An anonymous director reports

GABY REPORTS FOURTH QUARTER AND FISCAL YEAR END 2022 RESULTS

Gaby Inc. has released its financial and operating results for the quarter and fiscal year ended Dec. 31, 2022. All financial information is provided in U.S. dollars unless otherwise indicated. Gaby's financial statements are prepared in accordance with international financial reporting standards. The annual audited financial statements for Dec. 31, 2022, and the corresponding management's discussion and analysis are available for download from the company's investor website and on the company's SEDAR profile.

Fourth quarter 2022 and fiscal year-end 2022 financial and operational highlights:

• Mankind saw a 16-per-cent ($1.0-million) drop in revenue in Q4 2022 as compared with the same quarter in the prior year. When you compare the 2021 nine months of operations with the same period in 2022, revenue from Mankind decreased $4.2-million (21 per cent). A reduction in curbside sales over this period ($2.4-million) represented 56 per cent of the decrease. Management believes that this decrease represents a change in consumer behaviour following the removal of COVID-19 restrictions and that the majority of this volume moved to other geographically convenient dispensaries. After four quarters of revenue decline, Mankind has experienced two consecutive quarters of revenue growth from second quarter to third quarter 2022 of 4 per cent and third quarter to fourth quarter 2022 of 1 per cent, respectively.
• Proprietary brands are given priority shelf space and are emphasized by staff providing guidance to customers; moreover, given its value equation (price to quality), customers are naturally drawn to these products. The corporation realizes an average variable margin of over 70 per cent on its proprietary brands compared with 46 per cent over all. By the end of 2022, proprietary brands had penetrated the major product categories of flower, prerolls and carts. The company's DankSpace brand was launched in first quarter 2022 as a high-end premium brand. In Q3 2022, a sativa line of DankSpace was launched, and three SKUs of prerolls were developed and launched in Q4. Dank Space branded sales are on pace to be a $1.0-million brand in 2023.
• Gross margin continues to improve with Q4 2022, achieving 51 per cent up from 47 per cent over the same quarter last year. The margin improvement was driven by the closure of Wild West Industries (WWI) in Q2 2022, which included $400,000 of distribution and allocated labour to cost of sales in 2021. This improvement is also attributable to operational efficiencies, strong product selection, vendor management and discounting strategy. In Q3 and Q4 2022, Mankind realigned the discount strategy to focus on selling higher-margin items and on new customer acquisition. From Q3 to Q4 2022, discounts were reduced by 3.2 percentage points.
• The net loss of $29.3-million increased by $19.5-million over 2021 primarily as a result of increased non-cash items, namely impairment losses, which were $20.1-million higher in 2022 than in 2021, and the increase in exchange loss on translating the promissory note to Canadian dollars (held at Gaby) of $1.4-million.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from continuing operations of $1.0-million in 2022 decreased by $200,000 over 2021. Sales declines at Mankind in 2022 offset the benefits of improved margins and an additional quarter of revenue on the acquisition of Mankind on April 1, 2021.
• In Q4 2022, Mankind set a new delivery record, serving 10,163 customers, which represents 53-per-cent growth since Q1 2021. As more dispensaries continue to open in the market, management believes this business unit will continue to thrive as it is able to service customers well outside of the reach of its physical store and competition in close proximity thereof. While ticket value has decreased in line with Market trends (minus 13 per cent), the acquisition growth of customers will enable Mankind to outperform the pricing trends.
• In 2022, there was an impairment of goodwill of $22.0-million in the licensed CGU resulting from a significant decline in sales from the corporation's Mankind cannabis dispensary of 21 per cent when considering Q2 to Q4 in 2021 and 2022 as a basis for comparison. Management achievements in improved margins and operating costs have not been sufficient to offset the declines in revenue to support the carrying value of goodwill.

Management's commentary

After four quarters of revenue decline, Mankind has experienced two consecutive quarters of revenue growth in Q2 and Q3 2022 of 4 per cent and in Q3 and Q4 2022 of 1 per cent, respectively. This stabilization allows Mankind to leverage momentum in the dispensary and draw upon the strengths of the organization. Specifically:

• Revenue and gross margin growth opportunities on the expansion of Mankind's proprietary brands, which generate a variable margin of 70 per cent compared with 46 per cent over all: DankSpace, which was launched in Q1 2022 as a high-end premium flower brand, expanded in Q4 2022 to include three SKUs of prerolls, which put the brand on pace for $1.0-million of revenue in 2023. In Q4 2022, a vape cartridge and preroll were launched under the Kind Republic brand, which is a mid-tier flower brand introduced in 2021, which should build on the brand's revenue already in excess of $1.0-million in 2022.
• Continual improvement in margin support: Gross margin continues to improve with Q4 2022 achieving 51 per cent up from 47 per cent over same quarter last year. Management believes in combination with the proprietary brand's high margins and a targeted discounting/promotional program, Gaby can continue to protect its margins in a very competitive marketplace.
• Gaby's delivery business in 2022 offset a declining average check (minus 13 per cent) with a successful program of competitive pricing and promotional programs that grew transaction volume by 53 per cent from Q1 2022 to Q4 2022. The growth was also supported by a successful search engine optimization program.
• While management is continuing to address the need to increase revenue. Management remains focused on controlling costs, which in 2022 included the divestiture of an unprofitable subsidiary, Wild West Industries. The divestiture enabled Miramar Professional Services to further reduce operating expenses, specifically the lease obligation and lease guarantee of $20,000 monthly through March, 2025. The transaction contributed an additional $300,000, which was seller financed over a two-year period. The sale resulted in a $1.1-million loss on divesture.
• To alleviate a significant portion of the working capital deficit, management negotiated an agreement with the holders of the $25.5-million promissory note (issued as part of the consideration for the acquisition of Miramar), which resulted in significant amendments to the promissory note in April, 2023. In addition to a $3-million reduction of principal, the terms of the settlement agreement (1) provide an aggregate interest savings to Gaby of $2.3-million over the next two years.

(1) Gaby announces restructuring of its debt -- press release April 25, 2023.

About Gaby Inc.

Gaby is a California-focused retail consolidator and the owner of Mankind Dispensary, one of the oldest licensed dispensaries in California. Mankind Dispensary is a known and highly respected dispensary with deep roots in the California cannabis community operating in San Diego. Gaby curates and sells a diverse portfolio of products, including its own proprietary brands, Kind Republic Dank Space and Lulu's through Mankind. A pioneer in the industry with a strong management team with experience in retail, consolidation and cannabis, Gaby is poised to expand its retail operations both organically and through acquisition.

Gaby's common shares trade on the Canadian Securities Exchange under the symbol GABY and on the OTC under the symbol GABLF.

We seek Safe Harbor.