Indiva Limited (OTCQX:NDVAF) Q3 2022 Earnings Conference Call November 22, 2022 8:30 AM ET
Company Participants
Niel Marotta – President, Chief Executive Officer and Co-Founder
Jennifer Welsh – Chief Financial Officer
Conference Call Participants
Eric Livshits – ATB Capital Markets
Andrew Semple – Echelon Capital Markets
Operator
Good morning, ladies and gentlemen and welcome to the Indiva Limited Q3 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 22, 2022.
And 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 third quarter ended September 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 available on Indiva’s SEDAR profile.
We are pleased to report third quarter financial results for our quarter ended September 30th, 2022, including improved year-over-year revenue growth and on a year-to-date basis, we’re very pleased to report record revenue and record gross profit.
Indiva introduced more new products and SKUs in Q3 than in any other period in the company’s history. These new products are driving revenue growth in Q4 and will drive our growth in 2023. New products introduced in Q3 include Pearls by Gron dummies and Indiva Life Double Stuffed Sandwich Cookies and Indiva Life Lozenges and Dime vapes. Feedback on new products from budtenders and key accounts has been very positive, particularly with Pearls gummies and Double Stuffed Sandwich Cookies. It’s absolutely live up to the reputation Indiva is built for bringing best-in-class edibles to Canadian cannabis consumers. We expect to expand our distribution of all new products in the coming months.
Looking a bit closer at new product performance. Gron gummies have quickly become one of the top five edibles in Ontario and the SKU count has now reached seven flavors. Indiva Life Stuffed Sandwich Cookies have achieved excellent sore penetration out of the gate and have significantly improved Indiva’s market share in the baked goods subcategory. These baked goods cookies have experienced very fast organic growth with replenishment orders exceeding initial load in despite needed marketing efforts. We love it when our products sell themselves. We expect new flavors to be introduced into market and further innovation from Indiva in this area.
Indiva Life Lozenges are in high demand, but of all of Indiva new product introductions, this has been the most difficult to ramp production and keep up with orders. We have solved our processing and production bottleneck with new equipment which arrived on site in Q4 and we’re now ready to expand the distribution nationwide. Indiva is the first LP to introduce this type of extract in 25 count and 50 count packs. Dime vapes are also new to market and orders are gaining momentum, particularly for the Bubblegum Kush flavored 510-thread card. Look at many of these new products only had initial deliveries at the end of September and we expect the revenue contribution from new products to increase in Q4 and in 2023.
Indiva’s market share and the built rec channel remained robust in the third quarter. As per Hifyre data Indiva continues to lead the edibles category with 29.7% market share, holding the number one market share position in BC, Alberta, and Ontario. Despite the entrance of several new products, and SKUs in the gummie subcategory, Wana Sour gummie continued to lead the edibles category with 24.7% category share and 31.9% subcategory share. Bhang continues to lead the chocolate category with 37.2% subcategory share. Product ranking in Q3, 2022 showed for the top 10 edible SKUs are from Indiva.
Turning to events. Subsequent to quarter-end, Indiva was awarded 13 additional SKU listings by the OCS, which will deliver in late December, early January. New listings include from Pearls by Gron, Marionberry Lemonade CBG 25-pack gummies; from Wana Midnight Berry Indica CBN/CBD/THC, which will be available in 5-packs; Indiva Life Double Stuffed Sandwich Cookies: Golden Vanilla and Be My Valentine Strawberry flavours, each cookie containing 10 milligrams of THC; from Indiva Life Capsules and Lozenges: Sunrise CBG/THC 1:1 capsules, as well as Lemon Lozenges available in 25-pack count and Wild Cherry Lozenges in 50-count packs; Indiva Life Chocolates: Morning Espresso Milk Chocolate 1:1 CBG:THC and Raspberries and Cream White Chocolate 1:1 CBD:THC. Finally, from Dime Industries Vapes: 510-thread Blueberry Lemon Haze Sativa and our first, Wedding Cake Hybrid Rechargeable All-in-One vape.
Company has received and commissioned several new pieces of automated equipment in its facility in London, Ontario for use in the processing and packaging edible products. Company expects that by year-end all the new equipment will be fully operational, adding finished goods capacity while lowering operating costs and improving margins.
The addition of several new brands and products is created a growth environment at Indiva production facility requiring additional direct labor requirements, thus preventing any job cuts despite the increased automation.
Looking forward, we’re poised for strong sequential and year-over-year growth in the fourth quarter, driven by new product introduction, including Indiva Life products, Pearls by Gron gummies and Dime vapes. We expect 2023 revenue to be significantly stronger, and we continue to expect margin improvement driven by fixed cost leverage, new product introduction, and the benefit of improved productivity with the implementation of automation in the production and packaging edible products.
I’d like to thank all Indiva’s employees for their hard work and in particular, I’d like to thank our operations team in London, Move Mountains to launch a record number of new products in the third quarter. 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 fiscal Q3 ended September 30th, 2022.
Gross revenue in the third quarter increased 6% year-over-year and declined 1% sequentially to $8.8 million. Year-to-date gross revenue increased by 9% year-over-year to a record $27.4 million. Net revenue increased 6% year-over-year and declined $0.5% sequentially to $8.1 million in a quarter driven by new product introductions, that offset by delays in provincial deliveries of certain new products, which were impacted by the closure of the BC distribution center due to strike action, as well as the partial shutdown of the OCS distribution center due to a cybersecurity incident.
Year-to-date, net revenue increased 10% year-over-year to a record $25.1 million. The strong year-over-year growth was driven by the introduction of new edibles SKUs into the recreational market. Overall, edibles represented 91% of net revenue in Q3 and 92% year-to-date.
In Q3, 2022 Indiva sold products containing 57 million milligrams of cannabinoids, which represents a 32% increase when compared to 43 million milligrams of products sold in Q2, 2022 and 34% increase compared to 42 million milligrams sold in Q3, 2021.
Gross profit before fair value adjustments and impairments was $2.3 million in Q3, 2022, a decrease of 12% year-over-year and 13% sequentially. Year-to-date gross profit increased by 13% to a record $7.7 million. Operational gross margin, defined as gross margin before fair value adjustments and impairments, decreased 29% versus 34% in Q3, 2021, and also declined sequentially from 33% in Q2, 2022. The declining gross margin was due to delays in receiving automation equipment related production and processing of certain new products offset by lower inventory write-downs.
Operating expenses in the quarter decrease 3% sequentially, representing 42% of net revenue versus 43% in Q2, 2022 and 39% in Q3, 2021. Operating expenses declined due to lower general and administrative costs, which were down 23% year-over-year and down 6% sequentially, offset by higher marketing costs and sales commissions.
Year-to-date operating expenses increased by 25% to $10.4 million due to higher marketing costs and sales commissions, higher research and development costs related to new product innovation offset partly by lower G&A expenses.
Adjusted EBITDA decline sequentially in Q3, 2022 to a loss of $0.5 million versus a loss of $150,000 in Q2, 2022, a decline versus a profit of $130,000 in Q3, 2021 due to higher costs of goods related to new product launches, increased sales and marketing and research and development expenses and offset by lower general and administrative costs. Year-to-date, adjusted EBITDA was the loss of $1 million versus a profit of $80,000 in corresponding period last year.
Comprehensive loss of $2.6 million included one-time expenses and non-charges for impairment of inventory and gain on issuance of shares totaling $323,000. Excluding these charges, comprehensive loss increased to $2.2 million versus an adjusted loss of $2 million in Q2, 2022 and $1 million in Q3, 2021. Cash balance at quarter-end improved to $3.6 million.
Niel Marotta
Thank you, Jen. Operator, I think with that we will 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 will come from Eric Livshits of ATB Capital Markets. Please go ahead.
Eric Livshits
Hi. Good morning everyone, filling in for Puerto Rico here. And thanks for taking my question. So, I have a few questions here, if you don’t mind. So, first, how do you view the edibles market evolving? Given that we’ve seen some — more competition moving into the space, and at the same time, the category really hasn’t gained much meaningful share of the overall market.
Secondly, do you foresee the company continuing to generate positive free cash flow in the coming quarters? And is management evaluating any additional financing options at this point? And just lastly, so I know you guided for some improved margins ahead. Are you able to provide any additional color on margins in Q4 and going into 2023 given — just given the recent investments in automation equipment? Thank you.
Niel Marotta
Thanks Eric. Good questions. Taking the last one first, I don’t think we’re ready to give an actual number on margins. I think directionally it’s up based on the factors that we’ve discussed. Some of the new products that we’ve launched, typically the margins are a bit lower at startup, there’s a bit of a learning curve in terms of ramping up the productivity. And as we mentioned in our press release today and in our prepared comments, there’s been some delays in some automation equipment so that hurts margins. But that will improve now that some of that equipment’s arrived on site.
There’s also certain new products that we’ve launched, including Lozenges, where the gross margin is significantly higher than, let’s say, our average corporate level in the thirties. So that may should help, so directionally up, but not prepared to give an actual number for Q4 at this time.
Talking about — I’ll take the second, the second one second. On the financing side of things, we are in discussions with multiple lenders about refinancing our senior debt. And we did put out a press release yesterday about extending the maturity of our convertible debentures to the end of 2024. So, we think broadly, as our revenue increases driven by new products and margins increase — as margins increase our new products as the mix improves, that we should be in a positive cash position in 2023.
And then on your first question on the edible market, you’re right. We’ve seen it kind of stagnate here and we’ve seen an enormous amount of new competition in the last two years. I mean, the number of gummie SKUs in the market when we launched Wana was only a couple of dozen two years ago. Now it’s upwards of 200 or so. We’ve also seen new products come to market, whether those are different kinds of extracts or alpha eight [ph] products. So, the competition’s absolutely there.
I think the light at the end of the tunnel for us is regulatory change. There’s never a guarantee on timing, but I think the message is loud and clear from us, from Cannabis Council of Canada, from the Ontario Chamber of Commerce, and basically anybody else in this industry that, the potency limits on edibles at 10 milligrams are woefully low. It’s allowing the illicit market to thrive. You pointed out, Eric, that edibles have only — really gotten to about 5% to 6% of the total edible market, maybe a little bit north of 6% if you exclude Quebec from the denominator, which also doesn’t allow edibles beyond, I think, dried fruit and granola bites. So, there’s all kinds of room here for regulatory improvement. It’s great to see that the Cannabis Act is under review.
And our strong view is that — look, we’ve sold over 20 million packages of edibles in the last two years in this country. We’ve never had one complaint from a parent about a child eating one of our products. So, any public safety risk is certainly not coming from the legal market. And we think once we can offer a safe legal alternative in edibles with, let’s say, a hundred milligrams, benchmarking off California or Colorado, you’re going to see this category likely triple in terms of relevance. So, there’s all kinds of growth left ahead of us despite sort of what I would call stagnation this year.
Eric Livshits
Great. Thank you so much. I’ll hop back into the queue.
Operator
Your next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
Andrew Semple
Hi, there. Good morning. First question, would you be able to quantify the impact you saw from the OCS and from BC from the logistical issues on your results during this quarter, more specifically on the sales side of the equation?
Jennifer Welsh
I mean, quite honestly, Andrew, it’s hard to quantify. We were delayed in launching the Pearls by two weeks as a result of the OCS cyber incident. And then really everything just we kind of lost two weeks and there altogether that there was nothing moving or being recognized. So, it just — everything pushed out. And we kind of lost that two week period. So, I can’t really say that there’s specifically a number.
Niel Marotta
Yeah. I mean, just adding to that. Part of the problem with delays is that delays replenishment orders. If you can’t sell it into the channel, it can’t deplete and you can’t replenish it. So, I mean, thinking two weeks out of 13 weeks in a quarter, I don’t think it’s that big of an impact, calling it 15%. But it certainly could have been, we launched so many new products, but I think we would’ve been up significantly on a sequential basis, had the strike in BC not occurred and had that cyber incident not occurred in Ontario, Andrew. Hope that helped somewhat, even if we can’t quantify.
Andrew Semple
That helps. I appreciate you trying to put some figures around that. My second question, in terms of looking at the Q4 outlook and there’s a number of new products being launched, don’t want to ask you really to rank your children, but just directionally, could you provide some sense of which of the new products that are launching in Q4 are expected to have the largest contribution to the Q4 top line and bottom line results?
Niel Marotta
Yeah. It’s a fair question and we don’t want to rank our children either. We certainly are behind supporting every one of the brands, whether we innovated it or, internally or whether it’s something that we’ve licensed. I think we’re probably most bullish on Indiva Life Lozenges and Cookies and probably tied for first would also be the Pearls by Gron gummies, Andrew. So, we’ve seen really great sell in of the Pearls gummies and great demand for the Lozenges. We know that that category is growing pretty quickly.
And speaking to Pearls directly, the price point, the chew, the flavor and the cannabinoid profile a really tough to beat. And the one thing that we’re still missing for Pearls is a presence in Alberta. So, this is maybe lesser known by most folks. But when we license a brand that comes to Canada, they’ve got through — they must go through a brand registration process in Alberta. Fortunately Gron is nearly complete that process. So, we’re very hopeful that we’ll see Pearls gummies hit Alberta in Q1, that won’t affect Q4 necessarily, and maybe there’s a chance we get some loaded in Q4, but I think that’s how I would rank them if you put a gun to my head, Andrew.
Andrew Semple
Great. Appreciate that. And maybe one more question here, if I may. Just on CBN and CBG, would it be fair to say that those are making up a larger share of the total cannabinoid milligrams sold? And if that statement is true, is there room for the price of desolate minor cannabinoids to fall further from current levels, similar to what we’ve already seen in THC? And would that be a potential tailwind to gross margins in the future?
Jennifer Welsh
Yeah. I mean, I’d say they’re about 10% of the cannabinoids at this point, obviously the new Pearls gummies are — have the most minors in them, and those only launch kind of partway through the quarter. From a pricing perspective, we’re definitely seeing the cost — nice coming down and pushing for improved pricing. So, I do see — think we’ll see a bit of upside on margins, especially if the minor pricing comes down. But I mean, quite honestly, the most significant margin accretion that we got was with the THC and CBG pricing coming down just for the — the 90% of cannabinoids that those represent. And I don’t think we’ll see the impact to the extent we did in the last 12 months going into the minor pricing coming down.
Niel Marotta
I think Andrew, just wanting to comment, if I might. I think it’ll disproportionately help Pearls, right, given just the amount of CBN and CBG that go into many of those SKUs.
Andrew Semple
Great. That’s very helpful. Thank you.
Operator
[Operator Instructions]
There are no other questions. I’ll turn the conference back to Niel Marotta for any closing remarks.
End of Q&A
Niel Marotta
Well, thanks everyone for attending the call. We’re going to go get back to work and we look forward to speaking to you all again when we release our fiscal year 2022 results in early April of 2023. So, thanks everybody.
Operator
Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.
Be the first to comment