Earnings Transcript for MEDIF - Q2 Fiscal Year 2024

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MediPharm Labs 2024 Second 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 MediPharm 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 MediPharm and on estimates and assumptions made based on factors that MediPharm 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 MediPharm Labs' filings with the Canadian and provincial security regulators, which are available on SEDAR at sedar.com. The company's remarks may also contain references to certain non-IFRS 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 IFRS and therefore, may not be comparable to similar measures presented by other companies. MediPharm believes that the non-IFRS measures referenced provide information useful to shareholders and investors in understand our performance and may assist any evaluation of the combined company's business relative to that of its peers. For more information, please see the section titled Reconciliation of non-IFRS measures, the most recent MD&A of MediPharm, which is available on SEDAR. I will now pass the call to David Pidduck, CEO of MediPharm. Please go ahead, sir.

David Pidduck: Thank you, operator, and welcome, everyone, to our Q2 2024 earnings call. We are very happy to report today that we're close to profitability being essentially at breakeven adjusted EBITDA for the quarter. Q2 adjusted EBITDA is $124,000 negative for the quarter. The company and all of our hard-working employees have been strictly focused on getting to this moment. Over the last two years, we have gone through several significant restructurings, sold our MediPharm Australia facility, acquired and integrated Vivo, resolved outstanding litigation and significantly diversified our business. Recently, we completed the integration of our Canna Farms Medical business into the berry operation, resulting in lower costs and better service for our medical patients. We are now in the process of selling our Hope facility, which will further improve our financials and generate additional cash. The MediPharm team has transformed the business from losing over $6 million per quarter in adjusted EBITDA in Q2 2022 to being essentially breakeven this quarter. International sales for the quarter are over 40% of our revenues. We've grown sales quarter-over-quarter for the last three quarters. We have $16 million in cash at the end of the quarter and plans in place to sell underused assets that could generate significant additional cash. But, obviously, we're not satisfied to just break even. We have active plans in place to generate additional revenue and to further reduce costs. On the revenue front, international sales continue to drive growth and profitability. We will continue to focus on growing our business in Europe, Australia and Brazil, we are hopeful that our pharmaceutical partners filed in Brazil will be approved in the next quarter and starts to generate revenue in Q4. In Europe, we've made progress on initial contracts in the UK, France and Poland. The last quarter has also seen progress with our B2B and pharma channel. We have initiated several contracts both domestically and for international markets. We see continued future growth developing and manufacturing brand for other LPs and global pharma companies. On the cost side, the consolidation of the home facility and certain further restructuring efforts already in progress, will generate over $1 million in additional profit on an annualized basis. We believe that further efficiency and cost reduction opportunities still exist that will improve on the already implemented savings targets I just referenced. These include finding further efficiencies in our German supply chain and in our medical and clinical businesses. So now the task moves to driving consistent profitable revenue growth, and generating positive cash flows for 2025 in our core businesses. Our strength in international markets will be a key revenue driver. As mentioned, over 40% of our revenues last quarter came from international markets. Key drivers included newly launched vape and oil SKUs in Australia, and good response to our dronabinol launch in Germany. In addition, several companies have sought us out to supply new GMP SKUs for international markets as regulatory standards tighten in Australia and other markets. Our medical pharmaceutical approach has laid the foundation for growth in international markets, with established regulatory and supply chain pathways and reputable pharma and distribution partnerships. We've been leveraging these established paths to drive additional products through existing channels. We have also been leveraging all our quality regulatory and pharmaceutical expertise to assist partners. Several recent examples of this expertise and action include developing and manufacturing products like our agreement with Avicanna for their said capsule formulation, assisting our Brazilian pharma partner with their file submission, the recent signing of our Remidose inhaler deal, ongoing pharmaceutical product submissions with pharma partners and continued support of various pharma and academic clinical trial. Being the only natural cannabis site in Canada that is registered and inspected by the US FDA, allows us to further expand our pharmaceutical-related business into the US in the future. The rescheduling of cannabis has continued to make good progress in the US, which will ultimately lead to more medical research, expanding the total addressable market for MediPharm in this specialized high-margin niche area. We have a solid balance sheet and strong cash position and should soon generate even further cash from the sale of underutilized facilities. We removed our going concern qualification last quarter, and we intend to pay off $2.1 million, our only significant outstanding debt next quarter. As mentioned before, unlike many of our peers, we do not have any CRA excise tax exposure. And unlike our peers, we hold very minimal debt. Our balance sheet and cash position now stand out as one of the strongest positions of LPs in our peer group. But the industry challenges and ongoing consolidations are continuing. In the last few quarters, we have continued to see multiple LPs filing for CCAA protection. Industry profitability remains a challenge, and there are still far too many operating companies in the industry. In short, there are far too many publicly traded companies in the industry and the industry as a whole needs to take collective costs out of the system. As a result, industry consolidation will remain a reality. Unfortunately, we are in an excellent position to benefit from a thoughtful and prudent M&A approach. We continue to evaluate opportunities that represent significant upside for shareholders and strengthen the company long term. Our unique positioning and approach in the medical pharma space and our strong base of growing profitable international sales, makes us a unique partner of choice, whether as a contract manufacturer distribution partner, product development partner or pharmaceutical supplier, MediPharm is well positioned to grow both organically and through M&A in the near-term. I will now turn it over to our President, Keith Strachan, to share some further commercial insights.

Keith Strachan: Thanks, Dave. Thank you, everyone, for joining us this morning. As we build on our achievements from the first quarter, the second quarter of 2024 continued to showcase our commitment to operational excellence and strategic growth in the global cannabis market. The whole company is motivated and excited, as we are closing the gap to get back to profitability. This quarter, we fortified our innovative product portfolio through a new licensing agreement with Remidose Aerosols, granting us exclusive rights to their advanced cannabis product technology. This expansion enhances our offerings across domestic and international medical cannabis markets. We will assume their existing adult use sales in Q3 and start GMP shipments of these products internationally in Q4. Also, in partnership with Avicanna, a leader in cannabis research and formulation, we have been developing the scale-up and commercialization of a new self-emulsifying drug delivery system in capsule format. We are pleased to announce that we have now completed the scale-up validation and manufacturing of the first batches. Distribution of these new products are now available to Canadian cannabis patients. Our international portfolio continues to expand. In July, we began deliveries of high potency medical cannabis flower under our Beacon Medical brand in Germany. This is in response to favorable regulatory changes and is expected to complement our growing sales in that market. Additionally, our market share for GMP based in Australia is now third based on units sold and patient revenue, just nine months after their launch. Our international sales continue to grow and reached $4.5 million in the quarter. Dronabinol sales have continued their strong performance from Q1, doubling to a total of $1.9 million year-to-date. This revenue stream enjoys higher margins and is helping our drive towards profitability. Our sales to our German pharma partner, STADA, also had a strong quarter as oil and flower units to STADA patients in Germany have increased 35% in the first six months of 2024, compared to the same period in 2023. In compliance and quality, April was significant for us with the successful completion of two EU-GMP inspections. Both our Napanee and Barrie facilities were inspected by Germany's LAVG Health Department. I am pleased to report that our renewed EU-GMP certification were issued by the LAVG on July 1, 2024. Another milestone was reached in April with our submission of a drug master file for CBD API to Health Canada. This submission allows for current and future pharmaceutical partners to reference MediPharm's high-quality CBD API and their drug applications, echoing the DMS we filed with the U.S. FDA back in 2021. As we continue to advance on these fronts, our focus remains on innovation, strategic global market expansion and enhancing operational efficiencies. These pillars not only drive our financial performance, but strengthen our position as a leader in the global cannabis market. I'll now pass the call to Greg go over financial details.

Greg Hunter: Thanks, Keith, and good morning, everyone. As discussed in prior calls, MediPharm management has been focused on growing our revenue base through organic and inorganic initiatives, reducing cash burn and driving towards profitability as key priorities. I am pleased to report that Q2 was another step in the right direction. Before reviewing the results, let me add some additional commentary on the progress we made on the priorities in the quarter. Q2 was a pivotal quarter, as adjusted EBITDA loss of $0.1 million was very close to breakeven and was the best in over three years. Revenue of $10.3 million was the highest in over three years and increased $0.8 million or 8% versus prior year and improved $0.6 million or 6% sequentially. We had our largest commercial shipments of dronabinol to Germany in Q2, representing $1.3 million revenue, which was double the Q1 revenue. Our gross margin of $3.4 million was the highest in over four years and with over 33% of revenue. In addition, we completed the relocation of Hope medical channel operations to the Barrie facility, which will save approximately $1 million on an annualized basis. The Hope facility is being listed for sale and could generate $4 million to $5 million of additional cash in the near-term, adding to our balance sheet strength. Turning to the P&L performance for the second quarter. Revenue for the second quarter of $10.3 million increased $0.8 million or 8% versus prior year, and increased to $0.6 million or 6% sequentially from Q1 2024. Canadian adult use in wellness revenue of $1.5 million in Q2 2024 declined versus Q2 2023. Revenue also declined sequentially from $2.1 million in Q1 2024, driven by increased competitive pressures. The management team will be focused on improving this revenue stream in the coming quarters. Canadian medical cannabis revenue for Q2 2024 of $3.5 million was consistent with Q1 2024 and decreased from $3.8 million in prior year. International Medical revenue increased from $3 million in Q2 2023 to $4.5 million in Q2 2024, driven by dronabinol sales in Germany and new Australian base and oil business. Revenue increased sequentially from $3.2 million in Q1 2024 driven by increased dronabinol and oil sales. The international business represented approximately 44% of total revenue in Q2 versus 33% Q1. Pharmaceutical and B2B revenue in Q2 2024 of $0.8 million increased from $0.3 million in Q2 2023, largely due to a new contract manufacturing customers. Revenues decreased $0.2 million sequentially from Q1 24, driven by customer order timing. As Keith and Dave discussed previously, pharmaceutical revenue is a longer-term strategy. It will take time to pay off as clinical trials progress and applications make their way through the long-term process of approvals. Gross profit for Q2 was $3.4 million or 33% and improved significantly versus Q2 2023 of 8.2%. Q2 2024 gross profit also increased versus Q1 2024, driven by increased international medical cannabis revenue that typically enjoy higher margins. Q2 2024 gross profit was 37% when adjusting for several discrete items, such as biological asset fair value adjustments, inventory write-downs and severance for restructuring. This was the highest gross profit in over four years. Gross profit continues to improve, driven by product mix, production efficiencies and cost reductions. Management continues to focus on driving gross profit. General and administrative expenses in the second quarter of $3.9 million decreased versus $5.8 million in prior year, largely driven by achievement of synergies from the integration of VIVO and a continued focus on cost reductions. G&A decreased sequentially from $4.3 million in Q1 2024. Marketing and selling expenses of $1.5 million was consistent with prior year and prior quarter. Total OpEx, which includes G&A, marketing and selling, and R&D expense of $5.4 million for Q2 2024 and decreased $2.1 million versus prior year due to the achievement of synergies from the integration of VIVO and a continued focus on cost reductions. In addition, Q2 2024 operating expense decreased $0.3 million or 5% versus Q1 2024. When adjusting for severance and other discrete items, Q2 2024 operating expense was $4.9 million. Management continues to focus on further expense reduction opportunities, as Dave discussed. Adjusted EBITDA loss for Q2 was $0.1 million and improved $3.1 million or 96% versus Q2 2023. This improvement in adjusted EBITDA is driven by revenue growth, the improvement in gross profit, and the reduction of expenses. Q2 2024 adjusted EBITDA improved $0.8 million or 87% versus Q1 2024, driven by revenue, gross profit, and continued expense reductions. Management continues to pursue profitable revenue growth through organic and inorganic initiatives and further expense reductions to move from our essential breakeven adjusted EBITDA to positive adjusted EBITDA and positive cash flow. Moving to a few notable items on the balance sheet. Trade and other receivable balance at Q2 is -- and 93% of trade accounts receivable is aged 60 days or less. Our cash burn in Q2 was approximately $1 million, resulting in an ending cash balance of $15 million at June 30. The company has less than $3 million of debt and unlike many other cannabis companies, MediPharm is also up to date on cannabis excise duty and trade payables. Although we still have work to achieve profitability and become cash flow positive, Q2 was another step in the right direction. Revenue was the highest in over three years and increased 6% sequentially to $10.3 million and 8% year-over-year. Adjusted gross profit was 37% was the highest in over four years. Adjusted EBITDA loss was close to breakeven and improved sequentially and versus prior year to $0.1 million and was the best in over four years. And finally, we have a strong balance sheet relative to our peers with $16 million of cash and less than $3 million of debt and assets held-for-sale that could generate more stocks. And finally, we have a strong balance sheet relative to our peers with $16 million of cash and less than $3 million of debt and assets held-for-sale that could generate another $4 million to $5 million of cash. As a result of our strong balance sheet and significantly improved financial performance, we are well-positioned to invest in organic and inorganic growth opportunities as the industry continues to mature. With that, I'll turn it over to the operator to open the line for questions.

Operator: Thank you. We will now open the line for your questions. [Operator Instructions] Our first question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey: Hi. Good morning. Thank you for the questions here. So first one for me. I just want to talk a bit more about some of the M&A opportunities you spoke to, particularly in Canada, I know there's a lot of players there, still a lot of fractionalized players with small market share, 1% or even lower in some cases. So I wanted to see where you see the potential ops is just adding revenue and stripping corporate synergy costs, making it appealing from an acquisition standpoint? Or do you see opportunities out there to -- that would help you accelerate and drive top line growth. And this one is geared more specifically to Canada. And if you don't see things in Canada, that's fine, then maybe talk more about outside opportunities. Thank you.

David Pidduck: Yeah. Thanks, Aaron. It's Dave. So I'll touch on this and then maybe Keith or Greg can add. So for M&A opportunities, we have to be really careful. As you know, with our cash position, we are interested -- we are an interesting partner for many, many folks out there. And so we're being very selective and thoughtful about what we do. And I think it's a combination of we're looking for any partners where there is significant synergy and it has to be both sort of revenue synergy because they're leveraging either we're leveraging what they have or vice versa. You said you focused on the Canadian market. There's a lot of Canadian players that don't have an international presence where that could be significant synergy where we have sort of channels and partners internationally and maybe they have some areas where they're strong domestically, and that would be good synergy. Most of the various opportunities all come with off a general synergy opportunities in terms of people and management and facilities potentially. So that kind of applies to a lot of players. So anything we would do would look at something that had significant revenue synergies in addition to just a normal cost synergies of companies coming together. So that's kind of my reflections on that. I don't know, Keith or Greg, if you want to add anything to that?

Keith Strachan: Thanks, Aaron. So I think just to cover Dave's point, from a perspective in Canada, now that we are essentially breakeven from an adjusted EBITDA perspective, obviously, anything would need to be accretive or not looking to go backwards in that sense. And I think where we have capacity is probably where the best opportunity lies as far consolidation goes. So as you've mentioned, there's some folks that even have 1%, 2% market share, even if we do in some adult-rec categories as we are very strong in international and medical. So as we look at other Canadian opportunities, things like other medical platforms. So we do direct-to-patient distribution and ordering all that that infrastructure could take on more. And we are growing organically. But if there's an opportunity to grow something like that segment inorganically through M&A, that's where our focus would be in Canada.

Aaron Grey: Okay. Great. Thanks for the color there. I appreciate it. Second question for me, just on Germany. Could you discuss maybe how you're seeing the market evolve post the April 1 change in medical reform any potential bottlenecks, what you're seeing in growth as you speak with your partners out there. So that would be helpful color there. Thank you.

David Pidduck: Yeah. Maybe, Keith, maybe you take that.

Keith Strachan: Yeah. Germany has been exciting this year as we saw the changes come into effect in April with the removal of the narcotics. There is some logistical changes that need to happen with that. So everyone who had a narcotics license for cannabis now gets a new license for cannabis. They call it the can-g. So you would register all your products, but it's just registered in a different way. So I think everyone in the industry is working through that and BfArM, regulator in Germany has been very good on letting people get through that to the end of the year. We have seen a lot more physicians that are willing to do to write prescriptions, and we're seeing more pharmacies who are carrying the product, and that will continue to result in more sales. Last year, in Germany, MediPharm sold about $3.5 million, $3.6 million net sales. We've already surpassed that in 2024. So in the first six months of 2024, we are just cresting over our total sales of 2023. So that is big growth for us. STADA remains our number one partner there, especially on the oil side. They're not as impacted by what I would say, like the patient pay model. The patient pay model is those patients who are more cannabis curious as the therapeutic benefit and going into a pharmacy and paying out of pocket. Those are mostly flower consumers, a bit more promiscuous and trying different things. That has taken a pharma approach where they're getting folks for therapeutic benefits on prescriptions and keeping them on those prescriptions. Their business year-to-date is already up 35% and their business is, call it, 80%, 85% oil, which is higher margin. So in some cases, a bit lower on the top line as far as back a ton of flower, but obviously, great for us from a margin perspective. We do see that need and demand for the flower. So we continue to increase our flower sales. I think our big bolus of more delivery in fact, started in July and into August. So we'll see that translate more into Q3, and then we'll be able to see how that's trending into Q4 post the load-in of some of those new Beacon Medical streams. Beacon Medical, which is a MediPharm-owned brand internationally, in Germany was always small when we bought that from VIVO in 2023, but was really big and a market leader in Australia and continues to be. And so we want to replicate our success in Australia with that brand in Germany, and we've started to do that by signing on with the changes in April, we've signed on new distributors and new partners, and we're focused on more high potency THC as we mentioned in the earlier remarks. And so those deliveries started and then we'll see how those trend and are excited to give an update on that in the back half of the year here.

Aaron Grey: Okay, great. Really appreciate that color there. I’ll jump back in the queue.

Operator: [Operator Instructions] Seeing no further questions, I will now turn the call back to David Pidduck for any closing remarks.

David Pidduck: Thanks, operator, and thank you, everyone, for joining us. We look forward to seeing everybody or speaking with everybody in next quarter. And everybody, I hope you're having a great summer. Take care.

Operator: This will conclude today's conference call. Thank you all for your participation. You may now disconnect.