 and an improvement of $9.5 million over Q3 2021. This marks Decibel's third consecutive quarter of positive cash flow from operations.
Leverage: At the end of Q3 2022, Decibel had a funded debt to trailing twelve-month EBITDA of 3.9x.

Operating Highlights
New Unique and Innovative

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

Total of 5 products launched in various provinces over the course of Q3 2022
2 General Admission vape flavours in distillate and live resin formats
3 General Admission and Qwest infused pre-rolls

Summary Highlights

Quarterly Highlights
		Three months ended		Nine months ended
		September 30		September 30
	2022	2021	2022	2021
(thousands of Canadian dollars, except where noted)
Gross sales of flower ²	$2,776	$4,269	$12,726	$13,220
Net sales of flower ²	$2,266	$3,760	$9,959	$11,198

Gross sales of extracts ²	$23,386	$9,701	$59,321	$25,547
Net sales of extracts ²	$13,706	$6,586	$37,014	$17,854

Number of retail stores	6	6	6	6
Retail sales ²	$2,350	$3,023	$6,556	$9,383

Total
Gross revenue	$28,512	$16,992	$78,603	$48,150
Net revenue	$18,322	$13,369	$53,529	$38,435
Gross profit before fair value adjustments	$9,451	$4,101	$22,944	$14,174
Gross margin before fair value adjustments	52 %	31 %	43 %	37 %
Adjusted EBITDA ³	$4,259	$1,784	$9,948	$5,966
Adjusted net income ³	$2,926	($1,948)	$1,345	($4,758)
Cash flow from operations ⁴	$3,611	($5,906)	$8,372	($12,027)

Link to Decibel's Investor Presentation

Decibel's financial statements for the three and nine month periods ending September 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 September 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.

Hybrid Financial Engagement

The Company is pleased to announce that it has retained Hybrid Financial Ltd. ("Hybrid") to provide marketing services to the Company. Hybrid has been engaged to heighten market and brand awareness for Decibel and to broaden the Company's reach within the investment community.

Hybrid has been engaged by the Company for an initial period of six (6) months starting November 7th (the "Initial Term") and then may be renewed for successive three (3) month periods thereafter. Hybrid will be paid a monthly fee of $15,000, plus applicable taxes, during the Initial Term.

Hybrid has agreed to comply with all applicable securities laws and the policies of the TSX Venture Exchange (the "TSXV") in providing the Services.

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

²In the table above, wholesale inventory transferred to the retail stores and subsequently sold of $48 and $462 for the three and nine 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.

³Non-GAAP financial measure. Refer to "Cautionary Statement Regarding Certain Non-GAAP Measures" for further details.

⁴Refer to "Cash Flows" in the MD&A for further details.

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.

About Hybrid Financial Ltd.

Hybrid is a sales and distribution company that actively connects issuers to the investment community across North America. Using a data driven approach, Hybrid provides its clients with comprehensive coverage of both American and Canadian markets. Hybrid Financial has offices in Toronto and Montreal.

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

Cautionary Statements

Non-GAAP Measures

This news release contains the financial performance metrics Adjusted EBITDA and Adjusted Net Income, measures that are not recognized or defined under IFRS (a "Non-GAAP Measure"). As a result, this data may not be comparable to data presented by other cannabis companies. For an explanation and reconciliation of Adjusted EBITDA and Adjusted Net Income to related comparable financial information presented in the Financial Statements prepared in accordance with IFRS, refer to the MD&A for the three and nine months ended September 30, 2022. The Company believes that Adjusted EBITDA and Adjusted Net Income are useful indicators of operational performance and are specifically used by management to assess the financial and operational performance of the Company.

The Company calculates Adjusted EBITDA as net loss and comprehensive loss excluding unrealized gain on changes in fair value of biological assets, change in fair value of biological assets realized through inventory sold, depreciation and amortization expense, share-based compensation, other income, finance costs, foreign exchange loss, non-cash production costs and severance payments. Non-cash production costs relate to amortization expense allocations included in production costs. Non-GAAP Measures should be considered together with other financial information prepared in accordance with IFRS to enable investors to evaluate the Decibel's operating results, underlying performance and prospects in a manner similar to Decibel's management.

Adjusted EBITDA
		Three months ended		Nine months ended
		September 30		September 30
	2022	2021	2022	2021
(thousands of Canadian dollars)
Net income (loss)	5,169	(913)	(1,315)	1,089
Unrealized loss on changes in fair value of biological assets (gain)	(5,425)	(7,184)	(12,856)	(15,539)
Change in fair value of biological assets realized through inventory sold	3,182	6,149	15,516	9,692
Depreciation and amortization	895	954	2,714	2,770
Share-based compensation	(738)	117	1,355	1,620
Other loss (income)	(63)	(14)	(115)	(34)
Transaction costs	-	-	10	-
Finance costs	637	1,038	2,464	3,044
Foreign exchange loss (gain)	99	52	216	133
Loss on disposal of property, plant, and equipment (gain)	81	-	81	34
Non-cash cost of goods sold¹	376	305	1,284	736
Other adjustments²	46	117	594	344
Other non-cash costs³	-	1,163	-	2,077
Adjusted EBITDA⁴	4,259	1,784	9,948	5,966

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 September 30, 2022, non-cash cost of goods sold was comprised of $376 of depreciation and amortization. For the nine months ended September 30, 2022, non-cash cost of goods sold was comprised of $1,284 of depreciation and amortization.

² Severance payments of $46 are added back in the Company's Adjusted EBITDA calculation for covenant reporting purposes. For the nine months ended September 30, 2022, other adjustments included $349 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.

The Company calculates Adjusted Net Income as net loss and comprehensive loss excluding unrealized gain on changes in fair value of biological assets and change in fair value of biological assets realized through inventory sold. Non-GAAP Measures should be considered together with other financial information prepared in accordance with IFRS to enable investors to evaluate the Decibel's operating results, underlying performance and prospects in a manner similar to Decibel's management.

Adjusted Net Income
		Three months ended		Nine months ended
		September 30		September 30
	2022	2021	2022	2021
(thousands of Canadian dollars)
Net income and comprehensive income (loss)	5,169	(913)	(1,315)	1,089
Unrealized gain on changes in fair value of biological assets	(5,425)	(7,184)	(12,856)	(15,539)
Change in fair value of biological assets realized through inventory sold	3,182	6,149	15,516	9,692
Adjusted net income (loss)¹	2,926	(1,948)	1,345	(4,758)

¹ Non-GAAP financial measure. Refer to "Cautionary Statement Regarding Certain Non-GAAP Measures" for further details.

Accordingly, these Non-GAAP Measures is 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.

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, Decibel's 2022 operational outlook; the opportunity to Decibel for material growth; Decibel's expected fourth quarter results; our anticipated gross margin; the anticipated continued growth in demand for vapes and concentrates; Decibel's expectations regarding its compliance with financial covenants; 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.

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 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 TSXV, as applicable. Many of these risks and uncertainties and additional risk factors are described in the Company'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 the Company is ahead of its previously stated target to achieve 40-45% gross margin and Decibel's expected fourth quarter results, 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. These forward-looking statements are made as of the date of this press release and the Company disclaims any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

SOURCE Decibel Cannabis Company Inc.