Ladies and gentlemen, thank you for standing by and welcome to the MediPharm Labs First Quarter 2022 Financial Results Conference Call. Please be advised that today's conference is being recorded. Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of MediPharm Labs and all of its representatives on this call. The statements made on this call will contain forward-looking information that involve risks and uncertainties. Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts, or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in MediPharm Labs filings with the Canadian and provincial securities regulators, which are available on the SEDAR website at sedar.com. I will now pass the call to David Pidduck, CEO of MediPharm. Please go ahead.
Thank you, operator, and good morning, everyone. We appreciate you joining us for MediPharm's 2022 financial results conference call. Joining me on the call today are Keith Strachan, MediPharm's President, and Greg Hunter, the company's CFO. I joined MediPharm as CEO in late April, subsequent to Q1. Since joining, I've been spending my time listening to and speaking with different stakeholders. As an outsider until recently, one of the first questions I'm inevitably asked is, "Why move to MediPharm given the state of the overall cannabis space today?" My short answer is that throughout my career in the pharma and med tech spaces, I've been able to help companies manage through challenging transformative periods. I see a real opportunity for MediPharm to be one of the big winners in the space. The company's not there right now, but the raw ingredients are.
MediPharm's facilities, regulatory approach, quality processes, and product lines provide a unique platform in the industry. Its more medical pharma approach positions the company well to succeed in the emerging global medical cannabis markets. The GMP licenses, DEL license, and international sales presence allow for compelling growth opportunities and pharma partnership opportunities not available to most of our industry peers. While I am new to this sector, I've been following medical cannabis and the industry very closely in my former pharmaceutical life. I'm here because I believe that MediPharm Labs is one of the most pharma-like cannabis companies in North America. The entire industry, including MediPharm, has many challenges ahead. However, I believe MediPharm is well-positioned to succeed given their unique regulatory licensing capabilities, their opportunity pipeline, their existing global network, and their strong cash position. I'm confident we can turn this company into a value creation engine for shareholders.
The team has made solid incremental improvements on financial, regulatory approvals, and sales. However, in the past six quarters, MediPharm's net financial performance has remained essentially flat. The flat results somewhat hide progress in the move from a largely B2B business to focusing on our more profitable self-owned brands. We need to move faster. We're committed to speeding up our strong pipeline of organic growth opportunities, but we will now also be focused on prudent, strategic, and opportunistic M&A growth opportunities. I have reviewed the company's organic growth pipeline both domestically and internationally, and it gives me good confidence for the future. We have many channels in different countries that the company has worked on opening that are primed and ready to deliver after years of regulatory investments.
We are focused on international deals where we're more uniquely positioned due to our licensure status to drive revenue and now most importantly, profitability. In going forward, M&A activity will form an important part of accelerating our sales and profit growth. Over the next several months, we expect the M&A opportunity set to expand as weaker players continue to come under cash flow and profit pressure. I want to be clear as we talk about M&A. We will be prudent. We will preserve financial flexibility. We will seek deals with synergy in spaces where we have demonstrated the right to win. We will be both strategic and opportunistic, and we will be ready to successfully execute and integrate. MediPharm is in a strong position to participate as the industry consolidates and to continue to build our leadership in the more specialty medical and wellness segments.
We are virtually debt-free, one of the best cash positions among our peers. We're fully built out with unencumbered assets and a team hungry to grow. With a solid balance sheet, MediPharm has the strength to execute deals that will be accretive both in the short term and over the long term. The company needs top-line growth to better leverage its current infrastructure, and we are very focused on getting MediPharm to profitability as quickly as possible. I've had the privilege to participate in several company transformations over the years. These transformations have required significant growth through M&A, successful product launches in new and existing markets, profitability improvement programs focused on costs, pricing, and right-sizing footprints. I look forward to applying many of these learnings to the challenges and opportunities we face at MediPharm. We will be squarely focused on growth, profitability, and driving shareholder value.
I will now pass the call over to Keith.
Thanks, David. From a top-line perspective, Q1 was slower than we would have liked to see. However, we expect improvement in Q2, given positive trends in sales-related activities. For example, in the Canadian provinces where we track provincial warehouse to retail depletions, we continue to see improvement each month and an 86% improvement year-over-year for the same period. On the international front, where sales were slightly down in Q1, activity picked up exiting Q1 and into Q2. I'll turn to a brief discussion covering our three market segments, which include pharmaceuticals containing cannabis, international medical, and Canadian domestic. On the pharmaceutical side, we continue to make progress leveraging our Drug Establishment License received in July 2021. The most important being the submission and review of our Drug Master File, DMF, to the U.S. FDA.
When looking at the FDA DMF database, MediPharm is one of only 14 companies globally and one of only two in North America that can meet demand in this market currently. The API segment alone will be an absolutely massive opportunity as it develops. To remind you of the potential of this space, the U.S. cannabis pharmaceuticals market was worth $943 million in 2021, according to Grand View Research. Compare this with the traditional pharma API business alone, which was worth $159 billion in 2020. Clinical trial work is long-term by nature, and to be successful, you need more shots on net.
This is exactly the approach we are taking, ensuring that our APIs are part of ongoing trials, which we expect will give us the best chance possible of becoming part of a long-term, highly profitable supply chain if these new drugs receive U.S. FDA and global marketing authorization. To help drive this segment, in March, we added a VP of business development to the team. Located in the U.S., they have made a successful career of selling various APIs for pharmaceutical companies globally. This individual has continued to make progress entering Q2, and we expect to onboard additional pharma customers as the year progresses. Internationally, the most notable progress was the receipt of sanitary product approval from the Brazilian Health Authority, known as Anvisa.
Anvisa is known to be one of the toughest regulators in the world, which is evident when we see that they launched their medical cannabis program two years ago, and there are still just 15 products approved. MediPharm being the manufacturer of one of those 15 approvals and the only Canadian company with this authorization sets us up for success in this quickly growing market. Also internationally, we continued to deliver to clients in Australia and Germany while adding a new major market with initial deliveries to the U.K., a country that is expected to follow Germany's framework as a robust medical market. While revenue timing can be lumpy given the size of our current business, as we leverage our sales investments and add more customers and go deeper with the current ones, we expect this to smooth out hand-in-hand with volume growth.
On the domestic side, in March, we closed the previously announced acquisition of Shelter Cannabis Brands, which adds highly reputable specialty dry flower and pre-roll products to our portfolio. This fills a key gap in our Canadian product offering while leveraging existing infrastructure and overhead and opening the opportunity to expand our current international flower business over time. I'm happy to report that the first shipment of dried flower and pre-rolls left our building on May 10th. We also continued to uphold our reputation of being a leader in innovation, launching cannabis-first CBG oil, naturally-derived CBG vape pen, and water-soluble CBN. These were delivered in late Q1 and available to consumers in early April. We expect to be able to report back on their performance following Q2. We continued to invest in our sales force during the quarter, which led to new listings in Ontario, Alberta, Nova Scotia, and BC.
With a qualified sales force on the ground and maturing in the field, we see significant opportunity to deepen the presence of existing products on the shelf while establishing a pipeline to speed sales growth of new products as they're introduced. We are strategically positioned in the Canadian market and see room to run. I'll now pass the call to Greg to discuss MediPharm's financials. Greg.
Thanks, Keith, and good morning, everyone. As expected, Q1 revenue declined relative to Q4 given the seasonality in the cannabis market. We expect revenue to improve in Q2 as this seasonality dissipates and our investments in sales and marketing and new products, including Shelter, pay off. As David mentioned, growing our revenue base through organic and inorganic initiatives, reducing cash burn, and driving towards profitability are top priorities in 2022. Status quo is not an option. MediPharm continues to be well-positioned in the industry with our strong balance sheet, unique licenses, including our Drug Establishment License, and our innovative pipeline of products and customers across multiple geographies. As Keith discussed, we continued to open new markets during the quarter with our first sales into the United Kingdom.
We continued to drive our innovative pipeline by launching our new CBG:CBD tincture, a CBN THC water-soluble tincture and a CBG: CBD vape in Q1. We are optimistic these will start to make a meaningful contribution in future quarters. In addition, our Shelter brand started shipping from our Barrie facility in May and will contribute to revenue in Q2. Turning to the P&L performance for the first quarter. Q1 revenues decreased sequentially from CAD 5.7 million in Q4 to CAD 4.9 million in Q1. Looking at international revenue components for the quarter. International revenues decreased sequentially from CAD 2.2 million in Q4 to CAD 1.9 million in Q1. Australian revenue declined from CAD 0.9 million in Q4 to CAD 0.6 million in Q1. German revenues declined sequentially from CAD 1.3 million in Q4 to CAD 1.1 million in Q1.
Our first sales into the United Kingdom represented CAD 0.2 million in the quarter. International revenues represented 39% of total revenues in Q1 versus 38% of revenues in Q4. As discussed in prior quarters, international revenues will remain lumpy as the market matures. We are confident international revenues will continue to grow with our sales and marketing investments in existing markets and with our expansion into new markets such as Brazil. Canadian domestic revenues decreased sequentially from CAD 3.5 million in Q4 to CAD 3 million in Q1, driven by market seasonality. With the strategic investments we have made in sales and marketing, expanded distribution points, entry into new provinces, new and innovative products, and Shelter brands, we are confident we will improve domestic revenues as 2022 progresses.
Gross profit for Q1 was CAD -0.4 million, compared to Q4 gross profit of CAD -5 million. Even adjusted for the CAD 2.4 million inventory write down and CAD 1.5 million of accelerated depreciation in Q4, Q1 gross profit improved. While still negative, adjusted gross profit exhibited a third sequential quarter of improvement. General and administrative expenses in the quarter decreased sequentially from CAD 10.4 million in Q4 to CAD 4.9 million in Q1. Q4 included a receivable impairment of CAD 6.1 million and an employee compensation reversal of CAD 0.3 million. Q1 includes severance expense of CAD 0.4 million. Adjusting for these items, G&A expense in Q1 was consistent with Q4. As I've already noted, growing the top line is critical as we push towards profitability and cash flow generation.
We continue to invest in revenue-generating functions in order to achieve these objectives. As a result, marketing and selling expenses in the quarter increased slightly from CAD 1.4 million in Q4 to CAD 1.5 million in Q1. R&D expenses decreased sequentially from CAD 580 ,000 in Q4 to CAD 300,000 in Q1. These investments will vary as we selectively allocate resources to advance our capabilities and product portfolio with a vision to become one of the most sophisticated cannabinoid producers in the world and capture a sustainable portion of the global cannabinoid medical and pharmaceutical markets. Adjusted EBITDA for Q1 was CAD -5.7 million, which improved from CAD -6.6 million in Q4. Moving to the balance sheet.
The efforts of our team over the past year have continued to pay off with improvements in working capital as we continue to drive towards cash generation. Trade and other receivables decreased CAD 2 million from CAD 16.9 million in Q4 to CAD 14.9 million in Q1. This decrease was driven by a continued focus on collections. As discussed in previous quarters, there is one large customer owing a total of approximately CAD 8.5 million at the end of Q1, which is subject to legal proceedings. Adjusted for this one customer, trade and other receivables is approximately CAD 6.3 million. Our cash balance on March 31 was CAD 28.3 million, which decreased from CAD 34.1 million at December 31. We are materially debt-free and have outright ownership of our two primary GMP assets in Canada and Australia.
With that, I'll turn it over to the operator to open the line for questions.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Sean Muir from Canaccord Genuity. Your line is open.
Hey, good morning, and thank you for taking my questions. My first question is just on the Shelter acquisition. I was just wondering if you could offer any commentary on the pricing strategy with Shelter. Are you looking to place it as a premium craft offering? We've heard from other operators that they're able to secure wholesale biomass for less than growing costs. Is that something that you're noticing? If so, is there any desire to play in the lower pricing tier category?
Morning, Sean. Thanks for joining in. This is Keith here. It's a great question. I think when we looked at Shelter, when we acquired the IP of those brands, we actually were trying to make sure that we didn't break anything that they were doing well with. Shelter, when we reviewed that as an opportunity, they kind of play in the mid-tier space. They're definitely we're definitely not a premium brand, like as far as the small craft growers, just because of the volume that we plan to sell. Some of those smaller craft opportunities of the higher premium call it. You know, it's usually limited time offers. We do wanna have a smoother revenue than that. It is a bit higher, but we're not in the value brand either.
We are finding that buying wholesale flower is, you know, very advantageous kind of price-wise, and we've been able to find multiple cultivators within the supply chain, some that existed with the original Shelter business and some that came with the relationships that MediPharm had. We hope to make that even more margin accretive as we get better on volumes and forecasting with that. The product launch, I think as you heard me say, just last week we delivered and this week it'll be available to Ontarians for the first time from MediPharm. We're really excited about that.
Thank you for the color there. My next question, you may have addressed this in your prepared remarks. My line cut off a bit there. In the last quarter, Australian revenues had come down sequentially about 50%. Then this quarter, that's followed up a bit more than 25% decline there. Is there any commentary on what's driving that movement in that market and how we should expect the top line to evolve in coming quarters from Australia? If I could tag on just maybe any commentary on what the leadership structure is there now with Warren gone and that CEO Asia Pacific role eliminated, kind of anything on how those operations are being overseen. After that, I'll pass along the queue.
Thanks, Sean. I think I'll talk about the leadership structure there, and then I'll pass it over to Greg just to touch on the revenue that we've been seeing quarter- to- quarter. As we announced our Q4 earnings on March 31st, as part of that was some reorganization of the Australian facility with no longer having like a Region Pacific CEO. We do have a new leader there. He has worked with us since 2019. Very experienced. He came from a background in pharmaceuticals. He worked in places like Catalent, which makes capsules for people around the world. He's now running our plant there. You know, as you...
Greg will get into the financials, but as we see kind of the revenue go up and down and just kind of the size of what's happening there and the, and the bench strength of what we have here in Canada, it just didn't make sense to have the replicated executives. We are looking at, you know, how do we save costs and this was one way of doing it. Pass over to Greg to touch on the revenue piece.
Yeah, thanks. Thanks, Keith. Yeah, as you noted the lumpiness within the Australian revenue, as you said Q4 was down relative to Q3, and Q1 was down a touch relative to Q4. One of the biggest moving pieces was some larger spot sales we had of some isolate within Australia, and that was a large part of Q3's revenue. You know, if you look at Q3 and Q4, if you take out the large spot sale we had on the isolate, relatively consistent. Then into Q1, again, as I said in the opening remarks, we do expect the international revenues to remain lumpy as the market develops. Again, it's the isolate that was the big one.
Your next question comes from the line of Scott Fortune from Roth Capital Partners. Your line is open.
Hey, good morning. This is Nick on for Scott. First question from us. I appreciate the commentary on the M&A side. Just looking, is there a segment you're specifically looking to improve, be it on the sourcing or procurement side, brands or distribution? Just some additional color there would be helpful. Thank you.
Hey, Nick. Morning. Thanks. Yeah, I think we see, you know, as you look back at our last five or six quarters, it's been relatively flat on the revenue side. We see a great opportunity for consolidation and M&A in the space. We think that we're very well-positioned. As David mentioned in his remarks, we, you know, are virtually debt-free. We have a strong cash balance and a really clean balance sheet. I think that we are really in the driver's seat when it looks at that. I think for us, we're looking at, you know, how asset light we could get into new regions.
You know, some places where we're subcontracting some things in places like Europe, is there an opportunity there to do an acquisition that would help with that and get us better margins in that region? Even looking at regions that we're not in. You know, continuing to look at the U.S. as an opportunity. I think beyond that, I think we'll have more communication in this future as we kinda get together and set the guardrails on what that looks like. I think beyond that too is just kind of new novel either products or delivery methods, especially on the medical side. Like we pride ourselves on being a GMP facility with a Drug Establishment License.
We're in a number of trials, so we have placed our bets on the future of the pharmaceutical industry and drugs containing cannabis. We think that if there's some, you know, acquisitions in that space, that we'd be very well positioned to take part.
Okay, great. I appreciate that color. Next one for me. On the Canadian oil side, you mentioned last quarter your success within that segment and your market share despite employing kind of premium pricing and having products on shelves for a limited amount of time, kind of compared to competitors. Can you just provide an update on this product segment and how you're potentially looking to expand within this category? Thank you.
Yeah. Thanks, Nick. I think you know, we've been doing great with our oils. You know, we've bounced. We definitely punch outside of our weight class when we look at you know, who the top sellers are there and then where we sit. As you mentioned, it is a premium product for us and at pretty much double the price of any of our competitors and there. Now we're seeing as we get to have more experience in the field. We're looking at some of the bigger retailers in Canada, and we could see you know, share with them our successes. We're you know, the top oil brand in some of those larger chains, which I think will help us.
As you mentioned, a good way for us to grow revenue is to expand in that category that we're already successful in. We recently launched a CBG oil. It was the first CBG oil to launch in Canada. There's one other one today, but I think that adds to our portfolio. If you're, you know, one of the 2,500 stores that carry our, you know, oils now, to add that oil is something that's natural. That's a great opportunity for us. Then we added in our water-soluble. Rather than taking it as a sublingual drop, you can now, you know, take a water-soluble cannabis oil and use that as a delivery method. We are continuing to both innovate and grow that category.
I think in the future, we'll look at things like different carrier oils. Most of it today is MCT based. Obviously, not every consumer wants that. You know, things like carrier oils or delivery methods, putting it in a two-part capsule, things like that is a great way to get our quality premium GMP product out to more patients and consumers.
Great. That's it for me. I'll pass it on.
Thanks, Nick.
Your next question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions. First question from me. I just wanna talk about Germany a bit. You know, obviously, you guys are, you know, very focused on the medical side. A lot of conversations, you know, on the market about potential adult use, you know, and the timing of it coming on. Could you just remind us about where you guys would stand in terms of potentially wanting to participate within the adult use market that might come online within Germany, whether through your partnerships or otherwise? Thank you.
Thanks, Aaron. Yeah. I think it's a very interesting topic to follow. I was in Germany last fall when they had an election and elected the coalition government, and there was a lot of buzz in the industry in Germany about what that meant for cannabis. I think they recently said that they would be publishing some draft regs in the fall of 2022. I think looking forward to that, to seeing, you know, different ways that we might participate. Like, listen, I think I saw, you know, a few months ago, a survey that was done here in Canada, 50% of consumers going into a cannabis retailer are doing it for a wellness reason. They're self-medicating, or they're going there for some sort of wellness therapeutic benefit.
As a medical wellness product producer, you know, if you get an adult use market the size of Germany, which would be 3 x the size of Canada, it's definitely somewhere that we will participate. I think we could do it in a number of different ways. You know, working with STADA, which is one of the largest, not only just a generic drug company, but they also are a, you know, branded wellness company. I think it will probably create an opportunity through them and through some of our other great partners. Really excited for it, but kind of waiting to see what the regulations look like before we can determine how exactly we participate.
All right. Great. Thank you very much. Then on the medical market for Germany, can you talk about the competitive dynamics that you're seeing there? Obviously, a lot of competitors talking about, you know, heightened competition, you know, some pricing pressure, but then we're also hearing about, you know, increased amount of sales coming from outside that covered by insurance and people paying more out-of-pocket. Is there any more color you could offer in terms of the dynamics that you're seeing in Germany, and growth opportunities that you're seeing specifically within the medical market? Thank you.
Thanks, Aaron. Yes, it's you know, a lot of progress being made there. We're seeing more and more insurance providers in the country look at you know, regional even tenders, which is something that they would do for more popular established drug lines. The fact that that's now coming into play for medical cannabis shows that those insurers are seeing that as a product going forward. Obviously, some of our partners have done really well in there. There's definitely more entrants into the space, so there's more people coming into the space, especially with the news of possible adult use there. I think we'll see competition. We've done well you know, with competition in Canada. I think you know, we're happy to see it.
It just shows that it proves our business model and why we've been working to get in there since 2018 and have been selling there for a while. I think, you know, when people say, "Oh, we're entering into the German market," there's a lot of work to do. Depending on the product type, registration could take anywhere from two to six months. Permitting could take anywhere from one to three months. You know, entering the market and actually selling in the market are two different things, and we're happy that we've been there since Q2 of last year.
All right. Great. Thank you very much for the call. I'll drop back in the queue.
Thanks, Aaron.
There are no further questions at this time. Mr. David Pidduck, I turn the call back over to you for some final closing remarks.
Thanks, operator, and thanks everyone for your time. Look forward to our next update. Everyone, have a great week.
This concludes today's conference call. Thank you for your participation. You may now disconnect.