Indiva Ltd

XTSX:NDVA

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the Indiva Limited Q4 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded on April 26, 2022.

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 fourth quarter and year ended December 31, 2021.

Matters discussed in this conference call includes forward-looking statements. Each forward-looking statements are 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 annual MD&A and other public disclosure documents available on Indiva's SEDAR profile.

We're pleased to report record financial results, including record net revenue and record gross profit for our fiscal fourth quarter and fiscal year ended December 31, 2021. Record revenue in the fourth quarter was primarily driven by increased sales in the #1 edible product in the country, namely Wana Sour Gummies, as well as continued strength in market of Bhang Chocolate.

Our distribution in Canada is now coast-to-coast-to-coast and the recreational channel having expanded to all 13 provinces and territories. Indiva continues to distribute nationally through medical platforms as well, including medical cannabis by shoppers and Abba Medix.

Indiva's market share in the adult rec channel remained robust in the fourth quarter, ranking in the top 10 overall across all categories. As per Hifyre data, Indiva continues to lead the edibles category with 40% market share. Wana Gummies and Bhang chocolate continues to lead in their respective subcategories as well.

Looking closer to Hifyre market share data in the fourth quarter of 2021, edible category expanded to a record level, both in dollars and as a percentage of the total cannabis market. Product ranking in Q4 2021 showed 6 of the top 10 edible SKUs are produced by Indiva.

Looking back in 2021 highlights, Indiva introduced many new SKUs, including 3 new Wana Quick, 2 new Wana multipacks as well as 3 new Bhang chocolates. We introduced 5 new baked goods under the Slow Ride brand as well as many new cultivars under the Artisan Batch, which is dedicated to craft cannabis.

Indiva won enable of the year for the second consecutive year from Time Magazine for Wana Sour Gummies. And Bhang chocolate was the highest velocity seller of all products listed with the OCS. Wana and Bhang ranked #1 and #2, respectively, in Ontario in the edible category.

On the financing front, in Q1, the company closed a $22 million debt and equity placement with Sundial. And in Q4, we announced an amendment and increase to this debt facility, providing the company with an additional $8.5 million of debt financing. Proceeds were used to terminate, repay all remaining obligations over the Dycar manufacturing agreement, which was immediately accretive to cash flow. Indiva also completed its Warrant Incentive Program in Q4, providing gross proceeds to the company of $3.55 million.

Indiva strengthened its Board of Directors in 2021 with the addition of Mr. Russell Wilson in February, and the appointment of Ms. Rachel Goldman to the company's Board in December.

Finally, Indiva signed a license and manufacturing agreement with Portland-based edibles manufacturer, Gron. Products include Pearls gummies and candy coated chocolate pips.

For Gron Pearl, gummie SKUs have been accepted by the OCS already and deliveries of these fun innovative gummie products is scheduled for early Q3.

Turning to events subsequent to year end. We expanded our distribution for all 13 provinces and territories in Q1 of 2022 and by extension, we brought in the distribution of our products. Wana Quick Midnight Berry launched in Ontario, BC and Alberta; selling has been robust and orders continue to grow for this innovative CBN sleep gummie. We also introduced 3 additional Wana gummie flavors nationally, including Lemon Cream, Island Punch and Passion Fruit. Successfully launched Jewels Cannabis Tarts, perfect for microdosing. We launched 2 new flavors in Ontario, Strawberry and Raspberry 1:1. Further deliveries are expected in Q2 to Alberta and other provincial wholesalers.

Last week, we signed an exclusive license and manufacturing agreement with Dime Industries. The agreement is a 5-year term, which automatically renews for 3 additional 5-year terms. Indiva will launch Dime proprietary and innovative vape products, including disposable vapes, 510-thread carts and custom batteries in Q3 2022, marking Indiva's first entrance into the vape category. We're very excited about Dime vape products and the potential to add meaningful profitable net revenue.

For those of you that keep us close track to relative category size, vape categories are 3x as large as the edibles category in Canada, and both categories are underrepresented in Canada versus mature markets, setting the stage for continued above-average growth.

Turning for a moment to the regulatory front. I personally become more involved in proactively pursuing regulatory change with The Cannabis Council of Canada, where I co-chair the edibles coccus. The 10-milligram THC per package limit is clearly too low and is holding back the potential of the edible category while continuing to fuel the illicit market for edible products. As a company, we feel very strongly that this is a public safety issue and that Canadians need and deserve a safe legal alternative to the unsafe legal edibles still available through the illicit market. We will continue to work very hard in this area to grow our industry, our business and to enhance public safety.

Just yesterday, Indiva was granted a research license from Health Canada, which will allow the company to conduct sensory evaluation trials on site for medicated samples. This license will help accelerate in-house innovation.

Last but not least, Artisan Batch Sour Glue by Purplefarm was awarded best in Grow by Cannabis NB.

Looking forward, 2022 is shaping up to be Indiva's best year yet. We expect record net revenue in 2022 and further margin improvement driven by new product introductions, including Gron Pearl Gummies, Gron Pips Chocolate, Dime vapes, as well as our own in-house innovation set to hit market this year.

This is an important progress for Indiva. While we've had great success licensing award-winning brands, experience gained in producing these products at scale has made Indiva one of the largest and most important licensed producers in the country. We now have a talented research and development team to drive innovation, combined with best-in-class production and national distribution to leverage and grow our business.

Our goal is to become EPS positive in 2022. We have a plan to get there in the second half of the year, driven by new product and SKU introduction, continued disciplined cost control and substantial new automation of the production and packaging of our core edible products. We expect to see the benefit of this automation on our profitability in the second half of 2022.

I'd like to take a minute to thank all of Indiva's employees, and especially our dedicated staff at our facility in London, Ontario for their courage and hard work throughout 2021. 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, executive]

Thank you, Niel. I will review Indiva's financial performance for fiscal Q4 and fiscal year ended December 31, 2021. Gross revenue in the fourth quarter grew 35% year-over-year and 25% sequentially to $10.4 million. Net revenue grew 34% year-over-year and 18% sequentially to $9.5 million in the quarter, driven mainly by higher sales of edible products. For the 12-month period, gross revenue grew 119% year-over-year to $35.4 million, and net revenue increased by 122% year-over-year to $32.5 million. The strong year-over-year growth was driven by the introduction of new edible SKUs into the recreational market. Overall, edibles represented 87% of net revenue in Q4 2021 and 90% of net revenue for the 12-month period.

Gross profit before fair value adjustments and impairments hit a record $3 million for Q4 2021 and was a record $9.95 million for the 12-month period. Operational gross margins, defined as gross margin before fair value adjustments and impairments increased to 31.7% versus 10.6% in Q4 2020 and 37.8% in Q3 2021.

Margins improved substantially throughout the year, but lower cost led to improved margins on our edible products. Margins did decline sequentially in the fourth quarter from Q3 '21 due to lower overhead absorption on goods sold in the quarter, rework from relabel costs on certain finished goods, and a shift in product mix towards edible products with a higher cannabinoid content.

Operating expenses increased to 43% of net revenues versus 39.2% in Q3 2021 and 35.6% in Q4 2020 due to higher marketing costs and sales commissions and higher research and development costs, while general and administrative costs remained flat.

For the fiscal year, operating expenses increased by 54.8% versus the year ended 2020, primarily due to higher marketing and sales expenses. General and administrative costs increased 8.5% for the year versus 2020. It is important to note that operating expenses declined as a percentage of net revenue to 38.2% for 2021 versus 54.7% in 2020.

Adjusted EBITDA has declined to a loss of $494,000 in the fourth quarter versus a loss of $1.2 million in the same period last year. For the year ended December 2021, adjusted EBITDA improved to a loss of $290,000 versus a loss of $4.5 million for 2020. Comprehensive loss was $4.2 million in Q4 2021 versus $6.9 million in the same period last year. Comprehensive loss in the quarter included onetime expenses and noncash charges, including inventory write-downs, loss on settlement and modification of debt totaling $1.8 million.

For the 12-month period, comprehensive loss was $15 million versus $15.4 million in 2020. Comprehensive loss for the year included onetime expenses and noncash charges, including losses on contract settlement, modification of debt and inventory impartment totaling $9.6 million.

Onetime expenses and non-cash charges of $9.6 million include inventory write-downs of $2.6 million and loss on contract settlements and owners contract charges of $6.1 million. The inventory write-downs related primarily to the reduction in carrying value of aged inventory; and lastly, the loss on contract settlement related to the settlement agreement with Dycar.

Including all onetime expenses and noncash charges, comprehensive loss per share in Q4 2021 was $0.03 versus $0.06 in the year ago period. And for the 12-month period, comprehensive loss was $0.11 per share versus $0.16.

Turning to the balance sheet. The cash balance at the year-end was $2.5 million, and our working capital improved to $6.9 million from a deficit in 2020, primarily as a result of financings concluded in 2022 as well as the significant improvement in profitability.

[Carmine Marotta, executive]

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

[Operator]

[Operator Instructions] Your first question comes from Andrew Semple, Echelon Capital.

[Andrew Semple, analyst]

Congrats on the Q4 results. First question here, just on the gross margins. I know you noted the impact of some relabeling and rework costs as well as some other items. Just want to get a sense of how many of those potentially onetime or noncore costs may have been in the gross profit line. If you could quantify that for us.

[Carmine Marotta, executive]

I think that the rework and the relabel costs would have been onetime in nature. I think there's some R&D costs that actually fall below that line but are also, generally speaking, onetime related more to a phenotype program that we finished and we've ceased all grow operations since then. So I think we'd have to get back to you to give you the exact total amount. I don't know that we've disclosed that, but Jenn it's less than $1 million, right?

[Jennifer Welsh, executive]

Yes.

[Carmine Marotta, executive]

Under $1 million I believe is a fair bet, Andrew.

[Andrew Semple, analyst]

Okay. That's helpful. And then the outlook for gross margin points to improvements by H2 of 2022 with new packaging equipment. What level do you see that going to? Do you think you could get the consolidated gross margin line back above the 35% level on an adjusted basis exiting the year? Or do you think with the fixed costs you've added that that may not be feasible?

[Carmine Marotta, executive]

No, I think that's -- yes, I think 35% plus consolidated for the year is reasonable, Andrew. I think we're confident we'll get there. Some of the automation equipment has been delayed due to -- some is just technical stuff. It's got nothing to do with COVID. Some relates to the lockdown that's occurring in China right now. So we would have expected some of that equipment to come in sooner. But assuming we get a full, let's say, 6 months in the back half of the year, we could be saving upwards of $0.5 million to $1 million on our COGS line. So a pretty significant contribution.

I think also, some of the output levels that flowed during Q4 were a bit lower than average. And I think with all the new product introductions that we have, we'll get even better fixed cost leverage, again, aiming more towards the second half of the year when we start really seeing contributions from Gron Pips and Pearls and the Dime vapes and some of the other products we're working on. So I think we're absolutely comfortable with 35% plus for the year, Andrew.

[Andrew Semple, analyst]

Great. And perhaps one more, if I may. It looks like the milligrams of cannabinoids per package appears to be continuing to climb. First of all, is that the case? Second of all, is that having any impact to the cost of goods sold? And when do you foresee perhaps the milligrams per package stabilizing, I guess, within the context of the current Health Canada regulations and the limits on THC per package?

[Carmine Marotta, executive]

Yes, it's a good point, well made, Andrew. So 2 of the main SKUs that we introduced were the multipack Wana SKUs. So the Strawberry 10 pack, I believe, has 110 milligrams in it. The Blood Orange has 210. So that's significantly above even our Pomegranate and Blueberry, which lands at 60. And there's a big bunch of other SKUs that we had, let's say, initially, like the chocolate SKUs that trend much lower.

Looking at some of the new products we're launching, I would expect maybe that average to sort of be relatively stable where it is. I mean some of the Gron products are quite robust in minor cannabinoids, which actually have a higher price point than the typical THC or CBD. So I don't expect that that would necessarily add to margins going forward, but I wouldn't expect necessarily a substantial climb in the average from here. We saw a pretty big jump this quarter.

[Operator]

[Operator Instructions] Your next question comes from Michael Freeman, Raymond James.

[Michael Freeman, analyst]

Congratulations on a really strong year. You guys -- you really moved the dial, so congratulations on all this.

I would like to first talk about the -- how dynamic your brand licensing situation has been this year. You mentioned -- you talked about green product launches forthcoming this summer. I wonder if you could dive into the Dime Industries deal that you just recently announced in vapes, recognizing that this is a new category for you and also recognizing that this is a sort of a well-trod category in the Canadian cannabis market. I'm wondering how Indiva will aim to be competitive in the vape space, particularly given the cost base competition in the space?

[Carmine Marotta, executive]

Great question. Thanks, Michael. First off, the Dime deal, as we mentioned, that's a 5-year deal, which automatically renews for 3 additional terms. Importantly, there's no impact from any change control, if that would happen to either party. So this one is going to stick with us for a while. We're very pleased with that.

The royalty rates that we pay, we don't disclose them on any of our deals publicly for competitive reasons, but they're very much in line with recent deals that we've done. And the margin profile that we've estimated shows that these products might be margin accretive on balance to our appropriate margins.

If our product mix reflects what we see generally in the market, so when we look at the Dime or -- pardon me, we look at the vape category, somewhere around 15% of the total in Canada. When we look in Colorado, it's more like 23%. Incidentally, the edible category is about 5% and yet in Colorado it's north of 15%. So both of these categories are underrepresented.

When we look at the vape category, you're right, there are a lot of SKUs. It's not terribly differentiated. And that's exactly why we love the Dime products. So these involve proprietary hardware and formulations, which you sort of fit together hand in glove. The product itself is quite a nice-looking product. And the flavors as well, I think, are quite innovative. There's 10 different flavors available across 10 carts and disposables. So I think between, let's say, the design, the performance and the flavor profiles, I think we actually do have somewhat of a differentiated product in an area where you're right, it's better commoditized.

So we think this is a premium product. It doesn't necessarily have to price above all other products, but will be priced at that high end due to that performance. And when we look at how Dime has performed in very competitive markets like Southern California, they're based in Orange County. That gives us a lot of confidence that these products will be popular in Canada. And I mean this is really a big part of what's got us here today is looking at successful products that have survived that intense crucible of competition in the U.S., whether it's on the West Coast or California and Dime is another perfect example of that, Michael.

[Michael Freeman, analyst]

That's excellent and good word, crucible. Just on that, recognizing that vapes is a new category for you, will there need to be any sort of additional capital equipment that Indiva will need to put in place in order to start production of these vapes? And will there be adjustments in sourcing of cannabinoid or cannabis extracts to put in these vapes? If you could describe and perhaps quantify that, that would be great.

[Carmine Marotta, executive]

Sure. Fortunately, the incremental CapEx is quite low. As you know, we already make capsules under the Indiva brand. And so the equipment that form, let's say, the backbone for filling and making capsules is no different. In fact, it's the identical equipment that we'll use to fill the vape carts. So there's some minor change parts and tweaking required. But I mean we're probably looking at about CAD 35,000, very, very minor incremental CapEx, Michael, which we also like. So there's not a huge amount of risk in this deal. We'll probably invest more money in terms of buying packaging and hardware to get going.

In terms of the inputs, as you know, we're already very big distillate-buyers in Canada, probably some of the largest. We went through -- pardon me, we sold 60 million milligrams of cannabinoids in Q4, which is a record for us. So we'll continue buying distillate from the various sources. And then we -- obviously, we also source terpenes for some of the edible products we make. So whether we go with existing suppliers or new suppliers or work with Dime on this or some combination of the above, I think we're in really good shape. This is all pretty well-trodden territory for us.

And then the last piece I would say is in terms of filling the vape carts and making sure they perform well, just like the case with Bhang and Wana and Gron, we do get full training from the licensor, all the tricks and science and art that they use to make their products. So that will be the same case here.

[Michael Freeman, analyst]

All right. And if you'd indulge just one more, we'd appreciate. Your take on what we've observed as increasing competition in the edibles category. You're still the segment leader, but there are certainly fast oncoming groups with popular products in that space. How would you describe that competition?

[Carmine Marotta, executive]

That's a good question. Certainly, we have given a little bit of market share back, not to say that our sales aren't growing. The category itself continues to grow and outpace the overall market. I think we've seen a lot of new products come to market, and in particular, in the gummie space. As you know, gummies typically are the largest percentage of the edible category. In Canada, north of 75% of the market is gummies; in the U.S., it's probably closer to 50% or 60%. So we've seen a lot of new products come to market. We've seen a disproportionate amount of new products coming from our competitors. But we think will hit back quite hard in the second half of the year with the Gron products. I think we're seeing more competition at the lower price point. I think we've ceded some share. I think Gron be helpful in competing -- not competing on price necessarily, but it's a little bit more of a value-priced product than Wana, for example. And then Gron has a terrific focus on minor cannabinoids. And so we really see this as differentiated.

You've got a few SKUs out there that employ CBN and CBG. Of course, we launched our Wana Midnight Berry with CBN, the sleep gummie. But Gron is really focused on minor cannabinoids and ratios with more robust ratios. So we think between the profile -- and the flavor profile is fantastic as well at the price point and the value proposition. And the fact that we've already got 4 SKUs fully accepted with the OCS, we'll have lots of free samples available at LIFT for those that will be in Toronto next month. I would invite everyone else to come out and try it. We think we're going to gain a lot of share back with these products. But the landscape is competitive, and I would expect that to remain so Michael.

[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. We're going to go get back to work, and we look forward to speaking with you all again soon in just a few weeks when we release our first quarter 2022 results. So thank you, everyone.

[Operator]

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