Ladies and gentlemen, thank you for joining the Q2 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 its representatives on this call. The statements made on this call will contain forward-looking information that involve risk and uncertainties. Actual results could differ materially from.
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 conclusions, forecast, 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 Labs's 2022 Financial Results Conference Call. Joining me on the call today are Keith Strachan, MediPharm's President, and Greg Hunter, the company's Chief Financial Officer. Then hand the call over to Keith and Greg to provide more detail on the quarterly results. I joined MediPharm in April from the pharma industry because I recognized the significant emerging opportunity for pharmaceuticals containing cannabinoids and identified MediPharm as the most pharma-like organization in the industry. As a team, we are relentlessly focused on driving revenue with our staff. We are executing against several priorities to optimize the business and ensure that revenue is profitable. For the mid- to long-term, we continue to invest in new pharma opportunities. Reducing our prior manufacturing footprint, eliminating unnecessary headcount, and making continued progress on some key business fundamentals.
We need to improve margins and pricing on certain products. Progress on working capital, inventory, and cash management to maintain balance sheet strength. I'm happy to say that the team has made progress on all of these initiatives over the past few. We recently announced the sale of MediPharm Labs Australia. While the Australian facility was serving the local Australian market as well as the EU, given the capacity available in Canada, as well as the recent receipt of a GMP Drug Establishment License at our Canadian site, it made most sense to serve all jurisdictions from Canada at this stage. The sale is expected to close in the next 60 days, with proceeds of at least CAD 6.9 million. This change will provide annual savings of approximately CAD 4 million annually. We also addressed the difficult challenge of rightsizing our headcount. We had two key objectives with the restructuring.
One was to treat our excellent employees with care and respect as they transitioned out of the organization. The second was to ensure that as we made changes, we retained the critical resources and talent required to fuel our growth plan. With this in mind, we have implemented headcount reductions of more than 30% of salaried employees. Changes were made across all departments and all levels, including VPs and managers, and should be fully implemented by Q4. We anticipate that these reductions will result in annualized savings of over CAD 3 million starting. Fundamental, but important items that the team is starting to address within the organization. Starting with a focus on gross margin. We are committed to ensuring that incremental sales are gross margin accretive, and we are not willing to generate volume for volume's sake.
In Q2, there were cases where we sacrificed short-term top-line results in order to maintain our margins. The finance team has already done a good job with receivables and carefully analyzing cash cycle timelines from production through collection. We hope to see additional positive results from these efforts in early 2023. Given our balance sheet strength, we see the opportunity to execute accretive and opportunistic M&A in the current environment that builds on MediPharm's unique capabilities in the pharma, global, and Canadian business segments. We will be very prudent both with our balance sheet and with our stock as we actively look for deals that would build on our strengths while driving returns for shareholders. The recent acquisition of IP from Shelter Cannabis is an example of a creative deal that can be accretive for shareholders.
We have manufacturing capacity, people, established channels, and a sales pipeline that we can use to seamlessly leverage the right transactions. This gives us an edge in the current market compared to many smaller players. Turning to the larger strategic growth opportunity. In an industry that is still trying to find its feet, MediPharm knows exactly where its foundation is. As an earlier mover in the cannabis space with access to capital, MediPharm put resources into being a standout high-quality producer with a portfolio of domestic and international licenses.
As some of our peers were out buying facilities they would later close or companies that are now being written off, we saw a path to success by investing in our core strengths, securing licenses and building processes in preparation to be one of the very few players who can compete and win in the pharma cannabinoid space and the natural health products wellness space, where GMP level quality is a must. Many companies are now seeing that the need for GMP facilities. Converting a cannabis facility to a GMP facility is extremely expensive, difficult, time-consuming, and often not practical. On the international medical cannabis front, our multi-year head start has given. In the world of research, we are becoming the go-to partner for fully funded clinical trials.
In the pharma space, we are creating relationships to provide API and finished dose formats for future marketable drug products. In Canada, many of you will have seen that the government-appointed Science Advisory Committee has just released a number of recommendations in relation to over-the-counter CBD health products. This committee recognized the current Food and Drugs Act has the framework to regulate non-prescription and natural health products containing CBD. The MediPharm DEL and Natural Health Products GMP licenses. This report, if implemented, could put CBD in the Canadian natural health products market. While the final recommendations and the timelines for implementation are unclear, we believe that MediPharm, NHP, and GMP-compliant products. In the U.S., where new marketable drugs are approved by the FDA in both new novel and generic formats, manufacturers will need GMP. FDA CBD-approved drug today, Epidiolex, is made with a naturally sourced API.
MediPharm is one of only two commercial-scale natural extractors in North America. It is a CAD 900 million a year drug. Our R&D team has been working over several years to allow us to participate as a potential API supplier to this market. In Germany, the current coalition government has made cannabis legalization a key priority. With a population of over 90 million, this will create a new wellness segment for non-smokable formats. The long-tail opportunity in Germany was further validated as we saw one of the largest cannabis companies in the world, Curaleaf, make another acquisition in the EU last week. For MediPharm, we are already in Germany and have been selling medical. The authority has accepted our GMP license for imports, and we have 12 extract products registered in their medical program, with four new products launching by year-end.
According to Prohibition Partners, extracts accounted for 35% of German medical cannabis sales by April 2021. These are just some examples of opportunities on the horizon. The future for global opportunities requires stricter quality GMP medical cannabis, usually have very stringent approval processes. We are proud of our ability to get approval from countries like Brazil, where we have been approved and will be launching two products starting in Q3 of this year. As the global cannabis market evolves, MediPharm Labs's GMP and pharma approach provide unique advantages to accessing new global medical and wellness cannabis opportunities. I will now pass the call over to Keith.
Thanks, David. In Q2, where we saw overall sales results were challenging, we continue to see improvements in adjusted gross margins as we shift our mix in Canada towards B2C sales and away from B2B and tolling. MediPharm also continues to maintain its leadership in the Canadian wellness space. In Q2, we were the number two producer in the oil category nationally, with a 12% market share, which actually jumped to 15% in the month of July. The category leader has a 40% market share, so there is still lots of room to grow. Expertise and differentiated product lines. Our award-winning oil portfolio and the rest of our product portfolio is driven by innovation, which continues with our recent launch of a 30-pack of CBD, CBN soft chews, a rechargeable disposable vape, and a three-cartridge vape variety pack.
Far in 2022, which is a 75% increase over the same time period in 2021. Our entry into domestic flower offerings under the acquired Shelter brand was delayed slightly, with deliveries going out mid-May instead of April. Early indicators show solid demand in both the flower and pre-roll products, but with only five weeks of sales in Q2, we will provide a full breakdown of this product line performance following Q3. In Q2, international revenue was down compared to Q1, but we will remain lumpy quarter to quarter until the business is at scale. Our main customers continued to see consistent growth, and we anticipate delivering them large replenishment orders in the back half of 2022.
In Brazil, where the medical cannabis market is estimated to be worth CAD 110 million by 2025, MediPharm is set up for success. In 2022, we've completed the very difficult product authorization process for two SKUs. We are currently the only Canadian producer to successfully complete this process. In Q2, we received our first commercial purchase orders and import authorizations for Brazil totaling over CAD 500,000, which we expect to ship in the second half of 2022. Further orders will follow as we register additional products and complete replenishments. In the U.K., we have completed delivery for third-party customer-branded sales, but we are also launching a MediPharm brand in this medical market. Expanding our brand beyond Canada into the U.K. will enable us to leverage attributes like ongoing research, stability, and brand recognition.
This will optimize our success in a market that is estimated to be worth almost CAD 600 million by 2025. We have already set up our supply chain in the country, complete with product registration, and will begin first branded exports in the second half of this year. Our unique positioning in the Canadian domestic wellness, international medical, and pharmaceutical markets will enable MediPharm Labs to scale rapidly without the need for additional capital, licenses, or resources. We have made the investments, and we are focused on filling the sales pipeline. I'll now pass the call to Greg to discuss MediPharm Labs's financials. Greg?
Thanks, Keith, and good morning, everyone. In our Q1 Earnings Call, we discussed the importance of growing our revenue base through organic and inorganic initiatives, reducing cash burn, and driving towards profitability as top priorities. I'm pleased to report we made progress on these initiatives in Q2. As David noted, in June, we implemented a restructuring plan that will see a reduction in the Canadian non-manufacturing headcount by 30%. This initiative will save over CAD 3 million on an annualized basis starting in late Q3. In addition, we entered into an agreement to sell our Australian facility for a minimum of AUD 6.9 million or approximately 6.2 million based on the latest exchange rate. This transaction will have several key benefits. One, it will reduce our annual operating expense by CAD 4 million.
Two, it will consolidate our global supply chain and production capabilities into our GMP facility in Barrie to drive further efficiencies. Three, it will strengthen our balance sheet with additional cash to continue to execute upon our strategy. The Canadian restructuring plan and the sale of our Australian facility will save at least CAD 7 million on an annualized basis once complete. Revenue for Q2 was CAD 4.4 million. Although overall revenue was down sequentially, our Canadian domestic sales initiatives are showing progress. Q2 revenue in the provincial sales channel grew 12% on a sequential basis and 50% on a year-to-date basis as sales increased to CAD 2.8 million in Q2 and 5.3 million on a year-to-date basis.
This growth is driven by our new and innovative products containing novel cannabinoids such as CBN and CBG and the launch of our Shelter brand in May 2022. Turning to the P&L performance for Q2 . Q2 revenues decreased sequentially from CAD 4.9 million in Q1 to 4.4 million in Q2. Canadian domestic revenues of CAD 3 million in Q2 were consistent with Q1. Within this segment, our provincial sales increased sequentially from CAD 2.5 million in Q1 to 2.8 million in Q2, driven by new and innovative products and the launch of Shelter brands. However, as we continue to transform our business to end products, this growth was offset by a reduction in our tolling and B2B business. Looking at international revenue components for the quarter.
International revenues for Q2 were CAD 1.3 million, which was lower than Q1, as we continue to see lumpiness in the international business as discussed in prior quarters. Australian revenue of CAD 0.6 million in Q2 was consistent with Q1. German revenues were CAD 0.6 million, which was lower than Q1, driven by variability in the flower business. Formulated oil shipments to Germany increased 40% in Q2 relative to Q1, but was more than offset by the flower decline. International revenues represented 30% of total revenues in Q2 versus 39% of revenues in Q1. As discussed previously, international revenues will fluctuate 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.
Gross profit for Q2 was CAD -0.5 compared to Q1 gross profit of -0.4 million. Gross profit in Q2 was impacted by severance for restructuring and a write-down of selected inventory. Adjusting for these items, gross profit improved sequentially from CAD -0.4 million in Q1 to -0.1 million in Q2. While still negative, this is the fourth straight quarter of sequential improvement. General and administrative expenses in the quarter decreased sequentially from CAD 4.9 million in Q1 to 4.8 million in Q2. Q2 included severance for restructuring of CAD 0.8 million, while Q1 included 0.4 million. Adjusting for severance, general and administrative expense declined CAD 0.5 million. Marketing and selling and R&D expense in Q2 of CAD 1.6 and 0.3 million respectively were consistent with 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. Other operating expense of CAD 1.4 million was driven by non-cash unrealized foreign exchange loss on intercompany loans to our Australian subsidiary. Adjusted EBITDA for Q2 was -CAD 6.3 million, which was impacted by CAD 1.3 million from unrealized foreign exchange loss on intercompany loans to our Australian subsidiary, as previously noted. Excluding this item, Adjusted EBITDA would have been -CAD 5 million, which is an improvement versus Q1. Moving to a few notable items on the balance sheet. Trade and other receivables declined slightly from CAD 14.9 at Q1 to 14.8 million at Q2.
As discussed in previous quarters, there is one large customer owing a total of approximately CAD 8.5 million at the end of Q2, which is subject to legal proceedings. As previously disclosed, during Q2, we received a favorable summary judgment with respect to this legal proceeding, awarding MediPharm CAD 9.8 million. This is a positive outcome for MediPharm, but there is still work to be done to collect this cash. Adjusting for this one customer, trade and other receivables is CAD 6.3 million.
Our cash balance on June 30 was CAD 22 million, which decreased from 28.3 million at March 31. Closing the sale of our Australian facility and collecting the summary judgment award could add an additional CAD 16 million in cash to further support our strategy execution. With that, I'll turn it over to the operator to open.
If you would like to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. The first question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, this is Remy Smith on for Aaron Grey. Thank you for the questions. Kind of focusing back on Germany, I know you mentioned a little bit about the decline driven by variability in flower. Speaking to that decline, can you speak a little bit more to the dynamics that are going on with that? While we understand you have a medical focus, how best do you think about labs capitalizing on the potential adult use opportunities in Germany upon legalization?
Sure. Hey, Remy, it's Keith. Thanks for the question. Thanks for calling in. I think a couple of things just on Germany. We did see a quarter-over-quarter decline, although we are seeing some good demand signals there. We actually have been working through some of the existing inventory that some of our partners had just to get them to that cleanup happened in the quarter, which would have seen less deliveries go over. We'll see that kind of come back in the back half of this year as we give those customers replenishment orders. You mentioned STADA themselves, if you look at the insights data in Germany, they are progressing month-over-month. Every month is better than the month before. That's a really good sign.
We're really excited to participate in that. Although, as Greg mentioned, until we get to scale in that country, there will be some lumpiness quarter over quarter. There is, you know, some great demand signals, and we're looking forward to showing that through the financial results. Looking at recreational cannabis in Germany, we are really excited that the coalition government has taken on legalization as one of their priorities. Obviously in the EU to run through the legislation process in that we expect to take some time. We are cautious to make, you know, really concrete plans on how we're going to participate that until we see that legislation. We are in the country now. I think that's important to note.
We've been there since 2021. We know the regulators well. We know our regional state regulators well, and supply chain well. We do deliver to all pharmacies in the country. And if it is a pharmacy-driven program for the rec program, we will be able to participate pretty easily. What we see in Germany today and even in Canada is even though there's rec cannabis in Canada, 50% of users who walk into a rec store are going there for a wellness reason. We expect the same as we see legalization in a place like Germany. Even though we are a medical and wellness company, we expect to participate in that open access in a very meaningful way.
Great. That's really helpful. My second question in regards to your M&A, I know you spoke about this a little bit, but could you speak to what verticals might be appealing? Would this
Yeah, this is Dave. Thanks for the question. There's lots of opportunities out there today, as you're probably aware, and I think we're being very cautious and careful. We have engaged advisors and all of the segments that you mentioned are of interest, but we want to find one that both has synergy and is accretive and is sort of fiscally responsible given the current situation. Obviously, our balance sheet is very strong right now. We're feeling very good in terms of lots of opportunities and people coming, looking for that cash, and we really are thoughtful about where that would go. Certainly, the more medical, the better. The more pharma, the better. Pharma or wellness, all of those are of interest.
You know, we're actively exploring those now, and I think we see M&A as part of the solution to getting to profitability over time. Obviously, we're not in a position today to talk about sort of specific opportunities and where we're going. We have, you know, repeatedly said that this will be part of our mix of strategic initiatives and an important part of what we do in the coming quarters.
Great. That's really helpful. Thank you.
Once again, if you keypad. The next question is from the line of Tamy Chen with BMO Capital Markets. Please go ahead.
Thanks. Good morning. First question is, want to go back to Germany. You called out or described it as variability in flower, and I was wondering if you could just elaborate what you mean by that. Are you saying that some of the flower didn't meet import requirements or the potency variance threshold or something like that?
Hey, Tamy, it's Keith. No. The flower, like, so we look at the two categories that we sell in Germany. We have our extract product, which is a formulated oil, and then we have the flower. Our formulated oil sales were actually slightly up quarter-over-quarter. That's why we mentioned your variability. Naturally it should, as an extract company. The flower, as I mentioned in the last question, it was more of a right-sizing some inventory in the region that we work through some of it, and then that way we can do replenishments on the back half of the year. We haven't been running into many problems with meeting criteria. That's something that we would flag in Canada.
MediPharm actually wouldn't commit to purchasing something that doesn't meet our requirements either. We have de-risked the flower process there in some senses.
Okay, I understand. A follow-up to that, just right-sizing some inventory. Stepping back a little at a higher level in Germany, in terms of the demand expectations, do you feel the right-sizing of the inventory was more so you just shipped a decent amount initially and it just naturally takes some time? Or is the demand you're selling into your partners over there?
Yeah. I think more of the working through the inventory was more of, just when we do deliver, especially initial deliveries, one of our Canadian partners in the flower, to Germany through packaging and release, does take some time. Sometimes we'll load that up a little bit higher than demand, in order to get some economies of scale through the process. That's probably more of it. I think the demand, the increase in patients, increase in what they call the patient base, has been increasing and, STADA specifically has been, increasing with that market. As we see kind of month-over-month increase in the actual participation of patients in the market, STADA is right on pace with that or if not beating.
I think as far as expectations go, you mentioned expectations of ourselves and STADA. I think that we are in Australia, so we expect it to be more entrants into the market. What we're doing is we're using our experience of having been there for 1.5 years , and we're using our quality, you know, story and message and products to make sure that we're staying out on the forefront of patients, especially in that extract category.
Okay, great. One last question from me is, I wanted to ask about the focus on margin accretive revenue. That makes sense to me. You mentioned in Q2 there was some sacrificing of revenue for margin. I was curious if you could elaborate whereabouts that was in and how you think about this trade-off between growth and margins when, generally speaking, in the industry now in the various regions, competition is quite high and price intensity is also.
Good question. We looked at our overall business and you know, David spoke about the business fundamentals. We right-sized our business. We did a 30% deep. Along with those business fundamentals is we can't be you know, taping dollar bills to boxes on their way out. We need to be selling products that are profitable. Some of those sacrifices that we saw in Q2, very competitive in Canadian LP sales. You know, not really discontinuing anything there as far as where we're seeing margins, but more on to the best deal that day.
We've kind of taken our name out of the ring in some circumstances where we see some of our peers who are happy to sell at a loss, you know, just to move out some of their inventory, you know, be selling at too much of a loss. We need to make sure that we're selling products that are gross margin accretive.
Maybe just building a little on that. Looking through the portfolio that we play, we over the last several months have been very focused on are there particularly egregious non-profitable contracts or business spot or otherwise little ones. Those actually are very helpful in terms of in terms of cash flow and in terms of profitability. I think some of it is probably good housekeeping. We're just more focused on it and we are particularly focused on it ourselves.
Great. Thank you.
At this time, there are no further questions. I will turn the call back to David for any closing remarks.
Great. Thank you, operator. Everyone, thanks for taking the time t his morning and have a great week. We look forward to next.
Ladies and gentlemen, this does conclude the MediPharm Labs 2022 Q2 Financial Results Conference Call. Thank you all for joining. You may now disconnect.