MediPharm Labs Corp.

Good morning, ladies and gentlemen. Welcome to the Metaformin Labs second quarter 2021 conference call and webcast. I will now hand the call over to Keith Strong, Metaform Labs president and interim CEO.

Thanks, operator, and good morning, everyone. With me on the call today are Greg Hunter, our CFO, and Chris Page, our new chairman. 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 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 conclusions, forecasts, 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 MediPharm Labs filings with the Canadian and provincial security regulators, which are available on CDAR at their website, cdar.com. Our second quarter was one of transformational growth and establishing ourselves as a true pharmaceutical company with expertise in cannabis. Today, I will speak to the advancements made in Q2, which were achieved in the context of ongoing Canadian domestic challenges offset by international growth. Greg will then discuss Q2 results, including areas where we saw growth, segments where we have opportunity to improve, and continued progress with right-sizing our inventories. We will then introduce our new board chair, Chris Hayes, and I will close with final observations on executing on our business strategy. To start, I would like to provide more in-depth detail on our recent pharmaceutical licensing achievement, the way it grows our business, and our plan to capitalize on its unique status in the industry. 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 and medical cannabis market by providing multiple products and turnkey solutions to a broad customer base across multiple jurisdictions. A key part in becoming a pharmaceutical company is pharmaceutical licensing. And in Canada, that means a drug establishment licensing. A drug establishment license is a certification issued by Health Canada that a manufacturer maintains pharmaceutical good manufacturing practices, commonly referred to as GMP. It is done through an extensive review of a company's quality management system over several months, and then an in-person or virtual inspection spanning multiple weeks. A massive undertaking in comparison to our cannabis processing license issued in 2018. This license is awarded by the Health Canada Pharmaceutical Branch and is the exact same license as the one held by Fortune 500 multinational drug companies with operations in Canada. Pharmaceutical leaders like Eli Lilly, AbbVie, and Merck, just to name a few. Our drug establishment license allows MediPharm to manufacture any non-sterile drug in finished good or active pharmaceutical ingredient, API, format. leaving many options as we start to see more complex formulas in drugs where cannabinoids are the API. We are the first and only company in North America to receive a pharmaceutical GMP certification, which includes commercial scale extraction of natural cannabinoids. Other pharma companies working with cannabis with GMP licenses from Health Canada or the US FDA are only held by those doing final product formulation or working with synthetic cannabinoids. Based on the current therapeutic evidence in natural cannabinoids in products such as FDA-approved Epidiolex, there's a large demand for naturally derived and pharmaceutical-approved cannabis API and finished goods. So, what does this drug establishment license mean for Medifarm and its shareholders? To summarize, with this unique license, we can now access more markets globally where special access or OTC policies for cannabis are in place. We can now distribute cannabis API to pharmaceutical companies around the world, including the U.S., for use in both branded and generic drugs with marketing authorizations. We can now provide finished dose manufacturing to pharmaceutical companies seeking to outsource their production of their cannabis-based drugs. We can now be a service provider to other large cannabis companies with aspirations to enter the pharmaceutical cannabis space or expand their international reach. And we can now support new clinical trials with GMP clinical trial material to further advance research of the benefits of cannabinoids and give Medifarm future manufacturing rights. These Drug Establishment License business attributes create near-term opportunity while also preparing the long-term opportunity to produce future cannabis-based, clinical proven, FDA registered, and approved drugs. This is a great development for Medifarm and our shareholders and it means our outlook for growth as a specialist pharma company is bullish. Now turning to our second quarter results. Beyond the great advancements in our pharmaceutical strategy, Q2 saw growth in other areas, the most promising being international distribution. As a testament to the execution on our international contracts, we saw quarter-over-quarter growth of 24% in our international revenues. Now with regulatory channels open, we expect to continue to be a leading private label medical cannabis concentrate provider in new global markets. Like our industry unique supply agreement with Stata, one of the EU's largest generic drug companies, Medifarm has many contracts and a full pipeline of future contracts for private label medical cannabis products around the globe. Many of these being concentrated in the EU and LATAM. There is no shortage of demand for quality medical cannabis products from established companies with no interest in doing manufacturing themselves. The difficulty comes in the regulatory execution of delivering on these contracts. For example, in Brazil, you must register your product with INVISA, the Brazilian FDA, for sanitary authorization. This process can only be done with a lengthy product dossier to show quality, safety, and stability of the product. This process can take up to three months for approval following your manufacturing of pilot batches and six months for stability testing. Narcotic registrations in places like Germany and New Zealand follow similar processes with each country being unique. This is on top of the country-specific import and export process, which in the past year and a half has been subject to longer than normal processing times as global health regulators focus efforts on their COVID-19 pandemic response. In 2021, we have seen Health Canada export permits take anywhere from 30 to 60 calendar days after the receiving country issues an import permit. Medifarm masters this regulatory process with our staff who come with decades of experience in the international registration of pharmaceuticals. Now having worked with international partners for over 18 months, Medifarm's hard work is starting to result in steady growth of material international revenue. We are also establishing a cadence in permits ahead of international customer forecasts so that as we go into the back half of 2021 and beyond, we can have more repeatable monthly international revenue. A great example of these advancements is in Germany. In March, we made our first delivery to two extract customers in the region, Spada and Adrex Pharma. In Q2, not only did we deliver to those customers again, but we also delivered to two new customers in Cantourage and DemiCans. Of course, our reach goes beyond Germany, having already delivered to Peru in March, and we expect to deliver to Denmark, Brazil and New Zealand before the end of the year. However, I do want to highlight 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 a more advanced medical market than any other, and is said to be growing at around 30% annually, according to Forbes. Our strategy of targeted international expansion to medical and wellness customers is gaining traction, and that will lead to higher sales in the back half of this year. Our strategy is clearly global in nature, but we are also committed to driving growth in Canada's medical and adult youth markets as part of our priority of building a profitable and sustainable business. In Canada, we continue to launch new and innovative products. Our oil portfolio continues to grow and is a staple for many adult use consumers looking for cannabis wellness options. On the innovation front, in early Q2, we launched a vapable CBN product, which is the only product of its kind in the market and gives users the ability to inhale CBN for faster onset, which is easier to titrate. In late Q2, we released a vapable CBD product where we saw a gap in the market, and other CBD vapes were either heavily diluted, or subject to user difficulty as CBD crystallized in a competitor's purchase. These quality and innovative products will be accessed by more consumers as Medifarm officially launched in Quebec in May. Quebec is one of the leading provinces in cannabis sales and with a more complex listing process, the product categories are not crowded as we sometimes see in other provinces. The growth in Quebec should be better reflected in Q3 and onwards as we add more SKUs and fulfill weekly shipments. We continue to see opportunity to utilize capacity as our CMO partners grow their brands, such as the expansion of Aviconna's gels and topicals and the growth in Ace Valley bait products, which we now produce for canopy growth following a successful acquisition of that brand. Our sales in the domestic market are not where we want them to be. In Q2, we continue to be strained by COVID-19 restrictions at the retail level, which resulted in provincial distributors lowering inventory on hand. For the majority of Q2, the province of Ontario, which is our biggest domestic customer, still had significant COVID-19 restrictions placed on retail stores. As Medifarm is still less than 12 months into domestic retail sales, I see some immediate improvements we can make in managing provincial listings and fulfillment. This coupled with our high quality products and relaxed COVID-19 restrictions can result in near-term improvements in this sizable market. I will touch on our strategy to increase sales later in the call. Finally, we continue to add to innovation in both products and manufacturing automation. Our team of research experts have developed other rare cannabinoid formulations beyond our recently launched CBN and have innovated consumer delivery methods such as tasteless and odorless water-soluble drops. We will work with provincial distributors to sell these new products as the various provincial listing schedules permit. In automation, our engineers continue to deploy equipment already purchased to reduce the direct cost of our manufacturing. This will help improve the gross margin on our high-volume SKUs, such as our cannabis oils. Currently, Medifarm-branded oil ranks fourth in cannabis oil sales in Ontario. This is with double the retail price of the average oil SKU. This proves cannabis consumers are starting to recognize and are willing to pay more for high-quality products. It also presents a great margin opportunity as we implement our fully funded automation. Overall, our domestic presence is still growing in revenue, but it 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 health and wellness brand companies. I will now turn the call over to Greg to discuss our financial results. Thanks, Keith, and good morning, everyone. I'm pleased to report we continued to make progress with our international expansion with international revenues increasing 24% sequentially in Q2 versus Q1. This is the second consecutive quarter with double-digit international revenue growth. In addition, we added two new customers in Germany, bringing our customer count with successful German deliveries to four. Germany is the largest international medical market with a market value estimated to be 7.7 billion euros by 2028, according to Forbes, and continues to be a strategic priority for Medifarb. As Keith mentioned, in Q2, we continue to experience headwinds in our domestic business driven by restricted COVID-19 lockdowns and further channel inventory reductions with provincial distributors. which caused our Canadian and overall revenue to decline sequentially. Despite COVID-19 making the first half of 2021 challenging, we continue to make progress and are optimistic that revenue will rebound post-COVID-19 lockdowns with our recent expansion into Quebec and the launch of new innovative products such as CBN Oil and CBD and CBN Vapes. 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. While we made progress in the first half of 2021, there is still work to be done. Turning to the P&L performance for the second quarter. Q2 revenues decreased 7.7% sequentially from $5.5 million in Q1 to $5.1 million in Q2. international revenues increased 24% sequentially to $2.5 million, with German revenues increasing 24% sequentially to $1.5 million and Australian revenues increasing 30% sequentially to $0.9 million. Domestic Canadian revenues decreased 26% sequentially to $2.6 million and largely as a result of restricted COVID-19 lockdown and further channel inventory reductions with provincial distributors, as mentioned previously. Gross profit for the quarter of negative $7.7 million was impacted by a $5.7 million inventory write-down and $0.6 million of accelerated depreciation for assets no longer in use. Adjusted for these items, gross profit of negative 1.4 million declined sequentially from negative 0.7 million in Q1. Q2 gross profit was negative and declined sequentially due to unabsorbed overhead with lower production volumes and product mix with more flour being sold to German customers with lower margins. General and administrative expenses in the quarter increased sequentially from $4.0 million in Q1 to $5.2 million in Q2, largely driven by bad debt expense for one customer, higher insurance costs, and higher freight expense for our international customers. Marketing and selling expenses in the quarter decreased sequentially from $1.3 million in Q1 to $1.1 million in Q2, driven by lower promotional activity. R&D expenses decreased sequentially from $350,000 in Q1 to $140,000 in Q2. These expenses will vary as we selectively invest to advance our capabilities and product portfolios. Other operating income increased sequentially from a $0.7 million expense in Q1 to income of $3.2 million. Q2 included $3.7 million of income from the Canadian emergency wage and rent subsidy, while Q1 did not. Finance expense decreased sequentially from $9.7 million in Q1 to $0.6 million in Q2. as a result of accelerated conversions on the convertible debenture. Adjusted EBITDA for Q2 was negative $3.7 million and improved sequentially from negative $6.2 million in Q2, primarily driven by income from the Canadian emergency wage and rent subsidy. Moving to a few notable items on the balance sheet. Inventory decreased from $24.2 million in Q1 to $13.7 million in Q2. This includes the inventory write-down of $5.7 million mentioned earlier. Trade and other receivables increased from $27.8 million in Q1 to $32.6 million in Q2, largely driven by the Canadian emergency wage and rent subsidies. As discussed in previous quarters, there are two customers owing 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 and the wage and rent subsidy, trade and other receivables is 10.2 million. The current tax receivable of 4.3 million is a refund from 2020 that we expect to collect in Q3 and will further improve our cash position. Finally, our cash balance at June 30th was 38.9 million, which decreased from 42.1 million at March 31. The cash balance decreased $3.2 million, largely driven by operating activities. Capital expenditures were modest at approximately $180,000 for the quarter. Year-to-date capital expenditures are $460,000 as we continue to manage and prioritize select capital investments to expand the business. cash balance owing on the convertible to venture stood at approximately $2 million at the end of June, which is due to be repaid in September and October. While we made progress in the quarter by expanding our international presence and revenue and managing our cash consumption, we still have work to do to return the business to profitability and drive positive cash flow. With that, I'll turn it back to Keith. Thanks, Greg. This morning, we were also very excited to announce the appointment of Chris Caves as chair of our board, effective immediately. Chris joined our board in July 2020 and has applied his leadership in many areas, including as chair of our audit committee and providing guidance to our successful March 2021 financing. Chris is a financial industry expert serving as chief operating officer of BMO Capital Markets, one of the largest banks in North America. He also serves as a board member of BMO, ChinaCo, and First Mortgage General Partnership. I would like to pass the call to Chris to introduce himself and discuss our board priorities.

Thanks, Keith. I appreciate the board's confidence in the need to oversee the leadership of MetaPharm as it executes on its strategy to be a leader in supply of cannabis-based drugs and API to pharmaceutical companies around the world. In my career at BMO Capital Markets and prior, I have worked with many public companies, including those with cannabis and pharma specialties. With MetaPharm, I see an incredible growth opportunity as the pharmaceutical industry is just scratching the surface when it comes to accessing the therapeutic benefits of cannabinoids and drugs with marketing authorizations. MetaPharm's recent drug establishment license is a huge endorsement that it will be a go-to supplier for big pharma cannabis market entrants. One of the board's current initiatives is the appointment of a permanent CEO. To date, we have had significant interest from candidates across North America and have been interviewing strong candidates. Meeting with these individuals has assisted us in perfectly defining the right person for the job. Since we started this task, MetaPharm has made great progress in international sales and specialized pharmaceutical licensing. Developments like these in a fast-moving industry have helped us refine the experience and expertise in the criteria for our permanent CEO. Our selection process continues to progress and we are confident we will appoint the perfect candidate for this role and the exciting future of MetaPharm. And in the interim, the current management team has the full confidence of the board to execute on the company vision and to drive growth. Keith, back to you.