Decibel Cannabis : Management Discussion and Analysis

DECIBEL CANNABIS COMPANY INC.

Management's Discussion and Analysis

December 31, 2021

This Management's Discussion and Analysis ("MD&A") of the financial condition and results of operations of Decibel Cannabis Company Inc. and its subsidiaries (the "Company" or "Decibel") is dated as of April 21, 2022. This MD&A should be read in conjunction with the Company's audited annual consolidated financial statements for the years ended December 31, 2021, and 2020, inclusive of the accompanying financial statements notes (the "Consolidated Financial Statements"), all of which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Readers should also refer to the "Forward-looking information" legal advisory and "Non-GAAP Measures" cautionary statement at the end of this MD&A. All financial amounts and measures are expressed in Canadian dollars unless otherwise indicated. This MD&A has been prepared with reference to the National Instrument 51-102 Continuous Disclosure Obligations established by the Canadian Securities Administrators. Additional information concerning Decibel, including its Consolidated Financial Statements can be found on SEDAR atwww.sedar.com.

Company Overview

On March 1, 2020, pursuant to a series of internal reorganization transactions, Westleaf Inc. amalgamated with a wholly-owned subsidiary which resulted in the name of the Company changing to "Decibel Cannabis Company Inc.".

The common shares of Decibel ("Common Shares") trade on the TSX-Venture Exchange ("TSX-V") under the ticker symbol "DB" and on the OTCQB Venture Market under the symbol "DBCCF". The Convertible Debentures (as defined herein) trade on the TSX-V under the trading symbol "DB.DB". The Company's warrants trade on the TSX-V under the trading symbol "DB.WT" and "DB.WT.A".

Description of the Business and Corporate Strategy

Decibel's strategy is to build a cannabis company, focused on premium cannabis flower, vape, cannabis infused, and concentrate products, created through a vertically integrated business model. The three components of this strategy, among others, are:

• i) cannabis cultivation, processing, and sale of cannabis flower products;

• ii) extraction, processing, and manufacturing of a variety of cannabis derivative products; and

• iii) cannabis retail.

Cannabis Cultivation

Decibel has a Health Canada licensed 26,000 square foot cultivation, processing and distribution facility consisting of 14,000 square feet of dedicated grow areas and 12,000 square feet of production support areas located in Creston, British Columbia (the "Creston Facility"). The Company received a licence to grow, harvest, trim and store medical cannabis from Health Canada (the "Licence"), becoming a licensed producer on August 25, 2017. On October 16, 2018, Health Canada approved an amendment to the Licence to allow the Company to, in addition to growing, harvesting, trimming and storing cannabis, also sell or provide dried cannabis, fresh cannabis, cannabis plants and cannabis seed.

The Company has a second cannabis production facility with 80,000 square feet of indoor cultivation, packaging and processing space, located in Battleford, Saskatchewan (the "Thunderchild Cultivation Facility"). On January 29, 2021, Decibel's wholly owned subsidiary, dB Thunderchild Cultivation LP, which owns and operates the Thunderchild Cultivation Facility, received a cultivation license from Health Canada to grow, harvest, trim and store cannabis, becoming a licensed producer. Initial planting and activation of all 20 rooms at the Thunderchild Cultivation Facility was completed at the end of July 2021 and run-rate harvests was achieved in October 2021.

The principal products produced and sold by the Company are ultra-premium cannabis flower and cannabis pre-rolls, and, on occasion, bulk amounts of cannabis biomass to other licensed producers in Canada (collectively, the "Cannabis Products").

The Company has entered into supply agreements for flower products with the Alberta Gaming, Liquor and Cannabis Commission (the "AGLC"), the Ontario Cannabis Retail Association, the British Columbia Liquor Distribution Board, the Manitoba Liquor & Lotteries Corporation, and has also agreed to supply Cannabis Products to the Prince Edward Island Cannabis Management Corporation and Cannabis New Brunswick. The Company is registered as a cannabis supplier in Saskatchewan.

Decibel has four dried cannabis brands, two positioned as premium and ultra-premium brands, Qwest, and Qwest Reserve, and two positioned as core-segment and value-segment brands, Blendcraft by Qwest and General Admission.

Extraction and Manufacturing of Cannabis Derivative Products

Decibel has a large-scale cannabis extraction, processing, and manufacturing facility in Calgary, Alberta ("The Plant"). The Plant is a 60,000 square foot facility with 15,000 square feet of Health Canada licensed space. On July 13, 2020, the Company received a sales amendment from Health Canada for the ability to manufacture and sell dried cannabis, cannabis extracts, and edible cannabis as finished cannabis products to provincial wholesalers and retailers.

Decibel engages in processing, manufacturing, and packaging activities at The Plant. Currently, the Company sells vape cartridges, cannabis infused products, and cannabis extracts (also known as concentrates) from The Plant.

The Company has entered into supply agreements for derivative products with the Alberta Gaming, Liquor and Cannabis Commission (the "AGLC"), the Ontario Cannabis Retail Association, the British Columbia Liquor Distribution Board, the Manitoba Liquor & Lotteries Corporation and Cannabis New Brunswick. The Company is registered as a cannabis supplier in Saskatchewan.

Decibel has two cannabis derivative product brands, one positioned as premium brand, Pressed by Quest, and one positioned as a core-segment brand, General Admission.

Retail Locations and Operations

As at December 31, 2021, Decibel had six Prairie Records cannabis retail stores in operation in Saskatchewan and Alberta. There are three operational retail locations in Saskatchewan, with two stores located in Saskatoon and one in Warman, as well as an e-commerce cannabis platform throughout the Province of Saskatchewan. There are three operational retail locations in Alberta, with two stores located in Calgary and one in Edmonton.

Going Concern

The Consolidated Financial Statements and MD&A have been prepared based on accounting policies applicable to a going concern, which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. During the three and twelve months ended December 31, 2021, the Company generated net earnings of $1.2 million and $2.3 million, respectively, utilized $5.1 million and $17.1 million, respectively, of cash in operations and has net current assets of $10.0 million as at December 31, 2021. The effects the Novel Coronavirus ("COVID-19") pandemic have had, and are expected to continue to have, on the overall business environment and financial markets gives rise to uncertainty as to the future impacts COVID-19 may have on the Company. Refer to "Impact and Response to the COVID-19 Pandemic".

In order to continue as a going concern, the Company must generate sufficient income and cash flows to repay its obligations, finance operations and fund capital investments. The future of the Company is dependent on its ability to attain profitable operations and maintain compliance with covenants relating to its lending agreements, generate sufficient funds from operations, continue receiving financial support from its lenders and obtain new financing. There is no certainty that the Company will raise these necessary funds from operations or financings.

As a result of these factors, there is material uncertainty that may result in significant doubt as to the ability of the Company to meet its obligations as they come due and continue as a going concern.

The Company expects to comply with the financial covenants applicable to our credit facility for at least the next twelve months. On May 13, 2021, the Company amended its credit facility agreement with Connect First Credit Union Ltd. ("Connect First") to provide an additional $6.0 million on its authorized overdraft. The additional capital was fully drawn in June 2021 to support and accelerate sales growth through the Thunderchild Cultivation Facility and new vape and concentrate launches. On February 1, 2022, the credit facility agreement was amended and restated to $54 million over an initial 5-year term to provide added financial flexibility in support of the Company's growth strategy (refer to "Subsequent Events"). A decrease or sustained period of materially reduced demand for Decibel's principal products may result in non-compliance with the financial covenants and reduced liquidity related to changes in the credit facility. Non-compliance with the financial covenants in the credit facility could result in the debt becoming due and payable on demand. Should the Company anticipate non-compliance, Decibel will proactively approach its lender to amend the credit facilities to ensure their availability. There is no certainty that the Company will be successful in negotiating such amendments.

This MD&A and the Consolidated Financial Statements do not reflect adjustments that may be necessary if the going concern assumption was not appropriate. If the going concern basis was not appropriate for the Consolidated Financial Statements, adjustments would be necessary to the carrying value of assets and liabilities, the reported revenues and expenses and the statement of financial position classification used.

Impact and Response to the COVID-19 Pandemic

The Company has continued to closely monitor the impact of the COVID-19 pandemic, with a focus on the health and safety of our employees, business continuity and the support of our communities. We have continued to operate while implementing various preventative measures and have experienced minimal disruption to our production and supply chain. In addition, our non-production workforce continues to effectively work from our head office and through the use of various technology tools, we are able to maintain our full operations and internal controls over financial reporting and disclosures.

Quarterly Highlights

(thousands of Canadian dollars)
Gross wholesale revenue of flower 1	$5,500	$3,856
Net wholesale revenue of flower	$4,605	$3,243
Kilograms of flower sold	808	378
Average wholesale flower gross pricing per gram 2	$6.80	$10.21
Average wholesale flower net pricing per gram 2	$5.70	$8.58
Kilograms of salable cannabis harvested	1,059	327
Gross wholesale revenue of extracts	$11,722	$6,078
Net wholesale revenue of extracts	$6,893	$4,528
Number of retail stores	6	6
Retail revenue 1	$2,520	$3,654
Total
Gross revenue	$19,742	$13,588
Net revenue	$14,018	$11,425
Gross profit before fair value adjustments	$3,689	$4,519
Gross margin	26%	40%
Adjusted EBITDA 2	$1,450	$1,102
Cash flow from operations	($5,133)	$1,343

Three months ended	Year ended
December 31	December 31
2021 2020	2021	2020
$18,720	$12,360
$15,804	$10,386
2,181	1,160
$8.58	$10.17
$7.25	$8.47
2,808	1,140
$37,270	$7,043
$24,747	$5,312
6	6
$11,902	$14,232
$67,892	$33,635
$52,453	$29,930
$17,863	$11,683
34%	39%
$7,417	$1,527
($17,160)	($4,238)

1 Inter-company revenue of $1.2 million pertaining to sales to the retail operations, has been eliminated on the Company's Consolidated Financial Statements. In the table above, the inter-company revenue elimination has been made and the allocation between wholesale revenue and retail revenue is to provide a more accurate depiction of business performance.

2 Refer to "Cautionary Statement Regarding Certain Non-GAAP Measures" for further details.

• • Net revenue for the three and twelve months ended December 31, 2021 totaled $14.0 million and $52.4 million, respectively. The increase of net revenue by 23% and 75%, respectively, over the comparative periods is primarily driven by the continued sales growth in derivative products, sales from the commercial launch of the new General Admission and Qwest infused pre-rolls products, and increased volumes of dried cannabis sold. Partially offsetting the increase was, price compression in the flower segment, and slower retail sales from increased competition.

• • Gross profit before fair value adjustments for the three and twelve months ended December 31, 2021 was $3.7 million and $17.9 million, respectively, compared to $4.5 million and $11.7 million over the comparative periods. Gross margin for the three and twelve months ended December 31, 2021 was 26% and 34%, respectively, compared to 40% and 39% over the comparative periods. The decrease in gross margin for the fourth quarter of 2021 is attributable to a combination of permanent and transitory impacts. Permanent impacts include price compression in Qwest Family of Brands' products of approximately 25% and 4% reduction in retail sales margins due to new market entrants reducing prices in an attempt to gain market share. Transitory impacts in the fourth quarter included a $345 provision for aged inventory, $738 in air freight charges due to supply chain challenges, $369 of non-cash amortization, and $891 of write downs. Adjusting for the impact of the transitory factors, normalized gross margin for the quarter would have been 43%.