Indiva Limited

Thank you, operator. Welcome everyone.

Thank you for joining us this morning to discuss Indiva’s financial results for the first quarter ended March 31, 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 our Risk Factors section of the quarterly MD&A and other public disclosure documents available on Indiva’s SEDAR profile. We’re pleased to report record first quarter financial results, for our quarter ended March 31, 2022 including strong year-over-year growth in revenue and gross profit.

Indiva expanded its distribution and recreational channels, all 13 provinces and territories and continues to distribute nationally through medical partners, including medical cannabis by shoppers and other medics. Indiva's market share in the adult rec channel remained robust in the first quarter as per Hifyre data, Indiva continues to lead the edibles category, with 34% market share.

Wana Gummies and Bhang Chocolate continue to lead their respective subcategories, despite the entrance of several new products and SKUs, particularly in the gummies subcategory. Product ranking in Q1 2022 showed six of the top 10 edible SKUs are produced by Indiva.

Indiva introduced its new consumer brand Indiva Life at the 2022 Lift & Co. Expo in Toronto last weekend.

Initial cannabis products to be launched under the Indiva Life brand will include edibles, extracts and pre-rolls, all of which have been received preliminary acceptance from provincial wholesalers. Namely, new Indiva Life products include Double-Stuffed Vanilla Cookies, Double Stuffed Fudge Cookies as well as Wild Cherry THC Lozenges and Lemon THC Lozenges, which will be available in three unique multipack sizes.

We're very excited to bring these new products to market in June and July, which represents the hard work from our in-house innovation and production team. Looking back at Q1 2022 highlights; we expanded our distribution to all 13 provinces and territories.

Wana Quick Midnight Berry launched in Ontario, BC and Alberta and has since expanded to nine provinces and territories, making Midnight Berry one of the top-selling CBN products in the country. We also introduced two additional Wana Gummy flavors nationally, including Lemon Cream and Island Punch.

Indiva launched Bhang THC Toffee and Salt Milk Chocolate in BC, and we successfully launched Jewels cannabis tarts, which are perfect for micro dosing. We launched two flavors of Jewels in Ontario, Strawberry and Raspberry one to one and have now expanded distribution to five provinces and territories.

Further deliveries are expected in Q2 to Alberta and other provincial wholesalers. Indiva launched a new craft cultivar called Platinum Jelly by Stinky Greens under the Artisans Batch brand and finally, the OCS accepted four Gron Pearl gummie SKU listings with initial deliveries expected in July 2022.

The response from consumers at Lift & Co to our uninfused pro gummy samples has been overwhelmingly positive. Turning to events subsequent to quarter end; we signed an exclusive licensing and manufacturing agreement with Dime Industries.

The agreement has a five-year term, which dramatically renews for three additional five-year terms. Indiva will launch Dime's 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 vape -- Dime premium vape products and the potential to add meaningful profitable net revenue given the vape categories up roughly three times as large as the edible category in Canada. Indiva was granted a research license from Health Canada, which will allow the company to conduct sensory evaluation trials on site of Medicaid samples.

This license will help accelerate and perfect our in-house innovation. Artisan Badge Sour Glue, my Purplefarm was awarded Best in Grow by Cannabis NB, and Indiva launched additional SKUs subsequent to quarter end, including Wana Passion Fruit and Artisan Batch Mimosa Live Rosin.

Indiva continues to receive strong interest in new product and SKU offerings from provincial wholesalers. In the most recent OCS protocol, Indiva submitted 42 new SKUs for consideration for listing including Gron Pearl Gummies and Pips candy-coated chocolate, Dime Vapes, Indiva Life edibles, extracts and pre-rolls as well as new Artisan Batch flower and pre-roll SKUs.

Looking forward, the company expects that net revenue in Q2 will be higher sequentially, driven by new product introductions and continued strength in our core products. In the second half of the year, the company expects robust sequential and year-over-year growth given the introduction of several new products and SKUs, including Pearls Gummies, Pips candy-coded chocolates, Dime industry vape products as well as new Indiva Life branded products.

2022 is shaping up to be Indiva's best year, yes. We expect record net revenue for the full fiscal year of 2022 and margin improvement driven by 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 especially our sales and marketing team for the amazing work representing Indiva at the most recent Lift & Co Conference in Toronto. 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.

Thank you, Neil. I will review Indiva financial performance for fiscal Q1 ended March 31, 2022.

Gross revenue in the first quarter grew 41% year-over-year and declined sequentially 6% to $9.7 million. Net revenue grew 44% year-over-year and declined 5% sequentially to $8.95 million in the quarter, driven mainly by higher sales of edible products.

The strong year-over-year growth was driven by the introduction of new edible SKUs into the recreational market. Overall, edibles represented 95% of net revenue in Q1.

In Q1 '22, Indiva sold products containing 54.3 million milligrams of distillate, the active ingredient and edible products, which represents a 10% decrease when compared to the 60.4 million milligrams and products sold in Q4 2022 -- sorry, 2.51% and an 84% increase compared to 29.4 million milligrams sold in Q1 2021. The sequential decline was a function of lower sales due to seasonality and mix shift away from multipack SKUs.

Gross profit before fair value adjustments and impairments was $2.7 million in Q1 2022, an increase of 126% year-over-year. Operational gross margins, defined as gross margin before fair value adjustments and impairments increased to 30% versus 19% in Q1 2021 and declined slightly from 31.7% in Q4 2021.

Margins declined sequentially in the first quarter from Q4 due to additional labor costs and processing, higher shipping costs, lower overhead absorption on goods sold in the quarter and some returns of products related to past contract manufacturing agreement. The company expects margins to improve in the second half of 2022 as new automation for production and package incomes online.

Operating expenses decreased 14% sequentially, representing 39.2% of net revenue versus 43% in Q4 2021 and 35.8% in Q1 2021. Operating expenses declined due to lower general and admin costs, including lower professional fees and lower research and development costs.

offset by higher marketing costs and sales commissions. Adjusted EBITDA improved sequentially in Q1 2022 to a loss of $0.33 million versus a loss of $0.49 million in Q4 2021 due to lower sales and margins, offset by lower operating expenses.

Q1 2022 improved versus a loss of $0.51 million in Q1 2021, driven by higher sales and improved margins. Comprehensive loss was $3 million and included onetime expenses and noncash charges for impairments on inventory and equipment totaling $1.1 million.

Excluding these charges, comprehensive loss declined to $2 million or $0.01 per share versus a loss of $2.3 million in Q4 2021 and $1.5 million in Q1 2021. Turning to the balance sheet.

Cash balance at the end of the quarter was $2.4 million and working capital stood at $2.7 million, primarily as a result of lower inventories on hand at the end of the quarter and in the money convertible debentures being included in current liabilities.

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

Good morning, and thanks for taking my question and congrats on the Q1 results as well. First question, I just want to ask on the edibles category, which continues to see some new entrants.

Just wondering how pricing is holding up for your Wana products in market. In the past, maybe you're able to offset some of the competitive pressures by upping the cannabinoid concentration per package, do you feel like you want to make some pricing pressure this year if we continue to see new entrants?

And how is that pricing held up so far this year?

Thanks, Andrew. We haven't faced any direct pricing pressure, let's say, on Wana.

I think we've seen some lower-priced entrants, actually quite a few lower priced -- more value-priced products coming to the gummy category, and they have taken some share, let's say, the incremental growth in the category, a disproportionate amount of share. So I don't know if I would call that directly pricing pressure on Wana.

We're not getting any feedback really from any of the provincial wholesalers or customers or clients that we should be lowering price. But I think you are seeing more low-priced entrants.

I think rather than respond by lowering the price on wane, I think our response is kind of baked in the cake with the introduction of Brew and Pearls, which will come in at a lower price point for a variety of reasons. So I think that's how we'll hit that and probably see our market share hopefully climb begin in the second half of the year, Andrew.

Great. Next question on Indiva Life.

Great to see you begin to develop some of your own edibles brand in the market, looking forward to seeing that launch. Just want to dig into maybe some of the strategy behind Indiva Life and where you might take this brand and what kind of product categories you might go after under this brand in the future?

Would you take this to the gummies and chocolate areas of the edible market? Or would you be worried about some cannabinization of your own premium Wana and Gron products?

And then secondly, how are you looking to position the Indiva Life? Is that going to be more of a premium offering or more of a value-orientated brand?

Yes. Great question.

Thanks, Andrew. So taking the second one first, I would describe Indiva Life as more of a mainstream brand, right, where Wana was more of a premium product.

In terms of the categories -- and I would use Artisan Batch as another example, right? So Artisan Batch should be a more premium flower product and anything we may launch under Indiva Life.

Currently, on the slate, we have -- obviously, we have the 2 cookie SKUs have received preliminary acceptance. We're really excited about those.

I think Indiva Life generally will be geared towards initially what we innovate in-house, right? So whether it's the two cookies that we've described or the lozenge products, which will qualify as an extract rather than an edible and thus allow us to go well past the 10-milligram limit for those that don't pay as much attention to the prices we do, extracts can have up to 1,000 milligrams in one container.

So for instance, our 50-pack of lozenges load 500 milligrams in that container, that's a very disruptive product, we think. So the extra we've got edibles.

We certainly are looking at launching chocolate products. We don't think they'll compete with than directly.

We think it's probably more of a value product in a has a ways to go to catch up with the long history and brand that Bhang represents. And I would say the same for Wana.

But we would absolutely consider launching gummies under the Indiva Life brand. Each one of our deals has different nuances to it in terms of where we can and can't compete.

So that's really where the innovation comes in is trying to find ways to bring products to market. That don't violate any of our agreements, but also fill, let's say, white space in the market or areas where the products that we're currently launching you don't want to compete against our own product.

So your question is dead on. Beyond that, I think we're also looking at pre-rolls.

For those who don't know, we do have automation in place for pre-rolls so we can make upwards of 10,000 per-rolls a day. And our pre-roll business used to be quite robust some time ago.

We couldn't keep up with the demand and lost a lot of share, but we certainly have all the capabilities in the world to bring more priors to market. And now we're seeing bulk flower pricing come down to a point where we think there's a fair shot of actually having some economics in this business despite all the price pressure we see on flower.

So anyway, that's probably a long-winded answer to your question, Andrew, but I think that addresses all the different categories we're hoping to play in with in Indiva Life.

Very helpful. And then maybe a final question here, if I may.

Just on the gross margins, which softened again quarter-over-quarter on an adjusted basis. One of the new items referenced is maybe having an impact with shipping costs?

I don't believe we've seen that reference before. Obviously, we're seeing that across the economy, but just wondering how much of an impact is that actually was within the quarter, presuming that's probably continuing into Q2 and expectation for that to remain elevated into the latter bit of this year?

Yes, it was about a 1% impact on the margin from where we would have expected it to be. We are looking at ways to minimize the shipping cost by consolidation and looking at ultimate transport companies to see if there's ways to bring that down a little bit.

But I think you're right, we'll probably see that for a little while longer, hopefully, not too long. There were a couple of other items.

We did have some additional labor costs were going another 100 bps impact on the gross margin around over labeling for some packaging corrections and then we did have another 100 bps related to product return from contract manufacturing, which would have been more of a one-time related cost that we won't see in the future.

Great. Well, thanks for taking my questions and congrats on the Q1 results.

Thank you.

Good morning, Niel. Good morning, Jennifer.

Thanks for taking my call and congrats for having your sales hold in on a seasonally soft quarter. This is really well done.

I first wanted to ask about sort of the outlook on product and look on product launches and then get into some housekeeping. But first on your sort of nearest-term launches of new brand in Gron.

I'm wondering how you would describe the new addressable -- or I guess how your addressable markets within edibles might expand or new customers you might be addressing with the product offered under the Gron brand.

Right. Well, so good question.

So Gron as a brand has been around for a little while, maybe not as long as some of the other brands that we've put together on our house of brands here. But I would call Gron a little bit more of a value-priced product for the Canadian market.

So the price point will be -- I wouldn't say at the very low end, and that's not sort of the intent per se, but we're just able to price these products at a more affordable level. But the Gron products themselves I think maybe SKU a little bit younger.

And really their focus is on the minor cannabinoids. So if you look, for instance, at one of the gummies that was really well received at the show is the flavor is Blue Raslburry which sort of has a taste a little bit like a blue freeze.

So maybe more of a younger flavor, let's say, somewhere in the 20s versus somebody in their 60s. And in that particular SKU, by way of example, Michael, has 30 milligrams of CBG in it and 10 milligrams of THC.

So that's a pretty healthy dose of CBG compared to anything else that's out there. So another example would be the BlackBerry Lemonade SKU, which is a 1:1:1.

And as far as I'm aware, I think Midnight Berry might be the only example of sort of a multi-cannabinoid SKU. So that one will be THC, CBD and CBN.

So another, let's say, sweet gummy, for instance. And then maybe other flavors include Pomegranate, which is one of our best sellers and one of the most popular flavors as well as sour green apple.

Again, maybe a flavor that skews somebody that's sort of a young adult rather than an older and we've got 3 more SKUs that have received preliminary acceptance as well from provincial wholesalers. So we're really excited.

I think just pausing there for 1 second, to have 7 SKUs either permanently temporary or preliminary accepted. Ontario without having sold a unit yet, I think, speaks to our reputation.

So we're very pleased about that. But I would say on the Pips side of thing under Gron, the candy-coated chocolates, again, something that probably SKUs more towards a younger audience, a young adult and also the minor cannabinoids aren't forgotten in those SKUs either, Michael.

All right. That's really helpful.

Now sort of for your later in the year launch of vapes under the Dime Industries brand, I wonder if you could give us an update on how you are tooling up your facilities for that the production of those dates. If you could quantify any investments that you have or will have to make in tooling up this production line?

And if you could describe sort of the supply chain health for things like carts and batteries and packaging, just checking if you're on track for that the third quarter launch?

Sure. Yes.

I mean as far as supply chain goes, one of the benefits of working with a partner like Dime is that we don't need to test out new suppliers. We can kind of piggyback to their orders.

So we feel like that time line is run in hand. In terms of tooling of our facility, the incremental CapEx is sort of almost shockingly low.

It's a little and the equipment that we do require, it's a bit of a retrofit to our capsule line, Michael, and that equipment has been ordered and I think it will be delivered in the next few weeks. So it's -- I would say everything is on track.

In terms of the formulations, obviously, we have to make sure that everything is compliant and that work is well in hand as well. So we feel pretty good about being able to launch in Q3.

And we also did have a few SKUs accepted on a preliminary basis in Ontario as well. So we try not to get too specific about preliminary acceptance, but the vast majority of our SKUs were accepted, and there's always some tweaks before you get to that final acceptance, but we feel pretty good about where we stand with time and all the other products as well.

That's terrific. I'm glad there's appetite on the side of the OCS for these.

And you broke up a little bit with the incremental CapEx. Did you say 450,000 or 150,000 [ph].

No, no. It's under 50,000.

So...

Under 50,000.

Yes, it's very, very low, yes. So, I think part of that is -- I mean, look, we're a fully built facility.

We have equipment. We make capsules pretty much every day.

And so that's a skill set we already have. And again, working with a partner like Dime, we don't have to kind of reinvent the wheel.

We can piggyback off their SOPs and how they do things to make sure we maintain their quality.

Okay. Great.

And if you indulge just one more. Looking at marketing and sales this quarter, they seem to escalate rather sharply.

I wonder if we could -- if this is a level that we should expect going forward this year? Or should it level out to more historical levels?

Yes. So the marketing line is -- we really -- maybe we should consider doing this, and we can talk about it off-line, but breaking out the sales commission component from the marketing component.

So obviously, we work with an outside sales agency. We have a limited what I would describe as internal marching army for sales, although we have wonderful people in our key accounts that deal with the bigger chains and the smaller ones as well.

So when sales grow, you're actually going to get some increase in commissions that fall into that line. On the marketing side, we're trying to keep it sort of 5% of revenue or lower and we're trying to sweat those dollars as best we can.

So I wouldn't necessarily guide you to a lower number per se, Michael, but we take a look at what we spend there very closely and effectiveness really matters. We need to see sales grow as faster, faster than that marketing spend.

So that if anything, that's what I would guide you to, if we're not seeing a commensurate rise in revenue, and I fully expect we will, and we'll have to dial that back just naturally.

Okay. Well, if there's no other questions, I'll thank everybody for attending today.

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

Have a great day.