Earnings Call Transcript: Labs Corp. (MEDIF) CEO Keith Strachan on Q2 2021 Results - Earnings Call Transcript
Aug. 16, 2021 1:49 PM ET
MediPharm Labs Corp. (OTCQX:MEDIF) Q2 2021 Earnings Conference Call August 13, 2021 8:30 AM ET
Company Participants
Keith Strachan – President and Interim CEO
Greg Hunter – Chief Financial Officer
Chris Taves – Chairman
Conference Call Participants
Scott Fortune – ROTH Capital Partners
Aaron Grey – Alliance Global Partners
Natalia Cochran – Scotiabank
Tamy Chen – BMO Capital Markets
Operator
Good morning, ladies and gentlemen. Welcome to the MediPharm Labs Second Quarter 2021 Conference Call and Webcast. I will now hand the call over to Keith Strachan, MediPharm Labs, President, and Interim CEO.
Keith Strachan
Thanks, Operator. And good morning, everyone. With me on the call, today are Greg Hunter, our CFO, and Chris Taves, our new Chairman. Before we begin, please note the following caution respecting forward-looking statements which are 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 involves risks and uncertainties including those introduced by the COVID -19 pandemic. Actual results could differ materially from the conclusion, forecast, or projection in the forward-looking information. But 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 a projection as reflected in the forward-looking information are contained in MediPharm Lab's filings with the Canadian and Provincial Securities Regulators, which are available on SEDAR, after the website sedar.com.
Our second quarter was one of transformational growth in establishing ourselves as a true pharmaceutical Company with expertise in Canada. Today, I will speak to the advancements made in Q2, which were achieved in the context of ongoing Canadian domestic challenges, offset by international growth. We will then discuss Q2 results, including areas where we saw growth, segments where we have the opportunity to improve, and continued progress with rightsizing our inventory.
We will then introduce our new Board Chair, Chris Taves, and I will close with final observations on executing our business strategy. To start, I would like to provide more in-depth detail on our recent pharmaceutical licensing achievement, the way it grows our business, and our plans to capitalize on its unique status in the industry.
From the outset, MediPharm 's objective was to become a leading pharmaceutical Company specializing in Canada, taking charge in an emerging multi-billion-dollar global pharmaceutical and medical Cannabis market by providing multiple products in turnkey solutions to a broader customer base across multiple jurisdictions. A key part of becoming a pharmaceutical Company is pharmaceutical licensing.
And in Canada, that means a drug establishment license. A drug establishment license is a certification issued by Health Canada that a manufacturer maintains pharmaceutical good manufacturing practices, commonly referred to as GMP. It is done through an extensive review of the Company's quality management system over several months and then an in-person or virtual inspection spanning multiple weeks.
A massive undertaking in comparison to our Cannabis processing license issued in 2018. This license is awarded by the Health Canada pharmaceutical branch and is the exact same license as the one held by Fortune 500 multinational drug companies with operations in Canada. Pharmaceutical leaders like Eli Lilly, Abdi, and Merck just to name a few.
Our drug establishment license allows MediPharm to manufacture any non-sterile drug in finished goods or active pharmaceutical ingredient, API format, leaving many options as we start to see more complex formulas in drugs where cannabinoids are the API. We are the first and only Company in North America to receive a pharmaceutical GMP certification, which includes commercial scale extraction of natural cannabinoids.
Other pharma companies working with Cannabis with GMP licenses from Health Canada or the U.S. FDA are only held by those doing final product formulation or working with synthetic cannabinoids. Based on the current therapeutic evidence in natural cannabinoids in products such as FDA -approved Epidiolex, there's a large demand for naturally derived and pharmaceutically approved cannabis API and finished goods.
So, what does this drug establishment license means for MediPharm and its shareholders? To summarize, with this unique license, we can now access more markets globally where special access for OTC policies for cannabis are in place. We can now distribute cannabis API to pharmaceutical companies around the world, including the U.S. for use in both branded and generic drugs with marketing authorizations.
We can now provide finished dose manufacturing to pharmaceutical companies seeking to outsource the productions of their Cannabis-based drugs. We can now be a service provider to other large Cannabis companies with aspirations to enter the pharmaceutical cannabis space or expand their international reach.
And we can now support new clinical trials with GMP clinical trial material to further advance research of the benefits of cannabinoids and give many Pharm future manufacturing rights. These drug establishment license business attributes create near-term opportunities while also preparing in the long-term opportunity to produce future Canopy states, clinical proven FDA registered, and approved drugs.
This is a great development for MediPharm and our shareholders and it means our outlook for growth has a specialist pharma [Indiscernable]. Now turning to our second-quarter results, beyond the great advancements in our Pharmaceutical strategy, Q2 saw growth in other areas. The most promising in being international distribution. As a testament to the execution of our international contracts.
We saw quarter-over-quarter growth of 24% in our international revenue. Now with regulatory channels open, we expect to continue to be the leading private label medical Cannabis concentrate provider in new global markets. Like our industry's unique supply agreement with STADA, one of the EU's largest generic drug companies MediPharm has many contracts and a full pipeline of future contracts for private label medical Cannabis products around the globe.
Many of these being concentrated in the EU [Indiscernable]. There is no shortage of demand for quality medical Cannabis products from established companies with no interest in doing manufacturing themselves. The difficulty comes in the regulatory execution of delivering on these contracts. For example, in Brazil, you must register your product with ANVISA, the Brazilian FDA for sanitary authorization.
This process can only be done with a lengthy product dossier to show the quality, safety, and stability of the products. This process can take up to 3 months for approval following your manufacturing of pilot batches and six months for stability testing. Narcotic registration in places like Germany and New Zealand follow similar processes, with each country being unique. This is on top of the country's specific import and export process, which in the past year and a half has been subject to longer-than-normal processing times, as global health regulators focused efforts on their COVID-19 pandemic response. In 2021, we have seen Health Canada export permits to take anywhere from 30 to 60 calendar days after the receiving country institutes an import permit.
MediPharm masters this regulatory process with our staff who come with decades of experience in the international registration of pharmaceuticals. Now, having worked with international partners for over 18 months, many of Pharm's hard works are starting to result in the steady growth of material, international revenue. We are also establishing a cadence in permits ahead of the international customer forecast so that as we go into the back half of 2021 and beyond, we can have more repeatable monthly international revenue. A great example of these advancements is in Germany.
In March, we committed our first delivery to 2 extract customers in the region, STADA, and ADREXpharma. In Q2, not only did we deliver to those customers again, but we also delivered to 2 new customers in Cantaraj (ph) and Demi can (ph). Of course, our reach goes beyond Germany, having already delivered to Peru in March and we expect to deliver to Denmark, Brazil, and New Zealand before the end of the year.
However, I do want to highlight that Germany alone is an extremely attractive market. It stands as the world's leading country for medical Cannabis with more than 320,000 Cannabis prescriptions approved in 2020. This is a more advanced medical market than any other and is said to be growing at around 30% annually according to Forbes.
Our strategy of targeted international expansion to medical and wellness customers is gaining traction and that will lead to higher sales in the back half of this year. Our strategy is clearly global in nature, but we are also committed to driving growth in Canada's medical and adult-use markets as part of our priority of building a profitable and sustainable business. In Canada, we continue to launch new and innovative products. Our oil portfolio continues to grow and is stable for many adult-use consumers looking for Cannabis wellness options.
On the innovation front, in early Q2, we launched a capable CBN product, which is the only product of its kind in the market and gives users the ability to inhale CBN for faster onset, which is easier to titrate. In late Q2, we released a capable CBD product where we saw a gap in the market, as other CBD vapes were either heavily diluted or subject to user difficulty as CBD crystallized in the competitor's purchase.
These quality and innovative products will be accessed by more consumers as MediPharm officially launched in Quebec in May. Quebec is one of the leading provinces in cannabis sales and with a more complex listing process, the product categories are not crowded as we sometimes see in other provinces. The growth in Quebec should be better reflected in Q3 and onwards, as we add more skews and fulfill weekly shipments.
We continue to see opportunities to utilize capacity as our CMO partners grow their brands, such as the expansion of avocados gels and topicals and the growth in Ace Valley vape products, which we now produce for cannabis growth following the successful acquisition of that brand. Our sales in the domestic market are not where we want them to be. In Q2, we continue to be strained by COVID-19 restrictions at the retail level, which resulted in eventual distributors lowering inventory on hand.
For the majority of Q2, the province of Ontario, which is our biggest domestic customer, still has significant COVID-19 restrictions placed on retail stores. As MediPharm is still less than 12 months into domestic retail sales, I see some immediate improvements we can make in managing provincial listings and fulfillment. This coupled with our high-quality products and relaxed COVID-19 restrictions can result in near-term improvements in this idle market.
I will touch on our strategy to increase sales later in the call. Finally, we continue to add to innovation in both products and manufacturing automation. Our team of research experts have developed other rare cannabinoids formulations beyond our recently launched CBN and have innovative consumer delivery methods such as tasteless and odorless water-soluble drops.
We will work with provincial distributors to sell these new products as the various provincial listing schedules permit. In automation, our engineers continued to deploy equipment already purchased to reduce the direct cost of our manufacturing. This will help improve the gross margin on our high volume skews such as our Cannabis oils.
Currently, MediPharm branded oil ranks fourth in Cannabis oil sales in Ontario. This is with double the retail price of the average oil skew. This proves Cannabis consumers are starting to recognize and are willing to pay more for high-quality products. And also presents a great margin opportunity as we implement our fully funded automation. Overall, our Domestic presence is still growing revenue, but it serves as a proof-of-concept for our ability or about end-to-end development, manufacturing, and distribution solutions for multi-national Pharma, CPG, and innovative health and wellness brand companies. I will now turn the call over to Greg to discuss our Financial results.
Greg Hunter
Thanks, Keith. And good morning, everyone. I'm pleased to report, we continued to make progress with our international expansion, with international revenues increasing 24% sequentially in Q2 versus Q1. This is the second consecutive quarter with double-digit international revenue growth. In addition, we added 2 new customers in Germany, bringing our customer count with successful German deliveries to 4.
Germany is the largest international medical market with a market value estimated to be PS7.7 billion by 2028 according to Forbes and continues to be a strategic priority for MediPharm. As Keith mentioned in Q2, we continue to experience Headwinds in our domestic business driven by restricted COVID -19 lockdown and further channel inventory reductions with provincial distributors, which caused our Canadian and overall revenue to decline sequentially.
Despite COVID-19 making the first half of 2021 challenging, we continue to make progress and are optimistic that revenue will rebound post-COVID-19 lockdowns, with our recent expansion into Quebec and the launch of new innovative products such as CBN oil and CBD and CBN vapes. As I said last quarter, as a management team, we are committed to growing our top-line and adjusting our cost structure to return MediPharm to profitability. While we made progress in the first half of 2021 there is still work to be done. Turning to the P&L performance for the second quarter.
Q2 revenue decreased 7.7% sequentially from 5.5 million in Q1 to 5,100,000 in Q2. Internationally revenues increased 24% sequentially to 2.5 million with German revenues increasing 24% sequentially to 1.5 million and Australian revenues increasing 30% sequentially to 0.9 million. Domestic Canadian revenue decreased 26% sequentially to 2.6 million largely as a result of restricted COVID-19 locked down and further channel inventory reductions with provincial distributors, as mentioned previously.
Gross profit for the Quarter of negative $7.7 million was impacted by a $5.7 million inventory write-down and 0.6 million of accelerated depreciation for assets no longer in use. Adjusted for these items, gross profit of $-1.4 million declined sequentially from $-0.7 million in Q1. Q2 gross profit was negative and declined sequentially due to unabsorbed overhead with lower production volumes and product mix with more flour being sold to German customers with lower margins.
General and administrative expenses in the quarter increased sequentially from $4.0 million in Q1 to 5.2 million in Q2, largely driven by bad debt expense for one customer, higher insurance costs, and higher freight expense for our international customers. Marketing and selling expenses in the quarter decreased sequentially from 1.3 million in Q1 to 1.1 million in Q2, driven by lower promotional activity. R&D expenses decreased sequentially from 350,000 in Q1 to 140,000 thousand in Q2.
These expenses will vary as we selectively invest to advance our capabilities and product portfolio. Other operating income increased sequentially from a 0.7 million expense in Q1 to an income of 3.2 million. Q2 included 3.7 million of income from the Canadian emergency wage and rent subsidies while Q1 did not. Finance expense decreased sequentially from 9.7 million in Q1 to 0.6 million in Q2 as a result of accelerated conversions on the convertible debenture. Adjusted EBITDA for Q2 was -3.7 million and improved sequentially from -6.2 million in Q2, primarily driven by income from the Canadian emergency wage and rent subsidy. Moving to a few notable items on the balance sheet. Inventory decreased from $24.2 million in Q1 to $13.7 million in Q2.
This includes the inventory write-down of $5.7 million mentioned earlier. Trade and other receivables increased from 27.8 million in Q1 to 32.6 million in Q2, largely driven by the Canadian emergency wage and rent subsidy. As discussed in previous quarters, there are two customers owing to a total of approximately 19 million, including 8.5 million, which is subject to legal proceedings that we have previously disclosed and remain confident in its collection. The remainder of the 19 million is due from a second customer, and we are confident in its collectability.
Adjusting for these 2 customers, and the wage and rent subsidy trade and other receivables are 10.2 million. The current tax receivable of 4.3 million is a refund from 2020 that we expect to collect in Q3 and will further improve our cash position. Finally, our cash balance on June 30th was 38.9 million, which decreased from 42.1 million on March, 31. The cash balance decreased 3.2 million, largely driven by operating activities. Capital expenditures were modest and approximately 180,000 for the quarter.
Year-to-date capital expenditures are 460,000 as we continue to manage and prioritize select capital investments to expand the business. The cash balance on the convertible debenture stood at approximately 2 million at the end of June, which is due to be repaid in September and October. While we made progress in the quarter by expanding our international presence and revenue and managing our cash consumption, we still have work to do to return the business to profitability and drive positive cash flow. With that, I'll turn it back to Keith.
Keith Strachan
Thanks, Greg. (ph). This morning, we were also very excited to announce the appointment of Chris Taves (ph) as Chair of our Board effective immediately. Chris (ph) joined our Board in July of 2020 and he's applied his leadership in many areas, including as Chair of our audit committee and providing guidance to our successful March 2021 financing.
Chris is a financial industry expert, serving as Chief Operating Officer of BMO Capital Markets, one of the largest banks in North America. He also serves as a board member of BMO, China CO, and First Mortgage General Partnership. I would like to pass the call to Chris to introduce himself and discuss our Board priorities.
Chris Taves
Thanks, Keith. I appreciate the Board's confidence to oversee the leadership of MediPharm as it executes on a strategy, to be a leader in the supply of Cannabis-based drugs and API to pharmaceutical companies around the world. In my career at BMO Capital Markets and prior, I have worked with many public companies, including those with Cannabis and Pharma specialties.
With MediPharm, I see an incredible growth opportunity, as the pharmaceutical industry is just scratching the surface when it comes to accessing the therapeutic benefits of cannabinoids
in drugs with marketing authorization. MediPharm's Recent drug establishment license is a huge endorsement that it will be a go-to supplier for big Pharma Cannabis market entrants. One of the Board's current initiatives is the appointment of a permanent CEO. To date, we have had significant interest in candidates across North America and have been interviewing strong candidates, meeting with these individuals has assisted us in perfectly defining the right person for the job.
Since we started this task, MediPharm has made great progress in international sales and specialized pharmaceutical licensing. Developments like these in a fast-moving industry have helped us refine the experience and expertise in the criteria for our permanent CEO. Our selection process continues to progress and we're confident we will appoint the perfect candidate for this role and the exciting future of MediPharm. And then, in the interim, the current management team has the full confidence on the Board to execute on the Company vision and to drive growth. Keith, back to you.
Keith Strachan
Thanks, Chris. I want to thank you for taking on this role and providing your experienced leadership at such a pivotal point in our business. I will now provide some final thoughts on our outlook and strategic plan to increase revenue. There's a lot of opportunities for increased sales in Canada and internationally. Based on our fully built and funded manufacturing platform, we can increase revenue significantly without further capital investments. Activities are already underway to achieve this goal. These strategic revenue goals have three main focuses. One, investment into more sales resources.
Domestically, we have increased our sales team by almost doubling our retail sales reps subsequent to quarter close. With the more ongoing ramp-up of the innovative products we offer to the market, we can make great use of this newly scaled salesforce. Internationally, we are putting more boots on the ground in growing markets.
In August, we had one of our top international business development associates relocate to Frankfurt, Germany. And in September we have our first personnel in Mexico, starting with us, to expand our reach in Latam. As our area of highest growth so far this year, having in-country sales and business development representation will add to our growing international revenue opportunity. Two, expanding contract manufacturing:
Providing partners with access to the highest quality cannabis manufacturing platform to deliver them cost-savings and international reach. For example, here in Canada, just last week, we started a GMP tolling contract for one of the world's biggest cannabis companies. On the international front, we have continued to add to the private label services provided out of MediPharm Labs Australia. Three continued innovations. Internationally, there is a lot of white space when it comes to innovation.
Just like in the established adult-use markets such as Canada or legal U.S. states. Many international patients are seeking new formulation and delivery methods. The barrier is usually making one of these popular formats in a GMP-compliant way. MediPharm has just the expert team to assess and meet that challenge. Domestically, as Cannabis categories become crowded, and distributors scale back product listings, innovation is the sure way to get the product on the shelf and increased sales. We saw this recently with baseball, CBN, and CBD products, and we'll use the same approach going forward to get more products on the shelf with retailers.
In the pharmaceutical space, our R&D is more complex as Pharma customers will seek API suppliers who have borrowed the active ingredients from the FDA. These filings take in-depth characterization of substances with very tight specifications. This is an area where we want Chris ' efforts to remain ahead of the competition.
Overall, Q2 was a productive quarter with the accomplishment of our drug establishment license and further global market penetration for our products. 2021 is a year where progress will occur as we gain traction with our priorities and create a MediPharm that I know will deliver tangible value to our customers and shareholders. In my opinion, our current market Cap does not reflect the value of our very unique pharmaceutical licenses and strategies, making MediPharm a great investment opportunity.
As one of the founders of MediPharm, I can tell you that since day one, we had the vision to be a pharmaceutical Companies specialized in Cannabis, providing Companies in patients with API and drugs through a traditional marketing authorization, as opposed to being just another Cannabis Company who distributes to non-federally regulated or special-access medical programs. Having achieved our Drug Establishment License in Q2, I can confidently say we have reached that goal. This will result in many positive business outcomes for MediPharm and its shareholders. I cannot wait to show you what we will do next. Now, Operator, can you please open the lines for questions from our callers?
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Aaron Grey with Alliance Global Partners.
Aaron Grey
Hi, good morning. Thank you for the questions and congrats. Congratulations on the drug establishment license. So the first question for me, I'd like to just talk about the license and maybe in terms of the timing of where you see the opportunities. So certainly seems that you guys have a differentiated strategy there than maybe some of the other Cannabis plays, but we talk a lot about potential API that allows for you guys in terms of Big Pharma, could you maybe elaborate maybe on some of the conversations that you've had with pharmaceutical companies to provide that type of API.
Right now, there are such drugs like have dialects and Marinol out there. So how do you see in terms of the timing of that license eventually translating into revenue? Is it more of a near-term or maybe 2,3 years out there? Thank you.
Keith Strachan
Thanks, Aaron. Appreciate you calling in this morning. Great question. Our drug establishment license does truly differentiate us in many ways and does bring both near-term and long-term opportunities. I think in the near term, what we're looking at is more international sales. So we're resolved at 24% growth quarter over quarter in the international sales. This helps us, as part of the complex industrial processes and export processes around special access programs that are opening up and it seems like every couple of weeks you see a new country that's going to try something.
I think those health authorities are looking for a GMP solution and sometimes just didn't have one because they didn't exist. So, there are some near-term opportunities there for sure that we'll keep seeing that international growth. I think you nailed it on what the long-term opportunity is. Really, that's an API provider for drugs that have marketing authorizations. So, we've seen the great success of the effects of Epidiolex. If you look at their annual run rate in the U.S. of Epidiolex sales being over $600 million U.S. a year. You could imagine that most generic Companies are looking at that as an opportunity. And with those, they're already starting the development process. So there are multiple chair Companies that are looking at it, the development process, but that long term.
Just to create a timeline on that, there's a lot of patents on that product, it could take up to 2025, 2026 to really enter the market with the generic. But when they do, generic sometimes make up 30%, 40% of the market share. So there's a massive opportunity. These other drugs like, as you mentioned, Marinol in Germany, it's referred to as [Indiscernable] is still one of the main concentrates sold in Germany. So we can participate that right away as those products are often right up, has not been an office API opportunity for some really generic drug Company, but there is an opportunity for ourselves. To summarize, there is near-term material growth that does make a difference to our revenue today. And then the long term is limitless in where we can go.
Aaron Grey
I appreciate that color, Keith, that's really helpful. The second question for me, turning to the domestic market in Canada, you talked about finding gaps in the marketplace certainly being some potential buyers sure really are taking a focus on that in terms of new products that they'll take in. But just an overall question in terms of, as you're looking for these gaps in the market, how do you look at potential ROI in terms of the effort and CapEx needed is maybe ramp up production of that product versus how big a market share of maybe that gap in a market might be? How many other interests might come in? I will just like if some further commentary from you guys in terms of the ROI and different things you're looking at as you look to find gaps to mark and then decide whether or not you guys would be an opportune position to try and fill that gap. Thank you.
Keith Strachan
Yeah. For sure, Canada continues to be the focus that we're looking to increase in that retail space. As I mentioned, there's a big opportunity there. Any product that we do, we're obviously looking at it from an ROI perspective to make sure that it is accretive to the bottom line, but really what we're looking at in innovation is the Canadian space, there are some large players in there that have spent a lot of money on their retail whether they've owned, there's a retail platform, or they have like a mass of retail sales group. I don't think that we're looking to go head-to-head with a lot of those in some of the big categories.
But what we can do is we can own niches where there is innovation because we have such a strong team. So really for us, it's things like that CBN base, where we are the only ones who make it for the CBD based that doesn't crystallize, that's where we see that -- so in the future, we're looking at other formulations that would be minor cannabinoid base something like a CBG which you can find in the U.S. today, but not yet in Canada is probably a good spot where we could be and then, you know what different formats we can do.
So looking at there are some water-soluble products in the market today, but most of them are low quality. So how could we maybe make a higher potency water-soluble product for consumers? So there is a lot of -- there's a lot of opportunities there and a lot of ROI. And we're really focused on those niches of innovation and what really also helps us. And what's important is we are using it as a platform, as a proof-of-concept for our Big Pharma and CBG customers current and in the future.
So as we say start, I'd like to launch, like a CBN or CBG is their patient base. We're able to show that not only through the reformulated market and some small-scale responses from consumers and patients. So it really gives us back a proof-of-concept platform that really does build into that more future opportunities.
Aaron Grey
Great, thanks for that call and then just last one from me, if I could. Just for Germany then, Right. So as we look potentially see a bigger ramp in the overall market, once some of these COVID bought on that ease could shock on whether or not on your dice and there are any types of bottlenecks in terms of getting supplier or getting the product out there for a starter or any of your partners or if it's more of just like a demand and current -- current COVID dynamics there, right? So if the demand comes up and you see more prescriptions being issued in Germany. Do you guys have all the capabilities to fulfill that demand in the back half or through 2022, thank you.
Keith Strachan
Yes, thanks, Aaron. No bottlenecks on our side on, let's say, the delivery and fulfillment. We have no problem making those products and really, now that we have this drug establishment license, it does help with a protect, as far as EBITDA supply chain, whether we make it in Canada or we make it in Australia, it starts to give us a lot of options. Where is the bottleneck?
And you know, we saw in Q1, we had 2 customers; in Q2, we had 4 customers. And then we'll see that grow at that kind of rate. Where the bottleneck is is more on the registration site, as I mentioned in the call, when there are new narcotic products and when we onboard a German customer, they have to be on a B Farm, which is like the FDA of Germany. And then they register that product through [Indiscernable] .
That process can take anywhere from 3 to 6 months. And then once it's registered, we're able to fly for the next for authorization. So there is a bottleneck on new products. But once the channels open, we're able to get a good cadence. I don't think that we have any problem with demand. The demand keeps going up and really right now, we're the only really private label option in a state like Germany. So our competitors in Germany are with their own branded products like, let's say Tilray.
We have Tilray Oil in Germany [Indiscernable] we see more and more entrants like STADA and our partner that adjuncts or even [Indiscernable] we're looking to outsource it, we're really one of the only options and now we're probably the best as far as quality, license, and experience in getting to the market. So, I think we'll continue to see demand and MediPharm's prepared and well-capitalized, and well resourced to meet that demand.
Aaron Grey
Great, thanks for the call and I'll jump back in the queue.
Operator
Your next question will come from the line of Scott Fortune with ROTH Capital Partners.
Scott Fortune
Good morning and thanks for the questions. Real quick. First, housekeeping call where are the inventories sitting at now at 13.7 billion after the inventory write-off, and what type of cost does this inventory include. I just want to get a sense as we look at gross margins going forward from this point as far as that's concerned
Keith Strachan
Yeah. Thanks for the question. So we have the inventory being more right-sized now with some of these gaps. So we may be sitting at 13 million, there's five million exchange in -- as we've said, in raw material, which primarily flowers that we use for extraction And then the bulk of the rest, it's in the finished or semi-finished product, which again, some of that -- what's in there, which is new in the last couple of quarters is finished goods, flour that we sell for sale purposes or end consumption within Germany.
Obviously, this inventory, where we're tracking very closely as you can see, we are trying to manage it down as we improve our cash position and get better tendency issues with demand, both from the provinces and internationally and we'll continue to focus on managing our inventory to help improve cash.
Scott Fortune
Okay. I appreciate the color. And then, focusing on the EU or international side, Keith, you called out new product formats on the GMP compliant side of things and the timing is maybe new derivative products being getting approved for use in Germany, and then from your skews in the product portfolio, what's being in demand and the opportunity to increase different skews our products into Germany, as we look out to the second half and into 2022 here?
Keith Strachan
Yeah, Thank you. It's a great question I think. As you look at like U.S. date in Canada, popular format, things like a vape pen or like a water-soluble that you can put into a drink easier or something like that. As far as patient use goes for patients is really a great opportunity even well-developed medical programs such as the one in Australia right now really drive flower oil the only choices for them.
The reason why this has happened today is unique to do it as a GMP product. So doing like an oral solution, as a GMP product is something that there are some systems are in place because there are oral solutions for other drugs. But when you look at something like a vape pen, GMP vape pen has become very complex as you have to take into consideration the hardware and the stability of something in the vape pen and like nothing and we've got these new recreational markets that are so recent I don't think a lot of those studies have been done, so we're doing those now.
That registration process will probably take another three months to six months. So it's probably more of a 2022 opportunity as far as let's say something like a GMP-based friend. But We might be able to achieve that late this year, or early next year. But the development is starting today and we've just -- in the first part of this year engaging customer interest and patient interest and the ability to source all those GMP suppliers for that supply chain.
Scott Fortune
Okay, appreciate. And in focusing back on Canada, the growth in the second half here, as we open full-day, are you seeing more consolidation here or where is the growth going to come from? More pick up in the 2.0 expansion in that category. And then what are you seeing from some of the LPs front side of things or are they looking to outsource now more potentially in this environment, just thoughts on how we are stronger, second-half growth in Canada.
Keith Strachan
For sure, I think, you know, we'll continue to sell our quality and innovative products, branded products at the store level. And I think as I mentioned, subsequent to quarter close, we've increased our sales team there and some of our resources on the retail efforts. So we could see some incremental growth there.
But since we do participate in some of the smaller categories, we're back to more of incremental growth part of the back year. A back half of this year, I think where you mentioned where we see also a lot of opportunities is the B2B services coming back. So 2019, 2020 a lot of our business was B2B and now are seeing some of that come back as far as some of the big licensed producers that have a great brand, great marketing, really need some help there.
And then what's really great is now that we have this drug establishment license and we're the only one in North America who have this drug establishment license for the extraction of cannabinoids, large license producers are coming to us to do GMP -type services, whether that's totaling or using material that we source, we can make them like a GMP API or a GMP concentrate so that they can put that into their pipeline internationally.
And we've already started doing some of those activities just as recently as August, so we'll see a good pickup in some of our B2B totaling services with that.
Scott Fortune
I appreciate the color. Thanks, guys. I'll jump back into the queue.
Keith Strachan
Thanks, Scott.
Operator
Your next question will come from the line of Natalia Cochran (ph) with Scotiabank.
Natalia Cochran
Hi there. Thanks for the color on international and I have some questions on the Canadian side. So from the perspective of the provinces, can you give some color on what you're seeing now, are things improving compared to the restrictions that we've had so far? Are things opening up? And for instance, is that or doing more? And the second part of the question is the margin side. So can you give some color on are margins expected to improve or at what sales-velocity will you break even on the profit -- gross margins? So if you can give some color on that. Thank you.
Keith Strachan
Sure. Thanks, Natalia (ph). Thanks for joining us this morning. I'll provide a little bit of color on the promises and I'll hand it over to Greg (ph) to talk about the plans for their margin improvement. On the provincial side, we are seeing some encouraging demand signals, the province of Ontario being our biggest domestic buyer continues to open more retail stores. With restrictions being lifted, on June, July as far as people being able to shop in-stores, again, because we do have that high-quality wellness brand.
It is something that helps for sales in Brick-and-mortar as some of them might go in for flowers and then see a CBD or CBN oil that they want to try. So that doesn't really help us as far as the demand signals go. We're waiting to see if provinces will pick up inventory again like the distributors will pick up inventory as we saw in the last bit of 2020. So what we've seen to date of 2021 is distributors lower their inventory on hand to more of like a just-in-time ordering to get it out to retailers probably because of the uncertainty around COVID-19.
Now that uncertainty is away, we hope to see them pick up that inventory again, which will advert smoother and more deliveries on our end, but we are still waiting to see how that plays out. And I think that the provinces have done a good job now, looking at consumer demand. I think in our carrier specifically, they are changing the product core system and how they work with licensed producers on, what products they take in and what product they list, and when they list them. And I think given our long relationship with the provinces, that will bode well for MediPharm as well. So I'll hand over Greg to also talk about the margin.
Greg Hunter
Yeah. Thanks, Keith. With gross margin, as said prior quarters, we do see a path back here to not only just profitable on the gross margin side but EBITDA profitability. And there's a couple of different aspects where we're focused on that are going to drive that. One, as Keith mentioned in his prepared remarks is around automation, which we continue to bring into our production facilities, which will obviously enhance our cost positions.
The other one with the international expansion, which is why we're so pleased to see that sequential growth, there's obviously higher pricing and better profitability in the international markets, so that will continue. The other one is, as I mentioned, with some of our flower sales into the international markets where we did have to lower margin s this quarter, impacting us. The team is actively working on improving that market and we expect to see some improvements there in the future and then as well the international market, with some mix changes as we move into different products and potentially away from flour and oil should help.
And then the last 2 I would mention is one, the volume as I said in my remarks was challenging in the domestic market within Canada. So as Keith talked about it, and we expect to see that improvement and volume go up which helps us significantly in our manufacturing. And then finally, with some of the new products that Keith had talked about. With some of the new innovative products where we can get a higher margin on those as well. So those are all the different factors that are going to contribute in the future as we see getting back to a positive gross margin.
Natalia Cochran
Sounds great. Thanks. That's all from my side. I'll pass on.
Greg Hunter
Thank you.
Operator
Your next question will come from the line of Tamy Chen with BMO Capital Markets.
Tammy Chen
Good morning. Thanks for the question. Wanted to ask about Germany. Can you speak a bit about the evolving competitive landscape there? Because I think, as noticed, a couple of the other Canadian licensed producers that participate in that market have recently mentioned that the competitive level has increased in that market. So if you could talk a bit about that and how the relationship with STADA has been involving with respect to your penetration of Germany.
Keith Strachan
Yeah. Thanks for joining us. I think Everyone, sees that -- that great opportunity in Germany and we'll continue to see new entrants into that space. I think to date, we haven't been really hindered by co-profession, especially on the concentrated side as there are still products to be registered there. So I think that there's still opportunity. I think if we hear some more companies going into that phase and some more investment in that space, but really, I think it's also being faced with new patients.
So every month if you look at some of the data, I mean out of Germany as far as coverage by the national insurer, I think we're getting more and more patients that are looking to [Indiscernable] cannabis. So, as more people come in, there's also more patients there, so there's nothing there that we really -- that we see is a near-term, really competitive, but we continue to work with our partners there, especially STADA to look at that landscape and look at our pricing to make sure that we don't get priced out of the market and things like that.
So, it is something that we're looking at, but it's encouraging to see everyone else wanting to come to Germany because obviously, they see what we see in the great opportunity there. The STADA relationship is progressing nicely as we mentioned, we made our second delivery to them on the oil side in Australia in Q2. We continue to provide them with flowers of value-add service.
And as Greg (ph) mentioned, we think that we can improve our margin on that value-add service. But we've made multiple deliveries from Canada to Germany for that flower supply. So it really is ramping up I think as a large multinational Company. They are pretty cautiously moving forward with our product launches, so their trajectory is one that's a bit more conservative, as they add in more patients.
But what they are adding in on the patient side is probably more sticky than you would see in some of their competitors. So, their focus, and I believe is a great one, is that they're going to the patient level for education to make sure that they get those patients and then they keep the patients, no matter what cannabis solution they are looking for, for that therapeutic benefit, whereas some of the other companies in Germany are really focused on, let's say, pharmacist s that have a high sell-through of Cannabis, so then they're the only men in those pharmacies.
So I think that the status approach, while a little bit slower start, has a longer scale power. And we'll see more and more great results and the ability to put patients into new formulations or product delivery mechanisms in the future as well. So we're really happy with the progress there.
Tammy Chen
That's interesting ongoing through their patient level. Okay. And then the last question for me is a bit of clarification. The drug establishment license, Sorry. Did you say that did you say you are working on over the next several months, some sort of registrations and filings with the FDA for APIs, and that only once you have that, then the long-term vision of supplying APIs to Pharma Company can happen. Is that's the next step that you have to do to finish up on top of the drug establishment license? I wasn't clear if you could clarify that. Thank you.
Keith Strachan
Yeah, for sure. The drug establishment license is very unique in our industry, but not unique in the pharmaceutical industry. And there is a number of other steps that we could take to work with it. So the long-term strategy of working with a major pharmaceutical Company on the launch of a new drug containing Cannabis or a launch of a generic drug containing Cannabis is well underway and there's a lot of steps that we could do today that we are doing today to achieve that.
There is a Fortune, one of the Trex. If you register a new drug, you'd go, to the U.S., through a new drug application process. And the natural that you don't need to have that say the API registered as the registry in the entire drug. We could provide our customer with the API in that case. well, preferably doing the FDA filings. If you're doing the abbreviated drug application, which is a generic drug application with the FDA, they would be looking for you to be using an API that does have a drug master file already on file with the FDA.
So it's an important step for us to do and is something that MediPharm is actively working on. Going on well with the process of registering our API we're not only the FDA but Health Canada and the European Medicines Agency. So that way we weren't at our customer's needs. An API in the pharmaceutical space could go to those Vegas basis to validate that though EGI will work in there, I'm hundreds.
Tammy Chen
Okay, I understand. Thank you.
Operator
At this time, there are no further questions. Do you have any closing remarks?
Keith Strachan
Yeah, thanks. I really appreciate everyone joining the call. It was great to speak with everyone this morning. As I mentioned, we're really excited about the future and I appreciate your time. I hope everyone has a great day.
Operator
Ladies and gentlemen, thank you for participating. You may now disconnect.
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