Indiva Limited (OTCQX:NDVAF) Q2 2022 Earnings Conference Call August 16, 2022 8:30 AM ET
Company Participants
Niel Marotta – CEO
Jennifer Welsh – CFO
Conference Call Participants
Andrew Semple – Echelon Capital Markets
Operator
Good morning ladies and gentlemen and welcome to the Indiva Limited Q2 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded today, Tuesday August 16th, 2022.
I would now like to turn the conference over to Mr. 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 second quarter ended June 30th, 2022. Matters discussed in this conference call include forward-looking statements. These 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 on our earnings press release issued today as well as in the Risk Factors section of the quarterly MD&A and other public disclosure documents which will available on Indiva’s SEDAR profile.
We’re pleased to report second quarter financial results for our quarter ended June 30th, 2022 including improved gross margins despite weakness in net revenue year-over-year. As for our press release stated June 27th, 2022, the weakness in revenue in the second quarter is primarily due to delays in provisional deliveries beyond the end of the quarter as well as delays from as well as delays in fulfilling POs [ph] on certain new products. On the year-to-date basis, we’re very pleased to report record revenue and record gross profit.
We’re poised to resume sequential and year-over-year net revenue growth in the third quarter, driven by new product introduction, including the highly anticipated debut of our new gummy product Pearls by Grön, where we delivered initial quantities to Ontario and expect to deliver two additional provinces before the end of the month.
We also began shipping new products under the Indiva Life brand in the third quarter, including our lemon and cherry flavored lozenges, as well as our double stuffed sandwich cookies with come in vanilla and fudge flavors. Initial POs for new products had been received from provincial wholesalers.
We expect to begin shipping down — provincial wholesalers late the third quarter as well. Feedback on Indiva Life Pearls and Dime products from key accounts provincial wholesalers and budtenders across the country has been very positive and we expect to expand our distribution of all new products to all 13 provinces and territories in the coming months.
In addition to our national distribution platform in the recreational category, we continue to distribute nationally through medical platforms, including medical cannabis by shoppers and abemedics [ph]. We’ve recently added a new medical channel partner bringing our total to four, and initial POs had been fulfilled.
Indiva’s market share in the adult rec channel remain robust and second quarter. As for Hifyre data, Indiva continues to lead the edibles category with 32% market share holding the number one market share position in BC, Alberta, Saskatchewan, Manitoba, and Ontario.
Despite the entrance of several new products and SKUs in the gummies subcategory, Wana Sour Gummies continue to lead the edibles category with 26% category share and 34% subcategory share. Bhang continues to lead the chocolate category with 38% subcategory share. Product ranking in Q2 2022 showed the top six of the — pardon me, six and the top 10 edibles to use are from Indiva.
Looking back at Q2 2022 highlights, Indiva signed an exclusive licensing and manufacturing agreement with Dime industries. The agreement is a five-year term which automatically renews for three additional five-year terms. Indiva intends to launch Dime’s proprietary and innovative vape products, including disposable vapes, 510-thread carts, and custom batteries beginning in late Q3 2022, marking Indiva’s first entrance into the vape category.
Artisan Batch was awarded Best in Grow from Cannabis New Brunswick for best Indica flower, namely Sour Glue, produced by Purplefarm Genetics.
New gummies SKU hit shelves across Canada including Wana Lemon Iced Tea and Wana Quick Rise and Shine Clementine, with CBG. We also launched Indiva Capsules with new formulations including CBG and CBN.
Indiva introduced its new consumer brand at Indiva Life — pardon me, called Indiva Life at the 2022 Lift&Co Conference. The initial cannabis products to be launched under the Indiva Life brand will include edibles and extracts. All of which have been received acceptance from provincial wholesalers.
Subsequent to quarter end, Indiva was awarded 25 additional SKU listings at the Ontario Cannabis Store. These additional listings bring Indiva’s OCS listings to a total of 60 SKUs. The newly accepted SKUs are across six brands; Indiva Life, including lozenges, cookies, and chocolates; Artisan Batch; Pearls by Grön, including three SKUs in addition to the initial four Pearls SKUs delivered in July; Pips by Grön; Dime Vapes; and Bhang Chocolate. All SKUs are expected to launch in Ontario in September and October 2022, with deliveries to additional provinces beginning in September 2022. We would expect this headroom to launch later in the year.
Indiva completed an agreement with Kronic Relief, of Toronto, Ontario, to bring its premium craft flower to market under the Artisan Batch brand. The OCS has accepted this cultivar, and 3.5 gram jars of Kronic Relief flower are expected to hit shelves in Ontario in Q4 2022.
Indiva introduces new consumer brand, Indiva Life at the 2022 Lift&Co Conference and the initial products to be launched both with chocolate edibles, multiple-pack lozenges, and cookies, all of which received from provincial wholesalers and we have now received POs.
Looking forward, the company expects that net revenue in Q3 will be higher sequentially driven by the introduction of Indiva Life products, Pearls by Grön and Dime Vapes.
We expect the second half of 2022 to be significantly stronger and we continue to expect record net revenue for the full fiscal year 2022 as well as continued margin improvement, driven respectively by new products introduction and the implementation of automation in the production and packaging of edible products.
I’d like to thank all of Indiva’s employees for their hard work including all of our staff at our facility in London, Ontario and all of our remote team across the country. Thank you. 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, Niel. I’ll review the financial performance for Indiva for fiscal Q2 ended June 30th 2022. Gross revenue in the second quarter declined 9.9% year-over-year and declined 8.3% sequentially to $8.9 million. Year-to-date gross revenue increased by 11% year-over-year to a record $18.6 million.
Net revenue declined 9.7% year-over-year and declined 8.5% sequentially to $8.1 million in the quarter due to difficult comparisons versus the introduction of Wana Quick in Q2 2021 and delays in provincial deliveries of new and existing products causing revenue to slip into the third quarter.
Year-to-date net revenue increased 12.1% year-over-year to a record $17 million. the strong year-over-year growth was driven by the introduction of new edibles use into the recreational market. Overall, edibles represented 89% of net revenue in Q2 and 93% year-to-date,
In Q2 2022, Indiva sold products containing 44.2 million milligrams of distillate, the active ingredients in edible products, which represents a 19% decrease when compared to the 54.5 million milligrams in products sold in Q1 2022 and a 16% decrease compared to 52.5 million milligrams sold in Q2 2021.
Gross profit before fair value adjustments and impairments was $2.7 million is Q2 2022, a decrease of 11% year-over-year and an improvement of 2% sequentially despite lower revenue.
Year-to-date gross profit increased by 27% to a record $5.3 million. Operational gross margins defined as gross margin before fair value adjustments and impairments increased 33.1% versus 30.1% in Q2 2021, and also improved sequentially from 29.6% in Q1 2022.
Margins improved due to lower material costs on certain inputs, improved production efficiencies, and lower returns and impediments to inventory, offset by lower revenues and lower overhead absorption on goods sold in the quarter. The company’s gross margins to improve in the second half of 2022 as new automation for production and packaging comes online.
Operating expenses in the quarter decreased 0.4% sequentially, representing 42.9% of net revenue versus 39.4% in Q1 2022 and 34.4% in Q2 2021. Operating expenses declined due to lower general administrative costs which were down 19% year-over-year and down 6% sequentially, offset by higher marketing costs and sales commissions. Year-to-date operating expenses increased by 31.2% to $7 million due entirely to higher marketing costs and sales commissions.
Adjusted EBITDA improved sequentially in Q2 2022 to a loss of $0.15 million versus a loss of $0.38 million in Q1 2022 and declined versus a profit of $0.49 million in Q2 2021 due to lower revenue and higher marketing expenses offset by lower cost of sales — or cost of goods. Year-to-date adjusted EBITDA was a loss of $0.53 million versus $0.01 million in the corresponding period last year.
Comprehensive net loss of $2.5 million included one-time expenses and non-cash charges for impairment of inventory at property, plant, and equipment totaling $0.05 million. Excluding these charges, comprehensive loss declined to $2 million versus an adjusted loss of $2.02 million in Q1 22 and $0.72 million in Q2 2021. Cash balance at the end of the quarter was $2.5 million.
Niel Marotta
Thank you, Jen. Operator, I think with that, we’ll open it up to questions please.
Question-and-Answer Session
Operator
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]
Your first question comes from Andrew Semple of Echelon. Please go ahead.
Andrew Semple
Good morning and congrats on the Q2 results.
Niel Marotta
Thanks Andrew.
Andrew Semple
Hi, good morning. First question just want to ask about expectations for the second half of this year, Indiva is hovering pretty close to even a breakeven within the second quarter, with the outlook suggesting both higher revenues and margins in the second half and the management team continuing to monitor and control SG&A expenses fairly carefully. So, fair to say it’s the management’s expectation that the second half would also bring Indiva into positive EBITDA territory?
Niel Marotta
Yes. Hi, Andrew. Thanks for the question. I think I think the short answer is yes. We’re pretty bullish based on POs that we’ve received and the feedback that we received on all the new products that we’re launching. It is a pretty big number, I mean, to go from 35 to 60 SKUs in Ontario, that’s a big jump.
Not all SKUs are created equal, but, the Pearls have a terrific niche and should be margin accretive over the long-term as we — as automation comes online. And I’d say the same for the other products that we’re launching. The lozenges in particular, coming in at 10, 25, and 50 pack, those are really interesting SKUs. And as we talked to budtenders across the country, they’re very excited to see a product like that come to market.
So, we certainly expect revenue to pick up and we are going to be very, very conscious of our SG&A spend. So, yes, we would expect even thought to go into positive territory in the second half.
Andrew Semple
Great. Appreciate you clarifying that [ph]. Second question, in the outlook, you stated plans to fulfill OCS and other provincial orders despite some delays in receiving some machinery from overseas, would this delay in equipment arriving at the facility defer some of the anticipated margin expansion in the second half of the quarter into 2023?
And given that you might have had to involve some workarounds in order to get some of the product out the door in the third and fourth quarter? And I guess, what is the updated timing for that equipment to reach Indiva and be installed and operational?
Niel Marotta
Yes, sure. So, I think the short answer is yes. Obviously, there’s certain pieces of equipment we would have expected to arrive significantly earlier. The good news is that it feels like when it rains, it pours. So, over the next few weeks, most if not all of the automation and all of the equipment required, let’s say for us to be fully operational, all these products will be commissioned, installed, and up and running. Certainly, by mid-September, I would think all of it’ll be up and running, Andrew.
So, that might have delayed some of the margin improvement in Q4. But we’re still very bullish on where margins will go based on product mix, and based an overhead leverage.
So, I don’t think we’re expecting any, any significant decline in margins of any kind. And if it takes an extra quarter to get that margin realization, that’s where we’d really like it to be, then so be it.
We’re as focused on executing. The worst thing we can do as an LP and the biggest complaint we get from retailers is when a company stock out. And so if occasionally you have to sacrifice some margin, maybe need to hand them [ph] something instead of automating it in order to fulfill PO, that’s crucial, I’m not talking about product end market as kind of a cardinal sin.
So, we’ll do everything we can to keep the margins going north. And unfortunately, some of the supply chain delays globally have hurt us in terms of getting that automation equipment and in time, but most if not all of that equipment has now landed in North America and on its way that facility or has arrived. So, that makes us feel a lot better about it.
Andrew Semple
Great, that’s helpful. And just maybe building on that and one more question, if I may. You pointed to edible sales being up about 9% quarter-over-quarter in some of the key markets that you shipped to. Although Indiva shipments worked out sequentially, in part due to the logistical challenges at the provincial distributors that you noted, pushed a $1 million of revenue into Q3. Is there likely to be an inventory replenishment tailwind in Q3 2022, as some of the provincial distributors get caught up on their inventory levels? How might that play out?
Niel Marotta
Well, there’s a lot of moving parts. As you know, we’ve had a bit of a snafu with a couple of provincial wholesalers very recently, both in Ontario and BC. I don’t have any additional color there. But that would be, let’s say, an outlier that could hurt. So, certainly hope the strikeout West gets solved quickly and in that the OCS gets back to 100% quickly as well.
I mean, one of the interesting things we’re seeing in the market is as far as replenishment goes, is what happens to inventory in certain markets when some retailers struggle. And so I think over time, I would expect the slack to kind of go away and part of the beauty of launching all these new products is we have ample opportunity to replenish and grow in addition to what’s already in market.
As far as detail on whether replenishment would be higher in Q3 versus other quarters, I think really, it’s only seasonality that would play a role. And typically the fourth quarter and maybe late in the third quarter are our strongest periods of the year. So, we think that’s bullish for net revenue in the second half.
Andrew Semple
Great. Appreciate you taking my questions. Thank you.
Niel Marotta
Thank you.
Operator
[Operator Instructions]
There are no further questions I’ll turn the conference back to Mr. Marotta for any closing remarks.
Niel Marotta
Okay, well, thank you everyone for attending the call. We’re very excited about all these products we’re launching. I would encourage you to go to your local store and talk to your budtenders about Pearls and the Indiva Life products that are coming up and as well as the Dime Vapes. In the meantime, we’re going to get back to work and look forward to speaking with everyone again here when we release our third quarter results in mid-November. Thanks everybody.
Operator
Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.
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