CA - Indiva Limited (NDVAF) Q1 2023 Earnings Call Transcript

2023-05-16 13:12:05 ET

Indiva Limited (NDVAF)

Q1 2023 Earnings Conference Call

May 16, 2023 10:30 AM ET

Company Participants

Niel Marotta - Chief Executive Officer

Jennifer Welsh - Chief Financial Officer

Conference Call Participants

Andrew Semple - Echelon Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Indiva Limited Q1 2023 Earnings Release Conference Call. At this time, all lines are on a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday May, 16, 2023.

I would now like to turn the conference over to Niel Marotta, CEO. Please go ahead.

Niel Marotta

Thank you, operator. Welcome, everyone. Thank you for joining us this morning to discuss Indiva's financial results for the first quarter ended March 31, 2023. 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 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 in our earnings press release issued today, as well as in the Risk Factors section of the quarterly MD&A and other public disclosure documents available on Indiva's SEDAR profile.

We're pleased to report financial results, including improved gross margins, record gross profit and positive adjusted EBITDA for our first quarter ended March 31, 2023. Results in the first quarter were primarily driven by new product introduction and higher gross margins and lower operating costs, as we benefited from the implementation of automation and the processing and production of edibles.

Indiva's market share in the adult rec channel remained robust in the first quarter. As per Hifyre data, Indiva continues to lead the edibles category with 27% market share, and holds the number one market share position in aggregate in gummies, chocolate and baked good subcategories. In gummies subcategory, Indiva is 27.3% market share with Wana Sour Gummies having 19.6% share of Gummies sales and Pearls by Grön gummies has grown to 7.7% share in gummies sales, despite not yet being available in Alberta during the period.

Bhang Chocolate, Indiva held 34.8% total subcategory share, as Bhang continued to lead the chunk at category with 32.6% subcategory share. In baked goods, Indiva led the baked goods category with 61% share, driven by the success of Indiva Life double-stuffed cookies.

Looking closer to Hifyre market share data for the first quarter of 2023 and focusing on data from BC Alberta, Ontario, Manitoba and Saskatchewan, edible's category increased sequentially from the fourth quarter by 4% to $67 million in retail sales and increased by 26% compared to Q1 2022. First quarter results and highlights include Pearls Gummies continue to perform well. The Blue Razzleberry was the number one selling gummy by units in Ontario in the first quarter. Pearls gummies were the number seven best selling edible by dollars as per Hifyre data.

Our Pearls did shift Alberta in the month of April, and we're very excited to finally bring Pearls to this important market. Indiva began supplying products to Tilray's medical platform, including Pearls by Grön, Wana Sour Gummies, Bhang Chocolate as well as Indiva Life Double-Stuffed Sandwich Cookies. Indiva signed a non-exclusive agreement with Valiant Distribution Cannabis, a subsidiary of Canna Cabana, for the distribution of its products in the province of Saskatchewan. This agreement will substantially reduce shipping costs to Saskatchewan stores.

And finally, as per the press release dated March 14, 2023, the Company received notification from Health Canada of its determination that certain of its lozenges has been improperly classified an extract rather than edible under applicable cannabis regulations. Health Canada ordered Indiva to cease production of lozenges, and we did so immediately. Subsequently we have right sized our production team as a direct result of this Health Canada order.

Turning to events subsequent to quarter end, initial deliveries of Pearls by Grön gummies remain to the province of Alberta. All new flavors were delivered, including Blackberry Lemonade, Blue Raspberry, Pomegranate, and Sour Apple. The company expects meaningful revenue contribution from Pearls gummies in this important market.

We've also introduced Wana Gummies SKUs, including Citrus Percitiva, Wild Raspberry Indica, and Pineapple Passion Fruit. We also introduced three new chocolates into the Alberta market out of the Indiva 32 [ph] brand namely Dark Chocolate, Cookies & Cream, and Paramount Dark Chocolate.

Indiva recently proposed 18 new products for listing in its recent submission to the OCS, the majority of which were derived from new in-house innovation.

I want to take a minute to talk about edibles regulations in Canada. We continue to advocate the regulatory change with respect to the rules around per package THC limits relating to edibles.

While the edible category in Canada continues to grow at a faster pace than the overall cannabis market, the edible category remains stumped as a percentage of the total market primarily due to the 10 milligram per package THC limit.

Data for mature US markets, where the higher per package THC limit exist, so the edibles category represents two to three times the relative size of the Canadian edibles category.

Please note that we're not necessarily advocating for higher THC per serving. In fact, most mature markets in the US limit the per-serving THC limit to 10 milligrams just as we do in Canada, but they do allow for 100 milligrams or more of THC in total per package. In Canada, we remain limited to 10 milligrams per package.

Limiting the total THC per package of 10 milligrams just as we do in Canada has created prohibitively costly product for most consumers, and in particular, for medical patients that often require much more than 10 milligrams at a time for proper dosing.

Make no mistake, this is a public safety issue. When consumers cannot purchase safe, affordable product in the legal market, they turn to the illicit market where products contain upwards of 500 milligrams of THC. Where products are intentionally packaged to look like recognizable mainstream confectionary products and where the packaging is flimsy and easily opened by a miner.

Health Canada published a public advisory on May 10th, which I would encourage everyone to read, addressing what they call copycat edibles, "our package to look like popular brands of candy snacks or other food products that are typically sold at grocery stores, gas stations, and corn stores. Clearly, the illicit market has stepped in to fill the potency void created by the 10 milligram limit on edibles and has done so with packaging that looks confusingly similar and familiar to mainstream confectionery products."

The 10-milligram per package THC limit actually creates this public safety risk where they need B1. Indiva has sold 25 million packs of edibles in the last three years, and we've never received one single complaint that a miner has unintentionally ingested one of our edible products.

Most adults even struggle to open our packaging as we use child-resistant packaging that is receivable for products with multiple surveys. Robust demand for ingestible extracts, which, as per Health Canada's orders, will exit the market completely in Canada after May 31st, demonstrate the power of consumer demand for higher potency and hence, lower price per milligram product.

Our analogy is to manage wine and spirit companies were restricted to selling their product in many of our bottles. Imagine only being able to purchase wine and no larger than a 2.5 ounce bottle or spirits at only 2 ounces at a time. Clearly, this would -- these limits would be cost prohibitive to the consumer and, again, would result in unintended consequences.

We're not necessarily advocating for higher per serving potency per se, rather simply allowing more servings per package, allowing, for example, up to 10 milligram servings per package as is commonplace in US markets will have the effect of lowering the price per milligram of THC to the consumer. And ultimately, this is the only way we can sustainably shift demand from the illicit market to the legal market and drive out the dangerous and illegal copycat edibles.

The legal market makes high-quality edibles with safer packaging, consistent, accurate and even dosing with superior flavor, that we're unable to fully compete with the illicit market on price simply because of regulation, which while perhaps well intended, is betraying the very gold to cannabis act, namely to improve public safety and take money out of the hands of criminals.

The time is now for change, and with the Cannabis Act currently in review, we will continue to advocate for an increase in total milligrams of THC cedibles, on behalf of all licensed producers, retailers, for both the wholesalers, consumers and medical patients.

With that, I'd like to thank all of Indiva's employees, especially our dedicated staff at our facility in London, Ontario for their continued hard work and resilience in these times of regulatory uncertainty. Thank you and I'm sure cannabis enthusiast 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.

Jennifer Welsh

Thank you, Neil. I'll review Indiva's financial performance for fiscal Q1 ended March 31, 2023. Gross revenue in the first quarter increased 7% year-over-year and grew 1% sequentially to $10.4 million. Net revenue increased 6% year-over-year and 1% sequentially at $9.4 million in the quarter, driven mainly by new product introduction. Overall, edibles represented 78% of net revenue in Q1 2023, primarily due to higher sales of ingestible extracts in the quarter.

In Q1 2023, Indiva's sold products containing 112 million milligrams of cannabinoids, the active ingredient in edible products, which represents a 37% increase when compared to the 82 million milligrams in products sold in Q4 2022, and a 105% increase compared to 55 million milligrams sold in Q1 2022. The sequential increase was a function of higher sales and a mix shift towards products with higher average cannabinoid content.

Gross profit before fair value adjustments, impairments and one-time items improved year-over-year and sequentially to a record $3.1 million or 34% of net revenue versus 29% in Q4 2022 and 30% in Q1 2022. Improvement in gross margin percentage was due to the implementation of fully commissioned automation as well as product mix.

Operating expenses in the quarter decreased 17% sequentially and declined 8% year-over-year, representing 34% of net revenue versus 42% in Q4 2022 and 39% in Q1 2022. Operating expenses declined sequentially, primarily due to lower marketing and sales costs. Adjusted EBITDA improved sequentially in Q1 2023 to a profit of $415,000 and versus the loss of $526,000 in Q4 2022 and a loss of $378,000 in Q1 2022 due to higher sales, higher gross margins and lower operating expenses.

Comprehensive net loss of $2.3 million included one-time gains and non-cash charges for impairment of inventory and property, plant and equipment totaling $900,000. Excluding these amounts, comprehensive loss declined to $1.3 million versus an adjusted loss of $2.4 million in Q4 2022 and $1.9 million in Q1 2020. The cash balance at quarter end was $2.8 million.

Looking forward, the company expects Q2 2023 net revenue to improve compared to the same period last year. However, there is a risk that net revenue may decline sequentially, if sales of new products fail to offset lower sales of ingestible extracts as a result of Health Canada's recent order to stop production and sale of these products.

Sequential growth in net revenue is expected to resume in the second half of 2023, driven by the introduction of new products in the third and fourth quarters, resulting primarily from in-house innovation. Gross margins are expected to continue to trend higher and benefit from the implementation of automation in the production and packaging of edible products.

Niel Marotta

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Andrew Semple from Echelon Capital. Please go ahead.

Andrew Semple

Hi, there. Good morning. Thank you for taking my question. First off, I just want to maybe ask for a little bit of additional details on the new products that you've submitted to Ontario for listing, are these new SKUs within existing brands, or are these new formats and new products altogether?

Niel Marotta

Yeah. Thanks, Andrew. So these are -- it's a combination of both, but primarily, these will be under a new brand that we're not going to speak too much about just yet. But suffice to say, this will leverage our low-cost producer status. And the best I can tell you is that some of them are in edibles, some of them are in inhalables, but they're all products similar to what we make already. I don't mean to be cryptic, but we want to give folks an idea of what we're doing without necessarily broadcasting specifics for competitive reasons.

Andrew Semple

Understood. Appreciate the color there. And to the outlook pointing to gross margins trending higher, just wondering whether that's trending higher between now and year-end, or whether you actually expect each quarter to show step-ups? How much lumpiness might there be to that trend? Just wondering on that point, if you're expecting potentially sales to decline in Q2, whether there might be some operating leverage on the gross margin line there?

Niel Marotta

Yeah. And I think that's why we're not being specific about giving you a range per quarter looking forward. We'd love to have that visibility on our business, Andrew. But we are really starting to see the benefits of the automation, and we did have a nice tick up in margin sequentially on sales that were -- even though we thought they'd be down in Q1, we're actually slightly up on a sequential basis by about 1%.

So we're not expecting any huge drop off in sales. We're just trying to highlight a risk just to be thorough. But similarly with margins, one area, and I'm happy to turn this over to Jen too, but the margins on the ingestible extracts were very good, some of the best margins of any of the products we made. And part of the reason for that, too, is that there's no royalty involved that was enhanced innovation. So that mix shift will hurt somewhat. But I still think the trend for the rest of the year will be higher in margins, particularly once we get into Q3 and Q4.

Andrew Semple

That's helpful. Appreciate that additional color. And while we're on the topic of ingestible extracts, if you're able to, would you be able to provide a breakout of maybe the sales and EBITDA attributed to that product format within the first quarter. I'm just trying to fine-tune estimates as it relates to Health Canada's decision on that product?

Niel Marotta

Sorry. So I think the adjustable extracts, the revenue in the third quarter is about $1.3 million, $1.4 million. So about 50 -- pardon me, it was about 14% of sales as I remember it, and we're not going to give out the exact gross margin and gross profit guidance on there, but you can certainly assume that the gross margins are higher than the corporate average. So it's -- it was meaningful. But again, we think we have great products coming up, they'll be able to replace that revenue and that profit.

Andrew Semple

Great. And then maybe one last quick one for me. Just when in Q2 did the first shipments of room products in Alberta first begin?

Niel Marotta

Yeah. So they just hit stores literally on Friday to my knowledge. So this is all very recent. But I think we shipped it out about two weeks ago, and there's always a bit of a lag between at landing and getting out the stores, but people should be able to find the in-store in Alberta this week. And we'd certainly expect the distribution to broaden significantly across the province over the next few weeks here.

Andrew Semple

Thank you very much for taking my questions. Congrats on the positive EBITDA in the quarter, and I'll get back into queue.

Niel Marotta

Thanks, Andrew.

Operator

[Operator Instructions] Neil, there are no further questions at this time. Please proceed with your closing remarks.

Niel Marotta

Okay. Thank you, everyone, for attending the call. We're going to get back to work and look forward to speaking to you all again when we release our second quarter results in mid-August. Thanks, everybody.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.

For further details see: