Q1 2021 Medipharm Labs Corp Earnings Call

Good day, Thank you for standing by and welcome to the matter of farm Labs first quarter 2021 conference call on.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need the press star one on your telephone if you require any further assistance. Please press star zero. Please be advised the today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Laura on the part of Vice President of Investor Relations. Please go ahead.

Thank you operator, and good morning, everyone.

With me on the call today are Keith <unk>, President and interim Chief Executive Officer, and Greg Hunter Chief Financial Officer.

Before we begin please note the following caution the second forward looking statement you just made on behalf of money for them that on all of its representative on call.

Statements made on the call today will contain forward looking information that involves risks and uncertainties, including the introduced by the COVID-19 pandemic.

Actual results could differ materially from the conclusion forecast or projection in the forward looking information.

Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusion forecast or projection in the forward looking information and the material factors or assumptions that were applied in drawing the conclusion or making a forecast or projection as reflected in the forward looking information are contained in many farm labs.

Fillings with the Canadian provincial Securities regulators, which are available on the SEDAR website at SEDAR Dot com.

With that I would now like to turn the call over to Keystone.

Thanks, Laura and good morning, everyone.

Our first quarter included several important business development and set the stage for a very productive future.

Today, I will speak to the advancements made in Q1.

Which were achieved in the context of ongoing industry challenges related to COVID-19.

Greg will then discuss Q1 results, including continued progress with cost containment that narrowed our operating losses, and then I will close the final observations on our business agenda and outlook.

First since we operate in but for them to create long lasting shareholder value.

I would like to take a few additional minutes to remind you of our objective and strategic priorities how.

How we performed against those priorities, how we expect our accomplishments to translate into longer term financial results why we are fundamentally different than others in the industry and why that is good for our shareholders.

From the outset Berry farm's objective was to become a leading pharmaceutical company specializing in cannabis picked.

Taking charge and an emerging multibillion dollar global pharmaceutical medical wellness cannabis market by <unk>.

Providing multiple products and turnkey solutions to our broad customer base across multiple jurisdictions.

To achieve this objective we have focused on delivering against our top priorities.

One execute on our global platform purpose built for pharmaceutical specifications or good manufacturing practices to establish ourselves as the go to provider for pharmaceutical companies.

Okay.

The care pharmaceutical licenses globally to pioneer multiple regulatory pathways and access new markets, including the U S.

Three develop an international presence as a manufacturer of innovative formulations turnkey brands and distribution solutions for multiple customers globally and for build a profitable sustainable business here domestically in Canada to drive our innovation and R&D to support our longer term objective.

So.

How have we performed.

To begin our accomplishments are many I'm very pleased to say we are on a fundamentally different place than when we were first license in 2018.

And we're in a better position today compared to others in the industry for.

We have created a unique platform achieved GMP certification in both Canada, and Australia, the qualifies us to work with Big pharma and other companies in over 50 countries around the world.

This is a significant achievement.

It puts us in a best in class position with pharma companies now expanding into the medical cannabis space.

While some of the capital markets continue to assess many farm as if it is of traditional extraction. All the company I want to be clear of that we are inherently and fundamentally different than all others in the cannabis space.

This is by design.

The depth and breadth of our team technology expertise and licenses and global reach have not been replicated and for shareholders. This is a very good thing as the still to come pharmaceutical opportunity is significant and wide open to US second we have established a portfolio of pharmaceutical lie.

The senses that again has not been replicated critically important we continued to expand our licensed portfolio of to become EBIT more specialized and producing pharmaceutical cannabis products and participating in cannabis drug discovery clinical trials.

This expansion will further strengthen our competitive advantage and make us the natural partner for pharmaceutical companies and clinical trial groups entering into the space.

Longer term, we believe that traditionally approved pharmaceutical drugs containing candidates would represent a larger more sustainable and profitable revenue opportunity in multiple jurisdictions, especially when compared to recreational CBD or hemp segments.

Even in the U S. We are coming at the market from a position of strength.

Although cannabis is not federally legal in the U S. The fall.

Pharmaceutical products, we expect to produce over time will not be restricted by cannabis regulations.

Instead as the pharmaceutical company our products will be assessed and then approved by the U S FDA and other health regulators and the jurisdictions, we choose to work at.

This is of significant difference and the advantage over the jurisdiction or state specific programs that we see in place today.

Third we have quickly expanded our international presence and customer base to over 30 partnerships and nine countries across four continents. Our customer base has grown rapidly. We expect this baseline of customer support and add to our performance over the balance of this year and create tangible momentum for two.

And in 'twenty two.

Many of these agreements are yet to mobilize as we complete international product registrations.

As these pathways open we are confident it will lead to significant revenue opportunities.

International sales volumes will also help mitigate the impact of challenging conditions in Canada. As a result of COVID-19 restrictions we have already seen this benefit in Q1.

And delivering against the priority. The breakthrough achievement is our first pharma partnership of Stat of top five European generic pharmaceutical company.

This exclusive agreement was a pivotal moment for the industry and a huge validation of our business model. It represents our first entry into a growing European pharma market beginning with Germany.

As early as next year spatter in Berry farm, our committed to entering into additional European jurisdictions, which is a very exciting prospect.

However, I do want to emphasize that Germany alone is an extremely attractive market. It stands as the world's leading country for medical cannabis with more than 320000 candidates prescriptions approved in 2020.

This is more advanced medical market than any other and is said to be growing at around 30% annually.

And about two thirds of medical cases health care insurance reimburses German patients using candidates today.

With the stat of partnership and others, we expect to dominate this market.

And the seven months since signing the status there has been a significant ramp up in large pharma companies entering the cannabis industry.

Because of our reputation and capabilities. Many of these companies are looking to modify them to provide a true turnkey solution to launching medical on wellness products.

These projects create on near term opportunities, while also preparing for the long term opportunity to produce future cannabis space clinically proven FDA registered and approved drugs. This is of great development for shareholders. It means our outlook for growth at the specialist pharma company is bullish.

On the product side, we have created initial suite of brands.

And formulations in various formats and delivery methods.

Diversifying our revenue streams and provides the greatest potential in our domestic Canadian market compared to us selling only bulk formulated oils.

Our domestic presence serves as a proof of concept for our ability to provide end to end development manufacturing and distribution solutions for multinational pharma CPG and innovative health care and wellness brand companies.

The slow to start Canadian adult use market has proven to be difficult and we have responded by launching new branded product formulations.

Also reduced head count costs by 30% over the last three quarters.

Embedding new disciplines into finance and operations and maximizing the management insight available through our S. E T system to improve margin product and contract manufacturing performance.

As we discussed last quarter 2021 is expected to be a crossover of year as matter of pharma falls into a multi country operator with a highly diversified high quality product portfolio and a larger customer base now.

Now turning to our first quarter results.

At the top of the list of Q1 of accomplishment as our first sales in Germany, which added to total international revenue of $2 1 million.

This is of great start, but it is only the start.

While top line declined slightly from last quarter revenue from international sales increased over 600%, reflecting initial late quarter exports to only a small number of customers in Germany, Australia and Peru.

The important related development and one that is on our priority list is that the Australian therapeutic goods administration recently approved our application to export GMP certified cannabis oil products to our private label partners in Germany.

The <unk> status and address part of that this is another advantage of having GMP certification, which will become increasingly important at the medical markets expand worldwide and regulators insist on quality of standardization.

These authorizations and initial deliveries demonstrate that we can leverage our existing infrastructure in Australia, and Canada without having to add domestic assets in every region we serve.

Are already operating and easily expandable manufacturing platform remains of significant economic advantage for us as we pursue our global ambitions.

Scaling up versus scaling is preferred from a efficiency profitability and regulatory viewpoints.

Recently I took part in the panel discussion hosted by Alliance Global partners.

And the consensus among panelists and rightfully. So is that the entrance of big pharma will play an outsized role in encouraging German physicians to prescribe cannabis.

I was one of the more prominent members of large farm out we couldnt have selected a better partner the static trailblaze, the emerging European pharmaceutical cannabis market.

With our health status of has the means the catalyze the market by expanding available product formats, when they moved to educate physicians and pharmacists on the efficacy of canvas treatments.

One of the reasons, we're confident 2021 will be a better year as the ramp up of this and other agreements.

As I mentioned, we now have more than 30 committed supply agreements in nine countries compared to roughly half of that and only two countries a year ago.

Our strategy of targeting the international expansion to medical wellness customers is gaining traction and that will lead to higher sales this year.

We're also very pleased to complete our first shipments of premium I teach the medical cannabis oil the can farm career.

This was our first sales in Latin America, and more will follow pending final product registrations, covering our supply the other customers, including the accelerated Brazil.

In Australia, we are actively working with our customers on registrations to launch over the counter CBD products over the counter of legislation passed in February and we believe OTC represents a high growth opportunity for us, especially since manufacturers and suppliers of the CBD products must be GMP certified.

For for this growth our Canadian operations recently made the liberties of GMP CBD isolate to many farm labs, Australia with more volume to follow in Q2.

Our ambitions are clearly global in nature, but we are also committed to driving growth in Canada as medical wellness and adult use markets as part of our priority of building the profitable sustainable domestic business.

As mentioned the domestic industry has faced difficulties in.

And these continued in January and February as the province of Ontario of reduced inventory in response to pandemic lockdown affecting retail sales.

This did have an impact on our Q1 revenue. However, the good news is we still made progress in launching new branded products in late March with positive initial demand signals I'm, particularly pleased with consumer response to our first CB enrich formula one of only two available in Canada.

Sold out at retail within just a few weeks of launch we immediately used a robust manufacturing platform to respond to this demand quickly restocked in each of our provincial listings.

More of many foreign branded offerings will follow as we look to meet consumer wellness needs with innovative products, such as THC free oil additional minor cannabinoid tinctures and baseball CBD and CDN.

As an important footnote we announced the supply agreement in early March with the province of Quebec, under which we will supply cutbacks growing medical and wellness market. This year I'm.

I'm happy to report that the first Quebec shipments will leave our facility this week.

For the remainder of 2021 expect to see us expand our Canadian <unk> business, while also benefiting from expanded growth in consumer volumes for products, we produce under white label agreements with some of the country's top licensed producers.

Taken together the ramp up of sales to committed customers success with new product launches on the supply agreements secured in Q1 illustrate the advantages of GMP certification on our focus on supplying medical wellness markets as a global provider of pharmaceutical API and finished dose products.

We are on a crossover period to our future a period, where the short term financial results do not reflect the future potential.

But they are the yardsticks that we use to measure our progress is therefore important to us that we improve earnings even as we pivot to the next stage of our growth.

I'll point out that the Q4 2020, we achieved domestic revenues of $5 7 billion.

If we see the easing of COVID-19 restrictions, we expect to rebound to those levels. This will be in concert with our established baseline of 2 million International sales in Q1, 2021, together depicting a more attractive revenues in the near term.

With that I will now turn the call over to Greg for his report.

Thanks, Keith and good morning, everyone.

I'm pleased to report we made progress in Q1 on our goal to return the business to profitability.

While we did see incremental improvements in the quarter, we continue to focus on our priorities to drive growth the <unk>.

Cost containment measures put in place last year and in Q1 are working as we realized a $1 5 million sequential reduction in operating expenses on track to achieve the $3 $6 million in annualized savings, we discussed last quarter.

In addition, our focus on expanding our international reach has proven successful with approximately $2 million of international sales in Q1.

Also expanded our international revenue beyond Australia to include both Germany and Peru.

As Keith mentioned in Q1, we experienced headwinds on our domestic business driven by COVID-19, Lockdowns and channel inventory reductions with provincial distributors, which caused our overall revenue to decline sequentially.

I remain optimistic and excited about our future potential as we continue to focus on expansion in both domestic and international medical and pharmaceutical markets, while improving our cost structure and capital deployment.

As I said last quarter as the management team, we are committed to growing our top line and adjusting our cost structure to return medi for them to profitability.

Turning to the P&L performance for the first quarter.

Q1 revenues decreased 9% sequentially from $6 1 million in Q4 to $5 5 million in Q1. This was driven by a 40% reduction for the domestic sales from $5 7 million to $3 4 million largely as a result of COVID-19 Lockdowns and channel inventory reductions.

With provincial distributors as mentioned previously.

The reduction in domestic revenues was partially offset by international revenues as the increase sequentially for zero point of 3 million in Q4 to $2 1 million in Q1 the.

The increase was driven by $1 3 million from customers in Germany zero point for million incremental revenue from Australia, and the smaller amount from our first shipment to Peru.

Gross profit for the quarter was negative <unk> 7 million versus Q4 gross profit of negative $24 7 million.

Q1, gross profit was negative due to the unabsorbed overhead with lower production volume and because of the inventory sold in Q1 was held at net realizable value as a result of our Q for revaluation.

General and administrative expenses in the quarter decreased sequentially from $5 2 million in Q4 to 4.0 million in Q1, largely driven by restructuring that was completed in Q4.

Marketing and selling expenses of $1 3 million in Q1 remained consistent with Q4 as we continue to focus our sales efforts on both the domestic and international markets.

R&D expenses decreased sequentially from <unk> 6 million in Q4, two zero point $4 million in Q1. These expenses will vary as we selectively invest to advance our capabilities and.

Finance expense increased sequentially from $4 7 million in Q4 to $9 7 million in Q1 as a result of accelerated conversions on the convertible debenture.

Adjusted EBITDA for Q1 was negative $6 2 million largely driven by negative gross margin of <unk> 7 million and operating expenses of $5 6 million.

Adjusted EBITDA improved sequentially from negative $8 8 million in Q4, driven by improved gross margins and reduced expenses.

Moving to a few notable items on the balance sheet.

Inventory increased from $22 1 million in Q4 to $24 2 million in Q1, primarily driven by inventory additions in Germany to support our German customers, including SATA.

Trade and the other receivables declined from $29 6 million in Q4 to $27 8 million in Q1, largely driven by collection of the Canadian emergency wage subsidy.

As discussed last quarter, there are two customers, 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.

The remainder of the 19 million is due from a second customer and we are confident in its collectibility adjusting.

Adjusting for these two customers trade and other receivables is $8 8 million, which is more in line with our revenue performance.

The current tax receivable of $4 5 million is of refund from 'twenty to 'twenty, we expect to collect in or before Q3 and will further improve our cash position.

Finally, our cash balance on March 31 was $42 1 million, which increased from $19 9 million at December 31.

The cash balance increased by $22 2 million driven by net proceeds of $31 1 million for the previously disclosed bought deal and was partially offset by $2 6 million payment on our convertible debenture and 6.0 million usage from operating activities.

Capital expenditures were modest at approximately zero point $3 million as we continue to manage and prioritize select capital investments to expand the business.

The cash balance on the convertible debenture stood at approximately $3 9 million at the end of March which is largely to be repaid in Q3.

While we've made progress in the quarter by expanding our international presence and revenue, reducing our cost base and managing our capital expenditures, we still have work to return the business to profitability and drive cash flow with that I'll turn it back to Keith.

Thanks, Greg.

Some final thoughts.

On our outlook and business agenda.

At the top of the list is executing efficiently and effectively as we ramp up sales and make better use of our well established manufacturing capability the.

The success, we saw in international sales in Q1, particularly in Germany will pave the way to a very exciting future across Europe, and keep us top of mind of multiple global pharmaceutical companies entering the market.

Activity in Asia Pacific and Latin America markets will complement our sales potential.

And make further use of our existing GMP production capacity.

We also have a more constructive outlook of the Canadian market due to the broader distribution diversified sales and increasing revenue from finished formulated product.

As a result of strong progress made on building our presence in core wellness and pharmaceutical markets.

As an example of this growth our biggest distributor the Ontario cannabis store has expanded their operating retail footprint to 700 stores, adding 150 stores since mid March.

Yeah.

Our Q1 development that was discussed on our last call, but it's worth repeating is the receipt of our candidate drug license from health, Canada in February of 2021.

This enables us to manufacture and supply pharmaceutical prescription drugs that have been classified with of them and in turn creates opportunity for us to supply of cannabis based pharmaceutical drugs and Apis for clinical research trials aimed at abbreviated new drug applications in novel drug discovery.

Later this quarter, we will share an update on exciting progress within our clinical trial portfolio, which we believe will fully established Megafon labs as a pharmaceutical company an open long term growth opportunities.

Notwithstanding the near term challenges related to the ongoing pandemic, which I know, we all hope will be behind us by Q3 as more Canadians are vaccinated, we do expect to see a stronger back half of 2021, and we will further make adjustments to our cost base as required.

Before opening the line to questions. Let me update you on the company's current leadership transition.

As you know Greg joined US in February of this year and I took on the role of interim CEO late last year.

Over the last three months, Greg has focused on bringing in new senior level talent for the finance team to support our growth going forward in terms of the CEO role. The search is well underway with several strong candidates identified we will keep you up the date on the transition once the candidate has been confirmed.

Overall, Q1 was a productive quarter, marking the start up of sales volumes under important new customer agreements further global market penetration of our products and the improvement in bottom line performance.

2021 as of year on progress will occur as we gain traction with our priorities and create on many farm the I know, what the liver tangible value for our customers and shareholders.

Having been with many of farm since day, one I can confidently say that today. This company is better positioned than ever to dominate the global cannabis market.

Now operator can you. Please open the line the questions from our callers.

Certainly at this time, we'd like to take any questions. You may have for us to ask a question. Please press star one on your telephone keypad.

Our first question is from Aaron Grey with Alliance Global Partners. Your line is open.

Hi, good morning, and thanks for the questions.

First one for me is on Germany, let's do the sales start there we love to see if you could provide maybe some additional color in terms of maybe the sell through you're seeing and maybe some of the progress.

The sales force from side is making on nothing but about 30 people you know off during the force. So how that's kind of help in terms of what the physician adoption and how you think that might get accelerated even further you know at COVID-19 restrictions come through on an and and things start to normalize. Thanks.

Thanks, Good morning, Thanks for joining the call Yeah, I think we're really excited about Germany as I mentioned.

On the call already it was our first quarter, where we made deliveries into Germany and most of those deliveries did go.

Kind of in March on even in towards the end of March so a little bit early on some of the on some of the trends for us as we've been in the market for call. It 45 to the 60 day, depending on the product, but it is pretty encouraging of the stat of team. As you mentioned you know over 30 salespeople the canvas business unit there is over 45 people.

So they've really invested into the program and will be of dish and we'll be launching additional skus. So you know some of the more anecdotal signals such as you know launching more skus in the coming weeks, obviously is the.

Good sign and you know on that.

Out of investing that much on their side is also the time, but we have seen.

Flow through in the first.

For weeks kind of as expected and better in a couple of the Skus. So really looking forward to shipping them more product in Q2 and that goes for all of our German customers of mentioned, we had two German customers that we deliver to.

And we have a few more of that will be delivering to us.

Well on this quarter. So we see a lot of opportunity now that we've opened that pathway and we have the approvals in price it doesn't make it on the follow on orders a lot easier.

Okay, Great I appreciate that color and of the if we speak domestically on Canada. It looks like you know.

There might have been some some softness there on the quarter just wanted to know if you could give some sort of some sort of color on the.

Formulated products Q over Q, and then things how might think amount of change, especially with some some acquisitions such as like you know eight for all used to be working with by campus of how that might change things on your range and with your partnerships and interest any additional color on you can provide on on some of the kind of sales trends you've seen there. Thank you.

Yeah, It's a great point and it's something that Greg did call out of that is we did see the off January February in relation to the.

The pandemic.

And talking with provincial distributors, they were looking to bring the <unk>.

Inventory down so you know on some cases, if any of them.

That's like the demand of our products, but the province was not.

On a position where they want to take on more inventory, so they're actually holding less inventory in their warehouse so that FX effect.

The effect our sales I think that's what's really encouraging is a lot of the provinces have been doing you know of SKU rationalization exercise of the they go through and they're actually consolidated in different skus of having different categories and they're doing.

The more mature model of doing protocol and the and the recent.

Oh, Yes protocol on Q1, we actually added more skus are the.

Then the one that was taken away. So I think that that is of good.

The sign of our products, having the strong demand and as I mentioned.

The Washington D C B N.

And the CBD 100, we're really unique products for us and.

Sold out quickly and we're able to restart quickly. So I think we'll really see the performance of those and in this quarter like Q2 that we're in today with those again those deliveries kind of going into the March time frame and some of those retailers that haven't had on that product at the free.

The good water store until April so I think thats good on the consolidation I think.

A reoccurring theme that we're going to see all through the rest of this year and even into next year on the Canadian space. Obviously, there is some replication of of.

On different assets in our space and Theres a lot of room for that is really encouraging for us.

To see that you mentioned as valley, we launched the <unk> Valley.

The patents and they were really popular we did full turnkey solution for them. So help them with the selection of the hardware, we formulated and on the actual formulations of once you go into those defense. So I think Ken if you recognize how great of a product that was you know in conjunction with the great job that the <unk> Valley.

The team is doing on marketing and made that acquisition.

As far as you know the ongoing manufacturing goes we're still manufacturing today for cancer and we plan on doing that into the foreseeable future.

As many know canopy was actually our first long term agreement back in 2019, the wave of a long history of working with the group.

And we've seen success in the path of different partnerships you have with them. So really looking for is in all of them will expand that brand.

Okay. Thanks, Thanks for that color and I'll jump back on with you.

Your next question is from David can I go with a D E B capital markets. Your line is open.

Hi, Good morning, guys the sexually of Frederico champions for days.

Thanks for taking my question. So just one of them you know we know that your strategy is focused on on the pharmaceuticals, but in light of debt just how should we think about your strategy on the Canadian recreational market.

It does now ex second place to international.

I'm just trying to understand what's the strategy here given this focus on pharmaceuticals.

Thanks for the Rico morning, Thanks for joining us I think.

Really we are of pharmaceutical company that specializes in Canada and when you look at that and you look at the pharmaceutical market that you see today of a lot of.

Pharmaceutical people on our large pharmaceutical companies are very much in the wellness space as well if the if.

You look at our partners' data on some of their recent acquisition of lot of what they're doing today of consumer wellness products. So what we like to do is we'd like to think of the opportunity in Canada as a way of doing a proof of concept for.

And and you know of manufacturing and development abilities for those pharmaceutical companies. So it's really flexing their muscles to show what we can really do in that space for some of these really in the pictures that we have so you know obviously.

That is what we're showcasing two those two of those future customers at the same time also taking advantage of the capacity that we have we've spent tens of millions of dollars of building out the amazing GMP platforms, both in Canada, and Australia, and so we want to put those to use as we wait for the.

The entry of additional Big Pharma company. So this wellness market really does give us that opportunity and then lastly is on our contract manufacturing platform again, having that capacity allows us to do just manufacturing for people like the valley and canopy.

So then that way, we can serve them they take care of everything from the marketing and the retail of it but we're able to take care of that net use of that capital investment we had them. So the.

The answer your question of the number one focus does remain on being a pharmaceutical company and service the servicing pharmaceutical customers.

Customers, but you know that that wellness category doesn't leak into that and we are the to take advantage of that as you know of leaders in the space.

Okay. Thanks, Thanks, that's helpful and I'm just the you know we've seen the over the last few months, we've seen the some M&A activity accelerating in Canada and also on the West you know some Canadian companies entering the rest of the space.

Just wondering how are you guys seeing that that environment that of meeting.

And you have any specific plans are or more advanced negotiations maybe to sort of entered the U S. CBD space of any color there would be helpful. Thanks.

Yeah.

Like I said.

And they're really encouraged to see all of the activity of the space I think it shows you know how much opportunity there isn't candidates as it kind of for.

This beautiful company we.

Really are not affected by more so are the candidates company you have regulation that are governed by jurisdiction to the jurisdiction in the United States EBIT by state. The state. So that forces you to Dubai different assets as a pharmaceutical company. We can use our platform both in Canada, and Australia actually rest of your products all around the world.

And so we don't need to replicate some of those assets.

So I think that that's really important to call out I think when you look at the U S. CBD space, Although you know of great category in the U S is not something that we've targeted I think our opportunity in the U S. As you know the introduction of more of drug containing candidates. So when you look at the success of the drug like after the ILEC.

The you know the progress made with the out of ex out of GW pharma and <unk>.

As pharmaceutical I think we're seeing a lot more research and critical late stage clinical trials as.

As well as you know of Super our future opportunity for abbreviate of drug applications for Biosimilars and what that does is that many farm their ability to use our.

On a very unique certifications the manufacturer of those for us So we.

We can manufacture of that in Canada. If you look at exports of the Canadians rest of the day 50 per cent of the go to the U S. So we can take part of those traditional channel without having to go around in the plant flags in different countries.

Thank you no. That's helpful. Thanks for clarifying that the hub that meets the effects.

Your next question is from Tami Chen with BMO capital markets. Your line is.

Often.

Good morning, Thanks for the questions I'm glad the question for you the first.

With respect to be gross margin. So I know this quarter you called out on just a lower fixed cost absorption.

Aside from that how should we think about where you are at with respect to working through some of the legacy of higher cost flower.

Yeah. Thanks, Thanks for the question so yeah on the gross margin obviously, we're happy with the improvement that we've seen from Q4, even even excluding a lot of the onetime items in Q4, we've seen improvement as we've talked before you know where we're going to see improvement go forward isn't it in a couple of areas, one obviously with improved automation and process.

As efficiencies.

Two is as Keith has talked about when he mentioned the sales expansion.

Particularly internationally.

With with improved margins and then as you said, obviously with the inventory at net realizable value, we still need to work through that which you can see the amount that we have on the books. So we still need to work through that to get back to a positive gross margin and as I said last quarter. You know, we do have a view to get back to two of positive gross margin.

And in the future here and get back the business back the profitability. It's just going to take some time to work through some of this old inventory and drive the efficiencies that I talked about.

Got it okay. Thanks, and my follow up is on.

Keith I wanted to go back for some of the commentary you made about because I can see a better house second half of the year and expansion of and Canadian D to C. On White label for L. P. On the can you just digging for that a bit more specifically I'm wondering on the current environment with respect to our contract.

You're seeing some of the L. P outsourced that more and more and really what do you think it'll take for us to really see an acceleration in that the three needs to see just to point out category expand a lot more from here do we need to see some more consolidation and so just the larger Lps start to outsource more.

Can you just talk a bit about that.

Yeah. Thanks, David.

The great point I think you know a lot of what we're doing in the Canadian domestic.

It gets driven by either bulk sales of our by contract manufacturing and I think it is really encouraging to see some of the other leaders in Canada and what they're doing I think if you look at you know recent news.

Some people like to array of Aurora, where they're looking to actually close.

Whether it is growing our core production facilities in order to meet.

Meet their targets they are increasingly looking to outsource that so I think that that's the that's a big piece of it is you know as people specialized in what are the best that they're looking to people like us to outsource some of those services and some of those turnkey solution. So you know our ability and.

Our history to execute really allows us to compete on those contracts I think the second piece of it is is also the entrance of more specialty products and more unique products. So what's really encouraging is were seeing you know companies pop up that are specializing in a different end products.

So, let's say they are a bedroom beverage formulated and manufacturer or their.

The soft U a formulated and manufacturer they're really good at making these food or beverage products, but they're not going to you know.

Putting the investment or the or the resources to actually do the extraction of themselves. So a lot of times now they're coming to two <unk> to the market and and the BW space to buy those inputs and so many farms you're able to compete.

And that in that sector as well. So I think it is and I think it has two pieces I think it is the you know the growing consolidation of need for people to outsource what theyre not that debt and then I think it's also the increase of those the specialty products I think it's a really cool to see every month, you know something new.

On the BDC side of these retail stores and in all of them are usually made all of those new products are concentrated.

Got it thank you.

Again, if he would like to ask a question. Please press star one on your telephone keypad. Your next question is from Scott Fortune with Roth Capital. Your line is open.

Hey, Good morning. This is Nick stepping in for Scott you touched on the SKU rationalization, you're seeing in Canada, but on the other side of that are you seeing kind of.

Hum.

The more favorable purchasing opportunities and just looking out of people just update us on your go forward purchasing strategy that'd be great.

Yeah.

It does keep from a from a purchasing standpoint of of raw materials. It does create a great opportunity for us. So you know theres been some SKU rationalization all of them.

Obviously the increase of.

Growing in greenhouses are outdoor in Canada has really helped us so you know of.

As Greg mentioned of working through those the old inventory or cost of inventory as we are replacing that with new inventory. We're seeing you know volume prices on raw material reduced by up to even 10 axes on cases, so that really helped us with our.

Gross margin going forward so it's.

Definitely helps as we've kind of the that SKU rationalization.

In turn the to the ability for us to buy it for what kind of at a lower level.

Got it thanks for the color and then switching over to Germany. You recently signed on to your supply agreement with a subsidiary of I am cannabis in Germany.

I was wondering if you could quantify that opportunity a bit more and just also in terms of timing and record revenue recognition.

Whether or not you're seeing similar opportunities kind of outside of stat of given your GMP distribution capabilities there.

Yeah.

We're seeing a ton of opportunity in Europe, So I think Stan.

Data has really proven our ability.

For the launch in Europe, and move the product into Europe. So once they see you know many of our manufactured products.

Does increase the inbound business development opportunities I think on the company, we're even getting to the point, where we are having to make sure that we're picking the right partners and the partners that are able to move the volume that we want to we want to create for them is I am candidates are in particular of IMC is of great company.

And we're really happy to sign the agreement with they're a subsidiary of agile farm as the bonds are really in in Germany, and you know they have aspirations for and getting the product the patients of all day and flower and extracts of we will be taking care of the extra portion of that.

On a little bit early to tell on on volume. So I think that's the.

To quantify it today it would be a little bit difficult I think what's really important is the opening up that regulatory pathway and getting the product and we expect to do that you know within the next few quarters. There is a there's a bit of of protests, obviously in Germany has as a prescription drug and as of their cotton acres of number of registration. So we're working through.

Of those registrations with them today.

Got it appreciate the color.

Your last question is from Jane <unk> with Canaccord Genuity. Your line is open.

Yeah.

Hi, there and thank you for taking my questions. My first one just to touch on something that you mentioned in your prepared remarks are the early next year are met apartments that are of planning to expand into other international markets.

Was wondering if you could provide any details on which markets you're eyeing for for entry and the strategy around entering those new markets, whether it be more broad based across multiple George the jurisdictions.

Or if it'll be a on a market by market basis and.

If I can add on the on the back of that.

It's gotta go on to incorporate or evolve at the sales force while entering those markets.

As a sales force gonna be dedicated the same dedicated kind of its distribution from Germany, that's growing market the market or are they going to expand on that front. Thank you.

Thanks, Joe.

The great question and we are really excited with the progress that we're making with data and our ability to expand I think where we're expanding to we'd probably kicked out amongst the partnership just from a competitive advantage obviously, but.

That we can coffee day that it will be in in the EU. So having product in the EU you know with data today allows us to move product throughout the EU a little bit easier. So it just makes more.

More sense to start their scatter operating over 100 countries worldwide. So the options are really endless in that sense, but you know growing outwards from Germany of the base geographically it doesn't make sense for them a lot of different angles.

As far as investing on the sales force you know I think that obviously as the data decision, but from what I know and working with them over the last 18 months is I would say that we'll probably invest in additional resources in those new regions also keep in mind you know.

In the EU kind of even something as simple as the language. So we have 30 sales people on the street today talking to physicians and pharmacists in Germany and Germany.

It would be the primary language. So as we go into other countries that theyre not German speaking then we would be probably adding an additional resources. There. So I don't I think that you know as long as of the ROI of their that will continue to.

To invest in and definitely stat has seen the canvas opportunity of something that will help their business grow on the future.

Thank you.

The next question just staying on the topic of the the international sales channel. So there was a notable improvement in the quarter on the on net sales.

And those international channel and I'd be expecting just given kind of the 30 agreements that are in the pipeline today for that the ramp up fairly aggressively here.

So just wondering from a sales mix perspective, I think our international was about 38% this quarter. So from a sales mix perspective, how's the metaphor I'm looking at the cadence for international versus Canadian revenue mix into Q2, and then onwards throughout 2021.

Yeah, I think that's a good point of where we are our ambitions are global. So we are looking you know as these fans of really look at those medical markets, where we don't see as much price compression and where we have more competitive mode or we could use of certification. So I think that we will see you know the that.

It would become something where we're adding on more and more deliveries.

Mentioned, the those 30 contracts.

It is a little bit of a of a lumpy process of the way that we registered products in each country. So even though we've been let's say by the Skus the status of day as data add few number of six and seven we actually have to go through the process of registration again so.

So where we are approved as far as the manufacturer in the next quarter ago, But then we would register of new a new of new actual like drugs serial number that would allow us to do that so as we see our partners work on their launch there's different factors at play as far as them having their license for the.

And then we know we are working with different you know different regulatory in different countries. So for example of.

The New Zealand, which as you know of great opportunity for us because of so close to Australia. They actually changed on the regulations recently in February March. So then that allowed us to go back and actually have to re jig, our dossier to the regulator. So it does delay that that delivery by call. It another six.

60 days as we go through that process. So this would be I'd be cautious to say you know if the straight kind of a ramp up from here, but.

It's definitely the opportunity keep unlocking in the straight ramp, but the revenue will will be a bit lumpy as far as the process.

Thank you that's all my questions for today.

We have no further questions at this time ill turn the call back to keep strong for closing remarks.

Great well I'll, just close by saying that we look forward the hosted on our second quarter conference call and our upcoming annual meeting and keeping everyone abreast of all of the progress of between thanks for listening and have a great day.

This concludes today's conference you may now disconnect.

Sure.

Hum.

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