Earnings Transcript for CAN.AX - Q4 Fiscal Year 2019

Operator: Thank you for standing by and welcome to the Cann Group's FY '19 Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] From Cann Group today we have the Chairman, Mr. Allan McCallum and Chief Executive Officer, Mr. Peter Crock. I would now like to hand the conference over to Mr. McCallum. Please go ahead.

Allan McCallum: Thank you, Ashley, and welcome everybody to our year-end conference call. Prior to the market opening this morning, the company released its financial results for the 12 months to the end of June this year. In addition, we also announced an update regarding our expansion in Mildura, which will also speak to. With the materials released to the ASX this morning we included the slide pack, which we will reference on today's call. And I draw your attention to the disclaimer statements included in the slide pack. To results, as discussed last year, we are still in the development stage of commercial market for medical cannabis products in Australia, and this year the most pleasing aspect of our financial results was our ability to generate the first significant revenue from sales of medicinal cannabis. The revenues for the year totaled just over $2.3 million, as the company recorded a loss of $10.9 million. At the end of the period, the company had cash and cash equivalents totaling more than $46 million, a strong position for the company to continue to execute on its expansion plans and commercial strategies. While the revenues are modest in context it's important to step in demonstrating the commercial viability of our business in medicinal cannabis in the growing Australian market. We remain confident in the financial position of the business and continue to invest in our cash reserves wisely. As outlined in today's announcement, regarding the Mildura expansion, the company has executed term shake with a major Australian bank for debt financing, with full details and sign off to be disclosed the final construction costs of the revised design are confirmed. With this, we are confident in our ability to deliver on the expansion in our overall business strategy within the timeframes projected. Shortly, Peter will provide an overview of the developments in the past year and our current outlook, but I'd like to briefly discuss three core areas that underpin our focus for the business. Turning to slide six in your pack, the first is our experience and capability and the cultivation of medicinal cannabis in Australia. We’ve now completed more than 40 harvests of medical cannabis at our Southern and Northern facilities in Melbourne, and remain the most experienced cultivator in the local market. This proven capability we’ve established provides Cann Group with an important first mover advantage reinforced by the significant experience being gained by our cultivation team and the associated intellectual property position that comes with this. Our cultivation program has expanded in the past year to include the growing and harvested -- harvesting of imported international genetics. This formed a core part of the company's accelerated breeding program, as well as the associated research and development we're undertaking. It has always been the company's intention to set up and operate at large scale and our expansion program announced in Mildura region is integral to this. We're now underway with this construction of the state-of-the-art cultivation facility and we expected to produce up to 70,000 kilos of cannabis dry flower per annum, and Peter will provide more detail on this shortly. Turning to slide seven, the second core area we’ve progressed significantly in the past year is our processing capability. The key development in this regard is our manufacturing partnership with Melbourne based pharmaceutical manufacturing company IDT Australia. IDT will bring extensive experience in the development and production of high potent and high containment pharmaceutical products. The partnership gives Cann an integrated pathway through the entire supply chain, as IDT assist in the final delivery of cannabis based formulation. We've installed the necessary CO2 extraction equivalent of IDT at Melbourne facility, and this will be commissioned as necessary for full GMP compliance. Now turning to slide eight, as acceptance of medical cannabis treatments continue to increase alongside the rapid growth in patient approvals under the government special access scheme, it is been important for us to identify opportunities and execute on the commercial strategy of the company. During the year we signed a contract with the Victorian Government's Department of Health and Human Services for the supply of medicinal cannabis resin from April 2019 till June 2020. And we've completed our first deliveries under this contract. The prime focus of the business remains to supply medicinal cannabis for Australian patients. Early in 2019, we announced the five year offtake agreement with our Canadian strategic partner major shareholder Aurora Cannabis. The opportunity to feed into the global demand for medicinal cannabis via Aurora has allowed us to set up a scale that will bring direct benefits to Australian patients. The products we expect to supply for Aurora will include GMP processed dry flower, extracted resin and other manufactured products. Our team is also progressing the development and validation of the new final dose form products, with the objective of having products to patients in the last quarter of calendar year 2019. Led by our Head of Commercial, Shane Duncan, we've also partnered with numerous patient access pathways and will continue to identify opportunities for Australian patient supply as the market continues to grow. Before handing over to Peter, I want to acknowledge the commitment and hard work of our staff and management team. We're undergoing a period of rapid transformation within the business and the excellent team we’ve assembled cab be proud of their achievements in past year. In addition, I'd like to thank our shareholders for their ongoing interest and support. Peter will now provide a review of operations for the period. Thank you.

Peter Crock : Thank you, Allan. I'm now talking about Slide 10 in the pack. Since we reported this time last year Cann has continued an ongoing harvest cycle at its Southern and Northern facilities in Melbourne, which continue to operate at full capacity. We've now completed more than 40 habits from a base of genetics that includes 24 imported varieties. As shown in the bottom image of the slide, we also cultivated and harvested our first large scale crop of internationally sourced genetics as we continue to expand our capabilities and intellectual property position. Harvested material from the company’s Southern facility is being supplied under the Department of Health and Human Services contract as discussed earlier in the call. Material from our Northern facility is being used for several research programs being conducted by Cann Group independently, as well as with third-party organizations. Moving on to slide 11, in March, we announced the purchase of a site near Mildura in Northwest Victoria for the construction of the company's third facility, as state-of-the-art large scale cultivation and production facility. As announced to the market this morning, we now anticipate this facility will be capable of delivering up to 70,000 kilograms of cannabis dry flower per annum, 40% higher than previously forecast. This lifts our expected annual revenue from production to approximately $220 million to $290 million based on the facility operating at capacity and given the current wholesale price of cannabis dry flower. As we've previously noted, we expect to also deliver value added downstream formulations from the site, which will command higher margins and revenues. Cann Group is currently progressing through extensive modeling and design revisions to determine what impact that revised design and expanded production will have on the required capital expenditure for the facility. In the meantime, site works have been completed and construction is underway. Full completion of the facility is expected in calendar 2020 quarter four with mother plants to be on site in Q3 2020. As outlined by the Chairman, we have signed a term sheet with a major Australian bank for debt financing and this will be formalized and announced once the final amendments to construction costs attended by the contractors to the Mildura facility. We have now also negotiated and completed the purchase of our Southern facility in Melbourne having previously leased the property. Early in the 2019 financial year, we announced the manufacturing agreement with IDT Australia, which provides Cann with a high quality support in relation to manufacture of medicinal cannabis based product formulations. Upon IDT's receipt of a manufacturing license from the Office of Drug Control or ODC, we have now worked with their thing to install a supercritical CO2 extraction equipment necessary to the processing of medicinal cannabis. A successful order has been conducted by the therapeutic goods administration and commissioning and validation work is underway. On slide 12, you can see the positive progress we've made on a regulatory front. Shortly after the end of the reporting period, the IDT granted Cann manufacturing licenses for existing Southern and Northern facilities in Melbourne. These cover the manufacturing, packaging, storing, transport and disposal of medicinal cannabis in final dose and intermediate forms and means Cann now hold all cultivation, production and manufacturing licenses under the Narcotic Drugs Act, along with import and export licenses under the Customs Act. In May, we've announced that IDT have been granted a medicinal cannabis manufacturing license by the ODC. Another key step given the manufacturing partnership established with the Melbourne based pharmaceutical manufacturer. A key to our company strategy is the ability to export product and initial steps to test these export pathways has commenced. Cann's offtake Aurora Cannabis received an import permit from Health Canada in June for material cultivated by Cann Group. We continue to work closely with the ODC and relevant regulatory officials and remain very strongly positioned in this regard. Now moving on to slide 13, the Chairman made reference to some of the important strides the company has taken from a commercial perspective during the period. Under our contract announced with the Department of Health and Human Services during the year we’ve seen the Victorian Government take delivery of the first Australian sourced and commercially grown medicinal cannabis resin for the use by Australian patients. Extracted from medicinal cannabis cultivated at Cann’s Southern facility the supply contract is in place until June 2020. Announced in conjunction with our expansion plans in Mildura Cann secured an offtake agreement with strategic partner and major shareholder Aurora Cannabis during the period. This will see good manufacturing practice that's GMP processed dry flower extracted resin and other medicinal cannabis formulations supplied to Aurora by Cann until 2024. It is important to note the offtake agreement covers Cann's current and planned future capacity beyond that required for Australian demand and includes the capacity expected from Mildura announced today. As mentioned earlier we're in the process of preparations to export pathways in anticipation of delivery of medicinal cannabis products under the offtake agreement. Product Development and validation has been another commercial focus for the business, as we work with our partners to identify opportunities to deliver product to Australian patients. We expect this will see Cann supplying local product to Australian patients during the next quarter. As patient approvals continue to surge so the pathways to market and we're in discussions with strategic partners such as Emerald Clinics to position ourselves to take advantage of these commercial opportunities. Now turning to slide 14, a key to Cann's strategy has been strategically advantageous partnerships it has secured across medicinal cannabis landscape, particularly from a research perspective. We completed investment in New Zealand based medicinal cannabis company Pure Cann New Zealand Limited in April. Pure Cann is rapidly establishing itself as a leading player in New Zealand market and is anticipating regulatory changes that will permit the cultivation and border supply of its medicinal cannabis in New Zealand. In conjunction with the investment a technical services agreement was also reached by the two parties. Cann signed an MOU with Agriculture Victoria during the period to undertake further medicinal cannabis research. The areas of focus include medicinal cannabis cultivation extractions, strain genome analysis and strain identification, accelerated breeding and the development of novel and designer medicinal cannabis strains that will lead to Cann's growing intellectual property portfolio. Another R&D collaboration was executed with the CSIRO a broad three year agreement to investigate numerous opportunities across medicinal cannabis technologies. Cann will work with multiple CSIRO business units under the umbrella agreement, which will see technology development activities undertaken for use in commercial manufacture and sale of medicinal cannabis products, with all resulting intellectual property to be owned by Cann Group. We welcome news from Federal Education and Training Minister, Mr. Simon, Birmingham that government funding would help establish Australia's first research for medicinal agriculture at La Trobe University’s Bundoora Campus in Melbourne, to which Cann Group is an industry partner. Cann also completed a small strategic investment in independent medicinal cannabis clinic operator Emerald Clinics during the period. The investment forms part of a capital raising for the continued national rollout program being undertaken by Emerald, which now has clinics operating in Sydney, Melbourne and Perth. Turning to slide 15 and looking ahead to the 2020 reporting period, we are committed to maintaining a strong momentum in what will be a pivotal year for the business. Understandably, there will be a significant focus on the progress and construction of the Mildura facility as Cann Group moves toward being a large scale medicinal cannabis producer. As discussed earlier, the key to financing this major project will be our debt funding, which has progressed to a sign of term sheet stage. Upon finalization of design revisions this financing will be completed and announced to the market. Underpinning the investment in this project is our offtake agreement with Aurora Cannabis. And we will be aggressive in testing export pathways and pushing for commencement of deliveries under the agreement. Our manufacturing partnership with IDT is a key pillar in our ability to cover the full supply chain from plantation. And we expect to start manufacturing products under this partnership throughout the coming year. Commercial opportunities will be a continued focus as we look to effectively service the increasing patient base in Australia. While we also engage in clinical trial opportunities such as the plan -- as that plans with the Olivia Newton-John Cancer Research Center. In closing, I would like to second Allan’s prays of the excellent team we've put together at Cann. As the team continues to grow and our projects become more challenging and numerous, everyone within the organization is willing to put in the effort required to deliver positive outcomes. I share Allan and the board's confidence as we’re very well positioned for the future and I look forward to bringing you continued updates over the next year. I’ll now hand back to Ashley, our operator for questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Julian Mulcahy with Evans and Partners. Please go ahead.

Julian Mulcahy: Hello, Peter. I just wonder if you could just talk a bit more about the capacity upgrade at Mildura, is it increasing in growing area or is it yield? And also what does it do to your cost structure?

Peter Crock: Thanks, Julian. Thanks for coming on the call. So the benefit we've had working with Aurora around the experience that they’ve brought to the table with the facilities that they're currently developing, we've been able to leverage those learnings and the IP behind it has allowed us to bring efficiencies in planning density and configuration of the facility that allows us to within the same footprint have a higher production through progressing with one additional flowering room out of the 10 rooms that were originally forecast for everything from propagation, mother plant, cultivation and vegetation through to flowering and we're now able to increase the capacity on the flowering basis. And what that will bring in terms of the footprint and the operating costs will allow us to bring down the lower average overhead cost across the whole production and of course with higher production is obviously a benefit as well.

Julian Mulcahy: Right. And then the revenue you recorded for the year through -- I mean, given that was probably just the one last quarter, do we just annualize that for the government contract?

Peter Crock: That's -- no, the terms of the government contract need to remain confidential as part of our agreement with them. So we're continuing to work with the Victorian Government, and we're looking to provide this product as soon as I can to Victorian patients which is really important.

Julian Mulcahy: Okay. And with the permit for importing to Canada, would you expect to be shipping stuff there in the next year or this is just a long-term permit?

Peter Crock: Well, it's a continual process with the permit process. So we've got the first permit coming through and we have a transport study which we're preparing to pack and send in the coming quarter. So that will be the start of that process. And then we're looking at other international markets as well as Canada to test those pathways as well.

Julian Mulcahy: Right. And just on the CapEx profile over this year, is most of it is spent in what the second half of financial year?

Peter Crock: Yes, there is phasing and we're currently going through a process of finalizing the design in terms of what we're doing with the latest changes that have come through the design that that will see us with the construction occurring through to the third quarter of next year where we expect to be commissioning and are currently on track to commission the facility in the final quarter of next year.

Julian Mulcahy: The third quarter being the March quarter or the September quarter?

Peter Crock: September quarter of the calendar year.

Julian Mulcahy: September quarter of calendar year.Okay, cool. Thanks guys.

Peter Crock: Thanks, Julian.

Operator: Your next question comes from Alex Smith with PAC Partners. Please go ahead.

Alex Smith: Thank you, Ashley. Just, Peter and Allan if you could just give us a bit more color on the additional capacity and is that all intended for Aurora? And then, I guess, just on the timeline if your initial timeline is still intact for full capacity start of Q3 of next year?

Peter Crock: Yes, so, thanks, Alex. And yeah, look we are currently -- so all of our modeling to-date is being done on what was originally planned with the facility. And so where we're at now is with the upside that we believe is apparent, we're looking at the full cost of bringing that online. So at the moment, we're on track for the scheduled completion date, end of September next year, which we're not just reviewing what these latest changes bring. So that's the process that we're working through and we've been working closely with Aurora to finalize that design. We need to finalize that before we can put the -- get the bank financing complete as well. So all of those things are happening right now. And that includes looking at what we're doing with the production from that as well.

Alex Smith: And then, -- if I could just follow-up, just was the DHHS, if I was to just have a quick look at your inventory level, it’s about $3 million. Is that -- in terms of cannabis at current prices and look at the trend at 500 [ph] sort of 1,000 kilos. Is that sort of all allocated for kilo clients or if you could just walk us through where the current channels are? Thank you.

Peter Crock: Yeah, thanks, Alex. We actually can’t talk that through in terms of both from an ODT perspective where we're not meant to be disclosing what our capacity is, it makes it a bit difficult when we have to report as a public company as well those. So, in terms of disclosing who and where that product is going to, we can’t elaborate on that further. And so, I think that's -- so can’t take that one, sorry.

Alex Smith: All right. Thank you, Peter.

Peter Crock: Thanks Alex.

Operator: [Operator Instructions] Your next question comes from James Wilson with PAC Partners. Please go ahead.

James Wilson: Hey, Pet, Allan and Clive. My question is around access on to Aussie patients and you mentioned on slide 13 that you will be supplying the Aurora Cannabis oil to Australian patients. Are you going to label that with your -- label sort of like a white label products that your label Cann say or some sort of brand name? And as far as in the follow-up is when you are producing I suppose out of Mildura will you just be supplying that direct or via Aurora as well?

Peter Crock: Yes, good question. Thanks, James. And we'll be doing both. So you're right that the first or primary focus for all of that production is Australian patients first and foremost. And we will be doing that as a Cann branded product. So, we're in the final processes of the JMP validation and various steps that are required under the TGA requirements for Australian patients that we will be doing that as a Cann branded product range. In terms of working with Aurora and using their product in the short-term as well. We're continuing to work with Aurora and appropriate products to import into Australia that made Australian requirements and they have a number of brands that they working with that we expect will be in the mix as well.

James Wilson: Yes, okay. Thanks. So will be branded Aurora rather than sort of Cann the stuff that you are importing?

Peter Crock: The imported products would be important as Aurora product, yes.

James Wilson: Yes. Okay. And you also mentioned I think in the outlook statement, the IDT manufacturing commencement you were saying various products, I can't remember the exact wording, but you'd be producing various products this year. Can you sort of quantify that? And, I mean, I sort of thought most of your production, current production were tied up with government contracts?

Peter Crock: It is, but we do have capacity to and this is through the GMP validation process that we believe we will, and we're pushing to have product that we can conditionally release for Australian patients. So the first of that may will be through compounding pharmacies that we're working with, that's can produce product on a patient-by-patient basis. While we develop and have the product that's gone through and has full ICH stability data and other requirements we're looking to accelerate and have access to patients as quickly as they can say. So I know that I've got a secure supply that's been a big issue for Australian patients this year, is having continual supply to product. And we're pushing really hard to make sure that we've got Australian grown and produced product that can take place of what's been imported, but not sustainably for patients to have continual access to product.

James Wilson: Sure, that make sense. Okay, that's great. That's all for me. Thanks, Peter.

Peter Crock: Thanks, James.

Operator: Your next question comes from William Keppel [ph] with Cleveland Finance. Please go ahead.

Unidentified Analyst: Hello, Peter. Peter, I just want some more clarity around the relationship with Emerald Clinics. We have your competitors, if I can refer to Althea Group every time they reach a threshold with Australian patients, their share price reflects it. When will Cann be in that sort of position? And what is the relationship with Emerald once you are able to supply them? Is it a -- on an exclusive basis? Or will you have other clinics coming on board?

Peter Crock: Thanks, William. Finish or starting with the last question first I won’t be exclusive we are working with all of the clinic groups in Australia in terms of being ready to supply them with Australian product to replace all of the imported products that are currently there. And we know from the feedback from Emerald and others that they are currently struggling to access product consistently that when patients go to get repeat prescriptions they're unable to fill it because the products no longer available or a matching product isn't there. So that's really our focus. I am not sure that we will guide every time with announcements around what's happening on a patient-by-patient basis. But that is our plan to ensure that Australian patients have access to Australian product.

Unidentified Analyst: Thank you.

Operator: Your next question comes from Cameron Bell with Canaccord. Please go ahead.

Cameron Bell : Hi, guys. I just want to confirm. So the Aurora offtake agreement. I think initially said that it would cover the full capacity of the site. Is that is that now 70,000 kilograms or is that contract based off the previous capacity?

Peter Crock: Hi, Cam. Yes, look that contract is based off the 50,000 kilogram capacity that we had originally slated for the Mildura facility. But as I said, we’ve worked closely with Aurora in terms of looking at the opportunity to increase or take on board the IP and learning that that brought from their Sky Class facilities as we call them. But in terms of developments that we've seen come online in both Sky facility and their Nordic project we believe the there is an upside here. And that's what we're now working through in terms of looking at the impact of that on the capital expansion and changes at Mildura. But definitely the increased efficiencies and production is going to be excellent in terms of what we're bringing online there as well.

Cameron Bell : Yes, sure. And then more on the demand side from Aurora, are they still likely to purchase 50,000 kilograms or they go in excess of that now?

Peter Crock: Well, they're talking about global shortages, so we're still working on that expectation that in terms of the growth, and particularly in areas like Europe that we're saying, demand there were and that's where we're testing all of those pathways to have them available and can service that demand as it -- as we believe that’s going to continue.

Cameron Bell : Yes, okay sure. Thanks.

Peter Crock: Thanks, Cam.

Operator: [Operator Instructions]Your next question comes from David Aylward with Tribeca Investment Partners. Please go ahead.

David Aylward: Hi, guys. Sounds -- just sort of following on from that one, I'm still sort of just trying to get my head around sort of the business case for the upgrade. So you've gone from the 50,000 to the 70,000 you're not sort of quite sure yet what that's going to cost in terms of extra CapEx. And it doesn't seem to have changed the offtake agreement with Aurora. So I'm just sort of wondering kind of what was -- what prompted I quite understand what prompted the upgrade, I mean it’s great. But just trying to understand kind of how you came to that decision and how you sort of formed the business case for whether you're going to get a return. I mean, when it doesn't sound like you've got sort of any sort of tall processing sort of return guaranteed at the other end of it on the offtake side. So, just wondering to get -- just wondering sort of how you put the business case together for that?

Peter Crock: Yes. Hi David. Look, in terms of the process and how we've been working with ALP Aurora Larssen Project, leveraging their learnings that that brought to the table from the other projects, major projects they've working on with Aurora in the Sun facility, Aurora Sun, and Aurora Nordic, that's where this opportunities come to consider the design upgrade as we're in process. So in terms of the economics of what that does for us with the capacity, we're finalizing the impact, and that's going to be locked down obviously in the next short while. We're working through that process. So that's where we're at in the process on the way through and in terms of the capacity and the global demand position is that has been part of a modeling with where we believe we can take this.

Operator: There are no further questions at this time. I'll now hand back to Mr. McCallum for closing remarks.

Allan McCallum: Yes. Well, thanks everyone for your interest it’s certainly an exciting time and just to reiterate the 40% of digital production will involve some additional CapEx, but that's what will come back to the market with it's not anywhere near the equipment of 40%. So I just wanted to make that that clear that this is kind of our through IP that's being transferred to us as Peter said. So thanks for your time. Thanks for your effort and we look forward to catching up [indiscernible].