Indiva Limited

Good morning, ladies and gentlemen, and welcome to the NDVA Limited Q1 2023 Earnings Release Conference Call. At this time, all lines are in lesson only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May 16, 2023. I would now like to turn the conference over to Neil Marotta, CEO. Please go ahead.

Thank you, operator. Welcome, everyone. Thank you for joining us this morning to discuss Sandeepa's financial results for the first quarter ended March 31, 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. Some 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 in the risk factors section of the quarterly MD&A and other public disclosure documents available on Adiba's CEDA profile. We're pleased to report financial results, including improved gross margins, record gross profit, and positive adjusted EBITDA for our first quarter, ended March 31, 2023. Results in the first quarter were primarily driven by new product introduction and higher gross margins and lower operating costs, as we benefited from the implementation of automation and the processing and production of edibles. Indiva's market share in the adult rec channel remained robust in the first quarter. As per hard-fired data, Indiva continues to lead the edibles category with 27% market share, and holds the number one market share position in aggregate in gummies, chocolate, and baked goods subcategories. In the gummies subcategory, Indiva has 27.3% market share, with Juana Sour Gummies having 19.6% share of gummy sales, and Pearls by Groom Gummies has grown to 7.7% share in gummy sales, despite not yet being available in Alberta during the period. In chocolate, Indiva held 34.8% total subcategory share, as Beck continued to lead the chocolate category with 32.6% subcategory share. In big goods, Endiva led the big goods category with 61% share, driven by the success of Endiva Life double-stuffed cookies. Looking closer at high-fire market trade data for the first quarter of 2023 and focusing on data from BC, Alberta, Ontario, Manitoba, and Saskatchewan, the elbows category increased sequentially from the fourth quarter by 4% to 67 million in retail sales and increased by 26% compared to Q1 2022. First quarter results and highlights include Pearl's Gummies continued to perform well. The Blue Raspberry flavor was the number one selling gummy by Unix in Ontario in the first quarter. Pearl's Gummies were the number seven best selling edible by dollars as per HIFR data. Pearls Gummies did ship to Alberta in the month of April, and we're very excited to finally bring Pearls to this important market. Ndiva began supplying products to Tilbury's medical platform, including Pearls by Gruen, Juana, Sour Gummies, Bang Chocolate, as well as Ndiva Double Love Stuffed Sandwich Cookies. Ndiva signed an exclusive agreement with Valiant Distribution Cannabis, a subsidiary of Canada Cabana, for the distribution of its products in the province of Saskatchewan. This agreement will substantially reduce shipping costs to Saskatchewan stores. Finally, as per the press release dated March 14th, 2023, the company received an application from Health Canada of its determination that certain of its lozenges have been improperly classified as an extract rather than edible under applicable cannabis regulations. Health Canada ordered to give it a cease production and sale lozenges, and we did so immediately. Subsequently, we have right-sized our production team as a direct result of this Health Canada order. And to event subsequent quarter end, Initial deliveries of Pearl's Macroon gummies were made to the province of Alberta. Four new flavors were delivered, including blackberry lemonade, blue raspberry, pomegranate, and sour apple. The company expects meaningful revenue contribution from Pearl's gummies in this important market. We've also introduced three new monogummy SKUs, including citrus persitiva, wild raspberry indica, and pineapple passion fruit. We also introduced three new chocolates into the Alberta market under the Endiva 1432 brand. namely dark chocolate, cookies and cream, and caramel dark chocolate. We've recently proposed 18 new products for listing in its recent submission to the OCS, the majority of which were derived from new in-house innovation. I want to take a minute to talk about edibles regulations in Canada. We continue to advocate for regulatory change with respect to the rules around per package THC limits relating to edibles. While the edible category in Canada continues to grow at a faster pace than the overall cannabis market, The edible category remains stunted as a percentage of the total market primarily due to the 10 milligram per package THC limit. Data from mature U.S. markets where the higher per package THC limit exists show the edibles category represents two to three times the relative size of the Canadian edibles category. Please note that we're not necessarily advocating for higher THC per serving. In fact, most mature markets in U.S. limit the per serving THC limits to 10 milligrams just as we do in Canada. but they do allow for 100 milligrams or more of THC in total per package. In Canada, we remain limited to 10 milligrams per package. Limiting the total THC per package to 10 milligrams, as we do in Canada, has created prohibitively costly product for most consumers, and in particular for medical patients that often require much more than 10 milligrams at a time for proper dosing. Make no mistake, this is a public safety issue, and consumers cannot purchase safe, affordable product in the legal market they turn to the illicit market where products contain upwards of 500 milligrams of THC. The products are intentionally packaged to look like recognizable mainstream confectionary products, and where the packaging is flimsy and easily opened by a miner. Health Canada published a public advisory on May 10th, which I would encourage everyone to read, addressing what they call copycat edibles. I quote, are packaged to look like popular brands of candy, snacks, or other food products that are typically sold at grocery stores, gas stations, and corner stores. Clearly, the illicit market has stepped in to fill the potency void created by the 10 milligram limit on edibles and has done so with packaging that looks confusingly similar and familiar to mainstream construction products. The 10 milligram per package TTC limit actually creates this public safety risk where there need not be one. Indeed, we have sold 25 million packs of edibles in the last three years, and we've never received one single complaint that a miner has unintentionally ingested one of our edible products. Most adults even admit to struggling to open their own packaging, as we use child-resistant packaging that is resealable for products with multiple servings. Robust demand for ingestible extracts, which, as per Health Canada's orders, will exit the market completely in Canada after May 31st, demonstrate the power of consumer demand for higher potency and hence lower price per milligram product. Another analogy is to imagine if wine and spirit companies were restricted to selling their product in minibar bottles. Imagine only being able to purchase wine in no larger than a two and a half ounce bottle or spirits at only two ounces at a time. Clearly, these limits would be cost prohibited to the consumer, and again, would result in unintended consequences. One more time, we're not necessarily advocating for higher per serving potency per se, rather simply allowing more servings per package. Allowing, for example, up to 10 milligram servings per package, as is commonplace in U.S. markets, will have the effect of lowering the price per milligram of THC to the consumer. And ultimately, this is the only way we can sustainably shift demand from the illicit market to the legal market and drive out the dangerous and illegal copycat edibles. The legal market makes high-quality edibles with safer packaging, consistent, accurate, and even dosing with superior flavor. But we're unable to fully compete with the illicit market on price simply because of regulation, which while perhaps well-intended, is betraying the very goal of the Cannabis Act, namely to improve public safety and take money out of the hands of criminals. The time is now for change, and with the Cannabis Act currently under review, we will continue to advocate for an increase in total milligrams of THC per packet of edibles on behalf of all licensed producers, retailers, preventive wholesalers, consumers, and medical patients. With that, I'd like to thank all of Indiva's employees, especially our dedicated staff at our facility in London, Ontario, for their continued hard work and resilience in these times of regulatory uncertainty. Thank you, and I'm sure Canada's enthusiasts everywhere in Canada thank you, too. I'll now turn it over to NDEVA's Chief Financial Officer, Jennifer Welsh, to review the financial results and greater details.

Thank you, Neil. I'll review NDEVA's financial performance for Fiscal Q1 ended March 31, 2023. Gross revenue in the first quarter increased 7% year-over-year and grew 1% sequentially to $10.4 million. Net revenue increased 6% year-over-year and 1% sequentially at $9.4 million in the quarter, driven mainly by new product introductions. Overall, edibles represented 78% of net revenue in Q1 2023, primarily due to higher sales of ingestible extracts in the quarter. In Q1 2023, Indiva sold products containing 112 million milligrams of cannabinoids, the active ingredient in edible products. It represents a 37% increase when compared to the 82 million milligrams in products sold in Q4 2022 and a 105% increase compared to 55 million milligrams sold in Q1 2022. The sequential increase was a function of higher sales and a mixed shift for its products with higher average cannabinoid content. Gross profit before fair value adjustments, impairments, and one-time items improved year-over-year, and sequentially to a record $3.1 million worth 34% of net revenue versus 29% in Q4 2022 and 30% in Q1 2022. Improvement in gross margin percentage was due to the implementation of fully commissioned automation as well as product mix. Operating expenses in the quarter decreased 17% sequentially and declined 8% year over year representing 34% of net revenue versus 42% in Q4 2022 and 39% in Q1 2022. Operating expenses declined sequentially primarily due to lower marketing and sales costs. Adjusted EBITDA improved sequentially in Q1 2023 to a profit of $415,000 versus a loss of $526,000 in Q4 2022 and a loss of $378,000 in Q1 2022 due to higher sales, higher growth margins, and lower operating expenses. Comprehensive net loss of $2.3 million included one-time gains and non-cash charges for impairments of inventory and property plates and equipment totaling $900,000. Excluding these amounts, comprehensive loss declined to $1.3 million versus an adjusted loss of $2.4 million in Q4 2022 and $1.9 million in Q1 2022. The cash balance at quarter end was $2.8 million. Looking forward, the company expects Q2 2023 net revenue to improve compared to the same period last year. However, there is a risk that net revenue may decline sequentially as sales of new products scale to offset lower sales of ingestible extracts as a result of Health Canada's recent order to stop production and sale of these products. Sequential growth in net revenue is expected to resume in the second half of 2023, driven by the introduction of new products in the third and fourth quarters, resulting primarily from in-house innovation. Growth margins are expected to continue to trend higher and benefit from the implementation of automation in the production and packaging of edible products.

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

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to flip through your question, please press the star followed by the two. Again, to ask a question, press star 1. Your first question comes from Andrew Semple from Echelon Capital. Please go ahead.

Hi there. Good morning. Thanks for taking my question. First off, I just want to maybe ask for a little bit of additional details on the new products that get submitted to Ontario for listing. Are these new SKUs within existing brands, or are these new formats and new products altogether?

Yeah, thanks, Andrew. So these are – it's a combination of both, but primarily these will be under a new brand that we're not going to speak too much about just yet. But suffice to say, this will leverage our low-cost producer status. And the best I can tell you is that some of them are in edibles, some of them are in inhalables, but they're all products similar to what we make already. I don't mean to be cryptic, but we want to give folks an idea of what we're doing without necessarily broadcasting specifics for competitive reasons.

Understood. Appreciate the color there. And to the outlook pointing to gross margins trending higher, I'm just wondering whether that's, you know, trending higher between now and year-end or whether you have to expect each quarter to show step-ups. You know, how much lumpiness might there be to that trend? I'm just wondering on that point, you know, if you're expecting potentially sales to decline in Q2, whether there might be some operating leverage on the gross margin line there.

Yeah, and I think that's why we're not being specific about, you know, giving you a range, you know, per quarter looking forward. We'd love to have that kind of visibility on our business, Andrew. But, you know, we are really starting to see the benefits of the automation, and we did have a nice tick up in margins sequentially on sales that were, even though we thought they'd be down in Q1, were actually slightly up on sequential places by about 1%. So, you know, we're not expecting any huge drop off in sales. We're just trying to highlight a risk just to be thorough. But, you know, similarly with margins, one area, and I'm happy to turn this over to Jen, too, but, you know, the margins on the ingestible extracts were very good. You know, some of the best margins of any of the products we made. And part of the reason for that, too, is that there's no royalty involved. It was an enhanced innovation. So that next shift will hurt somewhat. But I still think the trend for the rest of the year will be higher in margins, particularly once we get into Q3 and Q4.

That's helpful. Appreciate that additional colour. And while we're on the topic of ingestible extracts, if you're able to, would you be able to provide a breakout of maybe the sales and EBITDA attributed to that product format within the first quarter? I'm just trying to, you know, fine tune estimates as it relates to Health Canada's decision on that product.

Sorry, so I think the ingestible extracts, the revenue in the third quarter is about 1.3, 1.4 million. So about 15, pardon me, it was about 14% of sales, I remember it. We're not going to give an exact gross margin and gross profit guidance on there, but you can certainly assume that the gross margins are higher than the corporate average. So it was meaningful, but, you know, again, we think we have great products coming up. I'll be able to replace that revenue and that profit.

Great. And then maybe one last quick one for me. Just when in Q2 did the first shipments of group products in Alberta first begin?

Yeah, so they just hit stores literally on Friday, to my knowledge. So this is all very recent. I think we shipped it out about two weeks ago, and there's always a bit of a lag between it landing and getting out to stores. But people should be able to find them in store in Alberta this week. And, you know, we'd certainly expect the distribution to broaden significantly across the province over the next few weeks or so.

Thank you very much, Neil, for taking my questions. Congrats on the positive EBITDA in the quarter, and I'll get back into queue.

Thanks, Andrew.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Neil, there are no questions at this time. Please proceed with your closing remarks.

Okay, thank you, everyone, for attending the call. We're going to get back to work and look forward to speaking to you all again when we release our second quarter results in mid-August. Thanks, everybody.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your line.