Q3 2023 MediPharm Labs Corp Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the meta firm Labs 2023 third quarter financial results Conference call.
Please be advised that today's conference is being recorded.
Before we begin please note that remarks today may contain forward looking information and forward looking statements within the meaning of applicable securities laws.
This includes without limitation statements about met a farm labs and its current and future plans expectations intentions financial results levels of activity performance goals or achievements and other future events trends profitability business growth or development.
Forward looking statements are made as of the date hereof based on information currently available to management of met a farm and on estimates and assumptions made based on factors that met a firm believes are appropriate and reasonable in the circumstances.
However, there can be no assurance that such estimates and assumptions will prove to be correct.
Many factors could cause actual results to differ materially from those expressed or implied by forward looking statements.
Additional information is contained in <unk> labs filings with the Canadian and provincial security regulators, which are available on SEDAR at SEDAR Dot com.
The Companys remarks may also contain references to certain non <unk> financial measures, including EBITDA adjusted EBITDA gross profit and adjusted gross profit.
These measures do not have any standardized meaning according to international financial reporting standards or I R. I F. R F.
And therefore may not be comparable to similar measures presented by other companies.
<unk> believes that the non I FRS measures referenced provide information useful shareholders and investors in understanding our performance and may assist in the evaluation of the combined company's business relative to that of its peers.
For more information please see the section titled reconciliation of non I FRS measures. The most recent MD&A of meta farm, which is available on SEDAR.
I will now pass the call to David.
Oh of meta farm. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate you joining us for meta farm Labs third quarter results conference call.
Turning me on the call today are key strong <unk>, President and Greg <unk>, the company's Chief Financial Officer.
I will address some of our strategic initiatives and then hand, the call over to Keith and Greg to provide more detail on the quarterly results.
This is our second full quarter conference call following the Eagle acquisition.
As an overview, we are very happy with our margin Opex and EBITDA results. Our balance sheet is the best shape. It has ever been now with our house largely in order, we can turn our focus to investments to drive profitable growth.
In the near term with cash flow and funding challenges faced by many of our peers, we look to leverage our stability in our cash position to consider M&A investments for growth.
The company has been focusing on improving gross profit, reducing opex and delivering significant improvement on adjusted EBITDA.
All of these initiatives combined to positively impact our quarterly cash burn rate as we work on getting to a position of generating positive cash flow.
We are very satisfied with the gross margin results and the continued improvement in EBITDA.
Q3, adjusted EBITDA for the quarter improved to negative $2 4 million.
Despite the softness in quarterly revenues.
As we are focused on improving margins, we have been diligent in our pursuit of higher margin business.
And in exiting or managing lower margin or negative margin business.
While this approach it had notable positive impacts on profit and cash flow. It is also negatively impacted our quarterly revenues.
<unk> has remained focused on the integration of vivo cannabis and delivering on the synergy targets. We've previously shared I am pleased to report that all vivo related cost synergy targets have been met and Greg will share details on the associated positive results in gross profit Opex and EBITDA.
A further round of restructuring was implemented in Q3.
We'll provide an additional $3 million in cost improvements starting in Q4.
The acquisition of vivo was the transformative transaction for <unk> labs, and has allowed us to deliver 45% year to date revenue growth over prior year, and an almost 50% improvement in adjusted EBITDA year to date.
Our combined adjusted gross profit was approximately 32% for the quarter versus a minus 10, 5% in the prior year quarter.
Year to date adjusted gross profit has improved by $6 7 million.
And Opex has been substantially reduced as well.
Greg will discuss our cash position in more detail, but we are very happy to report our cash balance today of approximately $19 million.
<unk> announced legal settlement has added significantly to our cash position.
With our Q3, adjusted EBITDA of minus $2 4 million a.
Our strong balance sheet, including full unencumbered ownership of our key assets and minimal debt of less than $3 million or.
Our improved cash position allows us to look for strategic investments that will drive revenue from both an organic and M&A perspective.
To summarize revenue gross profit and adjusted EBITDA improved versus prior year and versus trailing 12 months largely driven by our profitability focus.
Except for vivo integration and cost reduction initiatives with our profitability initiatives showing good results. We can further increase our focus on profitable revenue growth.
Our experience with the vehicle integration has shown that we can quickly and profitably integrate and drive synergies with like sized organizations and we are confident that this approach can be repeated.
As we head into 2024, we continue to focus on reducing costs and driving revenue growth in selected profitable segments.
Progressing our longer term pharmaceutical milestones and pursuing synergistic M&A.
With our cost position now well established and a very favorable cash and debt position relative to some of our peers. We believe that there may be several synergistic M&A opportunities available for consideration in the near term.
I'll now pass the call over to Keith.
Thanks, David Q3 was a great quarter for <unk> as we continued our strategic focus on our profit first model.
With a deep understanding of our time in the business acquired from vivo candidates in April we were able to laser focus on where to reduce investment and where do you invest on areas prime for growth.
The record gross profit margin and drastically reduced EBITDA loss in the quarter speak to the success of this focus.
I would like to take a few minutes to outline some of the examples of.
How we got here and what work is being done to expand revenue in the future.
I will start with the Canadian adult use and wellness category.
In this market we saw Q3 net revenue decline. However, there are good reasons for this.
One we grew cannabis oil market share, which is our highest margin adult use product.
Two we pulled back on non profitable dates dry flower and pre rolls SKU.
And three we stopped retail partnership programs, where we would not.
Return on investment.
In Q3, we laid a foundation to grow the top line in this category with the same guardrails of profitability.
Some good examples include.
We negotiated the elimination of the 10% royalty on the wildlife brands, making new dry flower and pre rolled launches more profitable.
We invested in new sales reps in Western Canada and.
And subsequent to the quarter launched two new oil products and two additional capital Skus.
Our high margin products for us.
Looking at the Canadian Medical category, we maintain sales while targeting profit by rationalizing skus on the Cana farms direct to patient portal.
In the process, we removed products that carry a higher manufacturing costs and replace them with products, where we have invested in automation.
On the third party side medical sales, we increased our listings with my <unk>, the former shoppers drug Mart platform from eight to 15, we.
We also grew listings with other major patient platforms, such as Aurora and Appomattox.
For future growth in the Canadian Medical category, We recently entered into agreement with <unk> to take on specialty Medifast branded skus for their medical channel.
Once launched with <unk>, we will have our products on all major Canadian direct to patient platforms.
Net farm a go to brand choice for patients no matter, where they purchased <unk> medical cannabis products growth.
In Q3, our clinic business harvests Medicine published two papers in the American Journal of Endo.
Alright medicine.
Which is also mentioned in the Wall Street Journal.
As published research like this.
That helps physicians and specialists and making candidates prescription decision.
Ultimately grow the medical business.
Lastly in the international medical category revenue was down on a quarter over quarter basis, but this area is where we've made the most improvement on gross margin.
In previous periods. The international sales included one time bulk flower sales.
Our existing oil customers.
Many of these sales were going to be a third party source flower, resulting in low margin.
This also came with inventory risk based on tight GMP flower specifications.
In Q3, we consciously made decision to decrease some of them marginally profitable spot business opportunities to refocus on our long term German partners like standup.
Much of our international focus was growing our beacon medical brand.
At the top three flower brand in Australia.
We can grow at that high margin base with more resources and expanded product portfolio.
In Q3, we launched our Beacon medical GMP Bates and oils.
The Australian market is poised for significant market growth.
The new and more strict Australia GMP standards put in place in July 2023.
We are well positioned as a partner of choice when regulations tightened.
We also increased our investment in the Australian medical sales team during the quarter.
Outside of those highlighted segments. Many farm remains a leader in pharmaceutical cannabis production.
We made additional progress on our U S FDA site registration and API filings.
International pharmaceutical partners navigate the U S generic drug application process.
We also completed a sizable delivery of clinical trial material to the U S. In July.
With new U S. DEA permits recently received for additional delivery this year.
We look forward to translating our leadership and quality pharmaceutical manufacturing into meaningful revenue growth in the future.
I am very excited about our position in Canada, and internationally and look forward to sharing our progress as more milestones are achieved.
I'll now pass the call to Greg to discuss many farms financials.
Thanks, Keith and good morning, everyone.
As David and Keith discussed, we continue to focus on growing our revenue base through organic and inorganic initiatives, reducing cash burn and driving towards profitability as key priorities.
Before reviewing the results for the quarter, let me add some additional commentary on the progress we've made on these priorities.
During Q3, we settled the long outstanding dispute for $9 million, which included $3 million of cash which was collected in October $4 5 million until Ray shares which were liquidated in October for net cash proceeds of approximately $4 3 million.
1 million inventory credit from jewelry and a commercial sales agreement with til rate for <unk> 5 million of revenue over four years.
In addition, we sold unused land can the vivo acquisition for $1 9 million of cash proceeds which was received in the quarter. This additional $9 2 million of cash further strengthens our balance sheet. So we can continue to execute our strategy, including selective M&A.
As of today, we have approximately $19 million of cash.
Furthermore, in September we implemented plans to further reduce our workforce as we focus on profitability.
This plan will reduce our expenses by approximately $3 million on an annualized basis starting in Q4.
This $3 million is in addition to the $7 million of annualized expense synergies from the vivo acquisition.
In addition to the $3 million of annualized savings from the restructuring we completed in late 2022.
In total over the last 12 months to 15 months, we have implemented approximately 13 million of savings on an annualized basis as we focus on profitability.
Turning to the P&L performance for the third quarter.
Revenues for the third quarter of $8 5 million increased $1 2 million or 17% versus prior year, while year to date revenue of $24 million increased $7 4 million or 45% versus prior year.
Q3, and year to date revenue growth was largely driven by the acquisition of vivo and partially offset by the divestiture of the Australian subsidiary at the end of Q3 2022.
Revenue in the Canadian Medical channel of $3 5 million increased exponentially versus zero point $2 million in Q3, 2022, driven by the vivo medical business.
Revenue in the International Medical Channel was $2 6 million versus $2 3 million in Q3, 2022, representing a 13% growth rate the.
The growth of the international Medical Channel was largely driven by the integration of Evo was Australia business peak and medical the.
The international business represented approximately 30% of total revenue in the quarter.
Revenue in the Canadian adult use and wellness channel was $2 2 million, which declined versus Q3 2022 in Q2 2023, as we selectively increased prices carefully managed sales and marketing expenses and exited selected products.
Pharmaceutical and <unk> revenue in Q3 was <unk> 2 million and decreased $1 $3 million versus Q3, 2022, driven by the sale of our Australian subsidiary.
As Keith discussed previously pharmaceutical revenue is a longer term strategy and we will take time to pay off as the market continues to develop.
Gross profit for Q3 was positive $2 4 million or approximately 28%, which is the fourth consecutive quarter with positive gross margins.
Most profit in the quarter was impacted by several discrete items, including fair value adjustments for biological asset incremental cost of cannabis acquired from the <unk> acquisition.
Severance for restructuring adjust.
Adjusting for these items gross margin was approximately 32%.
Year to date gross margin is 15% while the same period prior year was a negative 13%.
Gross profit continues to improve driven by product mix production efficiencies and price increases and cost reduction initiatives are.
Team continues to aggressively prioritize driving gross profit improvements.
General and administrative expenses in the third quarter of $4 $3 million increase versus prior year, driven by the integration of vivo and decreased sequentially driven by cost reductions and acquisition synergies.
G&A expense for the quarter was impacted by zero point $3 million of severance expense for restructuring adjust.
Adjusting for severance G&A expense was approximately $4 million rent.
Retrospectively if vivo were included in our Q3 2022 result, G&A expense in the quarter declined approximately 42%, reflecting our combined cost reduction initiatives.
Marketing and selling expense of $1 7 million was consistent with Q3 2022, and Q2 2023, despite the incorporation of vivo.
Total opex, which includes G&A marketing and selling and R&D expense was $6 1 million in the quarter adjusting for severance and some other discrete items normalized opex was approximately $5 9 million.
Retrospectively at vivo were included in our Q3 2022 results Opex in Q3, 2023 is approximately 37% or $3 6 million lower reflecting our combined cost reduction initiatives.
Adjusted EBITDA for Q3 at negative $2 4 million improved $2 6 million or 53% versus Q3, 2022 and year to date adjusted EBITDA was negative $8 6 million, which improved $8 3 million or 49% versus prior year.
This improvement is driven by both expansion of gross margins and the reduction of operating expenses.
Retrospectively vivo were included in our Q3 2022 results adjusted EBITDA in Q3, 2023 has improved approximately $6 million or 72%, reflecting our combined cost reduction and margin improvement initiatives.
Said another way in 2020, too many farm adjusted EBITDA averaged negative $5 million to $6 million per quarter, and vivo averaged negative $2 million per quarter before the acquisition. The two companies combined average adjusted EBITDA of negative 7% to 8 million per quarter in 2022.
Many foreign Standalone Q1, 2023, adjusted EBITDA pre acquisition was negative $3 1 million.
And now Q3 post vivo acquisition adjusted EBITDA improved to negative $2 4 million.
This means the company was able to incorporate vivo starting April one and improved profitability relative to Q1, 2023, largely driven by cost reduction initiatives and synergy achievement.
Moving to a few notable items on the balance sheet.
Trade and other receivables of $13 9 million includes the receivable from the legal dispute that was settled in the quarter as discussed previously excluding this item trade and other receivables is $6 4 million.
Our cash balance at the end of Q3 was $13 million and the company has less than $3 million of debt contrary to many other cannabis companies. Many farmers also up to date on cannabis excise duties sales taxes and accounts payable.
In addition, this $13 million cash balance does not include the $7 3 million collected from the dispute settlement as of today. Many firm has approximately $19 million of cash.
Although we still have work to do to get to profitability and become cash flow positive Q3 was another step in the right direction.
Gross profit was positive for the fourth consecutive quarter and expanded to 28%.
Adjusted EBITDA improved sequentially to negative $2 4 million.
We implemented another cost savings program to save $3 million on an annualized basis and.
And finally, we have a strong balance sheet relative to our peers with $19 million of cash as of today less than $3 million of debt and we are up to date on our liabilities, including excise taxes.
With that I'll turn it over to the operator to open the lines for questions.
Thank you.
If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one a second time.
Thank you and we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions. So.
First one for me so nice job there on some of the cost saving initiatives to narrow that EBITDA loss do you guys have done.
But going forward right, just kind of getting to that profitability.
Inevitably it seems like you have to get to that top line growth. So as you look to 2024.
Just to kind of high level to maybe where you see.
Those growth drivers being should we look at it more from from Canada.
Some of the initiatives you have going there, maybe Germany with the removal from the narcotics list hopefully coming in March and opening up the medical market. You also have all these SaaS trailers as well where.
Where do you think will be the primary lever for that driver for growth to ultimately lead you guys to profitability there. Thank you.
Hey, Aaron it's Dave Thanks for the question.
You actually touched on a lot of.
The places that we can be looking for growth I'll turn it over to Keith we are bullish on Australia and the opportunities in Australia with with the brand that we have established in the product launches that we mentioned and I think you touched on some of the other pieces I'll turn it over to Keith and he can give.
Little more color.
Thanks, Dave Good morning, Erinn, I think theres, a lot of opportunity for growth for us as we kind of pulled back in places where we saw that there wasn't a great gross margin are good opportunity for profitability, we get start expanding in places where we see it.
Thank for Germany, specifically.
We are really focused on the extract market there as well as other some novel deliveries in places that we werent before I'd like to turn abnormal or CBD isolate that pharmacists and used for compounding some of that takes time as far as registrations as we switch to that and.
And we have a lot of plans there for 2024 as Dave mentioned, the Beacon Medical brand, which was the vivo brand.
<unk> was something that.
Something that we had.
When we acquired people and they do it is a really strong one I mentioned, it's top III and flower sales and before this year. They never did have an extract product.
Such as oil or base, we launched those really late.
Q3 September when they're first available to customers and the pull through has been good.
And we expect that to grow replenishment orders scheduled for January so we'll see those products grow in 2024, and then finally.
Brazil, which we flagged as a really good opportunity in earlier periods when we heard on calls.
That was a bit of a slower start with one of our partners being acquired by a.
A multinational pharmaceutical company, we do have a new partner as we mentioned in July.
They're going through the registration process now we expect that to be approved in December that partners are large.
Generic company one of the biggest in Brazil. So.
So we expect them to have like a satellite.
Movement of product in that country.
With a lot of cannabis users there today medically.
You can see that expand so a lot of places I think internationally, it's a place where we're going to see most of that growth as far as what's going to drive the bottom line for profitability. We continue to be gained market share in Canada in the struggle with Canada as Youre hearing everywhere is as different companies.
Go through things like insolvency.
They are selling things just don't make sense the price.
So we will see price of a pan or a pre roll is not a price that we can make money and so we're not going to participate there.
If we can't make money so we'll keep our high value high quality products. Therefore for our consumers who are looking for those.
But when it comes to seen massive growth there, we still need to see a little bit of a washout.
Some of those companies are assigned below costs.
Maybe the only other thing I'll add to that Keith and the medical channel, we've been pretty successful building up our relationships with almost all of the providers in the medical space medical channels doing okay. Although that market is is.
Is declining I think our presence in all the platforms is is getting stronger so we're feeling pretty good about that.
That segment as well.
Great. Thank you for that color, there and detail some.
Question for me.
A lot in the U S around potential rescheduling of candidates from schedule, one to schedule III, what the HHS recommendation and awaiting rulings from the DEA.
Premier has perspective.
And early days until today right.
API provider for pharmaceuticals, and others could a rescheduling of the scheduled Korean and really open up that opportunity on your end as well.
I know a lot of folks who are talking more about it from the <unk> side.
From the operators in the U S, but from your side thinking about some a little bit different perspective could a reschedule went to three potentially open up opportunities for you more so on the API side or would that not make as much in business maybe thank you.
Thanks, Darrin, it's actually a massive opportunity for <unk>.
I think there's a little bit overlooked.
As far as how big it is right now with the scheduling of cannabis in the U S. It is.
The most strict narcotic and what that does is a few things one on our clinical trial material business right now.
Clinical trial material, we have an FDA approved trial, that's happening with the University of Southern California, and we deliver product.
To the U S. We already have and we will again this year and that has to be approved by the DEA and because of the scheduling of it now.
It's actually.
Governed under quota system, so our partner can't get the quota and then it would slow down and throttle how much product we can sen.
As well as their clinical research partner has to happen to have special arrangements in place to receive and handle and distribute that product based on the scheduling today. So the rescheduling of candidates with loosen those.
Wow programs like that to grow it would also open up new clinical trial.
Opportunities at a bigger scale. So right now if you are at a University and you go to the University administration to actually run a trial and then look at the scheduling of cannabis it would be something that would be commonly benign and thats reschedule, that's something that would open up some more.
More opportunities obviously, there's a lot of researchers that are.
Eager to continue to do research.
And when it comes to doing research to that scale with a proper SBA.
You do need to use FDA approved product so theres not many folks within the U S.
Have that so here at many farm in Canada, we've actually had an FDA inspection.
Two reconstruction and a lot of back and forth with the FDA, where foreign site license, so our quality products and API actually meet those standards as those gates open up for more clinical trials within the U S and a lot of U S operators today don't meet that because they.
Our government under those state by state laws.
The one big piece of it the second big piece of it.
It is on the API as you mentioned.
It's been win our pharmaceutical partner is successful in their generic application too.
Produce a generic epica ILEC and distribute it.
Under the current schedule and they are they do have some hurdle under the same.
Quota system.
With the rescheduling comps the quarters will be bigger and that will allow our international partner, when they're making that generic drug to import more API from <unk> to finish that product in the U S and get it out of the U S. Patients. So it does it is very significant for us not just as you mentioned not the same as <unk>.
But on the regulation side, it really does open up given our FDA.
<unk> approval and FDA status.
Okay, great. Thanks for giving the color on highlighting that I'll go and jump back in the queue.
And we will take our next question from Scott Fortune with Roth MK and your line is open.
Yes. Good morning. This is <unk> on for Scott first question for me just looking for some color on your oil offering in Canada, you called out increasing share despite it being kind of a high price points do you have in the marketplace. Just your sense of the consumer uptake there and the opportunity going forward would be helpful. Thank you.
Good morning, Nick.
Continue to lead in that category in many ways as the high quality provider. Many folks that are looking for wellness product via the recreational channel.
That oil business for us remained steady even as the category is slightly declining so we see the category.
Wellness being.
Put into different subcategories at first it was oil and now you have different formats and what we've done.
To meet the customer demand is actually just recently launched castle. So we had some THC capsules that launched in the summer.
Subsequent to the quarter, some CDN and CBD capsules. So.
We will hopefully see that grow as far as dollars as well as market share. So as we grow market share we saw a little bit of decline in month over month.
Actual sales on the oil category, but that's why we added those capsules we are still.
Number two in dollar spent in oil, but we are closing that gap.
Every month between the number one which is.
I'm ready Cam product now vital array.
Low cost.
Obviously, it just moving volume from a from a low cost perspective, but we are that kind of number one quality.
Go to product and will continue to own that space going forward.
No I appreciate that color. Thank you and the second one from me just on the cash balance you called out the M&A opportunity just your sense of the environment and the multiples youre seeing out there given the pressure on some of the smaller international companies out there just any specific category you are targeting.
Yes, maybe thanks Nick.
It's Dave.
Kind of mid.
<unk> commented that and then I'll turn it over to Greg and he can give some more color.
I think the short answer is there is lots of opportunities out there now, particularly in the Canadian market and the multiples are very low in terms of some of the opportunities depending on the.
The state of the various players.
And so we think it's actually the timing is very good.
For <unk>.
For companies that have a strong balance sheet that that have cash and we don't we don't intend to spend all the cash with any transaction that we do we intend to invest.
Look for partners.
Potentially where we can deploy that cash for investments for growth.
And probably more looking at equity related transactions, but part of the question was.
We are open to opportunities internationally as well for international growth.
The current market right now in Canada.
We've proven through the vivo acquisition that our ability to.
Integrate and synergize and really run run two companies for the cost of one which is essentially what we've been able to do we think there is.
Several opportunities to do that again with potential Canadian.
Target so.
Maybe as background I'll turn it over to Greg and he can give a little more color yeah sure. Thanks, Jay Thanks for the question, Yes, So as Dave said you know what.
With our cash balance where it is about $19 million today that gives us some flexibility obviously as Dave said, we don't want to do a deal in cash.
And we'll use equity we are seeing you in the Canadian market, Dave indicated the multiples are relatively low so that was a good time.
Watch out or the thing that we're being very careful with is to find the right partner like another vivo.
That isn't burdened with excessive amounts of debt, which we see across the market today is when we say that.
That includes some folks that have been.
Not paying excise duties, we've seen a lot of that where there is burdened on debt and excise duty.
The international market, where we continue to look for opportunities as well the valuations are a little bit higher than what we see in Canada. So again, we want to be careful there and make sure we.
We select the right partner, which is what I think we did with vivo as we've shown.
On integrating it relatively quickly and realizing.
Some synergies to really help drive that profitability improvement that we've seen over the last couple of quarters.
That's it for me I'll pass along.
And there are no further questions at this time I will now turn the call back to Mr. David <unk> for closing remarks.
Thank you operator, and thanks, everyone for joining US today, we look forward to sharing our year end results in March everybody has himself has a great week.
Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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