Indiva Limited

Good morning, ladies and gentlemen, and welcome to the INDIVA Limited Year-End 2022 Earnings Conference Call. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, April 18, 2023. I would now like to turn the conference over to Neil Murata, CEO of INDIVA. Please go ahead, sir.

Thank you, Operator. Welcome, everyone. Thank you for joining us this morning to discuss ADEVA's financial results for the fourth quarter and year-end, December 31, 2022. Matters discussed in this conference call include forward-looking statements. Each forward-looking statement is subject to risks and uncertainties that could cause actual results of different material from those projected in such statements. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements, factors, and assumptions is available in our earnings press release issue today, as well as in the risk factors section of the annual MD&A and other public disclosure documents available on Indiva's CEDA profile. I'm pleased to report financial results, including record net revenue and record gross profit for our fiscal year ended December 31st, 2022. Revenue in the fourth quarter was primarily driven by new product introduction, offset by decreased sales in other edible products. Our distribution in Canada reaches all 13 provinces and territories. And DIVA also competed to distribute nationally through medical platforms, now including Tilright, where DIVA's edible products are now available for sale on the medical platform. DIVA's market share on the Belt and Rec channel remained robust in the fourth quarter. As per hard-fired data, DIVA continues to lead the edibles category with 29% market share, and DIVA ranks 13th out of 164 LPs across all product categories. Looking closer to hard-fired market share data for the fourth quarter of 2022, And focusing on the big five provinces where edibles are available for sale, namely BC, Alberta, Ontario, Manitoba, and Saskatchewan, edibles category increased by 7% in Q4 to $61.8 million from $57.5 million last quarter and increased 24% year-over-year when compared to $51 million in retail sales in Q4 of 2021. Our product ranked four of the top 10 in Q4 of 2022 as per HIFAR data. Looking back at 2022 highlights, it even began production of pearls by growing gummies in mid-2022, and these gummies have quickly become one of the best-selling animals in the country. We completed initial deliveries in Ontario in August 2022, followed by deliveries to BC, Manitoba, and Saskatchewan, but we now have seven pearl skewers available on market. RIM recently received its registration in Alberta, and initial deliveries of pearls into this important market are planned for May of 2023. and should contribute meaningfully to revenue and market share. Pearls was awarded Best Edible Innovation by Kind Magazine in 2022 as well. Turning to Adiba Life, we introduced several new products under the Adiba Life brand, including double-stuffed sandwich cookies, available in vanilla and fudge flavors at 10 milligrams of THC per cookie, adding substantially to Adiba's market share in the baked goods subcategory. Subsequent to year end, Adiba introduced cookies in strawberry and golden vanilla flavors. We introduced three new 30-count capsule formats under Indeba Life, including Zen CBD CBN, Sunrise CBG THC, and Sunset CBN THC. We also introduced Indeba Life chocolates, Irish white chocolate THC delivered in Ontario with evening milk chocolate CBN CBD and afternoon trail mix milk chocolate becoming available in Ontario and BC in Q4 of 2022. Indeba Life lozenges, These innovative extract products were available in lemon and wild cherry flavors, I should say, are still available, albeit not for much longer, in 10-pack, 25-pack, and 50-pack counts. We signed an exclusive licensing agreement with Dine Industries in the spring of 2022, and Diva launched Dine's proprietary and innovative vape products in Ontario on Q3 of 2022, marking Diva's first entrance into the vape category. Recently, Indiva introduced wedding cake hybrid rechargeable olive on date in Ontario, and we're hopeful we'll be able to expand our distribution of fine products to other markets in 2023. For Iguana, we introduced five new Iguana SKUs in 2022, including Iguana Quick Midnight Berry and Classic Midnight Berry Indica, as well as Lemon Cream and Island Crunch under Iguana Quick, and finally, Iguana Passion Fruit under Iguana Classic. The bank will introduce Bank KT Chocolate and Salt Milk Chocolate, bringing full skews in the market to nine. The bank continues to hold the number one market share in the chocolate subcategory. The License City Diva was granted a research license from Health Canada, which will allow us to conduct sensory evaluation trials on-site for medicated samples. This is obviously very helpful for launching new innovative products. Turning to automation, Building on the Diva's strength as a best-in-class manufacturer and a low-cost producer of edibles, The company commissioned several new pieces of automated equipment in the fourth quarter at its facility in London, Ontario, for use in the processing and packaging of edible products. Margin benefit from implementing automation will begin to be realized in Q1 of 2023. And finally, Indiva extended the maturity on $2.8 million of convertible debentures to December 31, 2044, and lowered the conversion price to $0.15 per share, with the coupon remaining at 10%. Turning to events subsequent to your end, We're delighted to begin supplying Tilbury's medical platform with Indiva products. These products are now available on Tilbury to medical patients, including pearls by Grimm, water-sour gummies, pink chocolate, as well as Indiva Life double-stuffed sandwich cookies. We also signed a non-exclusive agreement with Valiant Distribution Cannabis, a subsidiary of Cannacabana, for the distribution of its products to the province of Saskatchewan. This agreement will substantially reduce shipping costs to Saskatchewan stores. And finally, as per the press release dated March 14th, 2023, the company received notification from Health Canada of its determination that certain of its lozenges have been improperly classified as an extract rather than an edible under applicable cannabis regulations. Health Canada ordered Indiva to cease production of lozenges, and we did so immediately. We may choose to continue manufacturing these products in alternative packaging formats. Looking forward, The OCS recently announced standardization and reduction in markups of edibles, which we view as a significant benefit to the category and for our product margins. This will go into effect later in 2023. We expect that Q1 2023 net revenue will be down slightly on a sequential basis and will be higher year-over-year with the benefit of broader distribution of the products offset by seasonal weakness. Margins are also expected to improve sequentially in Q1 2023, due to the benefit of implementation of automation in the production and packaging of edible products. Adiba also expects to continue to drive growth with innovation and introduction of new products through our national distribution platform throughout 2023. I'd like to thank all of Adiba's employees, in particular our dedicated staff at Facility London Ontario for their hard work throughout 2022. Thank you. I'm sure Canada's enthusiasts everywhere in Canada thank you too. I'll now turn it over to Adiba's Chief Financial Officer, Jennifer Wells, to review the financial results in greater detail.

Thanks, Neil. I'll review Adiba's financial performance for Fiscal Q4, and the fiscal year ended December 31, 2022. Gross revenue in the fourth quarter decreased 1% year-over-year and grew 17% sequentially to $10.3 million. Net revenue fell 1% year-over-year and grew 15% sequentially to $9.3 million in the quarter. driven mainly by new product introductions offset by weaker sales of water products. For the 12-month period, gross revenue was 6% year-over-year to $37.7 million, and net revenue increased by 7% year-over-year to $34.4 million. The strong year-over-year growth was driven by the introduction of new edible and extracts into the recreational market. Overall, edibles represented 81% of net revenue in Q4 and 89% of net revenue for the 12-month period. primarily due to higher sales of investable extracts during the last quarter of 2022. Gross profit before fair value adjustments and impairments was $2.7 million in Q4 and a record $10.4 million for the 12-month period. Gross margin before fair value adjustments was 29.3% of net revenue versus 28.9% in Q3 2022 and 31.5% in Q4 2021. The decline in gross margin percentage year-over-year was due to delays in deliveries of automated processing equipment related primarily to new products and a shift in product mix in the fourth quarter towards edible products with higher average cannabinoid content for unit and lower gross margin. The company expects margins to improve in Q1 2023 due to the implementation of some of the new automation equipment for production and packaging of edible products. For the 12-month period, gross margin improved slightly to 30.2%. Operating expenses in the quarter decreased 4.5% year-over-year to 41.7% of net revenue, versus 41.8% in Q3 2022 and 43.3% in Q4 2021, mainly due to lower marketing costs, which were partially offset by increased sales expenditures, while GMA costs remained flat. For the 12-month period, operating expenses increased by 15% versus the year-end of 2021, primarily due to higher marketing and sales expenses, as well as higher research and development expenses, resulting from the company's increased focus on in-house innovation. General administrative costs decreased 6.2% for the year versus 2021, as the percentage of net revenue operating expenses increased to 41.4% for 2022 versus 38.5% in 2021. Adjusted EBITDA declined sequentially to a loss of $600,000 in the fourth quarter and was flat versus the same period last year. For the year ended December 31, 2022, adjusted EBITDA decreased to a loss of $1.6 million versus a loss of $500,000 last year due to higher sales and marketing expenses and research and development expenses. Comprehensive net loss included one-time expenses and non-cash charges, including inventory impairments and losses on modification of debt totaling half a million dollars in Q4 2022 and $1.5 million in Q4 2021. Excluding these charges, comprehensive loss declines to $2.4 million in Q4 versus a loss of $2.7 million in Q4 2021. For the 12-month period, comprehensive net loss, including one-time expenses and non-cash charges, increased to $8.6 million in fiscal 2022 versus a loss of $5.4 million in fiscal 2021. The cash balance at year-end was $2.8 million.