Recently, Cannabis Daily has worked to up its game in the area of financial reporting by consistently digging into the financial performance of a select 50 companies that we track by virtue of either market capitalization or ongoing revenue generation.

Indiva Ltd., is on the smaller side but the company recently popped up on our screens, having recently started commercial shipments.  

In our review we found that although still carrying a health bank account, the product margins were ­not just low, they were negative.  Of further concern was that the company appeared to be burning through a lot of cash; so we decided to check in.

Unlike a few cannabis industry CEO’s I’ve encountered or approached, Mr. Marotta was humble and approachable, returned my inquiry and answered all my questions.  The answers provided offered some explanation and some reassurance that the problems are acknowledged and as was the case with manufacturing pre-rolls, that there is a learning curve involved in starting anything new.  “When we started, we were at hundreds per day, now we’re at thousands”, said Marrotta.

Based on what was related to me on the call, delays associated with getting grow rooms approved an into production – inspections, paperwork, testing and compliance, may have hurt profitability and limited supply of product for sale, but Marotta did not cast blame and has taken it in stride.  This experience appears to have been widely shared in the industry and that was before troubles at CannTrust were reported on.

Indiva stopped renting its premises last quarter and became the owner, which cost the company $5.5 million, or roughly 2/3 of the $8.3 million in investment activities in the first quarter.  With this step done, the company, which trades at a relatively modest 1.2x BVPS,  is ‘bankable and we’re quite focused”, according to Marotta. “We’re not an everything to everyone company”.   Mr. Marotta believes, as do a number of his industry colleagues, that with the existing licenses and the added tonnage of outdoor product staged to be grown and harvested by the fall of 2020, that margins are vulnerable in the flower space.

I recalled from an Indiva investor presentation I saw about a year ago that described some early outsourcing a licensing deals for Bhang products such as vapes and edibles – products that won’t be available until at least mid-October of 2019, when the so-called “Cannabis 2.0” phase of Canada’s legalization process, namely the regulations governing these types of cannabis products, goes into effect.   Bhang chocolates have developed quite a positive reputation in the U.S. and the sale of these products, presumably without the attractive packaging seen in American markets, may help to cushion Indiva from any supply glut or pricing revisions.   As Indiva’s sales are only in Ontario, Marotta has his eye on the Quebec market and chocolate may provide the impetus and the way in.  “If we did not speak to Quebec about dry flower, they would not want to talk to us about chocolate”.  Moreover, as the other products such as tinctures, gel caps etc. roll out, his expectation is that the company will move from being 100% in the sale of flower to about 90% in downstream products.

As the cannabis arms race in North American proceeds and companies invest in scaling up their cultivation and processing operations, Indiva appears committed to smaller scale grow operations in favor of a more focused approach of manufacturing and selling of niche products with greater profitability.  In fact, Marotta predicts a coming wave of profitability among cannabis producers as the promise of new and varied delivery systems for THC, CBD or both enter the marketplace.   Additional learning curves, regulatory hurdles and unforeseen conditions may still be in store, if history is any guide.  If the market has shown us anything, producing and distributing cannabis on an industrial scale, at least in Canada, is not as easy as it appears on a spreadsheet.  Ontario, where Indiva grows and sells, and Quebec, where the company wants to go, have had their own unique and ongoing challenges relating to distribution.

My biggest fear as it relates to any company dependent on the two largest cannabis markets in Canada is that because of the extended delay in providing product in sufficient quantity in locations where it is convenient to access, much of the promised upside may be lost for a time as consumers returned to (or never left) their previous (tax-free) underground economy sources.  News headlines in Toronto were filled with the exploits of a chain of illicit pot shops still in operation 10 months after legalization but years before there will be sufficient retail coverage of the area.  The tactics used to shut down these shops were described as “Whac-a-mole” [sic].  Perhaps the best way to get more conversion to legal sources of supply will be to pursue a strategy much like Indiva’s; entice buyers with products such as chocolate that doesn’t have the earthy taste like your college roommate’s pot brownies.

We left our discussion with the possibility of a follow-up on-site visit some time in the fall, as we approach Cannabis 2.0.

Note:  This interview was conducted over a phone with poor audio quality, so a precis of the discussion, rather than a transcription is provided.

The information and opinions presented here are that of the author and do not represent the thoughts and opinions of this website.  The analyst does not own and does not represent any of the companies listed in this article and receives no compensation from any party mentioned in this article. Readers are urged to do their own research and due diligence and should seek advice from an independent financial advisor before making any financial investment.

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