Q2 2021 Medipharm Labs Corp Earnings Call
Good morning, ladies and gentlemen, welcome to the meta Forman Bad second quarter 2021 conference call and webcast I would now hand, the call over to Keystone Medical I'm glad president and interim CEO.
Thanks, operator, good morning, everyone with me on the call today are Greg Hunter, our CFO and Chris <unk>, our new chairman.
Before we begin please note the following caution respecting forward looking statements, which is made on behalf of <unk> 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 many farm labs filings with the Canadian provincial Securities regulators.
Which are available on SEDAR.
At their website SEDAR dot com.
Okay.
Our second quarter was one of transformational growth and establishing ourselves.
As a true pharmaceutical company with expertise in canvas.
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 inventory.
We will then introduce our new Board Chair, Chris case, 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 achievements.
Way it grows our business and our plan to capitalize on its unique status in the industry.
From the outset, many farms objective was to become a leading pharmaceutical company specializing in canvas, taking charge and an emerging multibillion dollar global pharmaceutical and medical cannabis market by providing multiple products and turnkey solutions to our broad customer base across multiple juries.
Picture.
A key part in becoming a pharmaceutical company as pharmaceutical licensing.
And in Canada that means a drug establishment license.
It is done through an extensive review of the company's quality management system over several months and then an in person or virtual inspection spanning multiple weeks.
Massive undertaking in comparison to our cannabis processing license issued in 2018.
This license is awarded by the Health, Canada Pharmaceutical branch and it's 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 many farm to manufacture any non sterile drug and finished good or active pharmaceutical ingredient API Corp.
Leaving many options as we start to see more complex formulas in drugs, where cannabinoid or 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 cannabinoid.
Other pharma companies working with candidates with GMP licenses from health, Canada, or the U S. FDA are only held by those doing final product formulations or working with synthetic cannabinoids.
Based on the current therapeutic evidenced in natural cannabinoid and products such as FDA approved for dialects Theres, a large demand for naturally derived and pharmaceutical approved cannabis API and finished goods.
So what does this drug establishment license mean for <unk> and its shareholders.
To summarize with this unique license we can now.
Access more markets globally, or special access or OTC policies for candidates 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.
Can now be a service provider to other large cannabis companies with aspirations entered 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 cannabinoid and give <unk> future manufacturing rights.
Okay.
These drug establishment license business attributes create near term opportunity while also preparing for the long term.
Entity to produce future clinical space clinical Grubin FDA registered and approved drugs. This is a great development for many farm and our shareholders and it means our outlook for growth has a specialist pharma company is bullish.
Yeah.
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 and a testament to the execution on our international contracts, we saw quarter over quarter growth of 24% and our international revenue.
Now with regulatory channels open we expect to continue to be the leading private label medical cannabis concentrate provider and new global markets.
Like our industry unique supply agreement with <unk>, one of the EU largest generic drug companies. Many farm 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.
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 within visa 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.
The way in your manufacturing of pilot batches and six months for stability testing.
Their registration in places like Germany, and New Zealand follows 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 and global health regulators focused 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 and import permit.
Many farm 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.
Mehdi <unk>.
Work is starting to result in steady growth of material international revenue.
We are also establishing a cadence and permits ahead of international customer forecast.
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 in Germany in March we made our first delivery to to extract customers in the region spatter and <unk> pharma.
In Q2, not only did we deliver to those customers again, but we also delivered two new customers and Cantor <unk> and Debbie can.
Of course, our reach goes beyond Germany, having already delivered to Peru in March and we expect to deliver two 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 worlds, leading country for medical cannabis with more than 320000 cannabis prescriptions approved in 2020.
<unk> 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 medical and adult use markets as part of our priority of building a profitable and sustainable business.
In Canada, we continued to launch new and innovative products are oils 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 available CDN product, which is the only product of its kind in the market and gives users the ability to inhale CBD and for faster onset, which is easier to titrate.
In late Q2, we released a favorable CBD products, where we saw our GAAP in the market.
Other CBD tapes were either heavily diluted.
Subject to user difficulty as CBD crystallized in the competitors' purchases.
These quality and innovative products will be accessed by more consumers as many farm officially launched in Quebec and May Quebec is one of the leading provinces and Canada sales and with a more complex listing process. The product categories are not crowded as we sometimes see in other provinces the grow.
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 <unk> gels and topical and the growth in <unk> Valley baked products, which we now produce for canopy growth. Following the successful acquisition of that brand.
Our sales in the domestic market are not where we want them to be in Q2, we continued to be strained by COVID-19 restrictions at retail level, which resulted in provincial distributors lowering inventory on hand.
So the majority of Q2, the province of Ontario, which is our biggest domestic customer still had significant COVID-19 restriction placed on retail stores.
As many farmers 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 <unk> market.
I will touch on our strategy to increase sales later in the call.
Finally, we continued 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 CBS and have innovated consumer delivery methods, such as tasteless odorless water soluble drops.
We will work with provincial distributors to sell these new products as the various provincial lifting schedules permit.
And 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 many farm branded oil ranks fourth in cannabis oil sales in Ontario.
Joe.
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 am 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.
New customers in Germany, bringing our customer count was successful German deliveries to for 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 <unk>.
As Keith mentioned in Q2, we continued 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.
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 a recent expansion into Quebec, and the launch of new innovative products, such as CDN oil and CBD and <unk>.
As I said last quarter as a management team, we are committed to growing our topline and adjusting our cost structure to return <unk> arm 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 revenue decreased seven 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 zero point $9 million.
Domestic Canadian revenue decreased 26% sequentially to $2.6 million 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 zero point $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 <unk> 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 flower being sold to German customers with lower margins.
General and administrative expenses in the quarter increased sequentially from 4.0 million in Q1 with $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 350000 in Q1 to a 140000 in Q2. These expenses will vary as we selectively invest to advance our capabilities and product portfolio.
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 zero point $6 million in Q2, as a result of accelerated conversion 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 subsidy.
As discussed in previous quarters, there are two customers or 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 collectibility.
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 30 was $38.9 million, which decreased from $42.1 million at March 31, our cash balance decreased $3.2 million largely driven by operating activities.
Capital expenditures were modest at approximately 180000 for the quarter year to date capital expenditures of 460000, as we continue to manage and prioritize select capital investments to expand the business.
The cash balance owing on the convertible debenture 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 Cage is chair of our board effective immediately Chris joined our board in July of 2020, and it's 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.
As Chief operating officer of BMO capital markets, one of the largest banks in North America.
<unk> serves as a board member of BMO, China, Co and first mortgage general partnership.
I'd like to pass the call to Chris to introduce himself and discuss our board priorities.
Thanks Keith.
I appreciate the board's confidence in me to overseas leadership of meta firm 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 Pryor I have worked with many public companies, including those with candidates and pharma specialties.
With met a farm 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 in drugs with marketing authorization.
Meta firms 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 had been interviewing strong candidates.
Meeting with these individuals has assisted us perfectly to finding the right person for the job.
Since we started this past year <unk> has made great progress in international sales and specialized pharmaceutical licensing developments like these in a fast moving industry has helped us refine your experience and expertise in the criteria for a 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 medicine arm.
And then 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.
Thanks, Chris.
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 revenue.
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 the 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 and 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.
True.
Expanding contract manufacturing.
<unk> 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 worlds biggest cannabis companies.
On the international front, we have continued to add to the private label services provided out of many farm Labs, Australia.
Three continued innovation.
Internationally, there is a lot of white space when it comes to innovation just like in the established adult use markets, such as Canada or legal U S. States. Many international patients are seeking new formulations and delivery methods.
Barrier is usually making one of these popular formats and a GMP compliant way.
<unk> farm has just the expert team to assess and meet that challenge domestic.
Domestically as cannabis category has become crowded and distributor scaled back product listings innovation is the sure way to get product on the shelf and increased sales. We saw this recently with faithful CBD and CBD products and we will use the same approach going forward to get more product.
On the shelf with retailers.
In the pharmaceutical space, our R&D is more complex as pharma customers will seek API suppliers, who are active.
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 medi farm 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 bear unique pharmaceutical licenses and strategies, making <unk> a great investment opportunity.
As one of the founders of many farm 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 our special access medical programs.
Having achieved our drug establishment licenses in Q2, I can confidently say, we have reached that goal.
This will result in many positive business outcomes for many farm 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.
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 are there any number one for any audio questions. Paul So just a moment to compile the Q&A roster.
Our first question comes from the line of Aaron Grey with Alliance Global partners.
Hi, Good morning, Thank you for the questions and congrats congratulations on the drug establishment license.
So first question for me I'd like to just kind of talk about the license and maybe in terms of the timing where you see the opportunity. So certainly it seems that you guys have a differentiated strategy there than maybe some of the other candidates place but.
You talked a lot about potential API that is 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 functional pharmaceutical companies to provide that type of API right now there's such drugs that got dielectric marinol out there. So how do you see in terms of the timing of that license eventually translating into <unk>.
Revenue is it more of a near term or maybe two or three years out there. Thank you.
Thanks, Dan I appreciate you calling in this morning, it's a great question.
Our drug establishment license guidance truly differentiates us in many ways and does bring like both near term and long term opportunities I think on the near term what we're looking at is more international sales I saw where we saw the 24% growth quarter over quarter in the international.
This helps us as part of those are complex registration processes in export processes around.
Special access programs that are opening up and it seems like every couple of weeks you see a new country that is going to try something I think both health authorities are looking for a GMP solution. Sometimes just didn't have one because it didn't exist. So there is some near term opportunities there for sure that we keep seeing that international growth I think you nailed.
And then on on what the long term opportunity is really that API provider for <unk>.
Drugs that have marketing authorization, so we've seen that.
The great success of the effects of Epidiorite.
If you look at their annual run rate in the U S epidiorite sales being over $600 million U S a year.
You can imagine that most generic companies are looking at that as an opportunity.
And with those they're already starting the development process. So there are multiple generic companies are looking at the development process, but that is long term so just to kind of create.
A timeline on that there's a lot of patents on that product it could take up to.
2025, 2026th to really enter the market with the generic but when they do.
Generic sometimes make up 30%, 40% of our market share. So there is a massive opportunity theres other drugs like that.
As you mentioned Marinol.
In Germany, it's referred to as Dronabinol.
<unk> is still one of the main.
Concentrates sold in Germany. So we can participate that right away as those products are off patent might not be as massive an API opportunity for some of those generic drug companies, but there is an opportunity there so.
To summarize there is there is there is near term.
Material growth that does make a difference to our revenue today and then the long term is limitless and where we can go.
I appreciate that color keep that that's really helpful and a quick question for me.
Turning to the domestic market in Canada can you talk about you know kind of finding gaps in the marketplace. There's certainly been some provincial buyers who are really taking a focus on that in terms of new products that they'll take and but it's an overall question in terms of as you're kind of looking for these gaps in the market. How do you look at potential ROI in terms of the effort.
And capex needed to kind of maybe ramp up production of that product versus how big.
Sure maybe.
Maybe that GAAP in the market might be how many other interest might come in I would just like to give some further commentary from you guys in terms of the ROI and different things Youre looking at as you look to find GAAP to Mark and then decide whether or not you guys would be an opportune position to try and fill that gap. Thank you.
Yes for sure.
Canada continues to be a focus that we're looking to increase in that retail space as I mentioned theres, a big opportunity there.
Any product that we do we're obviously looking at it from an ROI perspective.
Respective to make sure that it is.
Accretive to the bottom line, but really what we're looking at in innovation is the Canadian space. There are some there are some large.
Players in there that I have spent a lot of money on their retail.
Whether there have ownership in a retail platform or they have like a massive retail sales Kurt.
I don't think that were looking to go head to head with a lot of those and some of that.
Big category, but what we can do is we can own.
Niche is where there is innovation because we have such a strong team so really for us it's.
Things like that CBD and base, where we're the only ones who make it or that CBD baked that doesn't crystallize thats, where we see that in the future. We're looking at other formulations that would be minor cannabinoid based something like a CBD, which you can find in the U S today, but not yet in Canada.
It is probably a good spot where we can be and then what different formats. We can do so looking at there is there are some water soluble products on the market today.
Most of them are low potency. So how can we maybe make like a higher potency water soluble products for consumers. So there's a lot of.
There's a lot of opportunity there and a lot of ROI and we're really focused on those niche.
Of innovation and what that really also helps for us.
That's important is we are using this as a platform as like a proof of concept for a big pharma and CPG customers current and in the future. So let's.
Let's say that I would like to launch CBD at our CPG to their massive patient base.
We're able to show that not only could we formulated it model it and kind of some.
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 opportunities.
Okay, great. Thanks for that color and then just last one for me if I could.
Just for Germany van right. So as we look to potentially see a bigger ramp in the overall market.
Some of these.
Covid bottlenecks ease.
Could you talk about whether or not on your guidance and there is there is any types of bottlenecks in terms of getting supply or getting the product out there for <unk> or any of your partners.
Or if it's more of just like.
Demand in carton.
Current COVID-19 dynamics that right so.
If the demand kind of comes up and you see more prescriptions.
Being issued in Germany, do you guys have all the capabilities to fulfill that demand in the back half or through 2022. Thank you.
Yeah. Thanks Erin.
No bottlenecks on our side on let's say the delivery and 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 EBIT 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 the where there is the bottleneck.
We saw in Q1, we had two customers in Q2, we had four customers.
And then we will see that grow at that kind of rate, where the bottleneck is more on the registration side as I mentioned in the call.
When there's a new narcotic products, so when we onboard.
Like a German customer they have to go to beef arm, which is like the.
The FDA of Germany, and then they registered product during our product submission with before that process can 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 channels open were able to get a good cadence.
I don't think 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.
With their own branded products.
Let's say accelerated would have fill rate oil and Germany. So as we see more and more entrants like Staten our partners at <unk> EBIT.
Jamie can where they're looking to outsource it.
We're really one of the only option to now where it's probably the best as far as quality license and experience of getting into the market. So I think we'll continue to see demand in many parts prepared as well.
Well capitalized and.
Well resource types to meet that demand.
Alright, great. Thanks for the color and I'll jump back in the queue.
Your next question will come from the line of Scott Fortune with Roth Capital Partners.
Good morning, and thanks for the questions real quick housekeeping called where the inventory sitting at now at $13.7 million after kind of the inventory write off and at what type of costs.
Does this inventory included just wanted to get sense as well.
Look at gross margins going forward from this point as far as that's concerned.
Yes. Thanks for the question so yeah on the inventory.
More right sized now with some of the adjustments that we've made sitting at $13 million.
$5 million ish in as we've said in raw material, which is primarily flower that we use for extraction.
The bulk of the restaurants and finished or semi finished product, which again some of that.
What's in there, which is new in the last couple of quarters as finished good flower that we sell for sale purposes or end consumption.
Within Germany. Obviously this is 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 will continue to focus on managing our inventory to to help improve cash.
Okay, No I appreciate that color and then.
Focusing on kind of the EU, our international side, Keith you called out new product formats on the GMP compliant.
Things and the timing of maybe new derivative products being 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.
Germany, as we look out to the second half and into 2022 here.
Yes.
A great question I think.
As you look at like U S States and Canada popular formats things like like like a vape pen or like a water soluble that you could put into into a drink easier or something like that as far as like a patient use goes for patients is really a great opportunity even.
Well developed medical programs such as the one in Australia, right now really dry flower oil as 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.
An oral solution.
As a GMP product is something that.
There are some systems already in place because there is oral solutions for other drugs, but when you look at something like a vape pen.
<unk>, a vape pen becomes very complex as you know.
You have to take in consideration the hardware and the stability of something innovate like nothing we've got these new recreational markets that are so Nathan 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 three months to six months. So it's probably more of a 2022 opportunity as far as let's say something like a GMP make friends, but we might be able to achieve that late this year early next year, but the development is starting today and we've just.
And first part of this year kind of gauging customer interest and patient interest in kind of the ability to source all of those GMP suppliers, so that supply chain.
Okay sure.
And then focusing back on Canada kind of the growth in the second half here.
Reopens or are you seeing consolidation more consolidation here or where is the growth and income from <unk>.
More pick up in the two point now.
Expansion in that category.
And then what are you seeing from the front side of things are they looking to outsource now more potentially.
In this environment and just thoughts on how are we second stronger second half growth in Canada for you guys. Yes.
Yes for sure I think.
We will continue to sell our quality and innovative products are branded product at the store level and I think as I mentioned, we've just subsequent to quarter close we've increased our sales team there and some of our resources on the retail effort. So we could see some incremental growth there, but since we do.
Participate in some of the smaller categories, we know where that's more of a incremental growth funding the back year back half of this year I think you mentioned, where we see also a lot of opportunity. It's kind of these <unk> services coming back. So 2019.2020, a lot of our business was BD.
And now we're seeing 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 it.
We're the only one in North America, who have this drug established license for the extraction of cannabinoid large licensed producers.
Are coming to us to do GMP type services, whether thats tolling or using material that we source. We can do we can make them like a GMP API or GMP concentrate so that they can put that into their pipeline internationally and we've already started doing some of those activities just as read.
<unk> as August so we will see a good pickup in some of our b to B tolling services with that.
Alright, Thanks Scott.
I'll jump back in queue. Thanks.
Thanks Scott.
Your next question will come from the line of Natal, Yeah, Cochran with Scotiabank.
Hi, Dan Thanks for the color on international and I have some questions on the Canadian side. So from the perspective of the provinces can you give some color on what Youre seeing now I think central bank compared to.
The restrictions that they have had so far things are opening up and collect.
Vincent that ordering more and the second part of the question is is the margin side. So can you give some color on either margins expected to improve or at what sales philosophy. When you break even on the profit growth.
So if you can give some color on that thank you.
Thanks, Nick.
Thanks for joining us this morning, I'll provide a little bit of color on the on the provinces and I'll hand, it over to Greg to talk about.
The plans for their margin improvement so on the provincial side, we are seeing some some encouraging demand signals.
The province of Ontario, being our biggest domestic buyer.
It continues to open more retail stores.
With the restrictions being lifted.
June July as far as people being able to shop in stores again, because we do have that.
That high quality wellness brand. It is something that helps for sales in brick and mortar as someone might go in for flower and then C.
Our CBD, our CBD oil that they want to try so that that doesn't really help us as far as the demand signals go where.
We're waiting to see if.
Provinces will pick up inventory again.
The distributors will pick up inventory like we saw in there.
The last bit of 2020, so what we've seen to date of 2021 as distributors lower their inventory on hand.
Two more of like I'm, just in time ordering to get it out to to retailers, probably just because of the uncertainty around COVID-19, now that uncertainties away, we hope to see them pick up that inventory again, which will add for smoother and more deliveries on our end but.
Still waiting to see how that how that plays out and I think that the provinces has done a good job now of kind of looking at consumer demand I think in.
And 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 are they less and when they list them and I think given our longer relationship.
With the provinces that will that will bode well for many farm as well so I'll hand over to Greg to also talk about the margins yeah. Thank you. So yes on the gross margin.
The prior quarters, we do see a path back here to one not only just profitable on the gross margin side, but EBITDA profitability and Theres a couple of different aspects, where we're focused that are going to drive that.
One as Keith mentioned in his prepared remarks is around automation, which we continue to bring into our production facilities, which will obviously.
Hence our cost position the other one with the international expansion, which is why we're so pleased to see the sequential growth.
Theres, obviously higher pricing and better profitability in the international markets. So that will continue the other one is as I mentioned with some of our flower sales into the international market, where we did have some lower margin 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 mix changes it moves into different products and potentially away from flower and 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.
As Keith talked about is we expect to see that improvement in volume goes up that helps us significantly in our in our manufacturing and then finally with some of the new products that Keith has talked.
<unk> talked about with some of these new innovative products, where we can 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 growth margin gross margin.
Yeah.
That sounds great. Thanks, that's all from my side.
Thank you.
Your next question will come from the line of Tami Chen with BMO capital markets.
Good morning, Thanks for the question.
Wanted to ask about Germany can you speak a bit about the evolving competitive landscape.
I think I've noticed a couple of the other Canadian licensed producers that participate in that market.
Mentioned that income competitive level has increased in that market. So if you could talk a bit about that and how the relationship with data has been evolving with respect to your penetration of Germany.
Yeah, Jamie Thanks for joining us I think.
Everyone sees that as a great opportunity in Germany, and we will continue to see new entrants.
Into that space I think to date, we haven't been really hindered by competition, especially on the on the concentrate side is there's still a product to be registered there. So I think that theres still opportunity I think.
Here are some more companies going into that space and some more investment into that space.
But really I think it's also being faced with new patients. So every month. If you look at 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.
That are looking to to medical candidates. So as more people come in Theres 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 well.
We continue to work with our partners there, especially started to kind of look at that landscape and look at our pricing to make sure that we don't get.
Priced out of the market and things like that so it is something that we're looking at but.
It's encouraging to see everyone else wanting to come to Germany, because obviously, they see what we see in.
In the great opportunity there.
That relationship is progressing nicely as we mentioned we made our second delivery to.
To them on the oil side from Australia in Q2.
We continue to provide them with flower of 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.
Two two.
<unk>, Germany for that power supply. So it really is ramping up I think is a large.
Multi national company they are.
Pretty.
Cautiously moving forward on product launches. So theyre trajectory is one that's a bit more conservative as they add in more patients, but what theyre, 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 has great one is that there.
They're going to the patient level for education to make sure that they get those patients and then they keep the patients no matter what candidate solution, they're looking for for that therapeutic benefit, whereas some of the other.
I know company in Germany are really focused on let's say pharmacists that have a high sell through of Canada. So then they're loading in those pharmacies. So I think that the stack approach well a little bit slower to start has a longer staying power and we will see more and more great results and the ability to.
Put patients into new formulations or or.
Product delivery methods in the future as well so we're really happy with the progress there.
Got it Oh, that's interesting on the going through their patient level. Okay.
And then last question for me instead of a clarification the drug establishment license sorry did you say that.
You are working on over the next several months some sort of registration to filing with the FDA for API and that only once you have that then the long term vision.
Supplying API from a pharma company.
That happened I think that the next step that you have to do too.
To kind of finish that pie.
On top of that drug establishment license that I wasn't clear if you could clarify that thank you.
Yeah for sure that the drug establishment license is very 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 candidates or a launch of a generic drug candidate is well underway and theres a lot of steps that we could do today that we are doing today to achieve that there is a portion of one of the tricks. So if you if you register a new drug.
You would go through in the in the United States you go through a new drug application.
Process and in that process, you don't need to have necessarily API registered as a registry and the entire drug. So we could provide our customer with the API in that case, well concurrently doing these FDA filing if youre doing a abbreviated new drug application, which is a generic <unk>.
<unk> 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 is an important step for us to do and it's something that many farm is actively working on so we will go through the process of registering.
Our API.
Not only the FDA, but health, Canada, and the EMA or European Medicines agency, so that way it wherever our customers need.
In the pharmaceutical space they could go to those databases to validate that those ACI will work in their final drugs.
Okay I understand thank you.
At this time there are no further questions do you have any closing remarks.
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 I. Appreciate your time and hope everyone has a great day.
Ladies and gentlemen, thank you for participating you may now disconnect.
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