Cann Group Limited (OTCPK:CNGGF) Q4 2022 Results Conference Call August 28, 2022 9:00 PM ET
Company Participants
Matt Wright – NWR Communications
Peter Crock – CEO
Deborah Ambrosini – CFO
Shane Duncan – COO
Matt Wright
Thank you for standing by, and welcome to the Cann Group FY ‘22 Results Investor Webinar. [Operator Instructions]
Presenting on behalf of Cann Group today, we have the CEO, Peter Crock; CFO, Deborah Ambrosini; and COO, Shane Duncan. The presentation today will ask for approximately 15 minutes, and we’ll allow for approximately 15 minutes for the Q&A session thereafter.
To begin, I’ll hand it over to Peter. Please go ahead.
Peter Crock
Thanks, Matt, and good morning, everyone. And welcome to the 2022 Cann Group full-year results presentation and business update. I’d like to start by acknowledging Aboriginal traditional owners from the various and many lands who are joining us from today. Their culture and elders past, present and emerging, and particular point out that this photo of our Mildura facility is looking across Ladji Ladji and Barkindji country.
For today’s presentation, I’m joined by Cann’s Chief Financial Officer, Deborah Ambrosini and our Chief Operating Officer, Shane Duncan. And we’ll take you through an update for the business. It’s been a big year, another COVID year under our belts for everyone, but we’ve made progress.
And now, I’d like to hand over to Deborah to talk through the financials. Thanks, Deborah.
Deborah Ambrosini
Thanks for the introduction, Peter, and thank you to everyone who’s attending today’s update. I will now provide a summary of the key financial areas for the company.
Revenue for the Cann Group increased to $6.41 million in financial year ‘22, which pleasingly represented a 49% increase from the prior corresponding period. Other income increased to $4.82 million after including an accrual of $1.8 million to March ‘22 for the current year R&D rebate. The rebate for the prior financial year of $2.3 million was also received and recorded in financial year ‘22 period.
Operating expenses increased during the year in line with expectations after the company scaled up its headcount and operations with the completion of its new state of the art facility at Mildura in March ’22. Depreciation & amortization also increased after the completion of capitalization of this new facility. The company closed the year with $1.9 million in the bank and access to a further $11.5 million from the newly established working capital facility, which was announced to the market in April this year.
I will now hand over to our Chief Operations Officer, Mr. Shane Duncan, who will provide an update on the commercial operations of Cann Group.
Shane Duncan
Thanks, Deb, and good morning, everyone. As Deb mentioned, we made some good progress on the sales front with 49% growth on the year before. A lot of that has been driven by expanding the range of products that we have available, growth out of the savvy farm range, particularly in the UK, and also growth in the number of customers. So we’ve laid a really good foundation over the last 12 months to continue this sales growth into this current financial year.
To support this growth, we’ve expanded the number of business development people on the ground to add greater representation at the cannabis clinic level and also pharmacy level. Most of the revenue has been driven by the formulated oral products, which will change over the next 12 months. We announced earlier this year that we received a GMP license, it’s a good manufacturing practice license to manufacture under our own steam under our own license finished products that can be prescribed and dispensed to patients. And just in the space between getting that license and commencing manufacturing that dried flower product represented 15% of our total revenue for the year.
This process, where we can cultivate, dry and then manufacture finished product really does help us drive the margins and diminishes our reliance on contract manufacturers which again, just strips margin out of those sales and helps us towards profitability.
I would talk more about Satipharm in a minute but the net revenue across the business grew 54% versus FY ‘21. Now this good manufacturing practice licensing capabilities, it’s licensed under the Australian TGA, and now across both facilities really allows us to expand our breadth. Up until that point, we’ve been a cultivation company and using contract manufacturers for these GMP activities, now we can do this all on our own steam. So it has quite a breadth of capabilities and products that we can do from primary extraction through to the Satipharm capsules and dried flower products, as I previously mentioned.
But also included in that license is the ability to do our own analytical testing and release testing onsite in Mildura, and all of this wraps up into greater — less reliance on those third-party suppliers, greater independence in our manufacturing process, and then ultimately better margins from each sale we make. So it’s really important step change to how we do — deliver greater margins and greater profitability for our future sales.
I’ll hand back to Peter now who can talk more specifically about the Mildura facility and the progress we’ve made there.
Peter Crock
Thanks, Shane. The delivery of our Mildura facility was definitely a highlight of the year, and for the team to achieve this in the face of the COVID pandemic headwinds we’ve faced is testament to the effort that’s gone into what in fact is a series of parallel projects. The facility is now fully operational with commissioning of automation systems ongoing. We have all the requisite ODC licenses in place as well as TGA GMP licenses. The first site of crops have been harvested and have gone into commercial manufacturing, and we’re now progressively expanding crops into the full cropping cycle. Early crops show that our conservative yield estimates are being exceeded, which will take us beyond the 12,500 kilograms nominal capacity.
Some images here of the Mildura facility, which is — and interestingly, we made quite a splash recently, you might have seen with the commissioning of the new flowering room. So what we are looking at here is our Mildura that we have. So we’ve taken from — cultivation all the way through to finished dose form manufacturing on site. But in between with the flowering process and everything else, we did in fact make a bit of a splash in global sensation with the pink lights over Mildura that saw some 4.13 billion people read this story across various news outlets. But the Mildura facility being operational as being a major employer in the district now is something that we’re definitely proud of.
In terms of — and now with these capabilities in place in Mildura from cultivation right through to final dose form manufacturing, we’re working on optimizing our production planning process to be responsive to demand opportunities. This includes determining the balance and mix of our own cultivars, introducing cultivation of third-party strains, including contract, cultivation research for other parties as well. Having the ability to cultivate, process, test and GMP release product out of Mildura is what we’ve been striving for and we’ve now achieved.
As we now look forward to what we will launch from this platform, I’ll hand over to Shane to take us through on an update of the Satipharm project.
Shane Duncan
Thanks Peter. And just some clarity around this image here on the — that image that was on the left. That’s actually part of the manufacturing suite that we purchased as part of the acquisition of the Satipharm business. So they are the microspheres of gelatin and CBD about to head into the drying phase of that manufacturing process. So we are well underway, I think we’re at eight or nine batches into manufacturing at Mildura, and we’ve got product on stability and some product that now we’ve got a GMP license, we’ll be heading towards the market in Australia in the coming months.
So probably the most significant thing we announced with Satipharm over the last 12 months is the registration program for the 25 and 50 milligram capsules into the OTC space here in Australia. So, we’ve mentioned before, it’s a long process of a clinical trial and then also a registration dossier that will submit to the TGA. And we can report today that we actually now — well over 50% of the patients required for completing the study recruited and on active treatment, we’ve expanded the number of trial centers. So we’ve got four centers in Australia and we’ve now got three centers in New Zealand to help accelerate this last phase of recruitment and get that study complete and onto the next phase, which is the completion of the dossier which is happening in parallel where the study is executed all wrapping up to being ready for a submission later this year or early in 2023.
Also we announced this year that we’d entered into option and evaluation agreement with Haleon formerly GSK Consumer Healthcare. And I think many people will be aware that it’s the largest consumer healthcare company in the world, they have expressed interest not only in the Australian market, but also other markets around the world, taking this Satipharm technology into their suite of market leading consumer healthcare products and those discussions continue while we make progress on the clinical trial and on the registration program, we continue — As we previously announced, we continue the commercial discussions about what our licensing and distribution agreement would look like. And we look forward to keeping our investors updated as that gets to a more material point over the next few months.
So, just moving our attention to our largest market for the Satipharm products at the moment, which is the UK. We’ve previously, I think stated that the CBD as an active ingredient was under reviewed by the UK Food Standards Agency, particularly around its safety and drug interactions and those sorts of things as a food supplement, active ingredient. And we announced early this year, that in April the food standards agency released their list of products that were — had gone through their review process and were available for continued sale in the UK with Satipharm being on that list.
So that’s certainly taken the hand break off the CBD market in the UK, and we’ve started to see the market grow again. Pleasingly for us, we’ve had a 54% growth. I think we’re number two in terms of market share within pharmacy, hospitals and GP surgeries, which is the segment that we’re currently mostly available in and all really good foundation places to see these range of products. They’re an anchor brand product for a lot of these retailers, and we are really looking for this brands to now expand distribution and subsequently sales over the next 12 months.
One important development as — from that Australian manufacturing line that we showed earlier is that we’re doing the engineering work and the validation work to put THC into these capsules, up until now these capsules have just contained CBD and just been food supplements. But with the registration program that we’re putting forward and a potential deal with GSK along with having THC in these capsules is that we’ll see probably for the first time a truly differentiated medicinal cannabis product that covers the spectrum of products available from high CBD, balanced formulations and high THC. And our aim is to launch those products, early 2023.
But I’ll hand back to Peter now just to talk about our strategic priorities for the coming year and beyond.
Peter Crock
Thanks, Shane. I mentioned earlier the importance of Mildura as a platform we are ready to launch from. With that project effectively fully underlying, we’re now able to adjust our resource allocation and focus more strongly on quickly building revenues. Leveraging our scale and capability, we’ll see us focus and streamline operations at Mildura, critical to achieving a competitive cost base, and cementing the delivery of differentiated value added products.
The Mildura facility is a state-of-the-art controlled environment protected cropping system. And with the work we’re doing with the likes of La Trobe University, CSIRO and Ag Vic, we’ve spoken to them about utilizing the facility as an industrial scale research facility, leveraging the big data opportunity of following and mapping our commercial production with things like inline hyperspectral imaging cameras, will see us at the forefront of cannabinoid production systems. And of course, our focus on the Satipharm platform and the opportunity of introducing registered over the counter product is front and center for the team.
As I’ve said in previous presentations, Cann is not setting up to be a supplier of commodity medicinal cannabis. With our Mildura capability now fully online, we’re ready and focused on supplying sought after GMP quality Australian product. Regulatory changes from the TGA requiring imports to have GMP equivalents are already changing supply chain pressures, and has already led to inquiries for cultivation of proprietary genetics through our facility. Reliability and certainty of supply remains a major issue across the sector, both in Australia and in export markets, and we are now ready to respond to those.
Interest in and demand for medicinal cannabis continues to grow. Australia has followed other markets with an early growth in demand for dry flour, it’s clear that mainstream medicine sees doctors looking for more traditional pharmaceutical product forms. Our Satipharm platform is going to be key in that space.
2022 saw us make important progress on all of the foundational building blocks that will underpin our growth. With our Mildura capabilities now in place, we can streamline our operations and focus resources on commercial objectives. We’re well placed and striving to deliver results that we’ll see as cash flow positive and appreciate our broad and ongoing shareholder support. In these times of global supply chain uncertainty, we’re proud to be delivering on a project that puts Australia and Victoria at the forefront of a new important and exciting area of medicine and patient wellbeing. And we see the year ahead as a pivotal one for Cann delivering on that promise.
Finally, thanks again to the Cann team. Being a startup in a startup industry is not easy, and we still face challenging times ahead, but we should be proud of what we’ve achieved as we continue to strive to make a difference in people’s lives with access to what can be life changing medicine.
I’ll now hand back to Matt and we can address any questions that have come in. Thank you.
Question-and-Answer Session
A – Matt Wright
[Operator Instructions]
Thank you, Peter, and to Deborah and Shane as well. [Operator Instructions] The first question I have is for Peter, approximately what is the forecasted earning capacity of Cann Group at the Mildura facility in its current level of development, as well as when it expands the facility?
Peter Crock
Yeah, thanks Matt. And I think the important thing with the capacity that we’ve now bought online and the certainty of supply, and as I mentioned with the first crops coming through our conservative capacity out of the facility we’re exceeding our estimated yield from crops coming through. But more importantly, the form in which the product’s able to now come through from GMP dried and released flower, so addressing the flower market through to the oil formulation based products that we’ve been actively working in, but also with the Satipharm platform going forward means that we are in a really strong position now to deliver on and have the facility operating at capacity and contributing to the group.
Matt Wright
A couple of questions related to production that I’ll throw to Shane. What was the total amount of dry flower from the first Mildura harvest? And when will Cann achieve full production of 12,500 kilos of dry flower per annum?
Shane Duncan
Thanks Matt. Two good questions from someone who’s following us very closely. So first few harvests were deliberately or first few crops were deliberately small to help us dial in a lot of the environmental fumigation and controls and processes within the facility. So they were around 40 kilos each, and pleasingly all of that material is commercial product and is actually being sold to a customer or on its way to a customer.
The information that we gathered off the back of those first few crops, and then even the subsequent crops that have got going through the facility at the moment are really helping us understand the gaps that we need to bridge that we’ve uncovered not a lot of significant things, but typical of a new facility, they are things that we need to look at and improve on. But we are well on the way of scaling up production at the moment. We continue to validate, improve, so it’s a continuous improvement process, particularly for this inhalable dried flower product.
But early in 2023, we’ll be in a position to scale up production to meet what’s significant demand, the globally for dried flower particularly is really high at the moment with companies — or companies and countries looking for high quality products out of producers like Australia who are under — who are governed under the TGA regulations for GMP product. So we’d see that in 2023, we’d be pushing the facility up to full capacity.
Matt Wright
Thank you, Shane. A couple more questions around the commercial focus of the company that I’ll throw to you as well. What is Cann doing right now to establish valuable long term commercial contracts? And how many confirmed supply contracts or dried flower does the company have?
Shane Duncan
Yes, thanks Matt. So most of our supply contracts are multi-year contracts. Customers are looking — very rarely they are customers looking to spot by. They are looking for reliable continued supply of high-quality product, which we know we can deliver. So many of our contracts or almost all of our contracts are multi-year contracts, two, three years in duration with options to continue beyond that initial term.
We mentioned in the presentation earlier that we have 17 customers, all of those customers have dried flowers as one of the products that they’re looking for. We also have a number of other customers both here in Australia, but also internationally who we are working through the commercials and supply agreements and those sorts of things to add to that list of customers. But just about every customer we talk to at the moment is looking for dried flower. So the timing’s terrific for us as we bring a large scale dried flower GMP production facility online.
Matt Wright
Thanks. I’ll direct the next question to Peter. Someone has asked — a shareholder has asked, I bought Cann shares when the prices at about $0.38 per share, do we expect prices will ever go this high again? If so, what sort of timeframe are we looking at?
Peter Crock
Thanks, Matt. And yes, I think the answer is clearly, from management’s perspective, we’re looking to build value into the company and we’re delivering on that. So bringing the Mildura project online and having that as our focus now that we can leverage from and use as a foundation we’ll absolutely see as add value into the Cann position, but also the medicinal cannabis space as it expands in Australia and globally having a trusted and valuable supplier leading into that is going to add value in the industry as well as into Cann Group.
Matt Wright
Thanks, Peter. Shane, another question for you. It seems as though we have not been updated on sales into the UK and EU, has that simply settled down into routine or are we looking at getting substantially increased orders as supply ramps up from Mildura?
Shane Duncan
Yes. Thanks Matt. I’ll start with the UK first. The UK has been — while a large potential market, has still been very slow. The pathway through to access to the products is primarily through a specialist prescription. So it’s been a bit slower than we had forecast in terms of taking off.
Having said that, is that — it is now starting to move quite dramatically. I think, specialist appointments were hard to get during COVID. So it was hard for patients to get in to see a doctor who could prescribe cannabis, but from the advent of telehealth and some more prescribers now looking at and prepared to prescribe medicinal cannabis is we are seeing increased demand out of the UK. We’re expanding the number of customers that we’ve got. So we’ve got two new customers that we’re bringing online this financial year to take an expanded range of product, which also includes dried flower. So we’ve got quite a optimistic perspective on how the UK is going to grow for us this financial year.
The European piece particularly Germany, we’ve previously announced a strategic partner iuvo, who have had some challenges in getting — establishing and getting their business running. They are reconfiguring their business at the moment in a slightly different business model, which will — they believe will see them have greater ability to drive doctor prescriptions and then ultimately sales. So we remain working closely with iuvo in parallel while we’re also talking to other companies who are again, looking for high quality and differentiated product, which is what we provide out of Mildura or out of both of our facilities. And those European discussions are progressing really well. And we — again, we look forward once they’re — the manufacturing and supply agreements are signed, we’ll be happy to share that information with our investors.
Matt Wright
Deb, the next question’s for you, how close is the company to being cash flow positive?
Deborah Ambrosini
Like most businesses at our stage of development, we are working towards achieving cash flow positive position, and in doing so, we’ll continue to closely monitor the cash position and expenditure commitments going forward. As a direct result, our Mildura coming online though, we are conducting a review of our processes for duplications while at the same time working to streamline our operating expenses. There’s a strong focus on our cash position and costs with new company, and we’ll continue to close and monitor this to assist the company to meet its strategic objectives going forward.
Matt Wright
The next question I’ll direct to you again, Shane is, what arrangements are already in place for the export of flower from Mildura?
Shane Duncan
So we already have an open pathway through iuvo to send product into Germany. I think we’ve also have announced that our New Zealand partner, Rua Bioscience have also got a pathway to send product to a different provider within the German market. So in terms of the logistics, the supply chain piece, we’ve done — we’ve already moved product into Europe and particularly into Germany. So we are ready to go, essentially it’s a case now of going through the steps of getting us added to the company in Germany’s license and then getting an order and packing it and shipping it. So we have all the component parts. We have the supply, all the air freight lane identified. So it’s just a case now, I think of finishing the last regulatory steps for a new customer, and then getting an order, packing it and shipping it.
Matt Wright
One more for you, which you may not be able to answer, but if Cann does do a deal with GSK, what will the revenue look like?
Shane Duncan
That is the many million dollar question. I think what I can say is if you look at the IQVIA data, which is the data that is independent, which collates sales out of pharmacy is the — so we’re seeking a short-term treatment of sleeplessness as our indication for the Satipharm capsules. In Australian pharmacy in 2021, there was around 90 million worth of sales of products that treat or claim to treat sleep disturbance, a lot of the OTC and also S3 like we — that we’ll be launching, and that market is growing quite rapidly. Sleep disturbance is a high prevalence disorder in society, lots of patients looking for self-care as well as doctor led treatment options. So it’s a very buoyant market. It’s a very — it’s a large market. So that’s the market we are looking at.
And we think that’s probably the great advantage that Haleon bring to this relationship is, they have the distribution agreements, they have the representatives calling on pharmacy and the different retailers, and they also have representatives calling on doctors. So the ability for them to get off to a fast start once this product is registered into a very large market we think is really — why this opportunity is just fantastic for us once we get the product registered.
Matt Wright
Thanks, Shane. Peter, a question for you. What’s your view of industry progress more broadly? Do you expect consolidation and will Cann take part in that consolidation?
Peter Crock
Yes. Thanks, Matt. And I think what we’re seeing in the industry is some maturing around both. There’s still a lot of turbulence and it’s probably how I was going to wrap up today’s session. But in terms of the industry and the role for cannabinoids in medicine is clear, and we are seeing the industry starting to mature and recognize that to ensure that we’ve got patients and doctors that trust what it is we’re delivering and the regulatory environment in Australia is a really solid one for us to develop and deliver against. And that has been a key focus for us the whole way through.
We’ve now delivered on that in terms of — from our perspective being able to supply high quality product at scale and scale was always going to be important in terms of ensuring that we had a globally competitive position and could bring products through that met the requirements of Australian patients first and foremost in a form that doctors can trust and understand. So we are seeing that starting to mature across the whole industry in recognizing that.
So yes, there will be industry consolidation. That’s always expected in such a nascent industry as well, but it needs to be from a position where the underlying requirement here is the patient’s first and foremost, and the doctors that we’re servicing, that they can trust and understand what it is they’re getting. So I think we’re on the cusp of a really exciting period in terms of showing that cannabinoids do have a mainstream role to playing in medicine. We’ve only just scratched the surface, and there’s a lot ahead of us in that space. But it is going to be — continue to be a dynamic and turbulent space I think that — anyway, back to you, Matt, any other questions?
Matt Wright
No, that was the final question, Peter. So we’ll wrap it up there, and I’ll hand it back to you for a closing comment.
Peter Crock
Yes. Terrific. Thanks, Matt. And I sort of started to launch into that, in that really where we’re at is a very exciting juncture. It’s been an incredibly turbulent process to get to where we’ve got to and throw COVID in, and that added a layer that no one expected. And when you look back at it over time, we are sort of losing track of how long we’ve had to deal with this issue, but –
So the Cann staff and the team in terms of what we’ve achieved and where we’ve got to is magnificent and really proud of what we’ve done as a team. Turbulence will continue and we’ve — we will make our way through that, there’s no question. It’s an exciting time as we focus and streamline operations around what we’ve built and done in Mildura, but it also is off the basis of all of the pieces of the puzzle that have gone into making that. So our Southern team, our Northern team, Corporate team have been instrumental in getting to where we’ve got to. And there is an exciting future ahead, that’s all coming to ahead.
So to the shareholders, thank you as well for your ongoing support. We’ve got a large — a huge shareholder base that are really interested in this space and we’re striving to be a player at the forefront of it and exciting times ahead. So thank you for your support, and we’ll look forward to keeping you abreast of updates and developments as they come through this year. Thanks very much everyone.
Matt Wright
Thanks, Peter. And I’ll just add to that if there are any follow up questions, please feel free to reach out to the team on the contact details at the bottom of each announcement. But for today, that does conclude the presentation and thanks again to everyone who joined. And to Peter, Deborah and Shane, thanks for the presentation. Thanks, again.
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