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spk01: Good day. Thank you for standing by and welcome to the MetaFarm Labs first quarter 2021 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'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Laura LaPorte, Vice President of Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. With me on the call today are Keith Strong, President and Interim Chief Executive Officer, and Greg Hunter, Chief Financial Officer. 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 the call. The statements made on this call today will contain forward-looking information that involves risks and uncertainties, 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 projections 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 MediFarm Labs' filings with the Canadian and provincial securities regulators, which are available on the CDAR website at cdar.com. With that, I would now like to turn the call over to Keith Strong.
spk04: Thanks, Laura, and good morning, everyone. Our first quarter included several important business developments that set the stage for a very productive future. Today, I will speak to the advancements made in Q1, which were achieved in the context of ongoing industry challenges related to COVID-19. Greg will then discuss Q1 results, including continued progress with cost containment that narrowed our operating loss. And then I will close with final observations on our business agenda and outlook. First, since we operate Medifarm to create long-lasting shareholder value, I would like to take a few additional minutes to remind you of our objective and strategic priorities, how we perform against those priorities, how we expect our accomplishments to translate into longer-term financial results, why we are fundamentally different than others in the industry, and why that is good for our shareholders. From the outset, Medifarm's objective was to become a leading pharmaceutical company specializing in cannabis. Taking charge in an emerging multi-billion dollar global pharmaceutical, medical and wellness cannabis market by providing multiple products and turnkey solutions to a broad customer base across multiple jurisdictions. To achieve this objective, we have focused on delivering against our top priorities. One, execute on a global platform purpose-built to pharmaceutical specifications or good manufacturing practices. to establish ourselves as a go-to provider for pharmaceutical companies. Two, secure pharmaceutical licenses globally to pioneer multiple regulatory pathways and access new markets, including the U.S. Three, develop an international presence as a manufacturer of innovative formulations, turnkey brands, and distribution solutions for multiple customers globally. And four, build a profitable, sustainable business here domestically in Canada to drive our innovation and R&D to support our longer-term objectives. So, how have we performed? To begin, our accomplishments are many. I'm very pleased to say we are in a fundamentally different place than when we were first licensed in 2018. And we're in a better position today compared to others in the industry. First, we have created a unique platform to achieve GMP certification in both Canada and Australia that qualifies us to work with big pharma and other companies in over 50 countries around the world. This is a significant achievement. It puts us in a best-in-class position with pharma companies now expanding into the medical cannabis space. While some in the capital markets continue to assess Medifarm as if it is a traditional extraction-only company, I want to be clear that we are inherently and fundamentally different than all others in the cannabis space. This is by design. The depth and breadth of our team, technology, expertise and licenses and global reach have not been replicated. And for shareholders, this is a very good thing as the still to come pharmaceutical opportunity is significant and wide open to us. Second, we have established a portfolio of pharmaceutical licenses that, again, has not been replicated. Critically important, we continue to expand our license portfolio to become even more specialized in producing pharmaceutical cannabis products and participating in cannabis drug discovery clinical trials. This expansion will further strengthen our competitive advantage and make us a natural partner for pharmaceutical companies and clinical trial groups entering into the space. Longer term, we believe that traditionally approved pharmaceutical drugs containing cannabis will represent a larger, more sustainable, and profitable revenue opportunity in multiple jurisdictions, especially when compared to recreational CBD or hemp segments. Even in the U.S., we are coming at the market from a position of strength. Although cannabis is not federally legal in the US, the pharmaceutical products we expect to produce over time will not be restricted by cannabis regulations. Instead, as a pharmaceutical company, our products will be assessed and then approved by the US FDA and other health regulators in the jurisdictions we choose to work in. This is a significant difference and advantage over the jurisdiction or state-specific programs that we see in place today. Third, we have quickly expanded our international presence and customer base to over 30 partnerships and nine countries across four continents. Our customer base has grown rapidly. We expect this baseline of customers to support and add to our performance over the balance of this year and create tangible momentum for 2022. Many of these agreements are yet to mobilize as we complete international product registrations. As these pathways open, we are confident it will lead to significant revenue opportunities. International sales volumes will also help mitigate the impact of challenging conditions in Canada as a result of COVID-19 restrictions. We have already seen this benefit in Q1. In delivering against our priority, the breakthrough achievement is our first pharma partnership with Stata. a top five European generic pharmaceutical company. This exclusive agreement was a pivotal moment for the industry and a huge validation of our business model. It represents our first entry into a growing European pharma market, beginning with Germany. As early as next year, Stata and Medifarm are committed to entering into additional European jurisdictions, which is a very exciting prospect. However, I do want to emphasize that Germany alone is an extremely attractive market. It stands as the world's leading country for medical cannabis with more than 320,000 cannabis prescriptions approved in 2020. This is more advanced medical market than any other and is said to be growing at around 30% annually. In about two thirds of medical cases, healthcare insurance reimburses German patients using cannabis today. With the Stata partnership and others, we expect to dominate this market. In the seven months since signing with Stata, there has been a significant ramp up in large pharma companies entering the cannabis industry. Because of our reputation and capabilities, many of these companies are looking to Medifarm to provide a true turnkey solution to launching medical and wellness products. These projects create a near-term opportunity while also preparing for a long-term opportunity to produce future cannabis-based, clinically proven, FDA-registered and approved drugs. This is a great development for shareholders and means our outlook for growth as a specialist pharma company is bullish. On the product side, we have created an initial suite of brands and formulations in various formats and delivery methods. This diversifies our revenue stream and provides the greatest potential in our domestic Canadian market compared to us selling only bulk formulated oils. Our domestic presence serves as a proof of concept for our ability to provide end-to-end development, manufacturing, and distribution solutions for multinational pharma, CPG, and innovative healthcare and wellness brand companies. The slow-to-start Canadian adult use market has proven to be difficult, and we have responded by launching new branded product formulations. We also reduced headcount costs by 30% over the last three quarters, embedding new disciplines into finance and operations, and maximizing the management insight available through our SAP system to improve margin, product, and contract manufacturing performance. As we discussed last quarter, 2021 is expected to be a crossover year, as Medifarm evolves into a multi-country operator with a highly diversified, high-quality product portfolio and a larger customer base. Now turning to our first quarter results. At the top of the list of Q1 accomplishments is our first sales in Germany, which added to total international revenue of $2.1 million. This is a great start, but it's only the start. While top line declined slightly from last quarter, revenue from international sales increased over 600%, reflecting initial late quarter exports to only a small number of customers in Germany, Australia, and Peru. An important related development, and one that is on our priority list, is that the Australian Therapeutic Goods Administration recently approved our application to export GMP certified cannabis oil products to our private label partners in Germany. including Stata and Ajax Pharma. This is another advantage of having GMP certification, which will become increasingly important as medical markets expand worldwide and regulators insist on quality standardization. These authorizations and initial deliveries demonstrate that we can leverage our existing infrastructure in Australia and Canada without having to add domestic assets in every region we serve. Our already operating and easily expandable manufacturing platform remains a significant economic advantage for us as we pursue our global ambitions. Scaling up versus scaling out is preferred from efficiency, profitability, and regulatory viewpoints. Recently, I took part in a panel discussion hosted by Alliance Global Partners. And the consensus among panelists, and rightfully so, is that the entrance of big pharma will play an outsized role in encouraging German physicians to prescribe cannabis. As one of the more prominent members of large pharma, we couldn't have selected a better partner than Stata to trailblaze the emerging European pharmaceutical cannabis market. With our help, Stata has the means to catalyze the market by expanding available product formats while they move to educate physicians and pharmacists on the efficacy of cannabis treatments. One of the reasons we are confident 2021 will be a better year is the ramp up of this and other agreements. As I mentioned, we now have more than 30 committed supply agreements in nine countries compared to roughly half of that in only two countries a year ago. Our strategy of targeted international expansion to medical and wellness customers is gaining traction, and that will lead to higher sales this year. We're also very pleased to complete our first shipments of premium, high-THC medical cannabis oil to CanFarm Peru. This was our first sale in Latin America, and more will follow pending final product registrations covering our supply to other customers, including Accelerate Brazil. In Australia, we are actively working with our customers on registrations to launch over-the-counter CBD products. Over-the-counter legislation passed in February, and we believe OTC represents a high growth opportunity for us, especially since manufacturers and suppliers of these CBD products must be GMP certified. To prepare for this growth, our Canadian operations recently made deliveries of GMP CBD isolate to Medifarm Labs Australia with more volume to follow in Q2. Our ambitions are clearly global in nature, but we are also committed to driving growth in Canada's medical wellness and adult use markets as part of our priority of building a profitable, sustainable domestic business. As mentioned, the domestic industry has faced certain difficulties, and these continued in January and February as the province of Ontario reduced inventory in response to pandemic lockdowns affecting retail sales. This did have an impact on our Q1 revenue. However, the good news is we still make progress in launching new branded products in late March with positive initial demand signals. I'm particularly pleased with consumer response to our first CBN-rich formula. One of only two available in Canada, it sold out at retail within just a few weeks of launch. We immediately used our robust manufacturing platform to respond to this demand and quickly restocked in each of our provincial listings. More Medifarm branded offerings will follow as we look to meet consumer wellness needs with innovative products such as THC-free oil, additional minor cannabinoid tinctures, and available CBD and CBN. As an important footnote, we announced the supply agreement in early March with the province of Quebec, under which we will supply Quebec's growing medical and wellness market this year. I'm happy to report that the first Quebec shipments will leave our facility this week. For the remainder of 2021, expect to see us expand our Canadian B2C business while also benefiting from expanded growth in consumer volumes for products we produce under white-label agreements with some of the country's top licensed producers. Taking together the ramp-up of sales to committed customers' success with new product launches and the supply agreements secured in Q1 illustrate the advantages of GMP certification and our focus on supplying medical and wellness markets as a global provider of pharmaceutical API and finished dose products. We are in a crossover period to our future, a period where the short-term financial results do not reflect the future potential, but they are the yardsticks that we use to measure our progress. It is therefore important to us that we improve earnings even as we pivot to the next stage of our growth. I'll point out that in Q4 2020, we achieved domestic revenues of $5.7 million. If we see the easing of COVID restrictions, we expect to rebound to those levels. This will be in concert with our established baseline of $2 million in international sales in Q1 2021. together depicting a more attractive revenues in the near term. With that, I will now turn the call over to Greg for his report.
spk02: Thanks, Keith, and good morning, everyone.
spk04: I'm pleased to report we made progress in Q1 on our goal to return the business to profitability. While we did see incremental improvements in the quarter, we continue to focus on our priorities to drive growth. The cost containment measures put in place last year and in Q1 are working as we realize a $1.5 million sequential reduction in operating expenses on track to achieve the $3.6 million in annualized savings we discussed last quarter. In addition, our focus on expanding our international reach has proven successful with approximately $2 million of international sales in Q1. We also expanded our international revenue beyond Australia to include both Germany and Peru. As Keith mentioned, in Q1, we experienced headwinds in our domestic business driven by COVID lockdowns and channel inventory reductions with provincial distributors, which caused our overall revenue to decline sequentially. I remain optimistic and excited about our future potential as we continue to focus on expansion in both domestic and international medical and pharmaceutical markets while improving our cost structure and capital deployment. As I said last quarter, as a management team, we are committed to growing our top line and adjusting our cost structure to return Medifarm to profitability. Turning to the P&L performance for the first quarter. Q1 revenues decreased 9% sequentially from $6.1 million in Q4 to $5.5 million in Q1. This was driven by a 40% reduction in domestic sales from $5.7 million to $3.4 million, largely as a result of COVID lockdowns and channel inventory reductions with provincial distributors as mentioned previously. The reduction in domestic revenues was partially offset by international revenues as they increased sequentially from 0.3 million in Q4 to 2.1 million in Q1. The increase was driven by 1.3 million from customers in Germany, 0.4 million incremental revenue from Australia, and a smaller amount from our first shipment to Peru. Gross profit for the quarter was negative 0.7 million versus Q4 gross profit of negative 24.7 million. Q1 gross profit was negative due to the unobserved overhead with lower production volume and because the inventory sold in Q1 was held at net realizable value as a result of our Q4 revaluation. General and administrative expenses in the quarter decreased sequentially from 5.2 million in Q4 $4.0 million in Q1, largely driven by restructuring that was completed in Q4. Marketing and selling expenses of $1.3 million in Q1 remained consistent with Q4 as we continue to focus our sales efforts on both the domestic and international markets. R&D expenses decreased sequentially from $0.6 million in Q4 to $0.4 million in Q1. These expenses will vary as we selectively invest to advance our capabilities and product portfolio. Finance expense increased sequentially from $4.7 million in Q4 to $9.7 million in Q1 as a result of accelerated conversions on the convertible debenture. Adjusted EBITDA for Q1 was negative $6.2 million, largely driven by negative gross margins of $0.7 million and operating expenses of $5.6 million. Adjusted EBITDA improved sequentially from negative $8.8 million in Q4, driven by improved gross margins and reduced expenses. Moving to a few notable items on the balance sheet. Inventory increased from $22.1 million in Q4 to $24.2 million in Q1, primarily driven by inventory additions in Germany to support our German customers, including Stata. Trade and other receivables declined from $29.6 million in Q4 to $27.8 million in Q1, largely driven by collection of the Canadian Emergency Wage Subsidy. As discussed last quarter, there are two customers owning a total of approximately $19 million, including $8.5 million, which is subject to legal proceedings that we have previously disclosed and remain confident in its collection. The remainder of the $19 million is due from a second customer, and we are confident in its collectability. Adjusting for these two customers, trade and other receivables is $8.8 million, which is more in line with our revenue performance. The current tax receivable of $4.5 million is a refund from 2020 that we expect to collect in or before Q3 and will further improve our cash position. Finally, our cash balance on March 31 was $42.1 million, which increased from $19.9 million at December 31. The cash balance increased by $22.2 million, driven by net proceeds of $31.1 million from the previously disclosed bought deal, and was partially offset by $2.6 million payment on our convertible to venture and $6.0 million usage from operating activities. Capital expenditures were modest at approximately $0.3 million as we continue to manage and prioritize select capital investments to expand the business. The cash balance owing on the convertible to venture stood at approximately $3.9 million at the end of March, which is largely to be repaid in Q3. While we've made progress in the quarter by expanding our international presence and revenue, reducing our cost base and managing our capital expenditures, we still have work to return the business to profitability and drive cash flow. With that, I'll turn it back to Keith. Thanks, Craig. Some final thoughts on our outlook and business agenda. At the top of the list is executing efficiently and effectively as we ramp up sales and make better use of our well-established manufacturing capability. The success we saw in international sales in Q1, particularly in Germany, will pave the way to a very exciting future across Europe and keep us top of mind of multiple global pharmaceutical companies entering the market. Activity in Asia-Pacific and Latin America markets will complement our sales potential and make further use of our existing GMP production capacity. We also have a more constructive outlook of the Canadian market due to the broader distribution, diversified sales, and increasing revenue from finished formulated products. This is a result of strong progress made on building our presence in core wellness and pharmaceutical markets. As an example of this growth, our biggest distributor, the Ontario Cannabis Store, has expanded their operating retail footprint to 700 stores, adding 150 stores since mid-March. A Q1 development that was discussed in our last call but is worth repeating is the receipt of our cannabis drug license from Health Canada in February 2021. This enables us to manufacture and supply pharmaceutical prescription drugs that have been classified with a DIN and in turn creates opportunity for us to supply cannabis-based pharmaceutical drugs in APIs for clinical research trials aimed at abbreviated drug applications and novel drug discovery. Later this quarter, we will share an update on exciting progress within our clinical trial portfolio, which we believe will fully establish MediPharm Labs as a pharmaceutical company and open long-term growth opportunities. Not withstanding near-term challenges related to the ongoing pandemic, which I know we all hope will be behind us by Q3 as more Canadians are vaccinated, we do expect to see a stronger back half of 2021, and we will further make adjustments to our cost base as required. Before opening the line to questions, let me update you on the company's current leadership transition. As you know, Greg joined us in February this year. and I took on the role of interim CEO late last year. Over the last three months, Greg has focused on bringing in new senior level talent to the finance team to support our growth going forward. In terms of CEO role, the search is well underway with several strong candidates identified. We will keep you up to date on the transition once a candidate has been confirmed. Overall, Q1 was a productive quarter. marking the startup of sales volumes under important new customer agreements, further global market penetration of our products, and improvement in bottom line performance. 2021 is a year where progress will occur as we gain traction with our priorities and create a Medifarm that I know will deliver tangible value for our customers and shareholders. Having been with Medifarm since day one, I can confidently say that today this company is better positioned than ever to dominate the global cannabis market. Now, operator, can you please open the line to questions from our callers?
spk01: Certainly. At this time, we'd like to take any questions you may have for us. To ask a question, please press star 1 on your telephone keypad. Our first question is from Erin Gray with Alliance Global Partners. Your line is open.
spk04: Good morning. Thanks for the questions. First one for me is on Germany. Let's see the sales start there. We'd love to see if you could provide maybe some additional color in terms of maybe the sell through you're seeing and maybe some of the progress. I know they've got about 30 people, you know, out there in the force. So, how does that kind of help in terms of with physician adoption and how you think that might get accelerated even further, you know, as COVID restrictions come to an end and things start to normalize? Thanks. Thanks, Aaron. Morning. Thanks for joining the call. Yeah, I think we're really excited about Germany, as I mentioned. on the call already, it was our first quarter where we made deliveries into Germany. And most of those deliveries did go kind of in March and even towards the end of March. So a little bit early on some of the trends for us. We've been in market for call it 45 to 60 days depending on the product. But it is pretty encouraging. The status team, as you mentioned, you know, over 30 salespeople. The cannabis business unit there is over 45 people. So they really invested into the program and will be launching additional SKUs. So, you know, some of the more anecdotal signals, such as, you know, launching more SKUs in the coming weeks, obviously is a good sign. And, you know, them investing that much on their side is also a good sign. But we've seen, you know, flow through in the first four weeks kind of as expected and better in a couple of disputes. So really looking forward to shipping them more product in Q2. And that goes for all of our German customers. I mentioned we had two German customers that we delivered to, and we have a few more that we'll be delivering to uh as well in this quarter so uh we see a lot of opportunity now that we've opened that pathway and we have you know the approvals in place it does make it um the follow-on orders a lot easier okay great appreciate that color um and if we speak domestically on canada it looks like you know there might have been some some softness there on the quarter just want to know if you could give some some color on the um formulated products Q over Q, and then things, how might things might have changed, especially with some acquisitions, such as like, you know, Ace Valley used to be working with by campus, and how that might, you know, change things on your end and with your partnerships, and then just any additional color on you can, you know, provide on some of the kind of sales trends you've seen there. Thank you. Yeah, it's a great point, and something that Greg did call out is we did see a soft January and February in relation to the pandemic. In talking with provincial distributors, they were looking to bring their inventory down. So in some cases, it didn't even affect the demand of our product, but the province was not in a position where they wanted to take on more inventory, so they're actually holding less inventory in their warehouses. So that affects our sales. I think that's what's really encouraging is a lot of the provinces have been doing a skew rationalization exercise where they go through and they're actually consolidating different skews that they have in different categories. and they're doing a more mature model of doing a product call. In the recent OCS product call in Q1, we actually added more SKUs than the one that was taken away, so I think that that is a good sign of our products having that strong demand, and as I mentioned, Launching CBN and the CBD 100 were really unique products for us and sold out quickly and we were able to restock quickly. I think we'll really see the performance of those in this quarter, like Q2 that we're in today, with those deliveries going in the March timeframe and some of those retailers not even having that product at the brick and mortar store until April. I think that's good. On the consolidation, I think it's a reoccurring theme that we're going to see all through the rest of this year and even into next year in the Canadian space. Obviously, there's some replication of different assets in our space, and there's a lot of room for that. It's really encouraging for us to see that. You mentioned Eighth Valley. We launched Eighth Valley last base pens and they were, you know, really popular, we did full turnkey solutions for them. So help them with the hardware, we formulated and owned their actual formulations which go into those base pens. So I think, Ken, if you recognize, you know, how great of a product that was, you know, in conjunction with the great job that the Eighth Valley team was doing on marketing and made that acquisition, As far as the ongoing manufacturing goes, we're still manufacturing today for Canopy, and we plan on doing that into the foreseeable future. As many know, Canopy was actually our first long-term agreement back in 2019, so we have a long history of working with the group, and we've seen success in the past in different partnerships we've had with them, so really looking forward to helping them expand that brand. Okay, thanks. Thanks for the call, and I'll jump back in with you.
spk01: Your next question is from David Canegro with ADPB Capital Markets. Your line is open.
spk04: Hi. Good morning, guys. This is actually Frederico, which I mean for Dave. Thanks for taking my question. So I just want to, you know, we know that your strategy is focused on pharmaceuticals, but in light of that, just how should we think about your strategy in the Canadian recreational markets? So, I mean, this is now like second place to international. I'm just trying to understand what the strategy here, given this focus on pharmaceuticals. Thanks. Thanks, Rodrigo. And, Morin, thanks for joining us. I think, you know, really we are a pharmaceutical company that specializes in cannabis. And when you look at that and you look at the pharmaceutical market that you see today, a lot of pharmaceutical companies are very much in the wellness space as well. If you look at our partner in Stata and some of their recent acquisitions, a lot of what they're doing today is consumer wellness products. So what we like to do is we like to think of the opportunity in Canada as a way of doing a proof of concept for our end-to-end manufacturing and development abilities for those pharmaceutical companies. It's really flexing our muscles to show what we can really do in that space with some of these really unique pictures that we have. Obviously, that is what we're showcasing to those future customers. At the same time, also taking advantage of the capacity that we have. We've spent tens of millions of dollars building out these amazing GMP platforms both in Canada and Australia. And so we want to put those to use as we wait for the entry of additional big pharma companies. So this wellness market really does give us that opportunity. And then lastly is on our contract manufacturing platform. Again, having that capacity allows us to do, you know, just manufacturing for people like H Valley and Canopy. So then that way we can, you know, serve them. They take care of everything from marketing and and the retail of it, but we're able to take care of that, make use of that capital investment we had then. So to answer your question, the number one focus does remain on being a pharmaceutical company and servicing pharmaceutical customers, but that wellness category does leak into that and we are able to take advantage of that as leaders in the space. Okay, thanks. Thanks. That's helpful. And then just, you know, we've seen over the last few months, we've seen some M&A activity accelerating in Canada and also in the U.S., you know, some Canadian companies entering the U.S. CBD space. Just wondering how are you guys seeing that environment, that M&A environment and Do you have any specific plans or more advanced negotiations maybe to enter the U.S. CBD space? Any color there would be helpful. Thanks. You know what, like I said, Aaron, they're really encouraged to see all the activity in the space. I think it shows, you know, how much opportunity there is in cannabis. You know, as a pharmaceutical company, we really are not affected by borders. So as a cannabis company, you have regulations that are governed by jurisdiction to jurisdiction, and in the United States, even by state to state. So that forces you to buy different assets. As a pharmaceutical company, we can use our platform both in Canada and Australia to actually register products all around the world. And so we don't need to replicate some of those assets. So I think that that's really important to call out. I think when you look at the U.S. CBD space, although a great category in the U.S., it's not something that we've targeted. I think our opportunity in the U.S. is the introduction of more drugs containing cannabis. So you look at the success of the drug, like Epidiolex, the progress made with Sativex out of GW Pharma and Jazz Pharmaceuticals, I think we're seeing a lot more research in clinical, late-stage clinical trials, as well as, you know, our future opportunity for abbreviated drug applications for biosimilars. And what that does is that gives MediPharm an ability to use our, you know, very unique certifications to manufacture those drugs. So, you know, we can manufacture that in Canada. If you look at, you know, exports of Canadian drugs today, 50% of them go to the U.S. So, you know, we can take part in those traditional channels without having to, you know, go around and plant flags into different countries. Thank you. No, that's helpful. Thanks for clarifying that. Hope that meets you. Thanks.
spk01: Your next question is from Tammy Chen with BMO Capital Markets. Your line is open.
spk00: Good morning. Thanks for the question. Greg, a question for you first. With respect to the gross margin, so I know this quarter you called out just lower fixed cost absorption. Aside from that, how should we think about where you are at with respect to working through some of the legacy higher cost flour?
spk04: Yeah, thanks for the question. So, yeah, the gross margin, obviously, we're happy with the improvement that we've seen from Q4, even excluding a lot of the one-time items in Q4. We've seen improvement. And as we've talked before, you know, where we're going to see improvement go forward is in a couple areas. One, obviously, with improved automation and process efficiencies. You know, too, as Keith has talked about, we mentioned sales expansion, particularly internationally with improved margins. And then, as you said, obviously with the inventory at net realizable value, we still need to work through that, which you can see the amount that we have on the book. So we still need to work through that to get back to a positive gross margin. And as I said last quarter, you know, we do have a view to get back to a positive gross margin in the future here. and get the business back to profitability. It's just going to take some time to work through some of this old inventory and drive the efficiencies that I talked about.
spk00: Got it. Okay. Thanks. and my follow-up is Keith I wanted to go back to some of the commentary you made about you know expecting to see a better half second half of the year expansion in Canadian b2c and white label for LPs can you just dig into that a bit more specifically I'm wondering the current environment with respect to contract manufacturing are you seeing some of the LPs you know outsource that more and more and really what do you think it'll take for us to really see an acceleration in that do we need to see just the 2.0 categories expand a lot more from here do we need to see some more consolidation and so just the larger LPs will start to outsource more can you just talk a bit about that more thanks yeah
spk04: Thanks, Amy. It's a great point. I think a lot of what we're doing in the Canadian domestic gets driven by either bulk sales or by contract manufacturing. And I think it is really encouraging to see some of the other leaders in Canada and what they're doing. I think if you look at You know, recent news, you know, from people like Tilray or Aurora where they're looking to actually close, whether it's growing or production facilities in order to, you know, meet their target. They are increasingly looking to outsource that. So I think that that's a big piece of it is, you know, as people specialize in what they're the best at, they're looking to people like us to outsource some of those services and some of those turnkey solutions. So, you know, our ability and our history to execute really allows us to compete on those contracts. I think the second piece of it is also the entrance of more specialty products and more unique products. So what's really encouraging is we're seeing, you know, companies pop up that are specializing in a different end product. So let's say they are a beverage formulator and manufacturer or they're – you know, a soft chew formulator and manufacturer. They're really good at making these food or beverage products, but they're not going to, you know, put in the investment or the resources to actually do the extraction themselves. So a lot of times now they're coming to the market in the B2B space to buy those inputs. And so Medifarm is able to compete in that sector as well. So I think it is two pieces. I think it is, you know, the growing consolidation and need for people to outsource what they're not best at. And then I think, you know, it's also the increase of those specialty products. I think it's really cool to see every month, you know, something new on the B2C side of these retail stores. And all of them are usually – all of the new products are concentrate-based.
spk00: Got it. Thank you.
spk01: Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question is from Scott Fortune with Roth Capital. Your line is open.
spk02: Hey, good morning. This is Nick stepping in for Scott. You touched on the skew rationalization you're seeing in Canada, but on the other side of that, are you seeing kind of more favorable purchasing opportunities? And just looking out, if you could just update us on your go-forward purchasing strategies, that would be great.
spk04: Yeah, I think from a purchasing standpoint of raw materials, it does create a great opportunity for us. So, you know, there's been some skew rationalization, obviously the increase of growing in greenhouses or outdoor in Canada has really helped us. As Greg mentioned, working through the old inventory or past inventory, as we're replacing that with new inventory, we're seeing buying prices on raw material reduced by up to even 10x in some cases. That really helps us with our gross margin going forward. It's Definitely helps as we kind of see that skewed rationalization in turn lead to the ability for us to buy and put that at a lower level.
spk02: Got it. Thanks for the caller. And then switching over to Germany, you recently signed a two-year supply agreement with a subsidiary of IM Cannabis in Germany. I was wondering if you could quantify that opportunity a bit more and just also in terms of timing and revenue recognition and and whether or not you're seeing similar opportunities kind of outside of Stata given your GMP distribution capabilities there.
spk04: Yeah, I think, you know, we're seeing a ton of opportunity in Europe. So I think, you know, Stata has really proven our ability to launch in Europe and move products into Europe. So once they see, you know, many farm manufactured products, It does increase inbound business development opportunities. I think as a company, we're even getting to the point where we are having to make sure that we're picking the right partners and the partners that are able to move the volume that we want to create for them. In IAM Canada, in particular, IAMC is a great company and we're really happy to sign an agreement with their subsidiary, Agifarm. Agifarm is in Germany and they have aspirations for getting product of patients both in flour and extract, so we will be taking care of the extract portion of that. A little bit early to tell on volume, so I think that to quantify it today would be a little bit difficult. I think what's really important is opening up that regulatory pathway and getting them product, and we expect to do that within the next few quarters. There's a bit of a process, obviously, in Germany as a prescription drug and as a narcotic. There's a number of registrations, so we're working through those registrations with them today.
spk02: Got it. Appreciate the call.
spk01: Your last question is from Shane Muir with Canaccord Genuity. Your line is open.
spk03: Hi there, and thank you for taking my questions. My first one is just to touch on something that you mentioned in your prepared remarks that early next year, Metaparm and Stata are planning to expand into other international markets. I was wondering if you could provide any details on which markets you're eyeing for per entry and the strategy around entering those new markets, whether it be more broad-based across multiple jurisdictions or if it'll be on a market-by-market basis. And if I can add on the back of that... How is data going to incorporate or evolve its sales force while entering those markets? Is the sales force going to be the same dedicated cannabis distribution from Germany that's going mark the market, or are they going to expand on that front? Thank you.
spk04: Thanks. Yeah, that's a great question, and we are really excited with the progress that we're making with data and our ability to expand. Where we're expanding to, we probably keep that amongst the partnership, just from a competitive advantage, obviously. But I think that we can confidently say that it will be in the EU. So having product in the EU with data today allows us to move product throughout the EU a little bit easier. So it just makes more sense to start there. Stata operates in over 100 countries worldwide. So the options are really endless in that sense, but, you know, growing outwards from Germany as a base geographically does make sense from a lot of different angles. I think as far as investing on the Salesforce, you know, I think that obviously is a better decision, but from what I know in working with them over the last 18 months is I would say they will probably invest in additional resources in those new regions. Also keep in mind, you know, in the EU, kind of even something as simple as the language. So we have 30 salespeople on the street today talking to physicians and pharmacists in Germany, and, you know, German would be their primary language. So as we go into other countries, if they're not German-speaking, then we would be probably, you know, adding in additional resources there. So I think that, you know, as long as the ROI is there, then we'll continue to invest and continue definitely that is seeing the cannabis opportunity as something that will help their business grow in the future.
spk03: Thank you. The next question is staying on the topic of the international sales channel. So there was a notable improvement in the quarter on that sales in those international channels. And I'd be expecting, just given kind of the 30 agreements that are in the pipeline today, for that to ramp up fairly aggressively here. So just wondering from a sales mix perspective, I think international was about 38% this quarter. So from a sales mix perspective, how is Metaparm looking at the cadence for international versus Canadian revenue mix into Q2 and then onwards throughout 2021?
spk04: Yeah, I think that's a good point. Our ambitions are global. So we are looking, you know, as we stand to really look at those medical markets where we don't see as much price compression and where we have more competitive modes where we can use our certification. So I think that we will see, you know, that would become something where we're adding on more and more deliveries because, as you mentioned, those 30 contracts. It is a little bit of... of a lumpy process in the way that we register products in each country. So even though we send, let's say, five SKUs to Stata today, as Stata adds SKU number six and seven, we actually have to go through the process of registration again. So we are approved as far as the manufacturer and exporter go, but then we would register a new actual drug serial number. that would allow us to do that. So as we see our partners, you know, work on their launch, there's different factors at play as far as them having their license to distribute. And then, you know, we are working with different, you know, different regulators in different countries. So, for example, New Zealand, which is, you know, a great opportunity for us because it's so close to Australia, they actually, you know, changed some of their regulations recently in February, March, So then that allows us to go back and actually have to rejig our dossier to that regulator. So it does delay that delivery by another 60 days as we go through that process. So I'd be cautioned to say it's a straight kind of ramp up from here, but it's definitely the opportunity to keep unlocking in a straight ramp, but the revenue will be a bit lumpy as far as process goes.
spk03: Thank you. That's all my questions for today.
spk01: You have no further questions at this time. I turn the call back to Keith Strong for closing remarks.
spk04: Great. Well, I'll just close by saying that we look forward to hosting our second quarter conference call and our upcoming annual meeting and keeping everyone abreast of all the progress in between. Thanks for listening and have a great day.
spk01: This concludes today's conference. You may now disconnect.
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