Earnings Transcript for CAN.AX - Q2 Fiscal Year 2021

Matt Wright: Thanks to everyone for standing by, and welcome to the Cann Group 2021 Half Year Results Investor Webinar. [Operator Instructions] Presenting on behalf of Cann Group today, we have the CEO, Peter Crock; and COO, Shane Duncan. The presentation today will last approximately 10 to 15 minutes, with ample time for the Q&A session thereafter. I will now hand over to Peter. Please go ahead.

Peter Crock: Thank you, Matt, and welcome, everyone, to Cann’s half year results presentation. Reflecting on what has been a tough 2020 for everyone, Cann has remained focused on executing on our strategy and have made really important headway in the first half. Our headline numbers show revenue from customers of $1.1 million and the first significant R&D grants contributed to other income, which brought our total revenue for the half to $5.2 million. We maintained a focus on headcount and corporate costs and saw lower expenses in those areas year-on-year. And it was a ramp-up in manufacturing that contributed to the total operating expenses of $8.6 million for the half. Finance costs of $3.7 million related to the revaluation of options to the convertible notes we issued last year, it is a noncash item. And at the end of the half, we held $27.7 million cash at bank, and our loss after tax was $9.4 million. We have continued to make important progress this half. Securing the $50 million facility with the National Australia Bank and completing the placement and share purchase plan, which raised $40.2 million, has allowed us to finalize plans and get works restarted in Mildura. We formalized our really important strategic relationship with iuvo in Germany and received the first significant orders to service that key market. We were also able to maintain all of our R&D programs throughout the COVID lockdown period and we watched with some interest to the volatility of global and particularly Canadian and American cannabis stocks. Aurora Cannabis has continued to refocus on its domestic position and exited its shareholding in Cann during the period. As we look to the second half, we’re focused on existing and developing new sales opportunities and delivering total revenue for the full year of $8 million to $10 million. We are actively managing and preparing for what COVID might thrive, particularly around the Mildura project, and we will also continue to deal with the cybersecurity incident, which hit us in 1 of our Dutch contractors in January. It is now the subject of an active place investigation. A really exciting body of work now underway is the completion and integration of the Satipharm acquisition we announced last week. Strategic M&A has long been flagged as 1 of our key pillars to Cann’s growth. I’ll now ask A - Shane Duncan, our COO, to talk through in some detail what Satipharm acquisition brings to us. Thanks, Shane.

Shane Duncan: Thanks, Peter, and good afternoon, everyone. The Satipharm acquisition is a really exciting opportunity for the company. The business brings a differentiated patent-protected technology for cannabis formulations to Cann and coming with that is a 20-year patent life. So plenty of time for us to commercialize this technology and this opportunity. The Gelpell technology improves the absorption and accuracy of dosing for cannabis medicines. So a much more precise way of delivering cannabis medicine. And is our first step into delivering 1 of our key strategic objectives moving us towards manufacturing more pharma like products. Low CBD products are [valben] pharmacies and health and wellness stores in the U.K. and parts of Europe. With Satipharm having supply agreements with retailers like Boots, Lloyds and Holland & Barrett in the U.K. and distribution agreements in place for some of the Eastern European markets. It’s a great foundation, given the recent and proposed regulatory decisions around low CBD particularly in Europe and the U.S. and we believe that this low CBD market will grow significantly over the next few years, making this investment in Satipharm a good -- positioning us very well to capitalize on this growth. In Australia, we’ve -- with the down scheduling of CBD or over-the-counter move for a CBD, the Satipharm products are currently being used under the special access scheme in Australia with a number of patients already being treated with 1 of the formulations. And it’s this product that we see as being our target product to take forward for registration for this pharmacy only medicine over the next 12 to 18 months. Part of the acquisition also includes bringing a Gelpell manufacturing line to Australia and installing it in our Mildura facility. By doing this, we provide ourselves with the capability to manufacture THC containing Gelpell products, which hasn’t currently been possible due to the manufacturing line being in Switzerland. And this will further differentiate ourselves and our product offering. In terms of revenue, the Satipharm business brings around $1 million into this financial year. But sales are forecasted to grow significantly over the next few years. And we see this as being a significant growth driver for us on the revenue front. Just in summary, the leveraging this opportunity is a significant focus for us now. It gives us the opportunity to develop new markets, access new geographies and bring a product range forward to all prescribers and patients around the world of medicinal cannabis that’s truly differentiated and patent protected. And it’s always been a central part of our growth strategy, which we think will drive our sales and revenue over the next few years. We look forward to sharing our progress with you throughout the year as we continue this integration and execution on the Satipharm acquisition. I’ll hand back to Peter now. Thanks, Peter.

Peter Crock: Thanks, Shane. As announced last week, we’ve revised guidance for the full year down from $15 million to $8 million to $10 million. We had always forecast our sales were going to be heavily weighted to the second half and regulatory time lines in this COVID environment have impacted our ability to ship orders as we wait key clearances. While the delays are frustrating, it’s clear that demand for Australian TGA GMP quality product is strong, and the fundamentals for our business remain unchanged. As mentioned earlier, during the first half, we secured financing from NAB and have now remobilized on-site in Mildura. Working to complete and commission stage 1A by the end of 2021. During the first half, we secured variations to licenses issued by the Office of Drug Control that now include the Mildura facility. And we’ll continue to work closely with the various regulators to meet all requirements in line with our critical path for commissioning Mildura. There’s no doubt we’ve got an exciting second half ahead. The Satipharm platform is a really important step for Cann, delivering on our strategy of differentiated and IP protected medicines that doctors and patients are looking for. We will continue to work through an open important regulatory pathways and focus on delivering full year results -- revenues of $8 million to $10 million. Cann is playing an important role as a leader in the medicinal cannabis industry in Australia, and our strategy to build economies of scale will see us deliver on export opportunities as well. We will also remain focused on delivering the Mildura facility this year. We’d now be happy to address some of the questions that have come in. Over to you, Matt.

A - Matt Wright: Thank you, Peter and Shane. Well, as Peter alluded to, we’ll now jump into the Q&A segment of the webinar. The first question is, will Cann Group be announcing deals with Australian pharmacies regarding supply of medicinal cannabis products? That’s for you, Shane.

Shane Duncan: Yes. Thanks, Matt. It’s a good question. We currently have a distribution and wholesaling agreement in place with Symbion. Symbion services about 95% of Australian pharmacies through that distribution network. And they also have their own chain. So Terry White Chemmart being sort of the predominant chain within their distribution network. So with that agreement in place, that leaves us with an infrastructure and framework in place, particularly as we start to bring the Satipharm products forward to move quickly into specific arrangements with different chains off the back of the Symbion distribution.

Matt Wright: Thanks, Shane. The next question is, are you able to provide some guidance on product developments and product approvals by the TGA?

Shane Duncan: Sure.

Matt Wright: We’ve got a related question as well that I’ll read out. Regarding CBD products being available without prescription, what is the current time line for products being approved? Where this company believe it’s placed in order of companies to receive approval, if not ahead of the queue, how far is Cann behind its competitors?

Shane Duncan: Okay. I’ll make sure I catch all that. So in terms of the product development, if we start first on the medicinal products, not including the recently announced over-the-counter change for CBD products. So we’ve had work underway in terms of identifying different product forms or even active parts of the cannabis plant that we can put into final formulations. And what the Gelpell, the SatipharmGelpell technology brings to us as a platform to essentially bring those ideas to life. So the really unique piece about the SatipharmGelpell technology is that we can combine, we can microencapsulate and also combine different actives into the 1 capsule to create a very unique cannabis formulation, which is supported by a large body of research that’s going on now around the different active parts of the cannabis plant. So for us, the focus now will be around that type of product development and really capitalizing on this very unique and patent-protected technology that we’ve got. The second piece around the OTC is I mentioned in the presentation that there is a form of Satipharm that’s available currently in Australia with a significant number of patients being treated. The product and the technology comes with some R&D behind it, which will be helpful in terms of completing the registration documents for the submission to the TGA around the over-the-counter, this S3 proposal for CBD. In terms of where are we in the queue, I think with this acquisition of the company puts us in the front of the pack, I wouldn’t dare say that we’re at the front of the pack, but we certainly have accelerated us in terms of having a very clear pathway that we think it’s about a 12 months process to get through the regulatory process at the TGA once you’ve submitted your dose here. So I think it would be fair to say between 12 to 18 months would be when we’d have approval and then have products available to go onto the shelf and Australian pharmacies.

Matt Wright: Thanks, Shane. The next question is with regard to the fraud issue and ASX documents being incorrectly handled recently, who is responsible for this and what’s changed to ensure it doesn’t happen again? Peter, I give that to you?

Peter Crock: Thanks, Matt. And yes, the ASX documents last week, that was an administrative step related to the auctions of the convertible note, which we thought we’d address separately. But in fact, that’s been resolved, which resolved within 24 hours and noted in terms of what’s required ongoing. And with the fraud issue, that’s -- we’ve already put in place procedural changes to how we’re interacting with our international partners. It was a very sophisticated attack that occurred at both ends, the Dutch and our end, and we’re working through. And as I mentioned, it is subject of a place inquiry. So that’s being actively pursued as well.

Matt Wright: Thanks, Peter. The next question is, how are you changing your strategies for more income?

Shane Duncan: Thanks, Matt. The Satipharm acquisition is a key part of that. It delivers, I mentioned in the presentation, delivers around $1 million in revenue from the existing business in this financial year and that’s forecast to grow significantly as distribution grows throughout the existing retailers. The really critical thing that’s happened sort of the back end of last year and also with the change of government in the U.S. is there’s some really key regulatory changes that are rescheduling CBD from being a narcotic to being almost, in some cases, a dietary supplement and that in itself is going to make a very clear pathway for low CBD products to get into a self-care market in a number of countries. And our relationship with iuvo in Germany, the Satipharm range will be ideal for them to take forward as that -- as those regulations come into play in Germany. The U.S., there’s $1 billion front of the Congress at the moment to reclassify CBD as a dietary supplement, hemp-derived CBD from a dietary supplement, which is what the Satipharm product is. So we see that along with our own growth plans for the existing customers, that we’ve mentioned as part of our $8 million to $10 million guidance for this year is that the addition of the Satipharm business and then some of these regulatory reforms and changes that are going to happen globally will make a step change in that whole revenue forecast over the next few years.

Matt Wright: Thanks, Shane. The next question is, which major local Australian avenues could you sell to?

Shane Duncan: Yes, that’s a good question. So we’ve currently got existing B2B relationships that are new companies that are establishing their position, their brands and their prescriber base and progressively growing their sales. There are still plenty of opportunities, and we’ve got active discussions going with a number of companies around continuing to provide that B2B position for those customers and essentially growing that B2B customer base. The second piece, which is probably the most exciting piece is that the Satipharm business gives us a branded position within the market now. We now have a brand that’s -- is established and is known by prescribers, differentiated products. So that in itself, I think, is going to change how we go forward in terms of growing our Australian business and our avenues towards sales and revenue.

Matt Wright: Thanks, Shane. Next question is, can you foresee a need for more employees around Australia? That’s probably back to you, Peter.

Peter Crock: Thanks, Matt. Yes, this year’s focus is absolutely around delivering on Mildura. And by the time we commission the facility there, we expect to have something like 130 new jobs in the Mildura district. So that is going to be a key move for us in the coming year and remains our primary focus.

Matt Wright: Thanks, Peter. And what looks like the final question was the presentation refers to products sold to LYPHE Group is 1,400 units. Can you give us a sense of what these units are, i.e., how much product was sold? And the same for the Australian customers regarding 5,000 bottles, how big are the bottles? I imagine that’s with you again, Shane.

Shane Duncan: Sorry about that, connection issue. The -- so it’s tied to -- I’ll do this in 2 parts. The 1,400 bottles to LYPHE Group in the U.K. is extracted product. So it’s product that’s been manufactured from our dried flower that we’ve grown at our southern facility. There 50 ml bottles of oils, and there’s 2 different formulations, one, which is a high-THC oil and the second one, which is a balanced formulation. And those products, we haven’t received a statement as yet on how many of those products have sold through, but we know that the LYPHE participating in the Project 2021, which is a large data-driven process around monitoring people being treated with additional cannabis. So we think there’s around 200 bottles that have been dispensed already through that program, probably more, as I said, we haven’t received the latest statement. In terms of the 5,000 bottles delivered to Australian patients, Australian -- sorry, our Australian customers. Again, they are a mix of both of those formulations, the high-THC and high CBD again, 50 ml bottles is what we’ve been selling of those extracted oils. And they continue -- the nice thing about that is we continue to see growth quarter-on-quarter from those customers as the units grow, their sell-through is happening. So we -- and I think we can see from our results from last half of last year to first half of this year is that we’re seeing steady growth of product that we’re supplying out to our Australian customers as well.

Matt Wright: Thanks, Shane. Well, there’s no more questions, so I’ll hand back to Peter for a closing comment.

Peter Crock: Thanks, Matt. We’re really pleased with the foundation we’ve continued to build at Cann. We are executing on key elements of our strategy and have a busy and exciting year ahead as we develop -- deliver for Australian patients and into key export markets. We appreciate your ongoing support and interest, and thank you for your time today.

Matt Wright: Thanks, Peter. That does conclude the presentation for today. Thanks again to everyone for participating, and you can now disconnect.