CA - MediPharm Labs Corp. (MEDIF) Q2 2023 Earnings Call Transcript

2023-08-14 12:11:02 ET

MediPharm Labs Corp. (MEDIF)

Q2 2023 Earnings Conference Call

August 14, 2023, 8:30 AM ET

Company Participants

David Pidduck - Chief Executive Officer

Keith Strachan - President

Greg Hunter - Chief Financial Officer

Conference Call Participants

Scott Fortune - ROTH MKM

Aaron Grey - Alliance Global Partners

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the MediPharm Labs 2023 Second Quarter Financial Results Conference Call. Please be advised that today’s conference is being recorded.

Before we begin, please note that remarks today may contain forward-looking information and forward-looking statements within the meaning of applicable securities laws. This includes, without limitation, statements about MediPharm Labs and its current and future plans, expectations, intentions, financial results, levels of activity, performance, goals or achievements and other future events, trends or developments.

Statements about MediPharm’s acquisition of VIVO Cannabis Inc., the combined company’s future financial and operational performance, the combined company’s key business segments, product offerings, pro forma and overall financial performance, potential revenue and cost synergies resulting from the transaction and statements about combined company’s profitability and ability to grow the business going forward.

Forward-looking statements are made as of the date hereof based on information currently available to management of MediPharm and on estimates and assumptions made based on factors that MediPharm believes are appropriate and reasonable in the circumstances.

However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by forward-looking statements. 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, pardon me, 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 Lab’s filings with the Canadian and provincial security regulators, which are available on SEDAR at sedar.com.

The company’s remarks may also contain references to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, gross profit and adjusted gross profit. These measures do not have any standardized meaning according to the International Financial Reporting Standards or IFRS, and therefore, may not be comparable to similar measures presented by other companies.

MediPharm believes that the non-IFRS measures referenced provide information useful to shareholders and investors in understanding our performance and may assist in the evaluation of the combined company’s business relative to that of its peers. For more information, please see the section titled Reconciliation of non-IFRS measures, the most recent MD&A of MediPharm, which is available on SEDAR.

MediPharm’s actual financial position and results of operations may differ materially from management’s current expectations. As a result, we cannot guarantee that any forward-looking statements or financial outlooks will materialize and you are cautioned not to place undue reliance on this information.

Forward-looking statements are made as of the date hereof and except as may be required by law, the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

I will now pass the call to David Pidduck, CEO of MediPharm. Please go ahead, sir.

David Pidduck

Thank you, Operator, and good morning, everyone. We appreciate you joining us for MediPharm Labs second quarter results conference call. Joining me on the call today are Keith Strachan, MediPharm’s President; and Greg Hunter, the company’s Chief Financial Officer.

I will address some of our strategic initiatives and then hand the call over to Keith and Greg to provide more detail on the quarterly results. This is our first full quarter conference call following the VIVO acquisition, so I would like to welcome legacy VIVO shareholders, stakeholders and employees to this call.

In Q2, MediPharm was focused on the integration of VIVO Cannabis, which closed on April 1st. The acquisition of VIVO was a transformative transaction for MediPharm Labs and has essentially doubled our revenue.

In addition to doubling our revenue, we have reduced our combined OpEx by over $3 million per quarter and improved our combined adjusted EBITDA by over $4 million per quarter. That’s over $16 million annualized.

With the integration of Beacon Medical Australia, our international footprint is even stronger and the combined company’s annualized international revenue will represent over one-third of our total sales.

In 2022, the separate companies had negative adjusted EBITDA of almost $30 million. We have dramatically improved these results by bringing the two companies together. Our current quarterly adjusted EBITDA was negative $3.2 million. This represents a very substantive improvement of approximately 50%. While we are very proud of this progress and our trajectory, the team continues to work on further cost reduction and driving more growth in our profitable revenue stream.

I’m happy to report that we are ahead of schedule with our integration and cost savings targets. Thanks to the efforts of our newly combined team members, we were ready on day one with detailed communication for all employees regarding their roles, reporting and how any changes affected each individual.

Thanks to this early communication, all personnel changes have now been fully implemented. We’ve now reduced the combined non-direct labor workforce by approximately 30% since the announcement of the transaction. This is in addition to previously announced restructuring efforts made separately by both companies in 2022.

As a result of all of these efforts, total non-direct labor headcount between both companies will have been reduced by approximately 45% compared to January 2022. Restructuring has been implemented at all levels, including the C-suite, senior level executive positions have now been reduced by 50%. The senior level changes represent a large portion of the employee-related cost savings.

We have previously shared a synergy goal of annualized $7 million to $9 million between cost savings and revenue. We are well ahead of all cost related synergy targets by both dollar and time line measures and on track for some of the key revenue synergies that Keith will address in our medical international channels.

Revenue is up approximately 120% over Q2 2022. Adjusted EBITDA has improved 50% over Q2 2022. Combined OpEx of VIVO and MPL has been decreased approximately $7 million versus 2022 first half. Combined adjusted EBITDA losses have been reduced $7 million to $8 million versus the first half of 2022.

As mentioned, our Q2 adjusted EBITDA was negative $3.2 million. This EBITDA improvement, combined with our strong balance sheet, gives us a solid runway to pursue our growth initiatives, including M&A opportunities.

Post-transaction, we continue to have a strong balance sheet with limited debt and a solid cash position relative to our peers. We have less than $3 million in debt and we have unencumbered ownership of all of our major assets. This strong balance sheet with about $15 million in cash, is expected to provide confidence in MPL’s ability to execute on our strategic growth roadmap. In addition, as Greg will address, we have various potentially sizable cash inflows in the next few quarters.

There’s been a lot of discussion in the industry about CRA excise tax liabilities that many companies have been running at. For clarity, MPL has always been and remain fully up-to-date in any CRA excise tax obligations. The often question how some of our peers were able to sell product extremely below cost as the government has reported $200 million in uncollected excise exposure and several CCAA filings have now made clear, there are a number of companies that have enjoyed a significant cost advantage simply by not paying their excise obligations.

As an industry, we have asked for a reduction, standardization and simplification of excise taxes and also for potentially excluding medical patients from taxes. But in the short-term, just ensuring that all companies are actually paying the existing taxes would be one good step towards market stabilization.

A few other key first that Keith will highlight were our successful FDA inspection first for a Canadian cannabis company and the first shipment of cannabis pharmaceutical products to the U.S. by Canadian LP for an NIH-funded clinical trial.

While Greg will share more details later in the call, to summarize, revenue, gross profit and adjusted EBITDA all dramatically improved versus prior year versus prior quarter and versus trailing 12 months, largely driven by the successful VIVO integration and cost reduction initiatives.

All key metrics, both financial and non-financial, are going in the right direction. For exactly where we plan to be, this includes focusing on profitable revenue streams and addressing low-margin products through price increases, cost decreases and SKU rationalization.

Our experience with VIVO integration has shown that we can quickly and profitably integrate and drive synergies with like-sized organizations and we are confident that this approach can be repeated.

In 2023, we will continue to focus on reducing costs, driving revenue growth in selected profitable segments, progressing our pharmaceutical milestone and pursuing synergistic M&A. We will remain focused on executing our strategy, and as discussed, we are on track to driving $7 million to $9 million in annualized EBITDA improvement from the VIVO transaction and driving towards positive adjusted EBITDA.

I will now pass the call over to Keith.

Keith Strachan

Thanks, David. Q2 was busy and exciting as we integrated VIVO. In many cases, digging in and intimately learning their business remind me of when we started operations at MediPharm in 2018. The fun and hard work involved with drinking from the fire hose of new information in a still very new sector.

I would like to personally thank the VIVO and MediPharm team current and past for supporting this transition. I was confident in our synergy savings estimates but impressed on how quickly we were able to achieve them.

Our focus commercially in Q2 was reviewing the new and legacy business lines to ensure we are focusing efforts on high growth and high margin areas. These would include things like new partnerships in Brazil, adding MediPharm products to our medical e-commerce site and expanding the established Beacon Medical Australia business to include non-flower products. The approach is to go deeper with good customers and products versus going wider and stretching resources into unknown outcomes.

This focused approach allowed us to expand gross profit by the biggest quarter-over-quarter jump in company history. The best MediPharm adjusted gross profit since Q4 2019 and reduced OpEx, all while maintaining revenue.

Even as we made material progress in rightsizing the business, we completed some major milestones in new areas of growth. In Q2, we completed important regulatory steps to optimize our German supply chain to drastically improve margins by the end of this year. And subsequent to the quarter, we hit the major milestone of our first commercial shipment of clinical trial material in the U.S.

The U.S. shipment followed a process where the clinical trial required endorsement via the FDA Investigational New Drug Approval and DEA import approval. In order for MediPharm to even be considered by our NIH-funded research partner, we required an extensive list of qualification and licenses, including our Health Canada Drug Establishment License and U.S. FDA Foreign Site Registration, both which came after millions of dollars in investment, years of work on our quality management system and in-depth audits. These attributes have created a competitive moat for us in the pharmaceutical cannabis sector.

This sector growth time line is long by nature, but we have seen progress. The latest cycle of funding grants by the Canadian Institute of Health Research provided funding to three of our clinical research partners, and in the U.S., the possible rescheduling of cannabis could open the floodgates on new research opportunities. At MediPharm, we are ready with the qualification and capacity to take on these high margin projects.

These quality and GMP attributes also contributed to international progress in Q2, the largest recent impact being in Australia. As of July 1, 2023, the Australian Therapeutic Goods Association mandated that all cannabis imports must meet GMP requirements. This limited some of the non-GMP products that we’re currently entering the market under the guise of a special access program.

In Q2, we delivered contract manufactured GMP vapes to Australia and prepared for our launch of Beacon Medical oil and vapes. Beacon Medical’s new products will be comprised of the first GMP line in Australia where a patient could choose a flower, full spectrum oil or full spectrum vapes, all from the same strain, allowing patients to access a consistent therapeutic benefit across all three delivery methods. This line will launch in Q3. The Beacon Medical flower portfolio is currently the number three flower brand by sales and we anticipate these high margin products to have the same success.

Before turning to Greg to discuss financials, I’d like to point out and briefly explain a new business channel in our financial statements and disclosures. The channel of Canadian Medical Cannabis has been added post-VIVO acquisition. This includes our direct-to-patient medical platform known as Canna Farms, sales to other LPs, medical channels and our patient clinics Harvest Medicine.

Canna Farms is a top 10 revenue generating direct-to-patient medical platform in Canada. Patients with a prescription register with Canna Farms e-commerce site where they can select from over 100 SKUs in all cannabis formats and be directly shipped to their home.

Harvest Medicine is an education-focused, patient-centric, cannabis discovery clinic, operating in three locations and via telemedicine, Harvest Medicine has conducted more than 150,000 registered patient visits through its clinics, making it one of the top clinic networks in Canada.

With the addition of VIVO, we are now in every major cannabis channel, as well as meaningful revenue in every major federal legal market, including Canada, Australia, Germany, U.K., Brazil and even dipping our toe into the U.S. with clinical trial material. This diversification gives us the foundation to support further growth both organically and through M&A.

I’ll now pass the call to Greg to discuss MediPharm’s financials.

Greg Hunter

Thanks, Keith, and good morning, everyone. As David and Keith discussed, we continue to focus on growing our revenue base through organic and inorganic initiatives, reducing cash burn and driving towards profitability as key priorities.

Before reviewing the results for the quarter, let me add some additional commentary on the progress we made on these priorities. On April 1, 2023, we closed the acquisition of VIVO Cannabis in an all-equity business combination. In aggregate, MediPharm issued 107.9 million shares valued at approximately $8.1 million.

As discussed last quarter, we’re committed to delivering synergies of $7 million to $9 million on an annualized basis. In the first week, post-closing the transaction, we implemented plans to reduce the combined MediPharm and VIVO non-direct labor workforce by approximately 30% and undertook steps to reduce public company costs as well. We have now achieved approximately $7 million in savings on an annualized basis. This is in addition to the $3 million of annualized savings from restructuring we completed in late 2022.

Turning to the P&L performance for the second quarter. Revenue for the second quarter of $9.6 million increased approximately 120% versus Q2 2022 and 64% versus Q1 2023 as we integrated the VIVO acquisition.

Revenue in our new Canadian Medical channel of $3.8 million increased exponentially versus just $0.2 million in Q2 2022 and $0.6 million in Q1 2023 as we integrated the VIVO Medical business.

Revenue in the International Medical channel was $3.0 million versus $0.9 million in Q2 2022 and $1.8 million in Q1 2023, representing a 249% and 66% growth, respectively. The growth of the International Medical channel was largely driven by the integration of VIVO’s Australian business, Beacon Medical. The international business represented approximately 33% of total revenue in the quarter.

Revenue in the Canadian adult use and wellness channel was $2.4 million, which declined versus Q2 2022 and Q1 2023 as we selectively increased prices and rationalized products as we prioritize profitability over volume.

Pharmaceutical and B2B revenue in Q2 2023 was $0.3 million. As Keith discussed previously, pharmaceutical revenue is a longer term strategy and will take time to pay off as the market continues to develop. However, we hit some major milestones with the successful FDA inspection and the first U.S. pharmaceutical shipment.

Gross profit for Q2 was positive $0.8 million or approximately 8%, which is the third consecutive quarter with positive gross margins. Gross profit in the quarter was impacted by several discrete items, including fair value adjustments for biological assets, inventory write-downs for some older international flower and severance for restructuring. Adjusting for these items, gross margin was approximately 21%.

Gross margin continues to improve, driven by product mix, production efficiencies, price increases and cost reduction initiatives. Our management team continues to aggressively prioritize driving gross margin improvements.

General and administrative expense in the second quarter of $5.8 million increased versus prior year and sequentially as we incorporated $2.1 million of VIVO G&A into MediPharm. G&A expense for the quarter was impacted by $1.4 million of severance expense for restructuring. Adjusting for severance, G&A expense was $4.4 million, which increased sequentially and increased versus prior year driven by the incorporation of VIVO. Retrospectively, if VIVO were included in our Q2 2022 results, G&A expense in the quarter declined approximately 35%, reflecting our combined cost reduction initiatives.

Marketing and selling expense of $1.6 million was consistent with Q2 2022 and Q1 2023, despite the incorporation of VIVO and doubling our revenue.

Total OpEx, which includes G&A, marketing and selling and R&D expenses was $7.5 million in the quarter. Adjusting for severance and some other discrete items, normalized OpEx was approximately $6.5 million and includes $2.3 million from the incorporation of VIVO. Retrospectively, if VIVO were included in our Q2 2022 results, OpEx in Q2 2023 is approximately 35% or $3.7 million lower, reflecting our combined cost reduction initiatives.

Adjusted EBITDA for Q2 of negative $3.2 million improved $3.2 million or 50% versus Q2 2022 and year-to-date adjusted EBITDA was negative $6.3 million, which improved $5.7 million or 47% versus prior year. This improvement is driven by both expansion of gross margins and the reduction of operating expenses. Retrospectively, if VIVO were included in our Q2 2022 results, adjusted EBITDA in Q2 2023 has improved approximately $6.7 million or 68%, reflecting our combined cost reduction and margin improvement initiatives.

Said another way, in 2022, MediPharm adjusted EBITDA averaged negative $5 million to $6 million per quarter and VIVO averaged negative $2 million per quarter. Combined, the two companies averaged negative adjusted EBITDA of $7 million to $8 million per quarter in 2022. In addition, MediPharm’s Q1 2023 adjusted EBITDA was negative $3.1 million. This means, in Q2 2023, we were able to incorporate VIVO without impacting profitability relative to Q1 2023, largely driven by our cost reduction initiatives.

Moving to a few notable items on the balance sheet. Trade and other receivables of $14.7 million includes one large customer owing a total of approximately $8.5 million at the end of Q2, which is subject to legal proceedings. Excluding this item, trade and other receivables is $6.2 million.

In 2022, we received a favorable summary judgment ruling with respect to this legal proceeding awarding MediPharm $9.8 million. Subsequent to the summary judgment ruling, the customer appealed the decision and a hearing at the Court of Appeal has been scheduled for October 12, 2023.

Our cash balance at the end of Q2 was $14.7 million and the company has less than $3 million of debt and opportunity for additional cash generation pending a favorable resolution of the $9.8 million summary judgment ruling.

In addition, the company has assets held for sale with the ability to generate cash of approximately $2 million to $3 million in the near-term. The company has signed an offer for the sale of one parcel of land and expect the transaction to close in Q3. We believe this gives MediPharm a very strong position relative to our peer group to continue to execute on our strategy, including selective M&A.

Assuming a favorable legal ruling and the successful real estate transaction, MediPharm could have an additional $10 million to $13 million in cash in the near-term. Combined with our reduced burn rate, we believe that we are positioned to pursue additional investments for growth, including participating in industry consolidation activities.

Although, we still have work to do to get to profitability and become cash flow positive, Q2 was another step in the right direction. We successfully integrated the VIVO acquisition, including executing the restructuring and cost savings program that will save approximately $7 million on an annualized basis as we progress towards our previously communicated synergy target of $7 million to $9 million; sales doubled versus prior year with the incorporation of VIVO; gross profit was positive for the third consecutive quarter; adjusted EBITDA remained consistent with Q1 2023 despite the incorporation of VIVO, which historically had an adjusted EBITDA of negative $2 million per quarter; and finally, we have a strong balance sheet relative to our peers with $14.7 million of cash, less than $3 million of debt and a plan to generate cash in the near-term.

With that, I’ll turn it over to the Operator to open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Scott Fortune with ROTH MKM. Your line is open.

Scott Fortune

Yes. Good morning and thank you for the questions. Just want to highlight a little bit on the revenue segments. Obviously, you added VIVO for the quarter, but I just want to kind of focus on kind of the Canadian Medical side of things and then International Medical, obviously, focus on International Medical and the Australian market, you mentioned the new rule changes. And what type of kind of boost will you see from your side as GMP, others aren’t able to qualify for the G&P side. But just kind of a quarter-over-quarter from the VIVO business revenue side, especially on the Canadian Medical side and the International Medical side as a comparison would be helpful, if you guys can break that out a little bit?

David Pidduck

Thanks, Scott. So I’ll ask Keith to take the question. The -- as we mentioned on Australia, we are in the process of launching a number of MPL products through the Beacon Medical brand and I think those are going to launch soon. So I’ll turn it over to Keith and Keith maybe you can address some of the Canadian Medical and Australia opportunities.

Keith Strachan

Hey, Scott. Good morning. Yeah. It’s a great question. I think, so we’re really happy with the integration of VIVO and what we’re seeing there and its effect on the medical market, especially. So in Canada, MediPharm participated in the medical market by selling to other licensed producers, so we’d sell to someone like Shoppers Drug Mart or Canopy and they sell it on to their patients. Now with VIVO, we have our own platform called Canna Farms. It’s been around since 2013. So it does have a lot of really good patient base.

Quarter-over-quarter, looking at the VIVO business of Canadian Medical and really year-over-year for the same period is relatively flat. It’s a good business. We’re looking at ways to take that flat and increase it.

One of the ways that we’re doing that is just having selection. It was always known as kind of a flower platform. So veterans and Canadian patients who use that really were looking at Canna Farms as kind of the go-to flower spot. We want to be that go-to flower spot for that Canna Farms product.

But what we’ve done is added in all those cool MediPharm products like our CBN oil and high potency CBD and we’ve already launched those on that platform and we’re seeing sales pick up for that. So we expect to see small growth in that segment as those base of 10,000 patients look at our platform to have more selection and we’ll continue to support other licensed producers with product as well.

In Australia, the same thing as far as performance goes. We work with one distributor in Australia. So quarter-over-quarter, we see like flat to slight decline in the VIVO business and that’s mostly as a distributor has right-sized their inventory. But when we look at the actual pharmacy sales, we actually are up year-over-year and month-over-month. So the pull-through from patients in Australia is actually growing, which is a great sign. So that should catch up.

And then, as Dave mentioned, we have got some new products that we’re launching into that market. So, again, it’s been for VIVO, the brand there, it’s called Beacon Medical, well-established brand, top three in the country for flower by dollars and so what we’ve done as we’ve added in new products.

So with the new rules there being GMP-only, there’s less, probably, concentrate products available and so what we’ve done is we’ve worked with our distributor and our pharmacy partners and we’ll be distributing -- we will be launching three new oils and three vapes into that market as well and those should deliver probably around the end of the month and that should give us a nice quarter-over-quarter increase going into the rest of the year.

Scott Fortune

I appreciate the color. And just a quick follow-on there. In the Canadian adult use, obviously, a little bit seasonality, how you guys are rationalizing SKUs there, you increased the prices there. Where is the focus or how do you view kind of the Canadian adult use for your portfolio going forward here?

Keith Strachan

Yeah. In Canadian adult use we will continue to be the premium supplier of non-smokable formats. We do have some smokable formats such as Wildlife and then, obviously, VIVO, with their growing background, we’re able to use some of that expertise to also put in a better product mix.

It is a little bit of a tough market right now. There’s a lot of other LPs that are struggling. So they are selling things below cost. They’re not -- as Dave mentioned in his remarks, they’re not keeping up with their excise taxes. So we do find that when the price of a vape goes below the cost of what one person could make it for, it’s just not a place that we want to compete. So we focus on where those large margins are.

So we’ll continue to be in that market. Our salespeople are still on the street educating bud tenders on the wellness products that we have, but there was a slight decline in that business, because we’re not going to chase it and we’re not going to sell anything out of loss.

Scott Fortune

Okay. I appreciate that. And then one last follow-on probably for Greg. You guys make and congrats on the kind of quickening of the integration or the combined, you’re looking for $7 million to $9 million kind of cost savings and synergies here. But can you provide ongoing -- you’ve done a really good job on the cost side that kind of give a sense for additional synergies or they need to be fully integrated in the second half? How should we look at kind of the OpEx from that side on the second half going forward here?

Greg Hunter

Yeah. Thanks. Thanks for the question. So, yeah, as we said in our prepared remarks, we’ve already -- our target, as we communicated, was $7 million to $9 million in annualized synergies, and thus far, with the cost reductions that we’ve already executed on restructuring and public company costs. We’ve already achieved about $7 million on an annualized basis.

One that obviously takes a little bit longer is within the sales synergies. But right now, we’re approximately $1.5 million annualized is what we’ve achieved on sales synergies in our first quarter of integration and expect to continue to evolve that.

Obviously, that doesn’t mean we’re done. As we’ve said in our prepared remarks, we’re aggressively pursuing further cost cutting initiatives and margin expansion to bring us to positive EBITDA and positive cash flow.

David Pidduck

And maybe just to build on that -- maybe just to build…

Greg Hunter

Go ahead.

David Pidduck

…on that thought on Greg’s comments. Keith tying -- Keith and great comments together. The revenue synergies, two of the big buckets are putting MediPharm products through the Beacon channel in Australia, and as Keith said, that’s launching later this month.

And the other one was putting MediPharm products through the Medical channel and that has already occurred. So we’ve planted the seeds of everything that needs to happen and now we have to actually make it happen in the marketplace. But we’re feeling good in terms of the -- I guess, the buckets of synergy on revenue we were chasing, we kind of started.

Scott Fortune

Great. I’ll jump back in the queue. Thanks for the color.

Operator

[Operator Instructions] And we will take our next question from Aaron Grey with Alliance Global Partners. Your line is open.

Aaron Grey

Hi. Good morning and thanks for the questions. So I wanted to piggy back off that question on profitability. And just really simply, how do we think about that path to get into positive EBITDA? What type of topline growth do you think you’ll be needed and what do you think will be a normalized gross margin after you get some of these initiatives through in the next six months, if you kind of like help to paint a picture of how we get to that EBITDA profitability. Do you think there is going to be some topline growth or we can get there at the current revenue levels that you have on a combined basis? So any help that would be appreciated. Thanks.

David Pidduck

Okay. Maybe both Keith and Greg will want to talk to this, but just at 60,000 feet. I think it’s a combination of executing really well on what we’ve already talked about, right? So feeling great on the cost side, but that doesn’t mean there’s not more cost opportunity. So we’re going to do even more cost opportunities on top of what we said. And now we have to make happen the revenue synergies of putting our products through the other channels and vice versa and we have to make those happen.

I think Greg can give some -- I think we’re reporting adjusted gross margin of 21% and I think that -- we’re feeling pretty good about that going forward and we want to build on that and make that better. Again, through the same things we’ve talked about, everything from SKU rationalization, to not selling things below cost, to focusing on our profitable products, to some of the international and international pharmaceutical opportunities that Keith discussed, which generally have higher margins. So maybe I’ll turn it over to Keith and then Greg for just a little more color.

Greg Hunter

Yeah. Thanks. Thanks. I think, Dave, covered that quite well. Yeah. Just our adjusted gross margin, as we discussed, was roughly 21% and we’re targeting that or better as we go forward here. Obviously, there’s a lot of variables in play with the gross margin, particularly on mix and within the International margins.

As Keith touched on with some of the new product launches in the International markets, which come with a little bit better margin. Obviously, as Dave said, we need to continue to focus on driving the sales synergy with the integration. We’re pleased thus far with how we’ve done on the cost synergy, as I said, to get to the $7 million and sales is really a focus to driving that as well.

And then as I said on the OpEx in the prepared remarks, our OpEx was higher within the quarter, given some of the restructuring items and getting to an adjusted about $6.5 million, which obviously, as Dave and Keith have touched on, we need to do more on that. We’ll continue to focus on driving that down to get to profitability as we move forward.

David Pidduck

Yeah. Thanks. I think, Aaron, the only thing I would add, Keith, is that normalized margin of 20% is a good target, but we are looking at some really good places to improve that. Probably the most would be our supply chain for International for MediPharm legacy was quite complex. In some cases, especially on flower that we delivered to STADA.

And with the addition of VIVO, they actually have a license in Germany called Beacon Medical GMBH and what that does is it gives us an opportunity to tighten up that supply chain. Some of the packaging that we are outsourcing will now do ourselves in our GMP facility that we acquired in Napanee, Ontario.

So some of those will actually give us a good opportunity to boost revenue in some of those segments that were a bit of a drag on, or sorry, boost revenue and boost gross margin, some of those segments where the margin might have been a bit of a drag in the past.

And some of those, it takes new licensing, so some of the applications would have went into the German health authority in the last month post-acquisition and we expect another three months to four months to get through that approval process. So really start humming on that new supply chain kind of end of the year, beginning of next year.

Aaron Grey

Okay. Great. Thanks for that color. And second question for me just, you mentioned, STADA. So any updates in terms of the progress of that initiative. Looking at Germany sales, it looks like it was about flat year-over-year. So how has that progressed with you guys with that relationship? And then any expectations specifically for the German market with potential for it to be removed cannabis from the narcotic list and the expectation for that market to grow and how that relationship with STADA might help you take advantage of that? Thanks.

David Pidduck

Yeah. We’re really excited about STADA continuing to invest. We’ve seen other large international player’s kind of come into Germany and then leave when they didn’t work as happy with the commercialization opportunities with the new pilot program for legalization and STADA continues to be invested with a large team, especially large on the sales and marketing.

A little bit flat, as you mentioned on sales, but what we really like is the change in mix. So what you don’t see in the financials is what products are going out the door and we’re really getting more oil, what they call extract there. So our cannabis oil is increasing, while we’re seeing a slight decrease in flower.

On the flower side, there’s some competition in what they call the patient pay market, where patients are kind of a bit more promiscuous and looking for something like high THC or what’s the cool new cultivar, whereas in the oil, it’s a lot more sticky with those prescriptions.

So really happy with the progress. They’re number two in market share and I think every month is a new record for them in oil sales. Still small compared to a market like Canada, but it’s growing and we’re really happy with that growth and we’ll continue to grow with that customer.

Aaron Grey

Okay. Great. Thanks for the color, gentlemen, and thank you.

Operator

And ladies and gentlemen, we have no further questions at this time. I will now turn the call back to Mr. David Pidduck for closing remarks.

David Pidduck

Thanks everyone for joining us, including our legacy VIVO shareholders and we look forward to our Q3 call. Have a good week everyone.

Operator

Ladies and gentlemen, this concludes today’s conference call and we thank you for your participation. You may now disconnect.

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MediPharm Labs Corp. (MEDIF) Q2 2023 Earnings Call Transcript