Decibel Cannabis Co. Flourishes Amid Provincial Supply Reset

With financial results coming in for Q1 2021, there is a pattern emerging among Canadian Licensed Producers of cannabis. With a few exceptions, sales and revenue figures are significantly down across the board. Compared to the prior quarter, many companies are reporting sales decreased anywhere from 10% to upwards of 25% for the period. There are a couple of reasons for the slump which we will discuss below, but the consequences for some companies may not be pretty.

One company bucking that trend is Decibel Cannabis Company Inc. (TSXV: DB) (OTCQB: DBCCF). Decibel reported strong net revenue growth accompanied by its third consecutive quarter of positive adjusted EBITDA amid the general downturn in the industry.

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What Happened to LP Revenues?

As with most everything these days, the COVID-19 pandemic is partly to blame for the plunge in revenues. For instance, Ontario went into full lockdown in January, mandating that cannabis outlets close for in-person visits and forcing sales to be conducted via curbside pickup only. The measures certainly dampened sales in Canada’s most populous province. On top of that, all cannabis in the province is wholesaled through the government’s Ontario Cannabis Store (OCS). The OCS was forced to reduce staff and warehouse capacity during the period, further influencing sales in the province.

Of course, the hurdles in Ontario are a factor but don’t completely explain the flagging revenues across the country. The biggest factor is what amounts to a widespread provincial reset of inventory levels and ordering patterns. In essence, several provinces looked at how much cannabis was on hand at the beginning of the year and decided that inventory was too high. To fix the problem, new orders were put on hold until the inventoried product was moved.

The effect was a chill on revenues for many LPs. If a given province had plenty of a given producer’s wares in stock, that producer didn’t receive the order it might have been previously expecting. But if a product/brand was about to sell out, a replenishment order was placed.

There is probably a whole discussion to be had on the wisdom of historical ordering and inventory practices that may have led to the oversupply of on-hand product, but we won’t get into that here. The purpose of this article is to highlight one of the few winners for the quarter, Decibel Cannabis.

Increased and Consistent Demand for Decibel Products

Decibel is one of the few companies able to flourish in the face of the industry-wide headwinds. The company has been increasing production capacity to meet rising demand for its premium products and was able to maintain growth through the difficult Q1 2021. Here is a chart showing results for Decibel and some premium cannabis peers, with the percent increase or decrease in net revenue from Q4 CY20 to Q1 CY21. We threw in Adjusted EBITDA figures for Q1 CY21 as an extra point of comparison. Though they wouldn’t really fit into this chart, a look at the comparative market caps for the companies provides even further information.

Source: Public Company Filings

Lest the reader wonder whether these numbers are cherry-picked to reflect the desired results, here are the figures for some of the larger companies in the industry. All percentages reflect net revenue numbers for the quarter just ended when compared to the prior quarter.

• Tilray -15.1%
• Cronos -26%
• Aurora -18.5%
• Village Farms -1.9%
• Zenabis -21.8%
• Delta 9 -6.5%

The pain is real. So how was Decibel able to sail through the quarter with revenues up 10.5% and adjusted EBITDA (of $2 million) up 82% when compared to the prior quarter? Chalk the revenue numbers up to increased production, consumer demand and loyalty, and consistent high quality in its products. The EBITDA results come from running a tight ship and investing in smart, measured growth, among other factors.

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Decibel’s premium Qwest brand consistently commands some of the highest prices in the industry. The company runs its own extraction/production facility (The Plant) to create premium derived products from its craft crops. Decibel is ramping up further production in its Thunderchild Cultivation facility in Ontario. The company utilizes its own retail outlets, under the Prairie Records label, to not only generate high margin revenue but to test and perfect its products with its loyal and growing customer base.

Overall, the Decibel story is compelling. The company didn’t make the biggest initial splash, or come out of the gates trumpeting a million square feet of production capacity. Rather, Decibel Cannabis has been slowly and responsibly growing its business with an eye on high quality and the bottom line. The approach appears to be paying off.

Disclaimer

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About Robin Lefferts

Robin Lefferts has been involved in the legal cannabis industry since 2012, sometimes as an active participant and always as an interested observer.