CA - Indiva Limited (NDVAF) Q4 2022 Earnings Call Transcript

2023-04-18 10:56:02 ET

Indiva Limited (NDVAF)

Q4 2022 Earnings Conference Call

March 18, 2023 08:30 AM ET

Company Participants

Niel Marotta - President, Chief Executive Officer and Co-Founder

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 Year-end 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded today April, 18, 2023.

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

Niel Marotta

Thank you, operator. Welcome, everyone. Thank you for joining us this morning to discuss Indiva'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 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 annual MD&A and other public disclosure documents available on Indiva's SEDAR profile.

I'm pleased to report financial results, including record net revenue and record gross profit for our fiscal year ended December 31, 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.

Indiva also continues to distribute nationally through medical platforms now including Tilray where Indiva's edible products are now available for sale on the medical platform. Indiva's market share in the adult rec channel remained robust in the fourth quarter. As per Hifyre data, Indiva continues to lead the edibles category with 29% market share. Indiva ranks 13th out of 164 LPs across all product categories.

Looking closer to Hifyre market share data for the fourth quarter of 2022 and focusing on big five provinces where edibles are available for sale, namely BC, Alberta, Ontario, Manitoba and Saskatchewan, edible's 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 4 to the top 10 in Q4 2022 as per Hifyre data.

Looking back at 2022 highlights, Indiva began production of Pearls by Grön gummies in mid 2022, and these gummies have quickly become one of the best-selling edibles in the country. We completed initial deliveries in Ontario in August 2022, followed by deliveries to B.C. Manitoba, Saskatchewan, where we now have 7 Pro SKUs available in market.

Grön received its registration at 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 Time Magazine in 2022 as well.

Turning to Indiva Life, we introduced several new products under the Indiva Life brand, including Double Stuffed Sandwich Cookies, available on Vanilla Fudge and Punch flavors at 10 milligrams of THC per cookie adding substantially to Indiva's market share in the baked goods subcategory. Subsequent to year-end, Indiva introduced Cookies and Strawberry in Golden Vanilla flavors.

We introduced three new 30-count capsule formats under Indiva Life, including Zen CBD:CBN, Sunrise CBG:THC, and Sunset CBN:THC. We also introduced Indiva White Chocolates, Irish White Chocolate THC delivered in Ontario, with Evening Milk Chocolate CBN:CBD, and Afternoon Trail Mix Milk Chocolate becoming available at Ontario and BC in Q4 of 2022.

Indiva Life Lozenges, this 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 Dime Industries in the spring of 2022, and Indiva launched Dime's proprietary and innovative vape products in Ontario in Q3 of 2022, marking Indiva's first entrance into the vape category. Recently, Indiva introduced Wedding Cake Hybrid Rechargeable All-in-One vape in Ontario, and we are hopeful we will be able to expand our distribution of Dime products to other markets in 2023.

Turning to Wana, we introduced five new Wana SKUs in 2022, including Wana Quick Midnight Berry and Classic Midnight Berry Indica as well as Lemon Cream and Island Punch under Wana Quick, and finally, Wana Passionate Fruit under Wana Classic.

For Bhang, we introduced Bhang THC Toffee and Salt Milk Chocolate, bringing total SKUs in market to nine. Bhang continues to hold the #1 market share in the chocolate subcategory. The licensing Indiva was granted a research license from Health Canada, which will allow us to conduct sensory evaluation trials on site for Medicaid samples. This is obviously very helpful for launching new innovative products.

Turning to automation, building on Indiva's strength as a best-in-class manufacturer and the low-cost producer of edibles, 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 through December 31, 2024, and lowered the conversion price to $0.15 per share with the coupon remaining at 10%.

Turning to events subsequent to year-end, we are delighted to begin supplying Tilray's medical platform with Indiva products. This product is now available on Tilray's medical patients, including Pearls by Grön, Wana Sour Gummies, Bhang Chocolate as well as Indiva Life Double-Stuffed Sandwich Cookies.

We also 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. We may choose to continue manufacturing these products in alternative packaging formats.

Looking forward, the OCS recently announced standardization and reduction in markups and 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 to the benefit of broader distribution of new products, offset by seasonal weakness.

Margins are also expected to improve sequentially in Q1 2023 due to the benefit of implementation of automation and the production and packaging of edible products. Indiva also expects to continue to drive growth with the innovation and introduction of new products through our national distribution platform throughout 2023.

I'd like to thank all of Indiva employees, in particular, our dedicated staff to our facility in London, Ontario for their hard work throughout 2022. Thank you. I'm sure Cannabis enthusiasm we are in Canada, thank you too.

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

Jennifer Welsh

Thanks, Neil. I will review Indiva'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 Wana products.

For the 12-month period, gross revenue -- 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 extract [indiscernible] 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 ingestible 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 per 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, 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 G&A costs remained flat. For the 12-month period, operating expenses increased by 15% versus the year ended 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 enhanced innovation. General and administrative costs decreased 6.2% for the year versus 2021 as a -- as a 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 $0.5 million in Q4 2022 and $1.5 million in Q4 2021.

Excluding these charges, comprehensive loss declined to $2.4 million in Q4 versus a loss of $2.7 million in Q4 2021. For the 12-month period, comprehensive net loss excluding one-time expenses and non-cash charges, increased to $3.6 million in fiscal 2022 versus a loss of $5.4 million in fiscal 2021. The cash balance at year-end was $2.8 million.

Niel Marotta

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Andrew Semple at Echelon Capital Markets.

Andrew Semple

Hi there. Good morning, Neil and Jen.

Jennifer Welsh

Good morning.

Andrew Semple

Good morning. Just my first question here. I just wanted to ask, first off, on the automation equipments. It 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?

Jennifer Welsh

Thanks, Andrew. Yes. 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 or the [indiscernible] and the packaging are both fully commissioned, and we are seeing those benefits already in Q1.

Andrew Semple

Great. And then there is a shift towards non-edible products within the current quarter. What do you believe the edible and non-edible 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?

Niel Marotta

Yes, probably. I mean, the mix shift is really the lozenges, right, the ingestible extracts, which -- although we may disagree, Health Canada deemed is noncompliant across the board, and it's not just in vivo with 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 beyond May 31. And we've already -- we stopped production several weeks ago of these products where we were ordered to. And we haven't sold anything in Q2 obviously. So if there shouldn't be any, I don't believe any lozenges [ph] revenue in Q2 and onwards. It will be a little bit in Q1. But yes, I would expect that percentage to climb again.

Andrew Semple

Okay. And that leads into my next question, which is obviously on the Health Canada notice and launch of new products. Could you maybe clarify kind of what percentage of overall net revenues those 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?

Niel Marotta

Yes, 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 will more than replace the revenue from those products. As far as the regulations go, look, we are still really bullish that the Cannabis Act is under review, and that review will be completed in the next 9 or 10 months. And so there is scope for, let's say, within a year to 1.5 year's time, if we get the changes in edible potency that we hope and maybe not expect but that we hope, we will be selling a 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 are 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 are class -- were classified as capsules. And what we saw there was that subcategory grew from 1% to almost 3% in about 3 months or 6 months rather, 6 to 9 months. That's incredible growth in the 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. So these were folks that have a tolerance level that's much higher than 10 milligrams and can't afford to pay $50 to buy 10 packs of gummies to get a dose. And so these products were serving the needs and so they weren't going back to the illicit market. So we really hope that the regulator is taking note of this. Certainly, with our work amongst the various councils and chambers, I think the chorus [ph] 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 [indiscernible] at a time at 10 milligrams, I'm not convinced that the economics are as compelling on such a small scale, I would say, relative to the product attributes. So we are 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, but what we need in this industry is regulatory change. And in particular, we really need it badly in the edible sector.

Andrew Semple

Understood and thank you. That's helpful color. Final question, if I may. Just want to ask on the Grön Pearls and the Wana Gummies and the market share of both those products in their respective subcategories. Good to see Grön 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, Wana could begin to stabilize, maybe see a little bit more stabilization of market share? Or do you think that might continue to drip as Grön ramps up and as the competition improves.

Niel Marotta

Yes. 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 Pearls specifically, the market share continues to increase month-over-month sequentially through 2023. And in fact, I think we were -- I think we was the #2, if not the #1 edible month-to-date in Ontario. So it's doing extremely well. We are very pleased with that.

On Wana, I think Wana might have been a victim of its own success in some ways. It's a pricier product and what we've seen come to market in the last 12 to 18 months. 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. So I think the short answer is that the market share and the unit volumes that we are 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 I would call an function 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 stores working capital position. So I'll let you say, I think Wana is probably stabilizing here. We don't certainly expect it to keep declining in terms of market share. Pearls products have been very, very well received. They're doing extremely well in Ontario, they're doing very well in DC as well. And we are very excited to open up the Alberta market in coming weeks.

Andrew Semple

Great. That’s very helpful. Appreciate you taking my questions, and I will get back in the queue. Thank you.

Niel Marotta

Thanks, Andrew.

Operator

[Operator Instructions] Mr. Marotta, there are no further questions. Sir, I'll turn the conference back to you.

Niel Marotta

Okay. Well, thank you, everyone, for attending the call. We are 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 will talk to everyone then. Thank you.

Operator

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.

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