Earnings Call Transcript--->>> Limited (NDVAF) CEO Niel Marotta On Q3 2021 Results - Earnings Call Transcript
Nov. 16, 2021 10:05 AM ET
Indiva Limited (NDVAF)
Indiva Limited (OTCQX:NDVAF) Q3 2021 Earnings Conference Call November 16, 2021 8:30 AM ET
Company Participants
Niel Marotta - CEO
Jennifer Welsh - CFO
Conference Call Participants
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
00:05 Good morning, ladies and gentlemen, and welcome to Indiva Limited Q3 twenty twenty one Earnings Conference Call. [Operator Instructions] Note that this call is being recorded on Tuesday November sixteen, twenty twenty one.
00:22 And I would like to turn the conference over to Niel Marotta, CEO. Please go ahead, sir.
Niel Marotta
00:28 Thank you, operator. Welcome, everyone. Thank you for joining us this morning to discuss Indiva’s financial results for the third quarter ended September thirty, twenty twenty one.
00:37 I've got some forward looking statements to read first. 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 in the our risk factor section of the quarterly MD&A and other public disclosure documents available on Indiva's SEDAR profile.
01:10 We're pleased to report strong year over year organic revenue growth for the third quarter of twenty twenty one, as well as record gross margins and our second consecutive quarter of positive adjusted EBITDA. Results continued to be driven by organic growth and sales of our Award winning products, including Bhang chocolate and Wana Sour Gummies. That revenue increased one hundred and fifty five percent year over year, our seventh consecutive quarter of positive year over year growth, but declined fifteen percent sequentially, primarily due to seasonal weakness and difficult comparisons versus Q2 twenty twenty one, our benefit from the selling and introduction of three Wana Quick gummie SKUs and two new Bhang Chocolate SKUs.
01:49 Gross margins before fair value adjustments, impairments and onetime items improved significantly in the third quarter to a record thirty point eight percent, a significantly lower distillate costs, positively impacted cost of goods sold, offset by lower revenues.
02:04 Adjusted EBITDA remained positive in the third quarter, but declined sequentially to one hundred and seventy thousand dollars from five hundred and forty thousand dollars last quarter, due to lower revenues offset by lower distillate costs.
2:16 Looking back at Q3 twenty twenty one. Indiva maintained its leadership in the edibles category. Indiva remains a national leader of edible sales with forty five percent market share in the category for the third quarter of twenty forty one. According to Hifyre data across DC, Alberta to Saskatchewan, Manitoba and Ontario across all categories Indiva ranked eleventh in Q3 amongst all Canadian LPs by dollar market share and ranked number one by units delivered.
02:44 Indiva also sold four of the top ten OCS products measured by unit sold for the quarter ended June thirty, twenty twenty one. This represents more SKUs in the top ten than any other LP in Canada.
02:55 Product ranking in Q3 twenty twenty one showed that the top eight edible SKUs were Wana Sour Gummies led by Mango Sativa, both Wana and Bhang continue to lead the respective subcategories. We added Prince Edward Island to our distribution platform in Q3 and as a result, Indiva now sales product coast to coast in all ten provinces in Canada, as well as two territories and in the medical channel through various partnerships. We intend to continue to leverage this national distribution platform going forward with further product and SKU introductions.
03:25 We introduced three new Cookie SKUs from Slow Ride Bakery to the Ontario market, marking Indiva’s first introduction of baked goods in the edibles category. According to Hifyre data, Indiva held leading market share nationally in the baked goods sub-category for the month September twenty twenty one, despite distribution beginning in August and being limited to -- only to the province of Ontario. Indiva has since expanded the distribution of Slow Ride Cookies to three provinces. We also introduce one new Wana SKU in Q3 a strawberry ten pack 10:1.
03:55 Finally, we introduced additional premium strains under the Artisan Batch brand, including Unicorn Sherbert by KRFT, Cereal Milk by KRFT and Sticky Larry by Stinky Greens, we also expanded distribution of the Artisan Batch brand to the province of Alberta.
04:10 Turning to events subsequent to quarter end. We introduced several new products and opened new markets for existing products subsequent to quarter end, which will help drive top line growth in Q4 and beyond. We launched and completed initial shipments of the Wana 10-pack Blood Orange 20:1 SKU a new flavor for Wana Gummies in Canada. Further Wana Gummies SKUs, including midnight -- sweet gummies will launch in Q1 twenty twenty one.
04:35 We introduced Bhang THC White Candy Cane White Chocolate, which has experienced strong selling across five provinces. We also fulfilled replenishment orders of bubble hash concentrate into the Province of Quebec, and delivered our first shipment of INDIVA Capsules to British Columbia. We've expanded distribution of of Slow Ride Cookies to two additional properties and introduced two new holiday themed SKU.
04:56 We also introduced high-potency, craft grown cultivars to the Canadian market, including Golden Pineapple by HWY 8 and Sour Glue by Purplefarm Genetics. The company expects to introduce more exciting and unique cultivars from Canada’s best craft cultivators in the coming months.
05:12 Indiva received nominations for five Adcann Awards, including Craft Brand of The Year, LP Brand of the Year, Best Social Media of the Year, Best Brand Marketer of the Year and Marketing Campaign of the Year.
05:26 On October twelve, twenty twenty Indiva completed its Warrant Incentive Program, a total of eight point eight warrants were exercised, providing gross proceeds to the Company of three point five million dollars. We also closed and amended and increased debt facility with Sundial Growers Inc., providing the company with an additional eight point five million dollars of debt. Proceeds were used to terminate and repay all remaining obligations under the Dycar manufacturing agreement. While there were one time charges in the quarter associated with exiting this contract, the refinancing is immediately accretive to cash flow.
05:58 Finally, pursuant to the press release issued by Canopy Growth on October fourteen announcing the acquisition of an option to acquire Wana Brands, we wishes to clarify that Indiva's exclusive rights to manufacture and distribute Wana Sour Gummies in Canada will remain in place until the earlier of May twenty twenty five, or the date upon which Wana terminates its agreement with Indiva following the exercise by Canopy of its option to acquire Wana, following federal legalization of cannabis in the United States.
06:26 Indiva and Wana may continue their licensing agreement beyond May twenty twenty five if both parties mutually agree. In the event that Canopy exercises its option prior to May twenty twenty five and causes Wana to terminate the current agreement, Indiva would be contractually entitled to receive a termination payment equivalent to four times the most recent three months of gross revenue, net of license payments, from the sale of Wana products in Canada. Indiva remains committed to supporting the growth of the Wana brand in Canada.
06:56 Looking forward, in the fourth quarter of twenty twenty one, we expect sequential revenue growth to resume, driven by new SKU and product introductions and we expect further gross margin improvement driven by higher revenue and improved operating efficiencies, including the commissioning new automation equipment for processing and packaging. Indiva will not stand still, we will continue to move forward and grow through innovation and by pursuing new brands and products introduced into the Canadian market as we leverage our best in class operations, our national distribution platform and our strong relationships with provincial wholesalers and key retail accounts.
07:33 I'd like to thank all Indiva employees including all of the staff at our facility in London, Ontario, as well as our staff working remotely for their fantastic effort and hard work as we continue to produce and sell new products and grow our business.
7:45 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
08:00 Thank Niel. I will review Indiva’s financial performance for the three and nine month periods ended September thirty, twenty twenty one. Gross revenue in the third quarter increased one hundred and forty three percent year over year to eight point three million dollars, while year to date gross revenue increased one hundred and ninety four percent year over year to twenty five point zero four million dollars, driven primarily by organic growth of our core edible products.
08:25 Net revenue increased one hundred and fifty five percent year over year which declined fifteen percent sequentially to seven point seven two million dollars in the quarter. Year to date, net revenue increased two hundred and three percent year over year to twenty three million dollars driven by new product introductions and expanded distribution of Indiva products. Overall, edibles represented ninety percent of net revenue in Q3 twenty twenty one.
08:49 Gross profit before fair value adjustments, impairments and onetime items increased by three hundred and nineteen percent year over year to two point eight two million dollars. Year to date gross profit increased to seven point zero million dollars versus one point three one million dollars in the corresponding prior year period.
09:05 Operational gross margin defined gross margin before fair value adjustments, impairments and onetime items increased to a record thirty seven point eight percent in Q3 twenty twenty one versus thirty four percent in Q2 twenty twenty one and twenty two point two percent in Q3 twenty twenty as the company benefited from lower cost offset by lower sequential revenue. Year to date gross margin before fair value adjustments, impairments and onetime items improved to thirty one point one percent or seventeen point three percent for the nine month period a year ago.
09:39 Forty two million milligrams [indiscernible] were sold in the third quarter versus fifty two million milligrams in the second quarter of twenty twenty one and ten million milligrams in Q3 twenty twenty, representing a three hundred and thirteen percent year over year increase with a decrease of nineteen percent sequentially when compared to Q2, which saw the initial sell-in of three Wana Quick SKUs and two new Bhang chocolate SKUs.
10:01 As a reminder, CBD and THC distillate are the active ingredients in our edible products. It is important to remember that there is not necessarily a direct correlation between units sold and milligrams sold as each SKU has its own unique combination and total amounts of milligrams of active ingredient.
10:18 Distillate cost averaged zero point zero five dollar in the third quarter, a significant decline from the second quarter and closer to [indiscernible]. The company expects to see continued gross margin improvement in the fourth quarter of twenty twenty one, this improvement will come as a result of higher quarterly revenue and improved operating efficiencies rather than any further significant contributions from the decline in distillate costs.
10:42 Operating expenses in the quarter remained flat at three million dollars, while year date they increased to eight point three million dollars primarily due to higher marketing and sales submissions driven by higher sales volumes and higher public company costs.
10:55 Operating expenses as a percent of net revenue were thirty nine point two percent in Q3 twenty twenty one. We expressed operating expenses to continue to decline as a percentage of net revenue in Q4 and into twenty twenty two. As a result of lower sequential revenue, adjusted EBITDA that remained positive at one hundred and seventy thousand dollars versus a profit of five hundred and forty four thousand dollars in Q2, and a loss of one million dollars in the same period last year. Year to date adjusted EBITDA, it was positive at two twenty thousand dollars versus a loss of three point three million dollars in the year ago period.
11:31 The company recorded a four point nine nine million dollars loss on contract settlement due to the termination of the Bhang Manufacturing agreement. Going forward, the company expect significantly improved cash flow from operations on a monthly basis due to the refinancing and termination of this contract.
11:48 Comprehensive loss was six point four million dollars in Q3. Comprehensive loss in the quarter included onetime expenses and non-cash charges of four point nine million -- four point nine nine million dollars as well as inventory write downs due to disposal of aged inventory totaling four hundred and forty six thousand dollars. Excluding all onetime expenses and noncash charges, comprehensive loss per share in Q3 twenty twenty one was nine hundred and ninety thousand dollars or one penny dollars per share versus a per share loss of zero point zero two dollars in the year ago period.
12:19 The cash balance stood at two point six million dollars at quarter end. Cash and working capital at quarter end excludes the positive impact of the eight point five billion dollars debt refinancing and three point five million dollars of proceeds from the warrant incentive program, which were all completed subsequent to quarter end. Including the positive impact of these transactions on our balance sheet working capital improves by nearly eleven million dollars
Niel Marotta
12:43 Thank you, Jenn. Operator, I think now we'll open it up to questions please.
Question-and-Answer Session
Operator
12:47 Certainly, sir. [Operator Instructions] And your first question will be from Rahul Sarugaser at Raymond James. Please go ahead.
Q – Unidentified Analyst
13:19 Hi, good morning Niel. Good morning, Jenn. This is [Mike Freeman] (ph) on for Rahul Sarugaser. I regret got missing the call. Hey, congratulations on maintaining pretty remarkable market share in edibles this quarter and in driving positive EBITDA. It's really impressive.
13:34 I've got few questions here on your description of sort of sales dip from a big second quarter, but a sales dip caused by seasonality, I'd be interested to understand more about this sort of August trough you guys indicate in the press release and share with us how this seasonal trend you see?
Niel Marotta
14:01 Sure. Yeah. So I mean our sales really peaked late in Q2 on a monthly basis, we don't break down our revenue on a month by month basis. So we had pretty heavy selling in and that related to a lot of new SKUs. We introduced five pretty popular new SKUs, the Wana Quick SKUs had really good sell and the Bhang chocolate, particularly the cookies and cream had very strong sell-in Q2. August, we trough it about two million dollars monthly revenue, again, we're not going to disclose every single month, but that's – we were down much closer to the Q2 run rate, let's say on a monthly basis since then. So we would attribute that really to seasonality, there is no other really clear reason why sales dipped. But it seems -- it is a bit lumpy too Mike.
14:47 You got to remember our sell-in is not as, let's say, steady and granular as retail sales. So there's a bit of lumpiness in the business as well. So, it's probably a multitude of factors and certainly not just the seasonality we saw in August.
Unidentified Analyst
15:02 Okay, all right. That's really helpful. And I wonder if you could share -- there's been an increased sort of incentive competition in the edibles category, we see Cronos with spinach introducing opinion products that seem to be doing well and organic [indiscernible] sort of holding steady there. Wondering if you're feeling or seeing any increased competition for retail shop space or room for your products?
Niel Marotta
15:29 I think the short answer is, yes. I don't think anything is going us off the shelf per se. We have really terrific store presence which just happened organically and also through key retail partnerships which we continuing to pursue. But we think this is a good thing. We're seeing accelerating – it seems like category growth. We put a new investor deck up today. It looks like the edibles categories is now north of five percent of the total that's the first -- that was in October according the Hifyre data. So, it would appear that while our market share declined somewhat our retail sales continue to grow. But it's not unusual to see, let's say, a high level of trial and initial sell in of new products, some of which are better than others, all of which do impact the total of what's on the shelf. So, we welcome the competition and we think it's good for the whole category. I think -- we think it's first trial for edibles in general, which as you know, are still well underrepresented in Canada versus, say, mature U.S. markets.
Unidentified Analyst
16:35 Okay. Thanks very much. That's really helpful. And now I understand you may not be able to speculate too much on the conclusion of the result of Canopy’s seeking to acquire Wana, but I wonder if there are any near term impact you at Indiva feel following this announcement?
Niel Marotta
17:01 I think other than just perhaps some confusion amongst investors on what does it mean? And this is why we've tried to clarify this with a statement both on the call and then in the press release itself. Indiva -- we're still the exclusive licensee for the next three point five years. We haven't really seen a short term impact, obviously, provincial wholesalers have been informed that there'll be no interruption in the production or distribution of Wana products. So, I guess the short answer from a commercial perspective is no, more so on the investor side and this is why we've tried to clarify things best as possible.
Unidentified Analyst
17:41 Okay. That's helpful. And it's important to know that you guys got there first. Thanks very much for these questions. I'll jump back in the queue.
Niel Marotta
17:51 Thanks Mike. Appreciate it.
Operator
17:53 Thank you. [Operator Instructions] And at this time -- we have a follow-up for Mike. Please go ahead.
Unidentified Analyst
18:14 Thanks very much. Just one more from me on gross margins. So you're working through distillate that was bought at a higher price than the spot market now, you're working towards spot market -- closer to spot market pricing on distillate. Where do you see -- what do you target as gross margins going forward?
Niel Marotta
18:40 Look, we think that -- first of all, we're very pleased that we're able to grow our margins in an environment where revenue decline sequentially, you don't see that very often. So – and we're also very pleased that we're finally seeing distillate flow through our COGS and closer to spot prices. But maybe are still a little bit lower than what we reported, but not meaningfully in a way that we would point to that having huge impact of margin going forward.
19:08 We've talked a little bit about automation. We think we can save upwards of about one million dollars a year of cost savings due to that automation at today's current run rates. So that would add upwards of about three hundred basis points on our current revenue run rate. So, we think forty percent plus is reasonable, whether we get there in Q4 will depend on where revenue shakes out. Again, we have a revenues accelerated from Q3. So I think our internal target in any case is forty percent plus and we'll just see how much higher we can keep pushing it Mike.
Unidentified Analyst
19:47 That's perfect. All right. Thanks very much and congrats on the quarter again.
Niel Marotta
19:51 Thanks, Mike. Appreciate it.
Operator
19:53 Thank you. [Operator Instructions] And at time Mr. Marotta, we have no further questions, sir.
Niel Marotta
20:11 Okay. Well, thank you everyone for attending the call. We're going to get back to work and hopefully we'll see some of you at the LIFT conference in Toronto later this week. We look forward to speaking to all of you again in the spring when we report our Q4 and fiscal twenty twenty one year end results. So thanks everybody.
Operator
20:27 Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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