Indiva Ltd

XTSX:NDVA

Earnings Call Transcript

[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.

[Carmine Marotta, executive]

Thank you, operator. 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 [ 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 the 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 the loan amendment with SNDL, which extends the maturity of our senior debt by 2 years to February 24, 2026. This important amendment provides Indiva with adequate time on our path to achieve profitability.

Concurrent with signing a 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 Lozenge 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 commission 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 6-month basis, we did report record adjusted gross profit. On May 30, we signed a significant 5-year contract manufacturing agreement with Canopy Growth, under which Indiva will have the exclusive rights to manufacture and supply Wana branded products in Canada to Canopy, with the ability to renew for an additional 5-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 once adjusted to remove Wana sales, reflecting the transaction closed on May 30, 2023. With 21.8% share of sales across B.C., 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 gummies 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 2 of the Top 10 edible SKUs are from Indiva's Pearls by Grön gummies. Looking closer to Hifyre market share data for the second quarter of 2023 and focusing on data from B.C., Alberta, Ontario, Manitoba and Saskatchewan, the 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 4 gummy SKUs and 3 1.2 gram vape SKUs. Company has already begun shipping product to B.C. and Alberta and is expected to ship to Ontario in September. Importantly, Alberta, B.C. and Ontario will carry both gummy SKUs and vape SKUs from listing 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 2 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 alone ].

And finally, the company received acceptance of 13 new SKUs for listing, the majority of which were derived from in-house innovation, including 4 No Future Gummies in Ontario, Alberta and B.C., and 3 No Future 1.2 gram vape products in Ontario and Alberta as well as 1 in B.C., our first vape listing in B.C. 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 enthusiast everywhere in Canada than 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, executive]

Thank you, Neil. 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, 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 ingredient 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 totaling 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 the 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 onetime items increased 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% to 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 onetime gain of $2.1 million on the sales license rates, offset by noncash 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.

[Audio Gap]

Looking forward, the company expects Q3 2023 net revenues 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 at scale from the implementation of automation and production and packaging activities and from the introduction of margin-accretive products.

[Carmine Marotta, executive]

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

[Operator]

[Operator Instructions] Your first question comes from Andrew Semple with Echelon Capitals.

[Andrew Semple, analyst]

First off, just looking for maybe a little bit of color on the minimum purchase agreements you signed with SNDL. Wondering what's -- wondering how significant that would be for your supply chain. So a 2-part question here. First, what sort of percentage would the minimum commitment represent relative to the amount of the THC distillate that you typically use in your operations? And second, how does -- how is the pricing set relative to the prevailing market prices?

[Carmine Marotta, executive]

Thanks, Andrew. Good questions. We're having been giving out specific numbers on this. This will show up in the commitments. I should probably refer it down this, but I think it will show up in the commitments off balance sheet and 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 will be market pricing. So it shouldn't have any impact on our cost structure. Certainly, no negative impact, yes.

[Andrew Semple, analyst]

Great. Great. That's helpful. And then just looking at the Q3 guide, that 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?

[Carmine Marotta, executive]

Yes. Yes, there's a few moving parts in -- going in the right direction. Number one, as you pointed out, is Pearls. So [ Manny ] in Alberta helps. So we also continue to experience market share gains in Ontario and B.C. And we're also launching new products, the multipack CBG product that's on flow-through in Ontario we hope will 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 B.C. We also have the 25-pack CBD peach flavored product. That's kind of a new one for us. We've never really done a big multipack CBD product that -- at that kind of scale. And the price point and 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 B.C. and those will hit Ontario in Q4. So we think that will help -- that may 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 30. And so there's -- that will 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 B.C. and Alberta. And 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, analyst]

Great. Great. Also helpful. 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?

[Carmine Marotta, executive]

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 at West. The No Future Gummies will retail for $2.99 in Alberta and B.C., 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, [indiscernible] and glitches, those 3 products -- those 3 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 100 milligrams of pack. And in some cases, we were selling 250 to 500 milligrams in a pack of lozenges.

But potency -- the reciprocal of the potency is really priced 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 -- total cannabis market in a matter of months. And that's because there were finally ingestible products that were, we think, appropriately classified as extracts. But Health Canada said we're edibles. But either way, it grew the total addressable 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. at 12% up to 15% in states like Colorado. And again, that's simply a function of potency and it's reciprocal, which is priced 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 performed throughout the rest of Q3 and into Q4.

[Andrew Semple, analyst]

Great. And then maybe just a 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 efficiency you're going to pick up in the second half of this year relative to what we would have seen in Q2?

[Carmine Marotta, executive]

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 used. We brought a second one in that was commissioned in Q2 into Q3, is really just ramping up now. So that's going to 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 is just leveraging our fixed cost. So these are all the efforts that we have. We continue 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 No 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.

[Carmine Marotta, executive]

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, and 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 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.