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spk09: Ladies and gentlemen, thank you for standing by, and welcome to the MetaPharm Labs Third Quarter Financial Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please limit yourself to two questions before returning to the queue. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Laura Lepore, Vice President, Investor Relations. Please go ahead, Madam.
spk01: Laura Lepore Thank you, Operator, and good morning, everyone. With me on the call today are Pat McCutcheon, Chief Executive Officer, Bobby Kwan, Chief Financial Officer, Warren Everett, Chief Executive Officer, Asia Pacific, and Keith Strong, our President. Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of Medifarm Labs and all of its representatives on this call. The statements made on this call will contain forward-looking information that involves risks and certainties, including those introduced by the COVID-19 pandemic. Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in many farm labs filings with the Canadian Provincial Securities Regulators, which are available on CDAR website at cdar.com. Now, with that, it's my pleasure to turn the call over to Pat.
spk07: Thanks, Laura, and good morning, everyone. I'll cut to the chase. Financially, Q3 was disappointing. On today's call, we will discuss the reasons why and the actions we are taking as a result of the quarterly performance. The good news in the quarter is that even though we were at a very early stage, I was pleased with the progress we've made since our last call in transitioning our company to serve global medical and wellness markets as a sophisticated pharmaceutical company. The recent partnership with Stata, a European leader in generic drugs, health and wellness, is arguably one of our most significant achievements to date and puts us in a unique category within the global cannabis industry. The deal, which took over a year to complete, is a clear illustration of what's possible for our differentiated GMP platform. We expect our Stata partnership, along with more than 30 other customer contracts in eight countries, to begin generating revenue growth early in 2021. This will justify the investments we've made to establish our pharma capabilities. In fact, I can say with certainty that Stata would not have become a partner of ManyPharm Labs without executing on our GMP certification in Canada and Australia. First, to our results. So far in our history, our revenue has come from the sale of bulk concentrates of resin and distillate, and the vast majority being distributed in Canada. As you know, we enjoyed early success in the B2B bulk extracts market when cannabis was first legalized in Canada. We purposely used revenues from this business to fund the startup of our higher-value pharmaceutical manufacturing activities and deployment of our international distribution strategy. Over the past three quarters, we have seen this segment of the Canadian cannabis industry change significantly. This is being influenced by a number of new players and many of the major LPs that have transitioned to selling bulk to compensate for the lack of growth in their core business model. Demand for our finished formulated products from the retail channel grew over 30% in the quarter. However, early industry projections on expansion of resale outlets and new cannabis 2.0 products have not been realized in the timeline that the market expected. As a result, there has been a steep decline in demand for bulk concentrates and pricing pressure brought on by acute oversupply in the market combined with an immediate associated price drop. This caused our revenues to decline to just under $5 million in the quarter. As a result, on much lower revenue and in spite of cost containment measures, adjusted EBITDA was negative for this quarter. Our pharma future is ready to take off, but we are not relying on the bulk concentrate market to bridge the gap. While we remain opportunistic, it is no longer attractive from a margin perspective and is currently not economically viable. In hindsight, the cost actions we took were not significant enough or deployed fast enough to align with the bulk market's downturn. Some of the Q3 expense reductions happened too late in the quarter to make a difference and will have greater impact in Q4. As a result, we are executing on a number of additional cost containment strategies to protect our earnings. Accordingly, over the past few weeks, and with the full support of our board, we commenced a stem-to-stern operational review to identify areas for improvement. Number one, we are actively enhancing our financial management to better align costs with the timing of sales generation. This means expense reduction is top priority. In Q3, continue to search for opportunities to right-size our business. This is in addition to the actions taken earlier this year that include employee reductions, a 10% decrease in executive management salaries, the elimination of discretionary expenditures, and the company-wide cost containment measures. As a result, subsequent to the quarter, we further reduced FTEs throughout our upper management ranks while also reducing inventory, ongoing service costs, and reducing the need for capital project consultants. There will be a cumulative effect from these actions, which means more impact in Q4 as our costs continue to drop. We expect annualized cost savings of over $3 million. I want to be clear here. I'm confident that we will not negatively impact our ability to serve customers, meet future market demand, or slow our path to global pharmaceutical and medical markets. To inform our cost and efficiency improvement actions, we tapped into SAP to target opportunities for process streamlining, and we will make the most of our increased visibility that the system affords as we move forward. SAP implementation costs themselves will also fall away in January 2021. It is a required element to build trust and confidence in major pharma contracts, existing and new. The central aspect of our expense drivers is procurement of cannabis inputs. we've arranged for much more attractive supply costs. This will lead to improved margin performance beginning early in 2021. Number two, we will continue to shift our focus from B2B wholesale contracts to contract manufacturing of finished formulated goods. Currently, under our traditional white label and CMO services, we are producing a total of 22 vape SKUs. In addition to these evolving contracts, we are now targeting more unique opportunities like the one that saw us provide a manufacturing partner with the labeling and distribution of 46,000 units of soft chews just in last month. Number three, and in recognition that we can't cut our way to growth, we've recently made significant enhancements to our sales and marketing strategies. In fairness, I think the team has done a great job in securing excellent customer contracts that will produce meaningful revenue in our target global medical and Canadian markets. May Q3, we consolidated sales and marketing under the leadership of our new VP of Sales. We are intensifying focus on our core future medical, wellness, and adult use markets. Across these target markets, our priority will be to produce finished goods We have gained traction with this approach with finished formulated product sales growing to comprise 57% of Q3 revenue, up from 16% in Q2 2020. Commercialized SKUs grew 13% and now include tincture bottles, topicals, isolates, capsules, sublingual sprays, and various formulations for edibles and beverages. As mentioned earlier, our sales team is currently driving a 30% quarter-over-quarter growth in our Canadian adult use provincial sales. I expect to see this base grow as we introduce more SKUs and enter Quebec for the first time in Q4. This investment in adult sales marketing initiatives came in mid-Q3 2020. We're already seeing great success. For example, our 510 bait cartridges are top sellers in BC and two of the top 15 SKUs in Ontario. Our Medifarm flagship oil, CBD50, was the third highest selling oil SKU in Canada. In late October, we were first to market with a consumer-sized 99% pure CBD isolate crystal through the launch of our Labs Cannabis CBD isolate, which targets a broad range of consumers and medical patients. This is an incredibly popular product in jurisdictions like Colorado and California, and currently we are seeing the same excitement here in Canada. Let me talk about our own branded B2C products. Becoming more efficient serial producers of differentiated labs cannabis products is critically important and we have the capabilities to do this. Our product roadmap specifies that we will introduce our next labs cannabis formulations in early 2021. Stay tuned. This is a good start and we expect more positive growth in these segments. Geographically, we will drive sales in Canada and abroad in a more aggressive fashion. Turning to our global medical pharmaceutical strategy. We have promising opportunities for near-term growth, starting with our Stata pharmaceutical partnership announced in late Q3. Under this agreement, Medifarm Labs will export GMP-certified finished product and cannabis API to Germany beginning in February 2021 with a plan to expand to other newly approved European markets over time. This is the first of its kind agreement for the cannabis industry and is a door opener for MediPharm Labs with other pharma leaders looking to enter the medical cannabis space. Germany is a rapidly developing market for medical cannabis. Stata is an exceptional partner and one of the first major pharma companies to enter the cannabis market. Given the extent of its pharmaceutically trained field team, market penetration across 120 different countries, and reputation in the European medical community earned over decades, we are well positioned to build our presence in the German and European markets. Key to our international strategy is Australia. Under Warren Everett's leadership, we continue to ramp up our customer base from Medifarm Labs Australia. Of the 30-plus sales agreements we now have in place around the world, 12 have been secured by our Asia-Pacific team. Our decision to deploy our balance sheet to acquire 100% Medifarm Labs Australia positions us to take full advantage of these opportunities and with full control. I'll now ask Warren to update you on his progress. Warren?
spk08: Thanks, Pat. I'm very excited to be here with the team on this call. This has been a very exciting, productive year for Medifarm Labs Australia. We are now executing in our state-of-the-art GMP platform. Executing in Australia has opened many doors for us in the global cannabis market. Our focus has been on cannabis 2.0. This has established us as a key manufacturing partner to support the emerging industry. During Q3, we received an evolution to our GMP certification from the TGA. This amendment allows us to manufacture cannabis API, which includes resin, extract and isolates. We then turned this API into the medical cannabis products such as oral liquids, soft gel capsules and oil. Only two companies in Australia possess this level of licence. The timing of the update could not be better. This year, the TGA is approving patient applications for medical cannabis at a record rate. We expected the approved patient population to reach 70,000 by the end of 2020. We need to revise that estimate upwards as the number was achieved by the end of September. Month-over-month growth has been phenomenal. With the introduction of more clinics and a simpler prescription process, we should only see the bell curve from here. The TGA is focused on changing legislation to provide CBD products over the counter in 2021. This has sparked interest from many large pharma companies for interest in our services. We've also been front and centre in driving changes in the current regulatory framework within Australia. Patients want quality products they can trust, and legislators are looking to make it possible for us to thrive as a domestic pharma company. The current lobbying to the TGA will likely see a ban on imported non-GMP medical products. This ban has substantially increased the value of our GMP license and our share of the market. This mirrors the lives of New Zealand and Germany. Overall, Australia fits well within our corporate strategy because it has a clear regulatory regime. Australia represents the highest level of opportunity for international export of products. These clear regulations mean that our facility in Australia can work seamlessly with our Canadian operations to serve the domestic market, Asia, Latin America, and Europe. It's a powerful GMP-based platform with a combination that allows us with huge flexibility. From a production perspective, Medifarm Labs is now fully licensed by both the ODC and the TGA, As Pat mentioned, our Asia-Pacific team has been extremely active in securing customers that align well to our overall strategy. The White Label Supply Agreement with Sunco Green Pharmaceuticals in late October being the latest example. This is the 12th customer agreement reached by our Australian team. Looking ahead, we have clear ambitions that go well beyond Australia and New Zealand. We have deliberate growth and facility optimisation plans for 2021 that are fully capable of executing on. In my estimation, Medifarm Labs Australia is destined to be a significant contributor to the corporate value going forward. Now back to Pat.
spk07: Thank you, Warren, for that update. No question, we're all very excited for what's on the horizon for Australia. In addition, we've formed our first customer alliances in the Latin American medical cannabis market with CanFarm Peru and Accelerate Brazil. Like you, I'm eager to see sales ramp, and everything is aligning well for 2021. and make that comment with confidence based on detailed discussions I've had with our customers that have reaffirmed agreed-upon production schedules. I'll return with a few closing comments, but now I'd like to provide a financial summary. Bobby, take it away.
spk10: Thanks, Pat, and good morning, everyone. As you just heard, we are disappointed with our performance in Q3, particularly after reporting a marked improvement in Q2. However, our results continue to reflect mainly Canadian cannabis market conditions in wholesale. Q3 revenue declined quarter over quarter by $9 million, and it was primarily driven by lower volumes in bulk oil, along with continued price compression to the tune of approximately 12%. There are, however, encouraging developments, namely sales of finished goods products grew by 23% quarter over quarter, We made our first sale of isolates with 99% purity in the quarter. Sales in Australia grew by 15%, and we signed additional sales agreements internationally, most notably with Stata, a leading pharma company in Europe, as well as Accelerate in Brazil and CanFarm in Peru. Gross profit was significantly impacted by the combined effects of lower pricing and lower volumes insufficient to cover fixed costs, as well as a non-cash inventory write-down of $6.3 million and $1.5 million write-down related to non-current deposits on a few CapEx equipment. Total operating expenses, excluding share-based comp, were marginally higher in Q3 compared to Q2 by $200,000. Lower project consultancy and personnel-related costs were offset by lower claims under Canada Emergency Wage Subsidy Program, lower foreign exchange translation gain, and a small provision, approximately $500,000 for estimated credit loss. As a result, operating income, including share-based comp, is a loss of $16.5 million, and adjusted EBITDA is a loss of $7.2 million. Turning to a few highlights on the balance sheet, our balance sheet remains strong with cash balance at $36.5 million at the end of the quarter. As mentioned earlier, reflecting the continuing market conditions with oversupply of products along with pricing compression, we took a non-cash write-down on our inventory by $6.3 million, resulting in a net position of $31.8 million. Looking ahead, we see increasing opportunity to take advantage of low-cost flour inputs coming to the market, the lowest we've seen to date. However, in light of the current market demand and supply dynamics, we are remaining selective and disciplined in our flour procurement efforts. We will purchase only what is required to fulfill our commitments as we look to preserve cash and maintain a healthy balance sheet. As we've said since the beginning of this year, cash preservation and liquidity have become front and center objectives for the business. While we took action to achieve cost savings to date this year, we will continue to pursue and accelerate additional cost reduction initiatives. These actions, combined with our cash and strong balance sheet, will also enable us to execute on initiatives that drive profitable growth going forward. Now back to Pat for closing comments.
spk07: Thanks, Bobby. As you know, Bobby is leaving us at the end of the month, and I would like to express my appreciation for his contributions over the past year. We have now initiated a search for his replacement, and in the meantime, we will be well served by our current finance team. I think it's important to note that Many Prime Labs has done much to upgrade our corporate governance over the past few months. The additions of Shelley Martin, retired CEO of Nestle Canada, Chris Taves, COO of BMO Capital Markets, and Chris Hallock, the former president of Janssen Canada, Johnson & Johnson, are making a difference to the quality of our board deliberations and decision-making. Clearly, Manyfarm Labs is not the only company in the cannabis industry that has had to adjust and evolve. The pace of the market development has been much slower than anticipated, and the global pandemic has definitely taken its toll. This is not an excuse. It is a reality, and one that we are addressing through the cost mitigation and active sales and marketing improvements currently underway. Once again, let me be crisp and clear on this point. We are aggressively cutting costs in order to accelerate our path back to profitability. It is important to mention that our global pharmaceutical strategy takes time and significant allocation of quality and regulatory resources not seen among our Canadian LP peers. When looking at our B2C business in Canada, it is fair to compare Medifarm Labs to their peers in the industry. However, when comparing our international pharmaceutical strategy, we must be benchmarked against other global pharmaceutical API manufacturers. This is what truly differentiates Medifarm Labs and where the future growth opportunities exist. This has been our vision from day one and is the right one to satisfy the global medical cannabis market demands. Looking ahead, I remain confident in our future. Our new customer relationships across the globe will produce revenue growth starting early 2021. The signing of the first Tier 1 pharmaceutical company to enter the medical cannabis industry is no small feat and with years in the making. Our now wholly owned Australian subsidiary is giving a long sought after multi-jurisdictional GMP supply chain to unlock new sales agreements and serve new customers in Europe and the South Pacific. Other major PICS member nation markets are opening up, such as in LATAM and the U.S. These are two of the largest jurisdictions in the world that will provide further growth opportunities and expand our Augusto markets given our TGA GMP certifications. The future of medical cannabis is bright, and Medifarm Labs is well positioned to be a prominent player in the evolving industry. Our long-term vision and strategy of GMP-certified platforms will create value for shareholders. This quarter's performance is no reflection of the future potential of Medifarm Labs, rather has served as a lesson in operational efficiencies on our journey back to profitability. Thank you for the ongoing support and the understanding of the requirements and time it takes to bring higher quality products to the global medical consumer. Although GMP quality is not required to serve the domestic adult use marketplace, it is the defining characteristic that sets Medifarm Labs apart from the rest. Now, we would like to answer your questions. Operator, could you please open the lines to our callers?
spk09: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. The first question comes from David Kadeko of ATV Capital Markets. Your line is open.
spk04: Hi, good morning. Thanks for taking my questions. I just want to dig a little deeper here, Pat and Tim, with respect to your independent operational review that you made reference to. So I'm just wondering if you can comment who's actually undertaking the review, but also, and maybe more importantly, is there a strategic component to this as well? Thank you.
spk07: Good morning, David, and thanks much for that first question. Yeah, so the operational review, we've engaged a group of pharmaceutical experts that are looking to take a deeper dive into our management systems and our efficiency structuring, as well as our cost structuring. We're looking at any real opportunity we can actually position to accelerate back to profitability. I'll maybe just leave with those two first opening comments, and Keith can add a couple of details on the logistics side.
spk03: Thanks, Pat. Thanks, David. Just as far as the review goes, just as Pat mentioned, we're really leaving no stone unturned. You know, I think looking at the results, there's obviously a lot of opportunity. So a lot of it is around processes and procedures. So that group that we've brought in is really focused bringing in some operational strength that they have from the pharmaceutical industry in a way that they can look at, you know, some of our activities and how we do that. So we've just launched SAP in July, which is a very sophisticated system, and then now we want to make sure we're getting the best use out of it through things like demand planning and scheduling and whatnot. So lots of opportunity there, and we're excited to kind of see that continue and be implemented in Q4.
spk04: Okay, thanks. That's helpful. Thanks for that color. My second question goes back to Stato, which obviously for Medifarm, I mean, this is a very important deal and also for the whole industry. I just want to know, just to level set here, you mentioned distribution, the deal part of it really coming to fruition, and I think you said February of 2021. When can we, as the analyst community, expect to see revenue kind of hitting your top line here with Stata? And also, if I can take that question a bit further, I know Germany is kind of the first country you're interested in. When we've seen a number of other LPs, in fact, report over the last week or so, one in particular, likely the largest in the whole sector, reported Germany in particular actually decreased in sales just due to increased competition. in that country. So I'm wondering how you feel about the German market in general and, again, just with Stata more generally. Thanks.
spk07: Yeah, thanks for that question, David. As you mentioned in the earnings script and on numerous different media events now, Stata has been our most fantastic achievement in terms of new customer relationships. It's definitely a signal that the Canadian market cannabis companies or a cannabis company overall globally can actually now sign deals when it proves they can execute on a GMP platform with a Tier 1 pharmaceutical company. So it's been a fantastic relationship. It's been a long time in the making. As we mentioned, we're expecting to see revenue from this in mid-Q1. I mentioned on the earnings call I said February, so that's what we're expecting to see the products start to move in Germany. There's a couple of little points that I would add on to with regards to kind of next steps and how that is going to look at the rest of Europe and the growing opportunity. Thanks, Beth.
spk03: Yeah, I think a couple parts that you touched on there, David. Other countries, other opportunities. As you know, Stata operates in 120 countries around the world. So we are looking right now as we get closer to launch in Germany, we're looking at other countries where we can duplicate the model and get some more runway out of these years that they'll be launching. So as far as getting more out there into other countries, especially in Europe, Once we have it within the EU, it is a little bit easier to move around within. So there is a lot of opportunity there, and we'll keep everyone updated kind of as the news comes. As far as the German market goes and some signals of decline because competition, I think – The pie there is getting probably split up a little bit more, as you mentioned, for some of the other suppliers, but I think that's why it is so important to work with someone like Stata. Whereas some producers might see increased competition as a threat, by us partnering with one of the largest pharmaceutical sales powers in the region, it really mitigates that risk from us and us trying to go alone.
spk04: Thank you, very helpful. I'll hop back in the queue.
spk03: Thanks so much, David.
spk09: Your next question comes from Aaron Gray of Alliance Global Partners. Your line is open.
spk05: Hi, good morning, and thanks for the question. First off, for me, I just want to kind of come to the Canadian market, particularly on the fitness formulations. We saw some increase quarter over quarter. Just looking at the vape market overall, you know, you mentioned some highlights with D.C. and Ontario. You'll be getting into Quebec. Just wanted to know in terms of what you're seeing right now in terms of the vape competition, it looks like we're seeing some pricing pressure, you know, within the markets. Wanted to know how you feel about the pricing of your own kind of fitness formulation products that you have with your white label partners and how you feel like that's evolving and how it might impact the gross margin profile. Thanks.
spk07: Good morning, Aaron. Thanks so much for the call. I'll mention a couple of things, and I'll actually pass on to Keith as well for a couple of added color logistics. Definitely with regards to the baby market, we've been doing well, as you mentioned in the earnings call, in terms of how competitive a couple of our SKUs are in terms of volume of sales across the country. We feel very strongly, and this is exactly how we kind of repositioned the balance of our revenue for Q3, with almost a 57% actual representation of our revenue up from 16 in Q2, base being a significant portion of this. We've also seen just over 30% growth quarter-over-quarter, as you mentioned. Now, this is across all the SKUs for our provincial distribution, as well as we've just signed Quebec recently. But I'll actually pass over to Keith for just a couple more details, specifically on the Babes SKUs in particular.
spk03: Thanks, Pat. Good to hear from you, Eric. So pricing on base, I think it's really, we are remaining very competitive. As Pat mentioned in the call, we have some of the best-selling base use either through our partners that are out there. So not everything that a consumer is looking for is based on price. We have a great reputation of a good quality product as well. When it comes to pricing, we do work really closely with the provinces. I think When you look at the Canadian adult use market, one of our main goals is eliminating or reducing the illicit market. And pricing is part of that strategy, so we're taking part in that strategy. So whereas right now we might not see as great of margins, We are reducing the illicit market, which will grow the market in the adult use Canadian products. And then we'll see those margins get better as we bring our cogs down mainly input material. So the flour that we're working on now is bought at a higher price than the flour that we would be buying in the future. So that's a great opportunity. opportunity for us. The great thing about us working kind of in the CMO B2B sphere is we do get a lot of exposure of volumes and pricing. So rather than us be making a decision just at the table with just a province, we have good intel kind of what's going out where through some of the most major distributors and producers here in in Canada as we work with them. So we're really relying on some of that information and intel to make sure that we're making the most informed choices when we finalize some of these pricing strategies.
spk05: Thanks for that, Cora. That's helpful. And then just second question for me, I'll kind of continue on, you know, with the gross margin. So, you know, it looks like gross profit, you know, even if we adjust for the two, you know, write downs to add up to about, you know, $7.8 million would have still been, you know, negative in the quarter. You know, you talked about, you know, buying flour now that will be cheaper than what you currently have, you know, with an inventory. So can you kind of talk about kind of, you know, the path to kind of improving the gross margin profile? I know historically you haven't given, you know, a ton between the different you know, top line segments and margin profiles. But as you kind of transition away, you know, from the bulk extract market and kind of into more of the finished formulation, how do I have to think about, you know, the margin profile over the near to medium term? Thanks.
spk07: Yeah, thanks, Aaron. I'll just start mentioning a couple of things, and then I'm going to pass over to Bobby, actually. But a couple of the elements that we did mention in the call, the significant reduction of price of input supply material that will be available for the Canadian domestic market distribution for our products. will be one influencing factor. And another really comes from the point we mentioned about our operational review and looking at efficiencies in our systems and ensuring they're actually moving forward in terms of higher numbers of production in a shorter amount of time and identifying all of those organizational management system efficiencies that we need to now to increase the margin base. I will pass over to Bobby for a little added color in terms of the gross margins.
spk10: Thanks, Pat, and thanks, Erin, for that question. I would just build on what Pat just said. I think, you know, looking forward, without giving any, obviously, firm sort of guidance, sort of the drivers for some improvements to be expected going forward are mainly in reverse order that Pat mentioned. One, certainly our ongoing efforts with respect to some efficiencies and process sort of reviews that was referenced earlier, all those little bits will add up. There's a bit of that. The biggest driver will be twofold. One, sort of the input material that hopefully going forward, even when we need some of those selected procurements, will certainly be, again, as I noted in my comments, reflective of the current market conditions of the input materials, which is, again, at a very low point, which is great in terms of input cost. The second bit will be hopefully our continuing sort of evolution in terms of our portfolio and the product mix. And certainly, if you look to 2021 and, you know, sort of on the way out, the international side of our portfolio, as I've mentioned a number of times, will ramp up and will continue to ramp up. And with that, sort of the positive effect of that sort of shift in mix, Aaron, alone, should be positive for our margin structure.
spk05: Okay, great. Thanks, Zach. I'll jump back in the queue.
spk09: Your next question comes from Scott Fortune. Your line is open.
spk02: Can I follow up a little bit on Australia? Can you quantify what you're doing there? And then you mentioned kind of the international mix. How should we look at the cadence or the percentage of revenues as we look out through 2021 coming into the international side of things?
spk07: Yeah, Scott, it must be very early from where you're calling in from this morning. Thanks for calling in. I'm actually going to push over to Warren to give a little bit of colour on the Australian business and the number of contracts and how it's now increasing, and then I can finish off with Harvard and look at the percentage mix of the kind of representation of revenue over the next year. Warren, do you want to answer that element, please?
spk08: Yeah, thanks, Scott. So I guess in terms of the first couple of quarters of revenue as a company in Australia, we've obviously only been able to focus in terms of actual transactions to deliver product out to the end of the quarter to companies actually in Australia. And that's obviously because the aspect of actually having a license here in Australia gives us the opportunity to get the product registered in other countries like New Zealand, Germany and Europe. But that regulatory pathway, even with the GMP licence, does take some time. Now, the good news is we've been working on that actually behind the scenes for many months now. So we're late stage in our evolution of getting approved from the Ministry of Health in New Zealand. We're late stage of getting our products approved to be registered into Bee Farm in Germany. So we're looking at the early quarters of next year will be very productive in terms of transacting the actual product delivery from Australian facility into those international markets. There's quite a big portion of mix, obviously. It depends on the maturity of the market. New Zealand is an immature market, but obviously companies entering that market space don't have the opportunity to actually execute on delivering products to their own jurisdiction because they need to go through the same challenges and evolutions of building a company like what you have here in Australia. in that sort of 36-month exercise needs to take place in country and so for the next sort of three years there'll be requirements for us to supply those organizations and likewise into europe while the market is evolving emerging and maturing a lot of companies are not necessarily looking to set up capital expenditure or facilities to execute on their business model so even when we look at sort of the question the earlier question around and those markets, do we see competition? The reality is we're still a white label solution. So we're not the likes of Tilray or other companies that potentially actually push their own brand into market. We're a company that actually provides a solution for a company that wants to enter with a brand. So that competition is not necessarily as difficult to navigate when you're a solution provider to multiple different companies.
spk07: Thanks so much, Warren. I'll just add a couple of points, Scott, for your question on the percentages. As you know, we're very conservative in terms of how we position any guidance, but we are very much expecting the international sales to Australia to increase, and it will be anywhere between, let's say, 30% and 40% through 2021 that we'd be very excited to see that growth over the next year.
spk02: Great. I appreciate the color. And then real quick, kind of, you know, with Mexico kind of moving forward, have you guys kind of look at opportunity in Mexico or other countries that you think are coming on board here?
spk07: Yeah, thanks for that question, Scott. I'm just going to pass it over to Steve for a couple of details on our international sales strategy.
spk03: Yeah, I think, you know, exciting in a lot of new jurisdictions as people move toward a medical or legalized market and how we can participate in those. Mexico in particular would be a member of the PICS nation, so they're part of the Pharmaceutical Inspection Co-op, which is the same co-op. that the TGA belongs to, which has given us a GMP license in both Australia and in Canada. So we expect the regulatory authorities in a place like Mexico to look at us under the same lens that the inspectors work under the same guidelines and regulations. So really exciting there. Obviously, you know, new countries are sometimes hard to do business in unless you find the right local partners. But I think, you know, Medifarm has a track record of success in these areas. We've signed agreements, you know, signed agreements in South America where people, you know, sometimes have the same commentary as far as, cracking into those markets. So with contracts and products being registered in places like Brazil and Peru, as more markets open up in Central or South America, there's a massive opportunity there. And then, you know, the expansion in Europe as we've signed agreements in places like the UK, Denmark, and, of course, Germany. So Mexico, but really all new markets we see as a massive opportunity because it will come with heavy regulation, and that's one of our strong suits.
spk07: I'll add another little point to this. One of the things, too, you've seen recently is the launch of our clinical trial portfolio, our new trial, and that's now going to be looking at dialysis patients taking different cannabinoid products with different delivery mechanisms. When we look at our clinical trial development and actually bringing on new countries to actually be involved in it, which gives us then the ability to work those regulatory bodies, I also have a system where we will have data that will be able to be used in a number of different countries. And so we are targeting Latin American countries as opportunities to be involved in some of our clinical trial portfolios, which we feel will accelerate commercial opportunities down the path.
spk02: Great. I appreciate the color. I will jump back in the queue.
spk09: Thanks, Todd. Again, if you would like to ask a question or re-queue for additional questions, please press star then the number one on your telephone keypad. The next question comes from Adam Buckham of Scotiabank. Your line is open.
spk06: Thanks for taking my questions. Okay. I wanted to get back to the Stata contract. Are you guys able to give a little more color around the resources that are being dedicated by Stata to it? Maybe the number of sales staff or something along those lines. It's already been highlighted a few times, but obviously the German market is getting increasingly competitive for cannabis. So it would be helpful to understand how Stata is going to apply resources to help drive sales.
spk07: Hey, how are you doing, Adam? Thanks for that question. I'll start by just saying we have obviously been a bit conservative in terms of details on the launching sales and marketing strategy and the sales team itself. But I am going to pass over to Keith to give a little bit more color in terms of how involved they are from the logistics side and actually how dynamic and broad a team that actually now is engaged directly with Medifarm to execute on this deal in early 2021. Thanks, Pat.
spk03: Yeah, Stata is obviously our most important customer considering the size of the company, the term of the deal as far as timelines go, and the opportunity to expand it. I think that the importance of the relationship is also mirrored on the Stata side. They have applied significant resources to the project to make it a success. I think, you know, with what that has done, especially in the last five years, is very tactful. And when they do do something, they do it with conviction. So I think we can be quite confident in how that will roll out as far as like. some of the additional color on specifics of, you know, sales strategy. That's a little bit harder to get into, obviously, because we don't want to hinder our ability to remain competitive. But there is, you know, a massive concentrated effort on both sides.
spk06: Okay, that's great. Thanks. So, my second question is likely to warn. If we think about Q3, We touched on that regulatory bottlenecks have slowed the revenue profile of new contracts in new jurisdictions. If we think about Australia, were there any bottlenecks that provided a barrier to growth in Q3? Or was this sort of, I think it was 12% growth that was highlighted. Is that the sort of cadence to be thinking about as these new contracts sort of roll on for you guys? Because I think it was highlighted that 2021 would likely be the big ramp, right, for all the contracts that have been signed, right?
spk08: Yeah, sorry. Yeah, so I guess the reality is in terms of you look at the evolution, if you go back through the series of different press releases, the first lot of materials that we distributed into Canada were actually manufactured in Canada and distributed to Australia and then sold into the domestic market. And obviously we could do that because of our duplicate certifications on the GMP in Canada. messaging that I had earlier where I talked about the fact that the Australian market actually is going to become quite significantly stricter going forward in relation to products coming in internationally. Australia's been quite free in terms of the how products... ..market in Australia... domestic body, the therapeutic school administration is actually going to close the borders on anything that's non-GMP, which is going to make it significantly difficult for Canadian companies and other companies throughout Europe who don't have that GMP certification under MRA to get products into Australia. And then the second lot of products in this quarter, which were distributed and manufactured locally. So we're sort of evolving in our business model because we're maturing and we have the actual capability now in our full licensing to actually execute on products locally. Obviously, with products, API input material coming from our parents in Canada. The evolution should continue to ramp. Obviously, the numbers that I presented there was the fact that up until... Domestically, we've rejected 70,000 patients throughout this year, 2020. We hit that number in September. And you'll look at the sort of doubling month-on-month of patient acceptance through the prescription process, which is a special access scheme. But next year specifically, the big ramp, in 2021 is that over the counter process so cbd specifically is going to be descheduled and that's going to be over the counter so you'll be able to go into your pharmacy and you'll be able to talk to the pharmacists and be able to access uh cbd products now The domestic market companies, pharmaceutical and nutraceutical companies, which have large market presence here, are all vying to have the first lots of CWP products over the counter as that B scheduling would happen in Q1. And obviously, they need a GMP platform, which is the minimum requirement for manufacturing of that product to actually enter the market. You know, the types of... Opportunities those companies are looking for are the likes of your sort of tincture bottles, soft gel capsules, and obviously we have the capability to execute on that. So the domestic market here is ramping significantly, and we continue to service capture market share with companies who are entering this space. The bigger cannabis companies overseas, a lot of them are not looking at necessarily setting up capital expenditure or execution capability here in cultivation or manufacturing. They're actually setting up sales arms in the domestic market to bring their products to Australian patients. Now, with the closing of the border under GMP, they also will require a manufacturing partner to create those products under GMP in Australia. They can't be importing them from Canada unless they have that certification, which a lot of them do not. So there's a big ramp as well in terms of the Canadian cannabis companies entering the market, looking for domestic manufacturing partners to grow their market share here locally as well.
spk06: Very great. Thanks. Thank you.
spk10: Thanks so much, Adam.
spk09: Again, if you would like to ask a question or requeue for additional questions, press star then the number one on your telephone keypad. That was our final question for today. I will now return the call to Mr. Patrick McCutcheon for closing comments.
spk07: Thanks so much, Ian, for that. Once again, let me be crystal clear on this point. We are aggressively cutting costs in order to accelerate our path back to profitability. Profitability that we expect to return to in 2021. It's important to mention that our global pharmaceutical strategy takes time and significant allocation of quality regulatory resources not seen among our other LP peers, which we are often inappropriately compared to. Our new customer relationships across the globe will produce revenue growth starting in early 2021. Real revenue growth. Opportunities that are not available even to the vast majority of our industry peers. The signing of this first tier one pharmaceutical company to enter the medical cannabis industry was no small feat and was years in the making. It was an incredible achievement of our team. We couldn't be more proud of this. Although GMP quality is not required to serve the domestic adult use markets in Canada, it is a defining characteristic that sets Smitty Farms Labs apart from the rest. And it truly is the core reason why we have now been able to sign such major, significant pharmaceutical deals such as Stata that immediately gives us an overnight competitive advantage in Europe. And in this fundamental core reason, we will continue to sign and execute on deals of this magnitude in science going forward. Thank you very much.
spk09: Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.
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