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spk07: Ladies and gentlemen, thank you for standing by and welcome to the Medifarm Labs fourth quarter and fiscal 2021 financial results conference call. Please be advised that today's conference is being recorded. 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. Statements made on this call will contain forward-looking information that involve risks and uncertainties. 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 Medifarm Labs filings with the Canadian and provincial security regulators, which are available on the CDAR website at cdar.com. I will now pass the call to Brian Howcroft, CEO of Medifarm.
spk06: Please go ahead.
spk10: Thank you, Operator, and good morning, everyone. We appreciate you joining us for Medifarm's Q4 and fiscal 2021 financial results conference call. Joining me on the call today are Keith Strong, Medifarm's president, and Greg Hunter, the company's CFO. As most of you know, I joined Medifarm as CEO in late November of last year. At that time, I saw a company with all the attributes required to become a true leader in the global precision-based cannabinoid space. In the five months since joining, I've gotten to know the business and the team better. We are all very confident that Medifarm is well positioned to achieve leadership in this space. Every member of our team would certainly acknowledge that the pharma opportunity is long-term in nature. However, it is our belief that there are very few companies in existence today that have the appropriate licensing and sophistication to capitalize on these opportunities. We believe that Medifarm will benefit highly from exposure to what the team expects will be one of the most profitable, sustainable opportunities in the global cannabinoid space. As the company pursues this longer-term opportunity, our team continues to execute on short and mid-term avenues to growth and profitability, both in the international and domestic markets. During 2021, in a challenging environment, particularly on the domestic front, the Medifront team, led by Keith and Greg, executed against several important initiatives designed to set the company's course squarely toward these objectives. Before I pass the call over to Keith to provide additional granularity on the team's effort, we'd like to take the opportunity to thank all of our shareholders for their patience and ongoing support as the team continues to position the company to not only achieve its long-term objectives, but to generate shareholder value along the way. I will now pass the call over to Keith.
spk09: Thanks, Brian. As Brian mentioned, the Medifarm team made meaningful progress in 2021. This progress was across our three primary market focuses, pharmaceutical, precision-based cannabinoids, international medical, and domestic retail. Broadly, our team brought an additional focus to the business as we progressed through 2021, hitting important milestones that set the company up for growth over the next 12 months. Our team opened key new markets both domestically and internationally, introduced new innovative products, and intensified sales and marketing efforts to execute on revenue opportunities. I will start with precision-based cannabis. During 2021, we received a cannabis drug license as well as a GMT drug establishment license from Health Canada. These key licenses enabled the companies to leverage the infrastructure built over the past several years to enter the cannabis-based pharmaceutical and active pharmaceutical ingredient, or API, supply chain now and to scale. Last quarter, I highlighted how the receipt of the drug establishment license had allowed us to start the supply qualification process in several jurisdictions. And while we were just getting started, we saw initial API sales to two different well-established pharma companies during Q4. In addition, we continue to work in partnership with organizations like McMaster University to develop drugs containing cannabis candidates. The API segment alone will be an absolutely massive opportunity as it develops. To put the potential growth in perspective, the U.S. cannabis pharmaceutical market was worth $943 million in 2021, according to Granby Research. Compare this with the traditional pharma API business alone, which was worth $159 billion U.S. in 2020. When looking at the FDA DMS database, Medifarm is one of only 14 companies globally and one of only two in North America that can meet demand in this market currently. Clinical trial work is long-term by nature and a bit of a numbers game. To be successful, you need more shots on net. This is exactly the approach we are taking, ensuring that our APIs and formulations, where possible, are part of ongoing trials. which we expect will give us the best chance possible of becoming part of a long-term, highly profitable supply chain if these new drugs receive U.S. FDA and global marketing authorization. Post Q4, we entered the U.S. pharma market, leveraging our drug establishment license to register CBD API with the U.S. FDA through the DMS process, aiming at commercial opportunities in novel pharmaceutical development and generic drug spaces. This is significant, as this is the only U.S. VMF for CBD held by a Canadian company and the only natural CBD VMF at commercial scale in North America.
spk06: Medifarm is serious about winning in this market and is positioned to do so.
spk09: Now let's turn to International Medical, where we also saw some important progress in 2021, and particularly in the fourth quarter. Our team opened several new markets during the year, but I'd like to focus my comments today on Germany, given it is already the largest medical market globally and is expected to grow to be worth 7.7 billion euros by 2028. It will remain our primary focus for this segment of the business. International sales more than doubled in 2021, driven by shipments to customers in Germany, including the completion of our first shipment to Stata. a leading European consumer healthcare engineering company with a product presence in 120 countries. We grew our customer base throughout the year, shipping to seven customers in the German market. This is compared to five when we spoke on our Q3 call. During 2022, we will focus on deepening penetration with existing customers as well as adding new customers as our sales team continues to build a presence on the ground. Given the fact that we only started to sell EU GMP certified dried flowers and oils in March 2021, we see substantial room to grow in both Germany and within other global markets.
spk06: Turning over to our domestic business.
spk09: In Canada, Medifarm launched several new innovative products during 2021. This included products like high CVE and high THC oil formulations, and industry-first CBN formulations in both oil and base formats. The primary thrust of our product strategy is targeted at the health and wellness consumer who doesn't mind paying for arguably the highest quality and in many cases, most differentiated products in the market. In Q4, Medifarm's CBG product was also accepted for sale by provincial distributors with initial deliveries planned for Q1 2022. Our premium product offering is resonating with customers demonstrated by the market position of Medifarm Labs line of premium cannabis oils. After only 14 months of sales, we are number four across the cannabis oil category according to high fire data in Q4. Just taking the third spot would double our Canadian branded sales. Our company's CBD dominant oil line was also named CBD brand of the year. at the 2021 KIND Awards, which is based on the feedback from over 200 frontline staff and a notoriously discerning group. In February of this year, we announced the acquisition of Shelter Cannabis Brands, which adds highly reputable specialty dry flower and pre-roll products to our portfolio. This fills a key gap in our Canadian product offering while leveraging existing infrastructure and overhead and opening the opportunity to expand our current international flower business over time. During 2021, we made investments in our sales force, which led to new listings with Ontario, Alberta, Nova Scotia, and D.C., and the entry into new markets like Quebec and New Brunswick. With a qualified sales force on the ground and maturing in the field, we see significant opportunities to deepen the presence of existing products on the shelf while establishing a pipeline feed sales growth for new products as they're introduced. We are strategically positioned in the Canadian market and see room to run.
spk06: I'll now pass the call to Greg to discuss Medifarm Financials. Greg?
spk02: Thanks, Keith, and good morning, everyone. 2021 saw revenue decline as expected, given the weakness in the Canadian bulk distillate and concentrate markets. Revenue for 2021 was $21.7 million, compared with 36 million in 2020. Despite the year-over-year headwind, our team made progress with several key initiatives that will prepare the company for growth as we continue to advance towards profitability. International sales of 9.5 million more than doubled in 2021, representing 44% of total revenue, compared to 4.3 million in 2020, which represented 12% of total revenue. Germany was a new market for us in 2021 with the launch of EU GMP dried flour and oil. German revenue was $5.2 million in 2021 and will remain a strategic priority for Medifarm given the size and growth of this market. As Keith mentioned, we had our first pharmaceutical sales in 2021. While the overall number was relatively small, It was an important milestone for Medifarm as the product was delivered to two reputable Canadian pharmaceutical companies. In addition, we are excited about our recent acquisition of Shelter Wildlife and Shelter Craft and expect shipments out of our Barrie facility to start in Q2. This addition will drive both revenue and improve profitability in 2022. Turning to the P&L performance for the fourth quarter. Q4 revenues increased 6.4% sequentially from 5.4 million in Q3 to 5.7 million in Q4. International revenues decreased 23% sequentially to 2.2 million as Australian revenue declined from 1.8 million in Q3 to 0.9 million in Q4. German revenues grew 21% sequentially from 1.1 million in Q3 to 1.3 million in Q4. International revenues represented 38% of total revenues in Q4. Canadian domestic revenues grew 40% sequentially from 2.5 million in Q3 to 3.5 million in Q4. With the strategic investments we have made in sales and marketing, expanded distribution points, entry into new provinces, and shelter brands, we are confident that we will continue to improve domestic revenues. We generated our first sales to New Brunswick in the quarter and are in the process of listing Newfoundland and Labrador. Gross profit for the quarter of negative 5 million was impacted by a 2.4 million inventory write-down and 1.5 million of accelerated depreciation for machinery no longer required. Adjusted for these two items, gross profit was negative 1.1 million which improved versus Q3 adjusted gross profit of negative 1.4 million. While the adjusted number was still negative, Q4 was the second sequential quarter of improvement. During Q4, we were able to renegotiate pricing on EU GMP flour to help improve our margin profile. This will take some time to work its way through the supply chain, and we expect to see improved margins in the back half of 2022. We also implemented an automated bottling line to produce tinctures during Q1 2022. While we don't expect any significant short-term margin improvement from this investment, we expect it to pay off as we scale. General and administrative expenses in the quarter increased sequentially from 4.6 million in Q3 to 10.4 million in Q4, driven by a receivable impairment of 6.1 million for one customer. This receivable was aged in excess of 365 days. Adjusting for this impairment, general and administrative expenses declined sequentially to $4.3 million. Despite the credit impairment, we will continue to aggressively pursue our collection rights. Marketing and selling expenses in the quarter increased sequentially from $0.9 million in Q3 to $1.4 million in Q4. The increase was driven by investments in sales employees, advertising, and promotional activities to drive future revenue growth in 2022 and beyond. R&D expenses increased sequentially from $280,000 in Q3 to $580,000 in Q4. These expenses will vary as we selectively invest to advance our capabilities and product portfolio. Other operating expenses increased sequentially from 0.6 million of income in Q3 to 4.2 million of expense in Q4, driven by a fixed asset impairment charge of 4.2 million. Adjusted EBITDA for Q4 was negative 6.6 million, which was consistent with Q3. Moving to the balance sheet. I've already mentioned a few impairments and write-downs that occurred during the quarter. Our team has been focused on cleaning up the balance sheet throughout the year and we believe most major impairments and write-downs are behind us. Trade and other receivables decreased $12.2 million from $29.1 million in Q3 to $16.9 million in Q4. This decrease was driven by improved collections and a $6.1 million impairment from one customer. Despite the impairment, we will continue to aggressively pursue our collection rights. As discussed in previous quarters, there is one large customer owing a total of approximately $8.5 million at the end of Q4, which is subject to legal proceedings and we remain optimistic in its collection. Adjusting for this one customer, trade and other receivables is approximately $8.4 million. Our cash balance on December 31 was $34 million, which decreased from $38 million at September 30. During the quarter, we made all remaining payments on our convertible debenture, leaving Medifarm virtually debt-free and with outright ownership of our two GMP facilities in Canada and Australia. I would echo Brian's comments and thank our shareholders for their patience as we continue to execute with a consistent focus on building shareholder value. With that, I'll turn it over to the operator to open the line for questions.
spk08: at this time i would like to remind everyone in order to ask a question press star then the number one on your telephone keypad your first question comes from the line of aaron gray from alliance global partners your line is open hi good morning and uh thank you for the questions um so first question for me um i want to talk about recreational business adding you know flower and pre-rolls to the portfolio um so can you guys talk about
spk04: you know, the timing to cue how meaningful you expect that to be, maybe additional investments in terms of procuring flour from third parties and otherwise, and then the ability to sell it internationally as well as how you're looking to allocate between both Canada as well as supporting some international markets. Thank you.
spk09: Hey, Aaron. Good morning. Thanks for joining the call. This is Keith Strong, President of Yeah, I think that's a great question. We're really excited, obviously, to be expanding our Canadian recreational businesses. You saw in Q4 we had some great results in that area and I think that we have built the infrastructure and we have everything in place to deliver to these provinces on a weekly and sometimes twice a week basis. So it makes sense to fill up those skids and get the flower and pre-roll product on there. It is, as far as capital goes, it's very capital-like. There's no significant investment on our end in order to get this going. The Shelter brand themselves, as you saw on our press release there, is 100% performance-based. So we were paying them a royalty only based on the performance of those actual brands. And then just to address the last part of your question, it ties really well into our international business. As you know, we've been selling EU GMP flour mainly in Germany since March 2021, and that's been a great business for us. We actually just recently also made deliveries into the UK, and we'll continue to expand that business. So there's no, you know, outlay as well on buying flour. We'll just more strategically buy that flour so that it can be, you know, put into different markets and further leverage, you know, that buying power as those two business lines grow for us.
spk04: Okay, great. Thanks. And second question for me, I just want to talk about Germany. You know, for Peter and Mark, you guys are still pretty bullish on the long term. You know, but near term, you know, obviously, you know, seeing some slower trends there than we had expected, you know, due to COVID over the past two years or so. So with your relationship with Stata, can you talk about, you know, some things that they're hearing? You know, one of the big hurdles, you know, I think has been in terms of physician adoption. So can you talk about some of the work you've done in terms of, you know, the sales force kind of getting in front of physicians are getting more adoption and prescriptions to the patient base out there? Thank you.
spk09: Yeah, that's a great question. Thanks, Aaron. I think, you know, I just spent some time in Germany. I was there last month meeting with the Shada team going over ways that we can increase our business. And, you know, they're really excited and they're seeing more and more physicians uh, adopt this and, and less stigma around the opportunity of cannabis as a medical product. Um, I think with Stata themselves, they're really looking at this as like another, any other drug product. So they're, they're really winning kind of patient by patient or physician by physician. So even though the ramp up is slow in some cases, it is very, um, it is very sticky. So once they have that patient, they're able to keep them. I think Germany in general, we've seen, you know, the, the the increase in patients kind of month over month as we look at the data and I think that will continue to grow. We obviously, we have a new government in Germany and that coalition government has looked at cannabis even legalization for adult use. So I think that will bring even more wellness consumers into the market there. So there's still a ton of opportunity and we'll continue to focus on that region for our EU sales.
spk06: All right, great.
spk04: Thanks for the call, Keith, and I'll go ahead and jump back into the queue.
spk08: Your next question comes from the line of Scott Fortune from Roth Capital Partners. Your line is open.
spk03: Good morning. Thank you for the questions. You know, congratulations on moving into new categories and new products. How should we look at continuing product innovation, different categories, different formats going forward that you see that there's white space opportunities from that standpoint? If you can kind of help us understand the kind of future growth for the new categories. You still have a lot of build to go on in the existing categories, but kind of new products that potentially MetaFarm can kind of brand and go on their own from that standpoint.
spk09: Thanks, Scott. It's a great question. I think, you know, Medifarm, something that we've always been proud of is our innovation and our product pipeline. We have a great R&D team. We do a lot of hard work and have developed, you know, formulations and product method delivery for both our own brands and some of our partner brands, such as, you know, 8th Valley, which is a canopy brand. So we work really hard on that. I think as far as the future goes, we saw the great success that we had with launching CBN. In Canada, as one of the first that had a CBN offering and the first to have a vapable CBN, we're doing the same thing with CBG. We've already delivered it to the provinces. It should be on sale for retail stores in the next few days. So it's really exciting for us to have one of the first vapable CBG products. And then, you know, now that we have this dry flour, you know, there's a lot of other opportunities there as far as product innovations. Like if we want to make a wellness dry flour where we have like an inhalable CBD that's also infused with, you know, a CBD isolate or resin so that that consumer or patient can get that extra, you know, CBD. So we'll continue to look at that and they'll fall under different brands, you know, depending on who that consumer is. And then... Continuing from there, we are, you know, as we mentioned the call, we rank about number four in cannabis oils across the country. So we'll continue to innovate that portfolio as well. So look at things like, you know, CBDA or CBGA as a differentiated offering there. And then look at, you know, different delivery methods, whether that be like a capsule or a spray and things like that. So we're trying to make sure that we have
spk06: consistent refreshments used to keep those consumers coming back.
spk03: I appreciate the color there. Thanks. And the last question for me, you know, as you look into the active pharmaceutical ingredient size, as that plays out over a longer term, but kind of the initiatives you're doing on growing the precision-based cannabinoid markets, I know you're having an opportunity here to go after some of the Elixinol or that side, can you refresh us on the timing and opportunity for developing your own specific active ingredients for that market per se?
spk09: Thanks, John. I think that's part of the business that I'm most excited about. I think that our company is built as a pharmaceutical company. And it has really grown and shaped that. In 2021, we hit some great milestones there. The biggest one, getting our drug establishment license, which is very unique. That's as a cannabis producer in Canada. And then the next one would be our drug master file. So having that drug master file in place with the US FDA allows pharmaceutical companies to buy our API. So that API can then be sold into different formulations that are actually marketable drug products. So think of the next Epidiolex or the next Sativex and what pharmaceutical company is going to launch that. So we're working really hard on that. I think we mentioned on the call that we've already sold development material to two pharmaceutical companies who are developing either novel or generic drugs. And, you know, we'll continue to build with those companies. It is a longer sales cycle, hence why, you know, we've put some resources into the adult use market to help pay and put funds for that. But, you know, when that sales cycle does come to fruition, then we will be ready and we'll be able to take advantage of that massive opportunity.
spk06: Thanks. I'll jump back in with you.
spk08: Your next question comes from a line of Amy Chan from BMO Capital Markets. Your line is open.
spk01: Hi, good morning. Thanks. First question is on the Stata relationship. So could you just comment overall, is Stata happy with the partnership so far? Is it supply on your end that's keeping revenue growth a bit more gradual, or is it that there's just much higher competition and product saturation in Germany than you expected. And also, can you elaborate, Keith, on what you said, that once Stata onboards a patient, it's very sticky and they're able to keep them?
spk06: Yeah, thanks, Tammy.
spk09: I think I'm happy to elaborate a little bit more on the Stata relationship. I don't think that there's a supply problem. I think, as you know, in the industry there is, a lot of supply. Obviously, when we're selling GMT flour, it is a little bit, you know, there's a little bit less option, but there is a lot available if they would like to, you know, Stata or any other of our German customers are looking for expansion there. So I don't think it's a supply thing. As I mentioned, they do take a bit of a slower growth. They are really happy with the program. You know, Stata themselves, they have a cannabis business unit. That cannabis business unit has over 20 employees. So you could kind of even look at that, having a business unit with 20 employees, you can imagine the investment that they put into this and that gives them that opportunity. So really with the Stata opportunity and continuing to grow and get those patients, it's really important for them to get that stickiness. And so what I mentioned on that stickiness is it's There's two different kind of markets within Germany. There's those who are going to cannabis-focused pharmacies and buying almost like as a spot consumer. And then those who are having firm prescriptions from their doctor. And so the doctor would have an option to write a prescription for, let's say, high THC, in which case the patient or the pharmacist could put them into any sort of high THC offering. Whereas with The other option for a doctor is to actually name the product. So the Shatter brand is called Cannabistata. So if they write Cannabistata 22 on there, then that patient can only fill that script with Cannabistata 22 in order to fill it. And then any refills would be that exact same product unless they went back to the physician. So that's where you get the stickiness is having those relations at the physician level and getting them signed on to your actual product. And given that has been in the pharmaceutical business for 100 years, this is something that they're very good at. So we're seeing month-over-month growth that is very encouraging, but as you mentioned, it is slower as they take more of an approach of getting them patient-by-patient.
spk01: I understand, okay, so they're going that stickier route, and so it takes time to establish the relationship and educate the physician specifically of their own products, hoping that the physician will write their specific products, and that whole process just takes longer than, say, going the former route of just writing high THC.
spk09: Yeah, that's correct, yeah. In some cases, a producer may take advantageous load-ins and try things like discount sales to pharmacies, and it's more of a one-and-done strategy. Whereas we're doing that slow build and really doing the physician education on some of it. And really that wraps back in to elaborate more with the Medifarm ethos. Like we're very heavily involved in the clinical area. So we have multiple trials going on, you know, some of the more notable ones with McMaster University. So it's actually Medifarm product, particularly in most cases are CBD 50 to 2 that's being used by patients in multiple trials. So then we could take initial data from that. And then we could use that for things like physician education. So that's where it starts getting, you know, more and more sticky where a brand can't just come out of nowhere and launch something and try to take those patients.
spk01: Right. Okay. That's helpful. So, and then my second follow-up is, can we just go back to the initial API sales you made in the fourth quarter? So, like, I wasn't sure if I fully understood, like, is this just, these two pharma companies, do they just need some initial material as they were doing studies? Or are these products or drug products that they're eventually looking to commercialize and you may be the recurring supplier?
spk09: Yeah, I think it's actually two different distinct routes. So with API, we really have three routes of business. It could be someone who's doing studies for a clinical trial. So they're doing like a new novel drug. The other route would be someone who's launching an abbreviated new drug application with the FDA, which would be your classic generic. And then there's another type of generic with the FDA where it's a different delivery method. And we have clients that fit into all three pillars. Our sales in Q4 is two types. One is a reputable pharmaceutical company that is building on a new drug application So they're now doing development batches. So they're actually making batches with our API so that they could put it on stability and start some of their initial toxicology and safety studies. And then the other client is really looking at the generic opportunity in cannabis. If you look at the Jazz Pharmaceutical portfolio, there's a bit of a patent cliff come 2026. So they're eyeing up that patent cliff. If you look at the FDA Orange Book, your patents on Epidiolex could start to be challenged in September of this year. So in order to put in a challenge with the FDA under abbreviated new drug application, you would actually have to have material on, let's say, like three batches that would be on stability. So where we're selling product into these pharmaceutical companies, they're working on those development batches. So they're pretty far along. It's not just, you know, phase one of a four-phase process. They would be pretty far along in that process, but they still have to go through the long abbreviated new drug application process.
spk01: And for both of these, would you be the exclusive supplier as they go further and further down the line and into commercialization down the road?
spk09: No, in either case, are we considered exclusive at this point? Obviously, as a pharmaceutical company, there's two things. One, you don't want to have all your, especially in today's uncertainties of supply chain, you usually don't have one supplier, which is very common in the pharmaceutical industry, as well as because you're in the application phase, they don't really want to sign up for something. Let's say they go and challenge the patent and they lose that challenge to Jazz Pharmaceuticals. They don't really want to be on the hook for that supply. So there's some things that we do, and we provide them with R&D support. We think that we've done the most characterization on natural CBD probably across the world in knowing what every single impurity is in that 1%. When 99% is CBD, everything else is in that 1%. So that's where we get it. And then really, even though we wouldn't be exclusive, once they name us in their application, so we have our U.S. drug master file, once they do their filing for abbreviated new drug application, they cross-reference our drug master file for the FDA. And then at that point, it becomes, you know, pretty hard for them to change the flyer. So although in agreement we might not be exclusive, there is, you know, multiple ways that we are able to work with them so we get some, you know, again, some stickiness in that relationship.
spk01: Got it. Okay, that's it for me. Thank you very much.
spk08: And there are no further questions at this time. Mr. Brian Howcroft, I turn the call back over to you for some closing comments.
spk05: Okay. Thank you very much, Operator. Look, we appreciate all of you for joining us today and certainly your ongoing support. We look forward to speaking with you in May for Q1 earnings. So wishing everyone a great day. Thank you very much.
spk08: This concludes today's conference call. Thank you for your participation.
spk05: You may now disconnect.
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