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spk02: 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.
spk06: 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.
spk03: 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.
spk06: Thanks, Chris. I want to thank you for taking on this role and providing your experienced leadership at such a pivotal point in our business. I will now provide some final thoughts on our outlook and strategic plan to increase revenues. There's a lot of opportunity for increased sales in Canada and internationally. Based on our fully built and funded manufacturing platform, we can increase revenue significantly without further capital investments. Activities are already underway to achieve this goal. These strategic revenue goals have three main focuses. One, investment into more sales resources. Domestically, we have increased our sales team by almost doubling our retail sales reps subsequent to quarter close. With more ongoing ramp-up of the innovative products we offer to the market, we can make great use of this newly scaled sales force. Internationally, we are putting more boots on the ground in growing markets. In August, we had one of our top international business development associates relocate to Frankfurt, Germany, And in September, we have our first personnel in Mexico starting with us to expand our reach in LATAM. As our area of highest growth so far this year, having in-country sales and business development representation will add to our growing international revenue opportunity. Two, expanding contract manufacturing. providing partners with access to the highest quality cannabis manufacturing platform to deliver them cost savings and international reach. For example, here in Canada, just last week, we started a GMP tolling contract for one of the world's biggest cannabis companies. On the international front, we have continued to add to the private label services provided out of Medifarm Labs Australia. Three, continued innovations. Internationally, there is a lot of white space when it comes to innovation. Just like in the established adult youth markets, such as Canada or legal U.S. states, many international patients are seeking new formulations and delivery methods. The barrier is usually making one of these popular formats in a GMP-compliant way. Medifarm has just the expert team to assess and meet that challenge. Domestically, as cannabis categories become crowded, and distributors scaled back product listings, innovation is the sure way to get product on the shelf and increase sales. We saw this recently with Vateful, CBN, and CBD products, and we'll use the same approach going forward to get more products on the shelf with retailers. In the pharmaceutical space, our R&D is more complex as pharma customers will seek API suppliers who have filed their active ingredients with the FDA. These filings take in-depth characterization of substances with very tight specifications. This is an area where we will increase efforts to remain ahead of the competition. Overall, Q2 was a productive quarter with the accomplishment of our drug establishment license and further global market penetration for our products. 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 customers and shareholders. In my opinion, our current market cap does not reflect the value of our very unique pharmaceutical licenses and strategies, making Medifarm a great investment opportunity. As one of the founders of Medifarm, I can tell you that since day one, we had a vision to be a pharmaceutical company, specialized in cannabis. Providing companies and patients with API and drugs through traditional marketing authorization, as opposed to being just another cannabis company who distributes to non federally regulated or special access medical programs. Having achieved our drug establishment license in Q2, I could confidently say we have reached that goal. This will result in many positive business outcomes for Medifarm and its shareholders. I cannot wait to show you what we will do next. Now, operator, can you please open the lines for questions from our callers?
spk02: Ladies and gentlemen, at this time, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Once again, that is star, then the number one for any audio questions. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Aaron Gray, Well Alliance Global Partners.
spk05: Hi, good morning. Thank you for the questions and congratulations on the drug establishment license. So, you know, first question for me, I'd like to just kind of talk about the license and, you know, maybe in terms of the timing, you know, where you see the opportunity. So, you know, certainly it seems that you guys have a differentiated strategy there than maybe some of the other, you know, cannabis plates, but You know, we talk a lot about the potential API that this can now allow for you guys in terms of big pharma. Could you maybe elaborate maybe on some of the conversations that you've had with pharmaceutical companies to provide that type of API? You know, right now, you know, there's such, you know, drugs like Epidiolex and Marinol out there. So, you know, how do you see in terms of the timing of that license eventually translating into revenue? Is it more of a near term or maybe two, three years out there? Thank you.
spk06: Thanks, Aaron. I appreciate you calling in this morning. It's a great question. Our drug establishment license does truly differentiate us in many ways and does bring both near-term and long-term opportunities. I think on the near term, what we're looking at is more international sales. So where we saw the 24% growth quarter over quarter in the international sales, this helps us as part of those complex registration processes and export processes around special access programs that are opening up and it seems like every couple of weeks you see a new country that's going to try something. I think those health authorities are looking for a GMP solution and sometimes just didn't have one because they didn't exist. So there's some near-term opportunity there for sure that we'll keep seeing that international growth. I think you nailed it on what the long-term opportunity is, is really that API provider for drugs that have marketing authorization. So we've seen the great success of the effects of Epidiolex. You know, if you look at their annual run rate in the U.S. of epidemic sales being over $600 million U.S. a year, you could imagine that most generic companies are looking at that as an opportunity. And with those, you know, they're already starting the development process. So there are, you know, multiple generic companies that are looking at it, the development process, but that is long-term. So just to kind of create, you know, a timeline on that. There's a lot of patents on that product. It could take up until 2025, 2026 to really enter the market with a generic. But when they do, generics sometimes make up 30, 40% of the market share. So there is a massive opportunity. There's other drugs like, as you mentioned, Marinol. In Germany, it's referred to as Dranabinol, which Dranabinol is still one of the main concentrates sold in Germany. So we can participate that right away as those products are off patent. It might not be as massive an API opportunity for some of those generic drug companies, but there is an opportunity there. To summarize, there's near-term material growth that does make a difference to our revenue today, and then the long-term is limitless in where we can go.
spk05: I appreciate that, Collin. That's really helpful. Same question for me. you know, turn to the domestic market in Canada. You talk about, you know, kind of finding gaps in the marketplace, you know, certainly being some provincial buyers who are really taking a focus on that in terms of, you know, new products that they'll take in. But it's an overall question in terms of, you know, as you're kind of looking for these gaps in the market, you know, how do you look at, you know, the potential ROI in terms of, you know, the effort, you know, and CapEx needed to kind of maybe ramp up production of that product versus, you know, how big, a market share of maybe that gap in the market might be, how many other interests might come in. I would just like some further commentary from you guys in terms of the ROI and different things you're looking at as you look to find gaps in the market and then decide whether or not you guys would be in an opportune position to try and fill that gap. Thank you.
spk06: Yeah, for sure. Canada continues to be a focus that we're looking to increase in that retail space. As I mentioned, there's a big opportunity there. Any product that we do, we're obviously looking at it from an ROI perspective to make sure that it is accretive to the bottom line. But really what we're looking at in innovation is the Canadian space is There are some large players in there that have spent a lot of money on their retail, whether they have ownership in a retail platform or they have a massive retail sales group. I don't think that we're looking to go head to head with a lot of those in some of the big categories, but what we can do is we can own niches where there is innovation because we have such a strong team. Really for us, it's, you know, things like that CBN base where we're the only ones who make it or that CBD base that doesn't crystallize. That's where we see that. So in the future, we're looking at other formulations that would be, you know, minor cannabinoid base, you know, something like a CBG, which you could find in the U.S. today but not yet in Canada, is probably a good spot. where we could be and then, you know, what different formats we could do. So looking at, you know, there's, there are some water soluble products in the market today, but most of them are low potency. So how can we maybe make like a higher potency water soluble product for consumers? So there's a lot of, um, there's a lot of opportunity there and a lot of ROI and we're really focused on those niches of, of innovation and what that really also helps for us. Um, that's important, is we are, you know, using this as a platform as like a proof of concept for our big pharma and CBG customers current and in the future. So as we, you know, let's say Stata would like to launch like a CBN or a CBG to their massive patient base, we're able to show, you know, that not only can we formulate it, model it, and kind of some, you know, small-scale response from consumers and patients. So it really gives us that kind of proof-of-concept platform that really does build into that more future opportunity.
spk05: Okay, great. Thanks, Michael. And then just last one for me, if I could. Just for Germany then, right, so as we look to potentially, you know, see a bigger ramp in the overall market, you know, want some of these, you know, COVID bottlenecks, you know, eased, Could you talk about whether or not on your guys' end, you know, there's any types of bottlenecks in terms of getting supply or getting the product out there, you know, for Stott or any of your partners, or if it's more of just like a demand and current COVID dynamics there, right? So if the demand kind of comes up and you see more prescriptions, you know, being issued in Germany, do you guys have all the capabilities to fulfill that demand in the back half or through 2022? Thank you.
spk06: Yeah, thanks, Aaron. No bottlenecks on our side on, let's say, the delivery and the fulfillment. We have no problem making those products. And really, now that we have this drug establishment license, it does help with the process as far as, you know, even the supply chain, whether we make it in Canada or we make it in Australia, it starts to give us a lot of options. Where there is the bottleneck, and you know, we saw in Q1 we had two customers, in Q2 we had four customers, and then we'll see that grow at that kind of rate. Where the bottleneck is, is more on the registration side. So as I mentioned in the call, you know, when there's a new narcotic product, so when we onboard, like a German customer, they have to go to Bfarm, which is like the SBA of Germany, and then they register that product through a narcotics submission with Bfarm. That process could take anywhere from three to six months, and then once it's registered, we're able to apply for import and export authorization. So there is kind of a bottleneck on new products, but once the channel is open, we're able to get a good cadence. I don't think that we have any problem with demand. The demand keeps going up. And really right now, we're the only really private label option in a place like Germany. So where we see our competitors in Germany is with their own branded products. So let's say Tilray would have Tilray oil in Germany. So as we see more and more like, you know, Stata and our partners at Padrex or even, you know, again, you can, when they're looking to outsource it, we're really one of the only options. And now, you know, we're probably the best as far as quality, license, and experience of getting to the market. So I think we'll continue to see demand and many farms prepared and well-capitalized and well-resourced to meet that demand.
spk05: All right, great. Thanks for the call, and I'll jump back in the queue.
spk02: Your next question will come from the line of Scott Fortune with Roth Capital Partners.
spk04: Good morning, and thanks for the questions. Real quick, where is the inventory sitting at now at $13.7 million after kind of the inventory write-off, and what type of cost does this inventory include? I just want to get a sense as we look at gross margins going forward from this point as far as that's concerned.
spk06: Yeah, thanks for the question. So, yeah, with the inventory being more right-side now with some of the adjustments that we made sitting at $13 million, You know, there's $5 million-ish, as we've said, in raw material, which is primarily flour that we use for extraction. And then the bulk of the rest is in finished or semi-finished product, which, again, some of that, what's in there, which is new in the last couple of quarters, is finished goods, flour that we sell for sale purposes or end consumption products. within Germany. Obviously, this is, you know, inventory we're tracking very closely. As you can see, we're trying to manage it down as we improve our cash position and get better cadence here with demand both from the provinces and internationally, and we'll continue to focus on managing our inventory to help improve cash.
spk04: Okay. I appreciate the color. And then... Focusing on kind of the EU or international side, Keith, you called out new product formats on the GMP-compliant side of things and the timing of maybe new derivative products being approved for use in Germany. And then from your SKUs and product portfolio, what's being in demand and the opportunity to increase different SKUs or products into Germany as we look out to the second half and into 2022 here?
spk06: Yeah, thanks. It's a great question. I think, you know, as we look at, like, U.S. states and Canada, popular formats, things like a vape pen or, like, a water soluble that you can put into a drink easier or something like that as far as, like, a patient use goes for patients is really a great opportunity. Even, you know, well-developed medical programs such as the one in Australia are Right now really dry flower oil are the only choices for them. The reason why this has happened to date is you need to do it as a GMP product. So doing like an oral solution as a GMP product is something that, you know, there's some systems already in place because there's oral solutions for other drugs. But when you look at something like a vape pen, GMP-ing a vape pen becomes very complex as, you know, you have to take into consideration the hardware and the stability of something in the vape pen. Like, nothing, and we've got these new recreational markets that are so nascent. I don't think a lot of those studies have been done, so we're doing those now. That registration process will probably take another, you know, three to six months. So it's probably more of a 2022 opportunity as far as, let's say, something like a GMP-based trend. But we might be able to achieve that, you know, late this year, early next year. But the development is starting today, and we've just, you know, in the first part of this year, kind of gauging customer interest and patient interest and kind of the ability to source all those GMP suppliers for that supply chain.
spk04: Okay, I appreciate it. And then focusing back on Canada, kind of the growth in the second half here as it reopens a little bit, are you seeing consolidation, more consolidation here? Or where is the growth going to come from? More pickup in the 2.0 expansion in that category? And then what are you seeing from the LP front side of things? Are they looking to outsource now more potentially in this environment? Just thoughts on how we beat stronger second-half growth in Canada for you guys.
spk06: Yeah, for sure. I think, you know, we'll continue to sell, you know, our quality and innovative products, branded products at the store level. And I think, as I mentioned, we've, you know, just subsequent to quarter close, we've increased our sales team there and some of our resources on the retail efforts. So we could see some incremental growth there. But, you know, since we do participate in some of the smaller categories. You know, that's more of an incremental growth point in the back here, back after this year. I think where you mentioned where we see also a lot of opportunity is kind of these B2B services coming back. So 2019, 2020, a lot of our business was B2B, and now we're seeing, you know, some of that come back. as far as some of the big licensed producers that have great brands, great marketing, really need some help there. And then what's really great is now that we have this drug establishment license and we're the only one in North America who have this drug establishment license for the extraction of cannabinoids, large licensed producers are coming to us to do GMP-type services, whether that's tolling or using material that we source. We can make them like a GMP API or a GMP concentrate, so that they can put that into their pipeline internationally. And we've already started doing some of those activities just as recently as August. So we'll see a good pickup in, you know, some of our B2B tolling services with that.
spk04: I appreciate the call. Thanks, guys. I'll jump back into the queue.
spk06: Thanks, Scott.
spk02: Our next question will come from the line of Natalia Cochran with Scotiabank.
spk01: Hi there. Thanks for the colour on international. And I have some questions on the Canadian side. So from the perspective of the provinces, can you give some colour compared to the restrictions that we've had so far, are things opening up and provinces ordering more? And the second part of the question is the margin side. So can you give some color on are the margins expected to improve or at what sales velocity will you break even on the growth margin? So if you can give some color on that. Thank you.
spk06: Thanks for joining us this morning. I'll provide a little bit of color on the provinces and I'll hand it over to Greg to talk about the plans for their margin improvement. On the provincial side, we are seeing some encouraging demand signals. The province of Ontario being our biggest domestic buyer continues to open more retail stores. With the restrictions being lifted, you know, June, July, as far as people being able to shop in stores again, because we do have, you know, that high-quality wellness brand, it is, you know, something that helps for sales in brick and mortar as someone might go in for flour and then see, you know, you know, a CBD or CBN oil that they want to try. So that does really help us as far as the demand signals go. We're waiting to see if provinces will pick up inventory again, like the distributors will pick up inventory like we saw in the last bit of 2020. So what we've seen, you know, to date of 2021 is distributors lower their inventory on hand. um to more of like just in time ordering to get it out to to retailers probably you know to because of the uncertainty around COVID-19 now that uncertainty is away we we hope to see them you know pick up that uh inventory again which will add for you know smoother and more uh deliveries on our end but we you know we're still waiting to see uh how that uh how that plays out and uh I think that the provinces have done a good job now of kind of looking at consumer demand. I think in Ontario specifically, they're changing the product call system and how they work with licensed producers on what products they take in and what products they list and when they list them. And I think given our longer relationship with the provinces, that will bode well for many farms as well. So I'll hand it over to Greg Bell to talk about the margins. Yeah, thank you. So, yeah, on the gross margin, as I said prior quarters, we do see a path back here to not only just profitable on the gross margin side, but even profitability. And there's a couple different aspects where we're focused that are going to drive that. You know, one, as Keith mentioned in his prepared remarks, is around automation, which we continue to bring into our production facilities, which will obviously enhance our cost position. The other one with the international expansion, which is why we're so pleased to see the sequential growth, there's obviously higher pricing and better profitability in the international market, so that will continue. The other one is, as I mentioned, with some of our flour sales into the international market where we did have some lower margins this quarter impacting us. The team is actively working on improving that margin and we expect to see some improvement there in the future. And then as well as the international market with some mixed changes that moved into different products and potentially away from flour into oil. should help. And then the last two I would mention is one, the volume, as I said in my remarks, was challenging in the domestic market within Canada. So as Keith talked about, as we expect to see that improvement and volume build up, that helps us significantly in our manufacturing. And then finally, with some of the new products that Keith had talked about, with some of the new innovative products where we can get a higher margin on those as well. So those are all the different factors that are going to contribute in the future that we see getting back to a positive gross margin.
spk01: Sounds great. Thanks. That's all from my side. Thank you, Ty.
spk02: Your next question will come from the line of Tammy Chen with BMO Capital Markets.
spk00: Good morning. Thanks for the question. I wanted to ask about Germany. Can you speak a bit about the evolving competitive landscape there? Because I think I've noticed a couple of the other Canadian licensed producers that participate in that market have recently mentioned that the competitive level has increased in that market. So if you could talk a bit about that and how the relationship with Stata has been evolving with respect to your penetration of Germany.
spk06: Thanks for joining us. I think everyone sees that as a great opportunity in Germany and will continue to see new entrants into that space. I think to date we haven't been really hindered by competition, especially on the concentrate side, as there's still products to be registered there. So I think that there's still opportunity. I think we hear some more companies going into that space and some more investment into that space. But really I think it's also being paced with competition. new patients. So every month, if you look at, you know, some of the data coming out of Germany as far as coverage by the National Insurer, I think we're getting more and more patients, you know, that are looking to medical cannabis. So as more people come in, there's also more patients there. So there's nothing... There's nothing there that we really – that we see as a near-term really competitive. But, you know, we continue to work with our partners there, especially Stata, to kind of look at that landscape and, you know, look at our pricing to make sure that we don't get, you know, priced out of the market and things like that. So it is something that we're looking at. But, you know, it's encouraging to see everyone else wanting to come to Germany because obviously they see what we see. in the great opportunity there. The staff relationship has progressed nicely. As we mentioned, we made our second delivery to them on the oil side from Australia in Q2. We continue to provide them with flour, the value-add service, And as Greg mentioned, we think that we can improve our margin on that value-add service, but we've made multiple deliveries from Canada to Germany for that flower supply. So it really is ramping up. I think as a large multinational company, they are pretty – cautiously moving forward on product launches so their trajectory is one that's a bit more conservative as they add in more patients but what they're adding in on the patient side is probably more sticky than you would see in some of their competitors so their focus and I believe it's great one is that they're you know going to the patient level for education to make sure that they get those patients and then they keep the patients no matter what cannabis solution they're looking for for that therapeutic benefit, whereas some of the other companies in Germany are really focused on, let's say, pharmacists that have a high sell-through of cannabis, so then they're loading in those pharmacies. So I think that the Stata approach, while a little bit slower to start, has a longer staying power and will see more and more great results and the ability to put patients into new formulations or product delivery methods in the future as well. So we're really happy with the progress there.
spk00: Got it. Oh, that's interesting on the going to their patient level. Okay. And then last question for me is a bit of a clarification. The drug establishment license, sorry, did you say that you are working on over the next several months some sort of registrations or filings with the FDA for APIs and that only once you have that, then the long-term vision of supplying APIs to pharma companies? can happen? Is that the next step that you have to do to kind of finish that path on top of the drug establishment license? I wasn't clear if you could clarify that. Thank you.
spk06: Yeah, for sure. The drug establishment license is very unique in our industry, but not unique in the pharmaceutical industry. And there is a number of other steps that we could take to work with it. So the long-term strategy of working with a major pharmaceutical company on the launch of a new drug containing cannabis or a launch of a generic drug containing cannabis is well underway and there's a lot of steps that we could do today that we are doing today to achieve that there is a portion of you know one of the tricks so if you if you register a new drug you go through in the United States you go through a new drug application process and in that process you don't need to have necessarily the API registered as you're registering the entire drug. So we could provide our customer with the API in that case while concurrently doing the FDA filing. If you're doing abbreviated drug application, which is a generic drug application with the FDA, they would be looking for you to be using an API that does have a drug master file already on file with the FDA. So it's an important step for us to do, and it's something that MediPharm is actively working on. So we will go through the process of registering our APIs with not only the FDA, but Health Canada and the EMA, the European Medicines Agency. So that way, whenever our customers need an API in the pharmaceutical space, they could go to those databases to validate that those APIs will work in their final drugs.
spk00: Okay, I understand. Thank you.
spk02: At this time, there are no further questions. Do you have any closing remarks?
spk06: Yeah, thanks. I really appreciate everyone joining the call. It was great to speak with everyone this morning. As I mentioned, we're really excited about the future and appreciate your time. I hope everyone has a great day.
spk02: Ladies and gentlemen, thank you for participating. You may now disconnect.
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