CA - Indiva Limited (NDVAF) Q2 2023 Earnings Call Transcript

2023-08-29 13:10:02 ET

Indiva Limited (NDVAF)

Q2 2023 Earnings Conference Call

August 29, 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 Q2 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on August 29, 2023.

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

Niel Marotta

Thank you, operator, and welcome, everyone. Thank you for joining us this morning to discuss Indiva's financial results for the second quarter ended June 30, 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 [Audio Gap] 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 Risk Factors section of the quarterly MD&A and other public disclosure documents available on Indiva's SEDAR profile.

We're pleased to announce our Q2 results, as well as a loan amendment with SNDL, which extends maturity of our senior debt by two years to February 24, 2026. This important amendment provides Indiva with adequate time on our path to achieve profitability. Concurrent with signing the loan amendment, Indiva signed an exclusive supply agreement with SNDL for distillate and isolate products. Q2 was a very busy and transitional quarter for Indiva. The results impacted negatively by Health Canada's ban on the sale of Indiva Life Lozenges products, offset by excellent gains in market share and expanded distribution of Pearls by Grön gummies, including initial sales of Pearls gummies into Alberta.

We continue to make improvements and commissioned further automation at our facility in London, Ontario, further driving our low cost producer status and these improvements somewhat offset the negative mix shift in margins due to the loss of lozenge sales.

I'll note that on a six-month basis, we did report record adjusted gross profit. On May 30th, we signed a significant five-year contract manufacturing agreement with Canopy Growth, under which Indiva will have the exclusive right to manufacture and supply Wana branded products in Canada to Canopy with the ability to renew for an additional five-year term upon mutual agreement of the parties. As consideration Indiva completed a $2.16 million non-brokered private placement with Canopy, received an additional cash consideration of $844,000 and will receive a further cash payment of $1.25 million on May 30, 2024.

Data from Hifyre for the second quarter of 2023 shows Indiva continues to lead nationally in the edibles category, even the ones adjusted to remove Wana sales reflecting the transaction closed on May 30, 2023. The 21.8% share of sales across BC, Alberta, Saskatchewan, Manitoba, and Ontario, Indiva continues to lead in the #1 market share position in the edibles category on an aggregate basis.

In the gummy subcategory Indiva's Pearls by Grön gummies ranked as the #5 edible in the category with 7.8% share based on sales and 11.6% subcategory share, a significant improvement from 7.7% share in Q1. And ranked as #3 in the edibles category based on units sold with 12.5% share, despite not yet being available in Alberta until late May during the period.

In the chocolate subcategory, Indiva held 39.5% total subcategory share, as Bhang Chocolate continues to lead the category with 35.2% subcategory share. In baked goods, Indiva led the category with 67% subcategory share driven by the success of our Doppio cookies, previously known as Indiva Life Double-Stuffed Sandwich Cookies.

Product rankings in Q2 2023 showed two of the top 10 edible SKUs are from Indiva's Pearls by Grön gummies. Looking closer at Hifyre market share data for the second quarter of 2023 and focusing on data from BC, Alberta, Ontario, Manitoba, and Saskatchewan, edibles category increased sequentially from Q1 by 1% to $67.6 million in retail sales and increased by 16% year-over-year compared to Q2 2022.

Turning to events. Subsequent to quarter end, Indiva launched a new brand called No Future, including four gummy SKUs and three 1.2 gram vape SKUs. Company has already begun shipping product to BC and Alberta and is expected to ship to Ontario in September. Importantly, Alberta, BC and Ontario will carry both gummy SKUs and vape SKUs from this new brand. Initial orders have been robust and encouragingly replenishment orders have already been received for both gummies and vapes.

Indiva entered into a loan amendment agreement with SNDL extending the maturity of the senior debt by two years to February 24, 2026. Interest rate and other terms of the amended loan remain the same. Concurrently, Indiva signed a supply agreement giving SNDL the exclusive right to supply Indiva with distillate and isolate products during the term of the loan.

And finally, the company received acceptance of 13 new SKUs for listing, the majority of which were derived from in-house innovation, including four No Future gummies in Ontario, Alberta and BC, and three No Future 1.2 gram vape products in Ontario and Alberta, as well as one in BC, our first vape listing in BC in the company's history. Six additional SKUs received acceptance across multiple brands, including Bhang, Doppio, 1432 and a 25-pack CBD gummy SKU under the Pearls by Grön brand, which we're very excited about.

I'd like to take a minute here to thank all of Indiva's employees, including our dedicated staff at our facility in London, Ontario for their continued hard work as we ramp production of new products and brands, and especially our sales and marketing teams that have truly gone above and beyond to support the launch of No Future across Canada. 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.

Jennifer Welsh

Thank you, Niel. I'll review Indiva's financial performance for the fiscal second quarter ended June 30, 2023. Gross revenue in the second quarter decreased 8.5% year-over-year, and 21.6% sequentially to $8.1 million. Year-to-date gross revenue decreased 0.5% year-over-year to $18.5 million. Net revenue decreased 7.6% year-over-year and decreased 20.3% sequentially to $7.5 million in the quarter driven mainly by the loss of lozenge revenue and lower sale of Wana products offset by the strength in Pearls gummies. Year-to-date, net revenue decreased 0.5% year-over-year to $16.9 million.

Overall, edibles represented 91% of net revenue in Q2 2023 and 84% on a year-to-date basis. In Q2 2023 Indiva sold products containing 82 million milligrams of cannabinoids, the active ingredients in edible products, which represents a 27% decrease when compared to the 112 million milligrams in products sold in Q1 2023, and an 86% increase compared to 44 million milligrams sold in Q2 2022.

Gross profit before impairments and onetime items declined year-over-year and sequentially to $2.2 million or 29.3% of net revenue versus 33.6% in Q1 2023 and 33.1% in Q2 2022. The decline in gross margin percentage was due primarily to lower revenue and negative product mix, which suffered from a loss of high margin lozenges, offset by lower unit costs, driven by the implementation of automated equipment in edibles processing and packaging.

Year-to-date gross profit before impairments and one-time items increased to a record $5.4 million or 31.7% of net revenue versus $5.3 million or 31.3% of net revenue in the corresponding period last year. Operating expenses in the quarter increased 0.2% sequentially and declined 7.2% year-over-year, representing 43.1% of net revenue versus 34.3% in Q1 2023 and 42.9% in Q2 2022.

Year-to-date, operating expenses declined by 7.4% to $6.5 million, primarily due to lower marketing costs, partially offset by increased research and development costs related to new product development. EBITDA was a positive $0.6 million in the quarter due to a onetime gain on the sale of Wana license rights to Canopy. Adjusted EBITDA declined sequentially in Q2 2023 to a loss of $0.6 million versus a profit of $0.4 million in Q1 2023 and a loss of $0.1 million in Q2 2022 due to lower sales and lower gross margins. Year-to-date adjusted EBITDA was a loss of $0.2 million versus a loss of $0.5 million in the corresponding period last year. Comprehensive net loss of $1 million included a one-time gain of $2.1 million on the sale of license rights offset by non-cash charges for impairment of inventory and assets held for sale totaling $0.8 million. Excluding these amounts, comprehensive loss increased to $2.3 million versus an adjusted loss of $1.3 million in Q1 2023 and $2 million in Q2 2022. The [Audio Gap] $0.6 million.

Looking forward, the company expects Q3 2023 net revenue to improve sequentially and year-over-year compared to the same period last year, driven by new product introduction. Gross margins are expected to continue to trend higher in the second half of the year as the company continues to achieve further efficiencies of scale from the implementation of automation and production in packaging activities, and from the introduction of margin accretive products.

Niel Marotta

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from Andrew Semple with Echelon Capital.

Andrew Semple

First off, just looking for maybe a little bit of color on the amendment and purchase agreements you signed with SNDL. I'm wondering what's -- wondering how significant that would be for your supply chain. So two part question here. First, what sort of percentage would the minimum commitment represent relative to the amount of THC distillate that you typically use in your operations? And second, how is the pricing set relative to the prevailing market prices?

Niel Marotta

Thank you, Andrew. Good questions. We haven't been giving out specific numbers on this. This will show up in the commitments. I should probably defer it down this, but I think it'll show up in the commitments off balance sheet in our financials next quarter on an annual basis. But what we can say is that the minimum requirements are significantly below what we spend on a monthly basis, and we do continue to grow with the launch of new products. So we don't have any concern about meeting these minimum requirements.

And in terms of pricing, to the second part of your question, it'll be market pricing. So, shouldn't have any impact on our cost structure, certainly no negative impact, yes.

Andrew Semple

And then just looking at the Q3 guide, it seems to be above our forecast on the revenue line. Just maybe wondering how much of a factor was getting Grön Pearls listed in the Province of Alberta or whether there was any other big drivers behind your expectations for returning to positive sequential and year-over-year growth in Q3?

Niel Marotta

Yes, there's a few moving parts going in the right direction. Number one, as you pointed out, is Pearls. So, landing in Alberta helps and we also continue to experience market share gains in Ontario and BC and we're also launching new products, the multi-pack CBG product that's on flow-through in Ontario. We hope we'll graduate to an in-stock item, given some of the new policy changes at the OCS, and we've also launched that 25-pack in Alberta and BC. We also have the 25-pack CBD peach flavored Pearls product. That's kind of a new one for us. We've never really done a big multi-pack CBD product of that kind of scale and the price point, the quality are really competitive. We've also seen, I think, unfortunately for the industry, but we've seen some other competitors in that space exit the market. And so, those products have launched in Alberta and BC and those will hit Ontario in Q4. So we think that will help. I mean, not help Q3 quite as much, but beyond that, we've also started experiencing POs from Canopy under the contract manufacturing agreement we launched May 30th. And so there's -- that'll probably be more lumpy going forward than typically. I mean, right now I would call this more of a load-in period for them as they transition and as we transition all the provinces to listings under Canopy as opposed to Indiva with Wana, but we are producing a lot of product and shipping to Canopy.

And then the third piece is, the launch of No Future. So those products have already been shipped to BC and Alberta. We have POs in hand as well as replenishment POs, and we have POs in hand for Ontario. So that's the I think healthy and long list of reasons why we're going to grow sequentially, Andrew.

Andrew Semple

Thank you, Niel. Maybe just on the No Future while we're on that topic, could you perhaps expand on the pricing strategy for those products and how those are shaping up relative to Grön Pearls? I believe in the initial release you were anticipating to price those a little bit more aggressively. So, maybe just going into some additional details on what you're thinking with those products and pricing and how that might impact the margins going forward?

Niel Marotta

Yes, sure. Good question. So you're right, they are priced below Pearls, which I believe retail for around $4.95 on the OCS and are more like $3.99 out West. But No Future Gummies will retail for $2.99 in Alberta and DC, that's the MSRP. In Ontario, I think it's $3.35. So that is significantly lower and part of the impetus behind this, of course, was the loss of the lozenge product.

If you look at the unit sales and the dollar sales, which are generally available on platforms like Hifyre, the ingestible extract category, which is really the Indiva Lozenges, Jolts and Glitches, those three product -- those three brands that are now gone, those were about 25% of the total category. And so you can draw a straight line between potency, right? These were at least a 100 milligrams a pack. And in some cases we were selling 250 milligrams to 500 milligrams in a pack of lozenges.

But, potency, the reciprocal of the potency is really price per milligram. So our thesis anyway, and it seems to be playing out at West fairly well so far, is that when you get the price per milligram down to a level where you're very competitive with the illicit market, you start to see incremental gains in market share. This is in our investor deck as well for people if they wish to review it. But when you look at the growth of the capsule category, which in Ontario did also encompass not just hard caps, which we sell, but ingestible extracts, that category grew from 1% to almost 3% of the total addressable market of the total cannabis market in a matter of months. And that's because there were finally ingestible products that were we think appropriately cast and classified as extracts but Health Canada said were edibles. But either way, it grew the total adjustable market. And so that price per milligram and that price elasticity that we see there is hugely important in terms of growing the edibles category. Something else that you'll see in our investor deck is looking at where edibles sit in Canada between 5% and 6% versus the U.S. and 12%, up to 15% in states like Colorado. And again, that's simply a function of potency and it's reciprocal, which is price per milligram.

So our view is that, we're probably one of the few companies that are even able to price a product this low, thanks to our low cost status and the great team that we have in London and the automation that we put in place. So initial sales have been good, and we're excited to see how well they perform throughout the rest of Q3 and into Q4.

Andrew Semple

And then maybe just the last one here for me quickly, it would just be on the outlook for the second half and the ongoing benefits from automation equipment that were installed earlier this year. Maybe you could just clarify what the additional automation efficiencies you aim to pick up in the second half of this year relative to what we would've seen in Q2?

Niel Marotta

Yes. So I mean, I'll give you an example of something that came online. One of the challenges we had with the Pearls product as an example, aside from demolding millions of gummies at a time and finding ways to innovate there, revolved around being able to count -- really just count the product as it's going into the tubes. And doing that manually with labor -- with human labor is tough. So we innovated and have a bespoke counter that we use. We brought a second one in that was commissioned in Q2 into Q3, is really just ramping up now. So that's going help on the positive side of things. We've also brought on additional kettles in our kitchens to be able to ramp more units per day. And all of this is in an effort to continue to leverage our fixed costs.

Our contribution margins on our products are very good. What's holding us back in terms of achieving real earnings and dropping, let's say, the adjective adjusted before reporting earnings or EBITDA, it's just leveraging our fixed costs. So these are all the efforts that we have [Audio Gap] need to look for new ways to automate and drive our costs lower, drive our overheads lower. But overall, the trend should be higher in margins in the second half of the year. And I think we've guided to higher sequential revenue in Q3.

I don't know that we're ready to -- the visibility in this industry as you know Andrew isn't always great. But if future performs as well, as it's doing and if the Wana orders come in the way they have and we think Q4 will be very healthy as well.

Operator

[Operator Instructions] There are no further questions at this time. Please proceed.

Niel Marotta

Okay. Well, thank you, everyone for attending the call. I'll note that we are going to have an investor webinar today at 4:30. I believe there's a link on our website if you wish to register. And there's been a couple of e-blasts that have gone out. So folks that haven't heard enough from me today can join at 4:30. I'll go through an investor presentation, we'll do another round of Q&A and I would encourage people to join. And in the meantime, we're going to go get back to work and look forward to speaking to everyone again soon when we'll release our third quarter results in mid-November. So thanks, everybody.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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