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.

Thank you, John. Operator, I think with that, we'll open it up to questions, please.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question will come from Andrew Semple at Echelon Capital Markets. Please go ahead.

Hi there. Good morning, Neil and Jen. Good morning. Good morning. Good morning. Just my first question here, I just wanted to ask, first off, on the automation equipment, sounds like that was kind of all installed by year end. Now that you have kind of a full quarter behind you of that contributing to your operations, is that driving the improvements you had hoped for, I mean, kind of subsequent to the Q4 period? And where do you think that drives the business in 2023?

Thanks, Andrew. Yeah, no, we are already starting to see the benefits. There are certain pieces, especially with the pearls, that are still being commissioned, or there's additional equipment still to come. So we haven't seen the full impact on the pearls themselves. But when it comes to the existing products, the automation for the clinic kitchen and the packaging are both fully commissioned, and we're seeing those benefits already in Q1.

Great. And then there was a shift towards non-edible products within the current quarter. What do you believe the edibles and non-edibles revenue mix would be in 2023 as we move throughout the year? Do you think that swings a little bit more back to the edible side of things?

Yeah, probably. I mean, the next shift is really the lozenges, right, the adjustable extracts, which are Although we may disagree, Health Canada deemed as noncompliant across the board and such to diva several companies, as you know, Andrew. So I would expect that percentage to climb higher again, given that these products will be out of market, you know, beyond May 31st. And we've already, you know, we stopped production several weeks ago of these products when we were ordered to. and we haven't sold anything in in q2 obviously uh so there shouldn't be any i don't believe any laws into revenue in q2 and onwards it'll be a little bit in q1 but um yeah i would expect that percentage to climb again okay that leads into my next question which is which is obviously on the health canada notice and lots of new project uh products um could you maybe clarify

kind of what percentage of overall that revenue might have been within the fourth quarter. And then maybe kind of a strategy going forward here. Are you planning to contest that decision? Do you think there is a viable pathway for that to potentially be reclassified as extracts in the future, either more soon or maybe as part of the Health Canada review? What kind of strategies or approaches are you taking with respect to that decision?

Yeah, good question. So on the first part, it was a little bit over 10% of our revenue in Q4. So a meaningful contributor, but it wasn't the majority of our business or anything like this. And I expect that with new innovation, it will more than replace the revenue from those products. As far as the regulations go – Look, we're still really bullish that the Cannabis Act is under review. That review will be completed in the next nine or ten months. And so there is scope for, let's say, within a year to a year and a half's time, if we get the changes in edible potency that we hope, and maybe not expect, but that we hope, you know, we'll be selling higher potency per package by next summer. Obviously, we can't just bank on that, but It really is important from a public safety point of view that we're able to offer more than 10 milligrams per package in terms of driving the illicit market out. The edible category is still only 5% or 6% of the total market. This is massively underrepresented when you compare with mature markets, and that's directly related to potency. I would say it's also related to edibles not really being available in traditional formats like gummies and chocolates in Quebec. So there's a lot of regulatory change. In terms of the ingestible extracts, I'm not sure where that category will land going forward. If we get the change that we hope for, Andrew, on edibles potency, I think those products become a little bit less relevant. But what was interesting to us was to see just how quickly those products were adopted in a market like Ontario. where they were classified as capsules. And what we saw there was that subcategory grow from 1% to almost 3% in about three months, or six months rather, six to nine months. That's incredible growth in a category, especially when compared with the edible category being at only 5% or 6%. And so what that means to us is that the demand is there. We also didn't see the edible category decline significantly in Ontario in that period. These are folks that have a tolerance level that's much higher than 10 milligrams. They can't afford to pay $50 to buy 10 packs of gummies to get a dose. And so these products were serving their needs, and so they weren't going back to the illicit market. So we really hope that the regulators taking note of this, certainly with our work, you know, amongst the various councils and chambers, you know, I think the chorus is getting louder for why we need higher potency per package. In terms of amending what we did with lozenges and let's say putting one lozenge in a pouch at a time at 10 milligrams, I'm not convinced that the economics are as compelling on such a small scale relative to the product attributes. So we're looking at it. I'm not sure that it's something that we plan to do, but depending on how the environment changes, we may look at it again. What we need in this industry is regulatory change. And in particular, we really need it badly in the animal sector.

Understood, and thank you. That's a helpful comment. Final question, if I may. I just want to ask on the Gruen, Pearls, and the Wannagummies and the market share of both those products in their respective subcategories. You know, good to see Gruen already at close to 5% market share within the fourth quarter. How do you think that that continues to develop in 2023? And do you think that going forward, you know, want to begin to stabilize, maybe see a little bit more stabilization or market share? Do you think that that might continue to drip as Gruen ramps up and, you know, as the competition improves?

Yeah, it's a good question. I mean, we certainly saw a lot of new competition and pearls would be a part of that. I mean, on Pearl specifically, the market share continues to increase month over month sequentially through 2023. And in fact, I think we were, I think it was the number two, if not the number one edible month to date in Ontario. So it's doing extremely well. We're very pleased with that. You know, on WANA, I think WANA might have been a victim of its own success in some ways. It's a pricier product than what we've seen come to market, you know, in the last 12, 18 months. You know, I'd also say that the total number of LPs and the total number of SKUs in the edible category in Ontario, for instance, has doubled in the last 12 months. So, I don't expect you're going to see that volume of new participants and new products come to market. I think the short answer is that the market share and the unit volumes that we're seeing appear to be stabilizing. So it's not just falling off a cliff. But when you get that much new competition in a market where brands are so young, stores tend to default towards what's new. And when you get what we call an ocean of new product coming to market, I think all that choice means that people are buying new products or new SKUs. And if they don't move, that hurts the store's working capital position. I'll have to say I think one is probably stabilizing here. We don't certainly expect it to keep declining in terms of market share. Kohl's products have been very, very well received. They're doing extremely well in Ontario. They're doing very well in B.C. as well. And we're very excited to open up the Alberta market, you know, in the coming weeks.

Great. That's very helpful. Appreciate you taking my questions, and I'll get back to you. Thank you. Thanks, Andrew.

Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 now. Mr. Murata, there are no further questions. Sir, I'll turn the conference back to you.

Okay. Well, thank you, everyone, for attending the call. I'm going to go get back to work and look forward to speaking to you again very soon when we release Q1. just a few weeks' time in mid-May. So we'll talk to everyone then. Thank you.

Ladies and gentlemen, this concludes your conference call for this morning. We thank you all for participating and ask you to please disconnect your lines.