Indiva Limited

Thank you, operator. Welcome everyone.

Thank you for joining us this morning to discuss Indiva’s financial results for the fourth quarter and year ended December 31, 2021. Matters discussed in this conference call include forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially 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 on our earnings press release issued today as well as our Risk Factors section of the annual MD&A and other public disclosure documents available on Indiva’s SEDAR profile. We’re pleased to report record financial results, including record net revenue and record gross profit for fiscal fourth quarter and fiscal year ended December 31, 2021.

Record revenue in the fourth quarter was primarily driven by increased sales in the number one edible product in the country namely Wana Sour Gummies as well as continued strength in market of Bhang Chocolate. Our distribution in Canada is now coast-to-coast-to-coast in the recreational channel having expanded to all 13 provinces and territories.

Indiva continues to distribute nationally through medical platforms as well, including Medical Cannabis by Shoppers and ABBA Medix. Indiva’s market share in the adult rec channel remain robust in the fourth quarter banking in the top 10 overall across all categories.

As per Hifyre data, it give a continues to lead the edibles category with 40% market share. Wana Gummies and Bhang Chocolate continues to lead in their respective subcategories as well.

Looking closer at Hifyre market share data in the fourth quarter of 2021 edible category expanded to a record level both in dollars and has a percentage of the total cannabis market. Product ranking in Q4 2021 showed six of the top 10 edible SKUs are produced by Indiva.

Looking back in 2021 highlights, Indiva introduced many new SKUs, including three new Wana Quick, two new Wana multipacks as well as three new Bhang Chocolates. We introduced five new baked goods under the Slow Ride brand, as well as many new cultivars under the Artisan Batch brand, which is dedicated to craft cannabis.

Indiva won edible of the year for the second consecutive year from Kind magazine for Wana Sour Gummies. The Bhang Chocolate was the highest velocity seller of all products listed with the OCS.

Wana and Bhang ranked number one, and number two respectively on Ontario on the edible category. On the financing front and Q1, the company closed a $22 million debt and equity placement with Sundial.

And in Q4, we announced an amendment an increase to this debt facility, providing the company with an additional $8.5 million of debt financing. Proceeds were used to terminate repay all remaining obligations under the Dycar manufacturing agreement, which was immediately accretive to cash flow.

Indiva also completed its one incentive program in Q4 providing gross proceeds to the company of $3.55 million. Indiva strengthen its Board of Directors in 2021 with the addition of Mr.

Russell Wilson in February and the appointment of Ms. Rachel Goldman to the company’s Board in December.

Finally, Indiva signed a licensing manufacturing agreement with Portland-based edibles manufacturer, Grön. Products include Pearls gummies and candy-coated chocolate Pips.

For Grön Pearls gummy SKUs have been accepted by the OCS already and deliveries of these fun, innovative gummy products are scheduled for early Q3. Turning to event subsequent to yearend, we expanded our distribution to all 13 provinces and territories in Q1 of 2022.

And by extension, we brought into the distribution of our products. Wana Quick Midnight Berry launched in Ontario, BC and Alberta.

Sell-in has been robust, and orders continue to grow for this innovative CBN Sleep gummie. We also introduced three additional Wana Gummies flavours nationally including Lemon Cream, Island Punch, and Passion Fruit.

We successfully launched Jewels Cannabis Tarts perfect for microdosing. We launched two new flavors in Ontario, Strawberry and Raspberry 1:1.

Further deliveries are expected in Q2 to Alberta and other provincial wholesalers. Last week, we signed an exclusive licensing manufacturing agreement with Dime Industries.

The agreement is a five-year term, which automatically renews for three additional five-year terms. Indiva will launch Dime’s proprietary and innovative vape products, including disposable vapes, 510-thread carts and custom batteries in Q3 2022, marking Indiva’s first entrance into the vape category.

We’re very excited about Dime’s vape products and the potential to add meaningful profitable net revenue. For those of you and I keep as close track to relative category size, vape categories roughly three times as large as the edibles category in Canada, both categories are underrepresented in Canada versus mature markets setting the stage for continued above average growth.

Turning for a moment to the regulatory front, I personally become more involved in proactively pursuing regulatory change with the Cannabis Council of Canada, where I Co-Chair the edibles caucus. The 10 milligram [indiscernible] per package limit is clearly too low and is holding back to potential the edible category while continuing to fuel the illicit market for edible products.

As a company, we feel very strongly that this is a public safety issue and that Canadians need and deserve a safe legal alternative to the unsafe legal edibles still available through the illicit market. We will continue to work very hard in this area to grow our industry, our business, and to enhance public safety.

This yesterday, Indiva was granted a Research License from Health Canada, which will allow the company to conduct sensory evaluation trials on site for medicated samples. This license will help accelerate in-house innovation.

Last but not least, Artisan Batch Sour Glue by Purplefarm was awarded Best in Grow by Cannabis NB. Looking forward, 2022 is shaking up to be Indiva’s best year yet.

We expect record net revenue in 2022 and further margin improvement driven by new product introductions, including Grön Pearls gummies, Grön Pips chocolate, buying vapes, as well as our own in-house innovation set to hit market this year. This is important progress for Indiva.

While we’ve had great success licensing award-winning brands, experience gained in producing these products at scale, it’s made Indiva one of the largest and most important licensed producers in the country. We now have a talented research and development team to drive innovation combined with best in class production and national distribution to leverage and grow our business.

Our goal is to become EPS positive in 2022, we have a plan to get there in the second half of the year, driven by new product and SKU introduction, continued discipline cost control and substantial new automation of the production and packaging of our core edible products. We expect to see the benefit of this automation on our profitability in the second half of 2022.

I’d like to take a minute to thank all of Indiva’s employees and especially our dedicated staff at our facility in London, Ontario for their courage and hard work throughout 2021. Thank you and I’m sure cannabis enthusiasts everywhere in Canada, thank you too.

I’ll now turn it over to Indiva’s Chief Financial Officer, Jennifer Welsh to review the financial results in greater detail.

Thank you, Niel. I will review Indiva’s financial performance for fiscal Q4 and fiscal year end of December 31, 2021.

Gross revenue in the fourth quarter grew 35% year-over-year and 25% sequentially to $10.4 million. Net revenue grew 34% year-over-year and 18% sequentially to $9.5 million in the quarter, driven mainly by higher sales of edible products.

For the 12 month period, gross revenue grew 119% year-over-year to $35.4 million in net revenue increased by 122% year-over-year to $32.5 million. The strong year-over-year growth was driven by the introduction of new edible SKUs into the recreational markets.

Overall, edibles represented 87% of net revenue in Q4 2021 and 90% of net revenue for the 12-month period. Gross profit before fair value adjustments and impairments hit a record $3 million for Q4 2021 and was a record $9.95 million for the 12-month period.

Operational gross margin, defined as gross margin before fair value adjustments and impairments increased to 31.7% versus 10.6% in Q4 2020 and 37.8% in Q3 2021. Margins improved substantially throughout the year as lower costs led some improved margins on our edible products.

Margins did decline sequentially in the fourth quarter from Q3 2021 due to lower overhead absorption on goods sold in the quarter, rework and relabel costs on certain finished goods and a shift in product mix towards edible products with a higher cannabinoid content. Operating expenses increased to 43% of net revenue versus 39.2% in Q3 2021 and 35.6% in Q4 2020, due to higher marketing costs and sales commissions and higher research and development costs, while general and administrative costs remained flat.

So the fiscal year, operating expenses increased by 54.8% versus the year ended 2020, primarily due to higher marketing and sales expenses. General and administrative costs increased 8.5% for the year versus 2020.

It is important to note that operating expenses declined as a percentage of net revenue to 38.2% for 2021 versus 54.7% in 2020. Adjusted EBITDA declined to a loss of $494,000 in the fourth quarter versus a loss of $1.2 million in the same period last year.

For the year ended December 2021, adjusted EBITDA improved to a loss of $290,000 versus a loss of $4.5 million for 2020. Comprehensive loss was $4.2 million in Q4 2021 versus $6.9 million in the same period last year.

Comprehensive loss in the quarter included one-time expenses and non-cash charges, including inventory write-downs, losses on settlement and modification of debt totaling $1.8 million. For the 12-month period, comprehensive loss was $15 million versus $15.4 million in 2020.

Comprehensive loss for the year included one-time expenses and non-cash charges, including losses on contract settlement, modification of debt and inventory impairments totaling $9.6 million. One-time expenses and non-cash charges of $9.6 million, included inventory write-downs of $2.6 million and loss on contract settlements and owners contract charges of $6.1 million.

The inventory write-downs related primarily to the reduction in carrying value of aged inventory. Lastly, the loss on contract settlement relates to the settlement agreement with Dycar.

Including all one-time expenses and non-cash charges, comprehensive loss per share in Q4 2021 was $0.03 versus $0.06 in a year ago period. And for the 12 months period, comprehensive loss was $0.11 per share versus $0.16.

Turning to the balance sheet. The cash balance at the year-end was $2.5 million and our working capital improved to $6.9 million from adjusted in 2020, primarily as a result of financings completed in 2022, as well as a significant improvement in profitability.

Thank you, Jen. Operator, I think with that, we will open it up to questions, please.

Hi, good morning. Congrats on the Q4 results.

First question here, just on the gross margins, I know you noted the impact of some relabeling and rework costs as well as some other items. Just want to get a sense of how many of those potentially one-time or non-core costs may have been in the gross profit line if you could quantify that for us.

I think that the rework and the relabel costs would have been one-time in nature. I think there’s some R&D costs that actually fall below that line that are also generally speaking one-time related more to phenotype program that we’ve finished and we’ve ceased all grow operations since then.

So I think we’d have to get back to you – to give you the exact total amount, I don’t know that we’ve disclosed that, but probably less than $1 million orderI would assume, right, under a million’s probably assured that, Andrew.

Okay. That’s helpful.

And then the outlook for gross margins points to improvements by half two of 2022 with new packaging equipments. What level do you see that going to?

Do you think you could get the consolidated gross margin line back above the 35% level on an adjusted basis exiting the year? Or do you think what the fixed costs you’ve added that may not be feasible?

No, I think that’s – yes, I think 35% plus consolidated for the years reasonable, Andrew. I think we’re confident we’ll get there.

Some of the automation equipment has been delayed due to – some is just technical stuff, that’s got nothing to do with COVID, some relates to the lockdown that’s occurring in China right now. So we would’ve expected some of that equipment to come in sooner.

But assuming we get a full, let’s say, six months in the back half of the year, we could be saving upwards of $0.5 million to $1 million on our COGS line. So pretty significant contribution.

I think also – some of the output levels that flow turn Q4 at lower than average. And I think with all the new product introductions that we have, we’ll get even better fixed cost leverage, again, aiming more towards the second half of the year, when we start really contributions from your Pips and Pearls and the Dime baked and some of the other products we’re working on.

So I think we’re absolutely comfortable with 35% plus for the year, Andrew.

Great. And perhaps one more, if I may, it looks like the milligrams of cannabinoids per package appears to be continuing to climb.

First of all, is that the case? Second of all, is that having any impact to the cost of goods sold?

And when do you foresee perhaps the milligrams per package stabilizing, I guess, within the context of the current Health Canada regulations and limits on THC per package?

Yes, it’s a good point, well made, Andrew. So two of the main SKUs that we introduced were the multipack Wana SKUs.

So the strawberry 10 pack, I believe is 110 milligrams in it. The Blood Orange has 210.

So that’s significantly above even our Pomegranate and Blueberry, which lands at 60. And there’s a big bunch of other SKUs that we had, let’s see initially like the chocolate SKUs that had much lower.

Looking at some of the new products we’re launching, I would expect maybe that average to sort of be relatively stable where it is. I mean, some of the Grön products are quite robust and minor cannabinoids, which actually have a higher price point than the typical THC or CBD.

So I don’t expect that that would necessarily add to margins going forward, but I wouldn’t expect necessarily yet substantial climate in the average from here, we saw a pretty big jump this quarter.

Got you. All right.

Thank you for taking my questions and I’ll get back in queue. Thank you.

Hey, good morning, Niel. Good morning, Jennifer.

Congratulations on a really strong year. You guys – you really moved the dial this year, so congratulations on all this.

I would like to first talk about the – how dynamic your brand licensing situation has been this year. You mentioned – you talked about a Grön product launches forthcoming this summer.

I wonder if we could dive into the Dime Industries deal that you just recently announced in vapes, recognizing that this is a new category for you. And also recognizing that this is a sort of a well tried category in the Canadian cannabis market.

Wondering how you view – how Indiva will aim to be competitive in the vape space, particularly given recent cost based competition in the space. Thanks very much.

Great question. Thanks, Michael.

First off, the Dime deal, as we mentioned, that’s a five-year deal, which automatically renews for three additional terms. Importantly, there’s no impact from any change control if that were to happen on either party.

So this one is going to stick with us for a while, and we’re very pleased with that. The royalty rates that we pay, we don’t disclose them on any of our deals publicly for competitive reasons.

But they’re very much in line with recent deals that we’ve done. And the margin profile that we’ve estimated shows that these products are the margin accretive on balance to our, let’s say, our corporate margins.

If our product makes reflects what we see generally in the market. So we look at the Dime – pardon me, we look at the vape category somewhere around 15% of the total in Canada.

When we looked at Colorado, it’s more like 23% incidentally, the edible category is about 5% and getting Colorado is north of 15%. So both of these categories are underrepresented.

When we look at the vape category, you’re right. There are a lot of SKUs, it’s not terribly differentiated, and that’s exactly why we love the Dime products.

So these involve proprietary hardware and formulations, which these sort of fit together hand in glove. The product itself is quite a nice looking product.

And the flavors as well, I think are quite innovative. There’s 10 different flavors available across five, 10 carts and disposables.

So I think between – let’s say the design, the performance and the flavor profiles. I think we actually do have somewhat of a differentiated product in an area where you’re right, it’s rather commoditized.

So we think this is a premium product. It doesn’t necessarily have to price above all other products, but we’ll be priced at that high end due to that performance.

And when we look at how Dime has performed in very competitive markets like Southern California, they’re based in Orange County that gives us a lot of confidence that these products will be popular in Canada. And I mean, this is really a big part of what’s gotten us here today is looking at successful products that have survive that intense crucible of competition in the U.S.

whether it’s on the West Coast or California and Dime is another perfect example of that, Michael.

That’s excellent and good word crucible. Just on that recognizing that that vapes is a new category for you, will there need to be any sort of additional capital equipment that Indiva will need to put in place in order to start production of these vapes and will there be adjustments and sourcing of cannabinoid or cannabis extracts to put in these vapes, if you could describe and to perhaps quantify that that’d be great.

Sure. Yes.

Fortunately, the incremental CapEx is quite low. As you know, we already make capsules under the Indiva brand.

And so the equipment that forms let’s say the backbone for filling and making capsules is no different in fact that it’s the identical equipment that we’ll use to fill the vape carts. So there’s some minor change parts and tweaking required, but I mean we’re probably looking at about 35,000 Canadian very, very minor incremental CapEx Michael, which we also like.

So there’s not a huge amount of risk in this deal. We’ll probably invest more money in terms of buying packaging and hardware to get going.

In terms of the inputs, as you know, we’re already very big distillate buyers in Canada, probably some of the largest we went through or pardon me, we sold 60 million milligrams of cannabinoids in Q4, which is a record for us. So we’ll continue buying distillate from the various sources.

And then we – obviously, we also source terpenes for some of the edible products we make. So whether we go with existing suppliers or new suppliers or work with Dime on this or some combination of the above I think we’re in really good shape.

This is all pretty well – and territory for us. And then the last piece I would say is in terms of filling vape carts and making sure they perform well just like the case with Bhang and Wana and Grön, we do get full training from the licensor, all the tricks and science and art that they use to make their products.

So that’ll be the same case here.

All right. Thank you very much, Niel.

And if you didn’t build just one more, we’d appreciate a sort of your take on what we’ve observed as a increasing competition in the edibles category. You’re still the segment leader, but there are certainly fast oncoming groups with popular products in that space.

How would you describe that competition? Thank you.

That’s a good question. Certainly, we have given a little bit of market share back not to say that our sales aren’t growing.

The category itself continues to grow and outpace the overall market. I think we’ve seen a lot of new products come to market.

And in particular, in the gummy space, as you know, gummies typically are the largest percentage of the edible category in Canada north of 75% of the market is gummies in the U.S., it’s probably closer to 50% or 60%. So we’ve seen a lot of new products come to market.

We’ve seen a disproportionate amount of new products coming from our competitors. But we think well, hit back quite hard in the second half of the year with the Grön products.

I think we’re seeing more competition at the lower price points. I think we’ve seeded some share.

I think Grön will be helpful in competing – not competing on price necessarily, but it’s a little bit more of a value price product than one, for example. And then Grön has a terrific focus on minor cannabinoids.

And so we really see this as differentiated. You’ve got a few SKUs out there that employ CBN and CBG.

Of course, we launched our one of Midnight Berry with CBN the sleep gummie. But Grön is really focused on minor cannabinoids and ratios with more robust ratios.

So we think between the profile and the flavor profile is fantastic as well. The price point and the value proposition and the fact that we’ve already got four SKUs fully accepted with the OCS.

We’ll have lots of free samples available at lift for those of be in Toronto next month. I would invite everyone else to come out and try it.

We think we’re going to gain a lot of share back with these products, but the landscape is competitive and I would expect it to remain so, Michael.

All right. Thanks very much.

I’ll jump back in the queue. Congrats again.

Okay. Well, thank you, everyone for attending the call.

We’re going to go get back to work and we look forward to speaking with you all again soon just a few weeks when we release our first quarter 2022 results. So thank you, everyone.