Khiron Life Sciences Corp. (OTCQX:KHRNF) Q2 2022 Earnings Conference Call August 29, 2022 10:00 AM ET
Company Participants
Paola Ricardo – Investor Relations
Alvaro Torres – CEO and Co-Founder
Helen Bellewood – Interim CFO
Franziska Katterbach – President-Europe
Paola Ricardo
Okay. Good morning, everyone. My name is Paola Ricardo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Khiron Life Sciences’ Q2 ‘22 Earnings Conference Call. Please note this conference call is going to be recorded and will be published shortly after the end of this meeting. [Operator Instructions]
On the call with me today are Alvaro Torres, CEO and Director. We have Helen Bellewood, CFO; and Franziska Katterbach, European President.
Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of Khiron Life Sciences and all of its representatives on this call. The statements made on this call will contain forward looking information that involves risks and uncertainties including those introduced by the COVID-19 pandemic. Actual results could differ materially from our conclusion, forecast or projection in the forward-looking information. 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, forecast, or projections in the forward-looking information and the material factors or assumptions that were applied in drawing conclusions or making a forecast or projection as reflected in the forward-looking information are contained in Khiron Life Sciences’ filings with the Canadian and provincial regulators, which are available on SEDAR website at sedar.com.
To provide the brief agenda, we will start with a discussion of the quarter financial results. After that, we’ll dive into operational highlights in each market that will drive growth. And then, we’ll wrap the call up with Q&A session.
Mr. Torres, Khiron’s CEO, you may begin your conference.
Alvaro Torres
Thank you, Paola. Hello, good morning, everyone. Thank you so much for being with us this morning. Joining us today are Franziska Katterbach, President of Khiron Europe, and she will be discussing our strategic initiatives and the operational milestones in Germany and the UK, as well as our transformational acquisition of Pharmadrug, our new EU-GMP distribution company in Germany Also with us is Helen Bellewood, our newly appointed Interim CFO. She will provide a financial update, including our continuous progress in cost reductions, our growing medical cannabis revenues, always have led us to achieve our lowest adjusted EBITDA losses ever recorded.
Before I turn over the call to Helen, I would like to highlight some key aspects of our first half of the year and our Q2 results. First, I’d like to say that in Q2, we announced the acquisition of Pharmadrug in Germany. I believe and we all believe that the acquisition of this distribution company marks a transformational inflection point for us in Germany and Europe. And it’s a departure from our previous sales strategy in Germany.
In Q2 2022, we recorded no revenues in Germany as the company was focused on continuing the sellout of the existing inventory with our distributor while culminating the negotiation, final agreements, and regulatory approvals for our acquisition of Pharmadrug, so that the new product portfolio we’re planning to launch can be exclusively sold through our own distribution hub starting in Q3 2022. Since we started our operations in Germany last year in the first quarter of 2021, we have sold over CAD1.4 million with gross margins of 50%. But with the acquisition of Pharmadrug, we expect to increase these figures significantly, increase our gross margins and become a true key player in the German market. And this is why we are very excited about the opportunity to begin our operations with Pharmadrug this year.
Secondly, in Q2 2022, we recorded our highest gross profits ever, our lowest EBITDA loss ever, our lowest net loss ever, and the lowest net cash used for operations ever. This is all based on the strength of our medical cannabis revenues and the high gross margins we enjoy in Latin America and the UK. Our company is on the right path to profitability. We are disciplined on our expenses. Our patient base grows every quarter. And now that we will accelerate sales in Germany, and there are our own distribution hub and that we have launched our new clinic in Brazil, we expect to continue revenue and gross margin growth into the future.
And thirdly, a year ago, our company was still refining its business model in Colombia; we had just begun our sales strategy in Germany and the UK. Today, our Zerenia clinics are an established model for patient acquisition, patient retention and data generation for medical cannabis across Latin America and the UK. We have acquired a transformational distribution platform with Pharmadrug, and we are expanding our clinic model into Brazil. In the first half of [2022], we grew over 63% in total revenues, driven by our medical cannabis sales that grew over 3.5x, doubling our gross profits and reducing our expenses. I think with all of this in place, our company is poised for much more continuous profitable growth and profitability in the short term. Our UK operations are now cash flow positive. Our clinic business in Colombia, Zerenia has achieved net profitability during the first half of the year. And we are very optimistic about this continuing trend across our company.
And with this, I would like to give the space for Helen Bellewood, our new Interim CFO to go through our financials and the financial review for the second quarter. Helen, please.
Helen Bellewood
Thanks, Alvaro. So firstly, I’m going to give you a high level overview of revenue and gross margins, before we dip into the detail. In the first half of 2022, Khiron has reported revenues of $9.1 million and that’s up 62% year-on-year, reflecting continued medical cannabis momentum in the target markets. In quarter two, Khiron recorded revenues of $4.7 million. That’s a 60% increase from quarter two 2021, but a 4% decrease quarter-on-quarter as revenues from medical cannabis surpassed $2.6 million for the second time. In quarter two 2022, the medical cannabis segment represented 58% of total revenues compared to only 29% of total revenues in quarter two ‘21. This is a trend that we expect will continue to increase over time. The flat growth on medical cannabis sales quarter-on-quarter was driven mainly due to the pause on sales in Germany and the Pharmadrug acquisition. Corporation expects to resume sales in Q3 ‘22 through its own distribution network, improving margins and implementing more control over the sellout strategy.
Moving on to gross profit. Gross profit before fair value adjustments grew to $2.2 million. That’s up a 115% from quarter two in ‘21. This was driven primarily by growth in the high gross margin medical cannabis business with a gross margin of 76%. This is one of the highest in the industry. Thanks to an efficient supply chain, including our low cost cultivation, high value-added finished products. In Q2 ‘22 medical cannabis represented 89% of Khiron’s total gross profits before fair value adjustments.
Moving on to below gross margin. Expenses in the quarter have decreased by 16% to $5.5 million. This is mainly driven by a reduction of 34% in general and admin costs when you compare to quarter one of this year. This is in areas including insurance, salaries, corporate governance costs and share-based payment and compensation charges. Corporation expects to see further reduction in costs over the rest of this year. Net change in cash and cash equivalents was a reduction of $2.1 million for half one compared to $11.6 million in the half one for the previous year.
Now moving into a bit more detail on the medical cannabis business. Medical cannabis revenues grew 216% compared to Q2 2021. As we’ve said before, it decreased slightly by 2% quarter-on-quarter, driven by strong demand in Colombia and the UK that offset the reduction in sales in Germany. In Q1 of this year, the medical cannabis revenues from Europe represented 39% of total medical cannabis revenues. This compares to 26% in Q2 of ‘21. This growth is attributed to increase in new patient acquisitions and retention in Zerenia clinics, doctor prescriptions and growing patient average spend on medical cannabis across all our markets.
In the medical cannabis segment, gross profit before fair value adjustments grew to $1.9 million. That’s up 174% from Q2 ‘21, it’s flat quarter-on-quarter. Gross profit in this segment is driven primarily by Latin America, which represents [Technical difficulty]
Sorry, I’ll just read that bit again. Gross profit in this segment is driven primarily by Latin America, which represents 72% of all medical cannabis gross profits. Gross margin of 90% is enjoyed in Latin America and it’s driven by Khiron’s vertical integration strategy in the region, where the Corporation cultivates low cost high-quality medical cannabis in Colombia, produces its own pharmaceutical grade medications and sells through its own pharmacy in Colombia or third-party pharmacies in countries such as Peru.
In Europe the gross margin for medical cannabis was 56%, driven by the higher purchasing power of European patients as compared to Latin America and the higher cost of cannabis production within Europe. With the acquisition of Pharmadrug, Corporation expects to increase its gross margins through the addition of distribution margins, and to continue increasing its sellout volumes in Germany throughout 2022 and beyond.
Moving on to the health services sector, the Corporation recorded revenues of $1.9 million in health services segment in quarter two of 2022. This is down 6% from Q1 of this year and 4% lower than Q2 of last year. This is due to the reduction of high value, medium-complexity, neurological surgeries in Colombia, and continuous strengthening of the Canadian dollar against the Colombian peso. Appointments of such high end services are subject to patient and insurance company availability and remaining COVID-19 restrictions and related patient cancellations. Corporation is actively engaged with institutional clients to increase availability of such procedures and looks to return to pre-pandemic levels in 2022.
Looking at our health services segment, which includes the revenues and costs from the ILANS and Zerenia health centers, the company made a gross profit of $0.3 million this quarter, representing a gross margin of 13%. This compares to a $0.3 million gross profit last year, and a 15% margin. This reduction in gross margin is attributable mainly to the early stage implementation of the new Zerenia clinic in the UK.
Moving on to EBITDA, the Corporation recorded an adjusted EBITDA loss of $2.2 million in the second quarter, this compares to an adjusted EBITDA loss of $3.7 million in Q2 of last year, this is a reduction of 39%. It’s the lowest adjusted EBITDA loss we’ve ever recorded. This is a result of continuous high growth in the high margin medical cannabis segment, and a continuous decrease in general and admin costs, which will continue throughout 2022.
Corporation recorded a net loss of $2.2 million in the second quarter and a comprehensive loss of $3.8 million. This compares to a net loss of $4.8 million in the second quarter of last year. This year, the Corporation recorded higher revenues and higher gross profits before fair value adjustments, as well as lower expenses than the previous year. This was offset by a higher positive impact of unrealized gains in fair value of biological assets last year, and also the Corporation recorded an unrealized gain of $1.6 million on warrants valuation.
Moving onto the balance sheet and our cash position. For the first half of the year, the Corporation’s cash outflow on operating activities was $4.8 million compared to an outflow of $10.3 million in the first half of ‘21. Net cash was $5.8 million at the end of the quarter. This is a result of actively managing the working capital cycle, improving collection times for our accounts receivable and extending payment terms on accounts payable, while we’ve also reduced overall general and admin costs and the increases in high gross margin medical cannabis have resulted in this reduction in cash outflow. We are now spending $0.50 per dollar earned in Q2 2022 versus $0.80 per dollar earned a year ago with almost double the revenue. In summary, spending almost 50% less and growing by almost double.
At the end of Q2, the Corporation had $36.1 million in total assets on the balance sheet excluding goodwill, with more than $10.5 million in land, buildings and equipment, high quality medical cannabis inventory of $8.2 million, a healthy accounts receivable with credit worthy clients in Colombia and Europe of $4.4 million and only $0.6 million in financial debt.
With this in mind, I’ll ask Alvaro, our CEO; and Franziska, our European President to provide more details on our Q2 operational highlights and catalysts for revenue growth.
Franziska Katterbach
Well, I think now it’s my turf. Can everybody hear me, okay? Paola, can you confirm?
Alvaro Torres
Yes, Franzi.
Franziska Katterbach
Perfect. So, thanks. So, yes. Thank you, Helen. And, yes, hello. Buenas tardes, and it’s good to talk to everybody. It’s Franzi from Europe. And I would like to now give a little overview of our European operations, and I will start with giving a little background on our journey so far. Then I will deep dive a bit into our Pharmadrug acquisition, I will then move on to the UK. And at the very end, I will speak about our product portfolio and the future.
So let’s start with our beginning of Khiron in Europe. I’ll call it from the beginning, from zero to being or becoming indispensable. While I’m very proud that Khiron Life Sciences is a true first mover in South America, we had a very different situation here in Europe in late 2019 when we started the European business from scratch. Both markets in which we are active now, which are Germany and the UK, already had in 2019 a legal framework for medical cannabis, and we were certainly not the first mover. Both markets have still something in common. The patient potential is huge but it’s still untapped. And this, while it’s very sad for patient, but this means that most of the Canadian LPs, which had a head start since 2016, left a void, which me and my team wants to fill. Many of my team members here in Europe, including myself, previously worked for large Canadian cannabis companies that pioneered the European cannabis market since 2016.
Having this first-mover advantage in Europe in our back pocket, we at Khiron have a unique understanding where the market is coming from and where the voids and unmet meets still are. This brings us to our goal. Our overarching goal here in Europe has always been to provide medical cannabis solutions, which makes us indispensable for the four main key stakeholders in the market, and these are: patients, prescribers, pharmacists and insurances. While I move on, you will hear me coming back to these stakeholders quite often to show how we approach which one of them.
So comparing the last year versus where we are now, we are now in a completely different situation regarding our four stakeholders, because last year, our product portfolio was very new. We started in Germany in Q2 with our first sales. So we had to start to develop the popularity of our products now have with the key stakeholders in Germany and the UK.
We had to introduce the products both to the public but also to healthcare professions. We also had to build a reputation in the market with our doctors and patients and gain their trust. At the same time, we also had to stay very focused on our strategy, even when always new interesting opportunities emerged, such as, for example, the debate around the upcoming legalization of recreational use in Germany. Also last year, we opened in late November, our first European Zerenia clinic in UK, which, by the way, addresses all the needs of all the four key stakeholders.
Since the end of last year, we have experienced a tremendous growth in Europe with our first million in cannabis sales just in the first quarter and just in UK. That has been more than we sold in the entire year of 2021 in the UK.
So what was our goal during the last year? We started with sourcing out our supply network and all the regulatory findings. And our overall question was, how can we become indispensable with the generally commodity product? Because THC and CBD molecules are just me-too products, if you say so. So we’re firmly focused on providing medical cannabis solutions for our four key stakeholders in the markets, which are again doctors, prescribers, pharmacists and insurers.
So let’s move on to Germany. Compared to the previous month, Germany did not continue its strong growth in Q2 2022. And the reason for this, Alvaro already alluded to it, is pretty easy. The decrease in 4% of the total revenue for Q2 in 2022 compared to Q1 2022 is attributable to reduction in medical cannabis sales in Germany, while we were finishing the negotiation, final agreements and regulatory approvals for our acquisition of our German pharmaceutical company, Pharmadrug. Having now obtained all the permits and regulatory approvals from German regulators Pharmadrug will become our principal European hub for our cannabis product portfolio starting in late Q3 2022.
Why did we do Pharmadrug? With Pharmadrug, we added to our medical cannabis solution platform in Europe and European GMP and GDP certified manufacturer and distributor in Germany. This acquisition marks a transformational inflection point for us in Europe as we can now directly access with our dedicated pharmacy sales team, with an established network to the more than: A, 18,000 pharmacies in Germany generating data to understand and adapt continuously evolving market preferences; B, we also get a revenue diversification through distribution of different products for ourselves, but we can also act as a distributor and wholesaler for other companies; C, we have now the ability to control the last mile manufacturing steps and quality control until the point of sale of the pharmacy; and D, we now have potential entry into other European markets as cannabis continues to be legalized across the region. And this applies both to the medical cannabis market, which we’re active in now, but it will also allow us to act in the recreational cannabis market in Europe.
Let’s now move to the UK. Our presence in the UK started in 2019 when we became a founding member and also the Latin American sole supplier for Project Twenty21, which offers a subsidized pricing model for patients in the program to help address barriers to access in the UK market. On the Project Twenty21, the data collection and access to both prescribers and patients is the most valuable asset for us.
With the opening of our first clinic in Europe, Zerenia Clinics UK last November, we are using another strategic approach to address all our four key stakeholders in the market and to provide a solution for doctors, patients, pharmacists and also for insurances. The project and also our clinics allow us to collect data that we then later can use to convince the National Health Services in the UK, the NHS, and other private insurers to reimburse medical cannabis therapies in the future.
With our UK setup, we now have the direct access to prescribers in our clinic, and we can connect them to the patients. At the same time, we work very closely with importers and dispensaries to make sure that all our products that are being prescribed are available and dispensed as soon as possible. And the result in patient satisfaction and prescriber trust translates naturally to economic success.
In Q1 2022, we achieved in the United Kingdom alone a cannabis sales volume growth of more than 240% compared to the entire year 2021. This growth is generated by our end-to-end solution of government regulation, supply chain, distribution and clinics prescribing Khiron’s medical products, and this growth will continue. We now also collect product-specific patient data in Europe, which are used directly for the development of new products and the elaboration of medical studies to secure our growth. These studies are very important for us and the whole industry to improve the evidence situation for various indications to convince even more prescribers in the UK and beyond; and ultimately, the NHS and private insurances on the benefits of medical cannabis. For example, in the very recent studies, our researchers at Khiron and doctors from our clinics in Latin America and Europe examined more than 2,000 patients diagnosed with chronic pain, who are treated with Khiron’s oils and extracts. The study describes the short, medium and long-term efficacy of two THC and CBD formulations from Khiron. And the key findings are pretty impressive. Nine out of 10 patients reported some improvement in their chronic pain, while seven out of 10 reported more than 50% improvement already after four weeks of treatment. Seven out of 10 patients also experienced no side effects related to the treatment. These studies are super instrumental in making prescribers feel more confident about prescribing cannabinoid-based medicine.
It is a reality that with a legal framework, cannabis has arrived in medicine. But what is still missing is the data set — the robust data set on its actual efficacy, and this is still limited. Therefore, too many doctors are still skeptical and don’t prescribe this natural medicine often enough. We, with our data set — a very robust data set, which is generated globally, address these barriers. Interestingly, our most recent study, which was exclusively carried out in Europe and the UK shows almost similar results than our Colombian study. But this time, our data explicitly refers to patients with different indications who inhale our flower, the KHIRON 20/1, which is very popular in both UK and Germany.
The value of our global data collection is that we see the same results in different countries, which allows us to cross-refer our results all around the globe. And this data set has a very universal language, and we can translate it to every country and convince both prescribers but also insurance about the efficacy of our products.
Now finally, let’s move on to an outlook of our product offering. With Pharmadrug, we’re perfectly positioned to accelerate the expansion of our medical product portfolio in Europe with both additional exclusive flower varieties but also with the THC dominant full-spectrum extract, which will be available very shortly. Additional new products are already in the pipeline, and these will comprise the entire spectrum of therapies with medical cannabis to be able to offer the right therapy for every patient because this is very important for us. Cannabis is the perfect example of personalized medicine. So we have to broaden our product portfolio to offer for every patient what benefits in the most.
So what are we talking about now? So first, we are going to introduce in late Q3 our THC dominant full spectrum extract, our KHIRON — KHIRIOX 25/1, which will be available to pharmacies and patients in UK and Germany in the next month. KHIRIOX combines the medical properties and areas of application of the established THC isolate formulations better known as dronabinol, with specific advantages of a full-spectrum extract.
In addition to that, we will also bring two new highly demanded and non-irradiated flower varieties to Germany and the UK, our KHIRON Gelato 19:1, a high-THC flower and our KHIRON Caramel 5/7, which is a balanced flower. We are already promoting these products to the German and UK society. Our new product portfolio, after its increase, now covers the entire spectrum of chemotypes and routes of administrations in the interest of our four key stakeholders in Europe where we always stay focused on. It is patients, prescribers, insurances and pharmacies.
And with that, thanks for listening. Happy to answer any questions. So now I will hand over to Alvaro.
Alvaro Torres
Thank you, Franzi. Thank you so much for that color on our European operations. Continuing on that, I would like to say that the company today continues to deploy a very successful patient-oriented strategy. This strategy allows us to grow our medical cannabis sales with the highest gross margins amongst our peers in Latin America. During — in the second quarter of this year, our revenues in medical cannabis grew by 30%, with gross margins of 90%. This is combination of our low-cost production advantage in Colombia and this patient-oriented strategy of high-value sales on a business-to-consumer basis.
A year ago, when we look back at what we’ve been able to accomplish, we were building a platform that we believe could allow us to become a medical cannabis solution for our patients. I think today, our business is not only driving but has also become a sustainable, profitable and successful business model that we are replicating in different countries. Only a year ago, we received around 24,000 patient visits in our Zerenia Clinics, 30% of these visits resulted in a prescription of 1.5 bottles to patients. In the second quarter of this year, we received around 36,000 patient visits in Zerenia. More than 40% of these visits resulted in medical cannabis subscription with 1.8 bottles per patient. Also a year ago, we began to analyze data gathering our clinics. We wanted to continue the education efforts that we continuously make to doctors all across the region.
And as Franzi mentioned earlier, in Q2, we published our first study in a prestigious peer-reviewed communication on the effectiveness of our products, controlling chronic pain in one of the largest cohorts under study in the region. A year ago, our clinic strategy was focused mainly in Colombia. And today, Zerenia has become the standard in medical cannabis treatments. We have more than 23,000 individual cannabis patients serviced, and we are opening locations beyond Colombia into the UK, Peru and more recently in Brazil, as we announced a couple of weeks ago.
And from a financial perspective, I think we have proven a model that can be profitable. And in the first half of 2022, our clinics in Colombia have become profitable, thanks to our growing sales of medical cannabis, our discipline in expense allocation and our focus in offering higher-margin services that are complementary to our cannabis offering to the patients and to the insurance companies in Colombia.
Now when we talk about — I would like to step a bit and talk about Colombia. It’s been in the news quite recently. As you know, we have elected a new government that was inaugurated on August 7. Before the inauguration and in the past few weeks, this new government has publicly stated a very positive position regarding the importance of the medical cannabis industry to the future of the country. The government’s coalition has gone even to the steps of introducing new deals to expand cannabis applications to include adult uses, while strengthening the importance of and access to insurance coverage to medical cannabis for patients. I think, of course, these deals may take some time to become realities due to a natural legislative and regulatory procedures but I think it’s very encouraging to see a government that places cannabis as a priority topic in the government agenda and not just something that has to be discussed on the sideways but rather part of the political agenda for the government.
Meanwhile, despite the longer wait for insurance approvals due to the transition of new officials into key administrative posts, medical cannabis awareness grows within the country, our well-known brand continues to attract patients and new potential insurers. In Brazil, we have recently opened our first Zerenia Clinic in Rio de Janeiro. Our clinic is led by Dr. Eduardo Faveret. He is one of the most prestigious doctors in the country and one of the doctors with most experience using medical cannabis. We have been operating the clinic for just a few weeks, but we are extremely encouraged by the positive response from patients, the high conversion rates that are higher than Colombia when we began here in this country. Today, more than 50% of the patients that have come in the last two weeks to the clinics in Brazil are leaving with a cannabis prescription, which is, of course, a lot higher than what we started in Colombia, and those are all very encouraging signs that all the learnings we have done, that we have had in Colombia, Peru and now the UK are being deployed in a much more smarter way in Brazil, but we expect this clinic to be very positive for us in late Q3 and Q4 of this year and moving forward.
I think we continue to optimize our supply chain into Brazil. Very soon, we will be able to ship our branded product portfolio, Alixen, from Peru to Brazil and that will improve our margins even more. And this will make Brazil a significant revenue-generating country for us starting Q4 and beyond. We are only still in the first weeks of operations, but the positive response from patients are very encouraging to us. And I think this business model that we have shown that works in Colombia, in Peru and the UK will be able to show the same in a much larger market like this.
In terms of Peru, Peru and Brazil combined represented about 6% of our revenues in Q2 in Latin America. Although Peru is not a major contributor to our top line, it is a major contributor to our pharmaceutical product pipeline. So far, we have received approval for finished branded product registrations for CBD and THC products called Alixen and Khiriox. And we expect to be able to leverage these approvals to sell into this product into the other Latin American markets such as Brazil very soon. And although Peru is not a major contributor yet, we are working towards making Peru EBITDA positive and ensuring that we can continue to register new products, take advantage of this regulation, particularly for THC products and being able to ship these products all across all the Latin American countries, particularly in Brazil very soon.
When we talk about Mexico, we all know Mexico is a major market that we have targeted for quite some time. We’re still awaiting final authorizations to commercialize medical cannabis into the country. But as we stated before, we have set all the necessary partnerships as we did with Teletón recently to ensure that once we are able to we can build the market rapidly, and we will deploy the same strategy that has made us so successful and unique in Colombia. All of these, as we being a first mover takes a little longer than anybody would expect, and we are waiting for ANVISA and the regulatory agents to make final decisions. But the meanwhile, I mean, Mexico will be cherry on top for our financial results. We still believe that we can get this done before the end of the year. Meanwhile, we will continue to focus on reducing expenses and growing in the UK, in Germany through Pharmadrug, in Colombia and Peru and of course, Brazil.
All that being said, I think I would like to finalize with these final thoughts before we get into the Q&A session: Again, a year ago, we were a Colombian-based company with aspirations to grow beyond into other Latin American markets and Europe. Today, we have a solid foot in Europe. We have our own distribution company, our own clinics in the UK, and we have a growing patient base everywhere. We are leaders in Latin America because of our successful and proven business model that keeps growing our revenues, patients and reputation.
This quarter, Q2 shows our discipline to execute more with less. We have posted our strongest gross profits ever, our lowest adjusted EBITDA ever, our lowest net loss and our lowest cash used in operations ever, while we are setting up a platform that’s going to continue to generate tremendous growth with Pharmadrug acquisition in Europe. And I think this transformation acquisition for us will generate tremendous growth and tremendous profitability in the near term and for the future. And this platform that we are having with Pharmadrug, we are complementing with expanding Zerenia in Brazil. These acquisitions, these growth are just showing us that we can continue to execute at a very high level that we have the right strategy to continuously grow sustainably to generate tremendous gross margins and to become real players in the European market. And still, there are plenty of external catalysts yet to come in Europe and Latin America.
We truly believe Khiron is positioned better than anyone to take advantage of all these catalysts because we have earned a significant credibility with patients, with doctors, with insurance and with governments. Medical cannabis in the international markets is still in amazing stage. I think we have the right strategy to take advantage of all these catalysts, and we will continue to be disciplined in our expenses. We will ensure that we keep maintaining our excellent gross margins that are above anyone in this industry, and we will continue to grow our revenue base in a sustainable manner. I think we — our aim is to become a reference in medical cannabis in these regions in the years to come.
So with that, I will begin on the Q&A. I apologize, we don’t get to all the questions today. And in meantime, please feel free to reach out to our Investor Relations team at investors@khiron.ca, who will promptly relay any unanswered questions you may have.
Question-and-Answer Session
A – Alvaro Torres
So moving on to some questions. I will start, and again, I apologize if we can’t go to all of them, but — so first of all, how do you receive President Petro’s comments about removing the licenses and allowing cannabis to be treated or across?
Petro seems to be against companies funded by Canadian investors. I think we have to take those comments in the sense of what they were meant to be. I think the position of the government is really to open up the cultivation process to all the actors that are currently involved in it. Khiron is a Colombian-founded company. If there’s a company that would certainly be more in tune to what the government strategy is, is ours. We’ve never overbuilt our facility. We only have 1 hectare of cultivation, which means that for us, it will be tremendously important to be able to work with indigenous populations, work with farmers that they can continue to supply and be part of our supply chain. In Europe, we don’t even cultivate ourselves, we work with third parties. And I think our focus is to build that demand, not to necessarily focus so much on the growth.
So we’ve had conversations with the government. We are the company that is treating the most patients in Colombia. I think it’s understood by the current government that we are an important part of this industry because what we mostly want is to change the front of the social founding of this country, more than happy to work with third parties that they can provide us the cultivation because our focus is not on that. Our focus is to build relationships with insurers to reduce the cost of health in the country and to be able to generate tremendous goodwill for the country.
So I think those conversations, those speeches are mostly related to why cannabis has to be part of the entire fabric of the country? And Khiron, particularly, I think we are perfect actors for this conversation from the new President.
So what is Khiron’s marketing plan for the USA?
Currently, we don’t have a plan for the United States. I think we’ve been very focused on these markets in Latin America and Europe, one day of our lives once all the United States is fairly legal, SAFE Bank Act passes, we may be able to look at a further worldwide consolidation. But for now, I think Latin America and Europe present tremendous advantages for us. We have first mover advantage in many countries. We have a very solid footing in Europe and Latin America, and we can be very successful in these markets before we start to look at how to enter the hugely consolidated U.S. markets.
Somebody here talking about the currency impact that we’ve had.
Yes, I think we all know the Canadian currency has been very strong lately. I would say it’s around 8% to 9% per quarter that we have experienced in terms of the impact of the currency with the Canadian dollar against the euro, against the Colombian peso and against the UK pound. But I also believe that we are now making our companies profitable in each one of these countries so that we can look for mitigating of this risk in the long term.
That aside, this is all currency transformational risk. So that’s very expensive to hedge against and we believe that it’s not necessary at the time.
Regarding sales in clinic in Rio, I already spoke about it briefly. We just started a couple of weeks ago. The patient conversion rate that we’re having in Rio is much higher than what we started in Colombia. That’s extremely encouraging. And now that we are working out all the sales and call center procedures, and we keep improving them, I think we will continue to see tremendous growth from Brazil, and we hope that we can start talking about that specifically in quarter four and moving on.
The status regarding the importing license for Mexico.
As I mentioned before, we are waiting right now for final approvals of import and release of product to be able to commercial, just to begin commercial sales in Mexico. And the timeline of that, it really depends up to the government. In the meantime, we keep working with educating doctors, doing the partnership with Teletón — the partnerships with Teletón, sorry. And I think we are very — in a position where once we get these permits, we can start selling right away. So we don’t know the timeline for that. I still believe we can get it done before the end of the year. But again, some of these things are not under our control.
Regarding cash flow neutrality and EBITDA neutrality, I think what we want to aim for Q2 is to show that we can do a lot more for less. We are very disciplined in our expenses. We think that for the next two quarters, we will continue to show that discipline. We sell a very high gross margin product far above anybody in this industry, particularly in this region, because we focus on this B2C strategy, and we believe that we can get there. And part of the strategy for the last three months has been not only to position a platform like Pharmadrug that’s going to increase our gross margins but also show the discipline of cost reduction that we can streamline our company while continue to execute a lot more. So we are continuously working on this. We are positive we can get to that in the near term. And I think this Q2 results are showing that.
Regarding the progress and plans for non-dilutive financing through debt or revolving credit.
Yes, one of the key aspects of our business that we are now showing that the UK’s cash flow positive and the Colombia clinics, which are the biggest revenue generation in Latin America for us, are now profitable. And for us, it’s important to show lenders that we have the ability to generate profits, that we have the ability to generate cash that we can negotiate favorable terms on those types of instruments. We are working on that. We are looking at different alternatives and hopefully soon we’ll be able to talk publicly about where that is taking us.
In the meantime, we have to continue to grow our sales, be disciplined with our cash management and continue to improve our working capital cycle.
Regarding Pharmadrug and the UK as well as Germany.
I know Franzi, you are — you could answer a little bit about that. But of course, Pharmadrug is a platform not just for Germany. And I think we can do tremendously positive things with that platform in the near future. But Franzi maybe you could elaborate on the impact that Pharmadrug could have on the rest of our European operations.
Franziska Katterbach
Yes. Perfect. Thank you. That’s a great question. So as I said, Pharmadrug will be our European distribution and manufacturing hub.
So what we’re able to do with Pharmadrug? We can do the last mile of packaging and manufacturing and from there under a European GMP certified conditions. So this puts us into a position where we literally can supply all of Europe, including the UK, but also the rest of the world. We have the more or less unlimited grow network, so we can really use Pharmadrug to supply Germany, UK, any other market that might open, I mean Spain is about to open. But there’s also think about scenarios where we ship products, for example, from Germany to Latin America. It doesn’t have to be one growth thing. As Germany and the Pharmadrug assets complies with the highest standards, we can certainly do a lot with it in the medical market because they are allowed to manufacture, release and ship controlled substances. But this also can apply to any recreational market because if you can treat the highest regulations, if you comply with them, it’s certainly easy to also fulfill other requirements, for example, for the recreational market.
Alvaro Torres
Thank you, Franzi. Great answer to that. Another question regarding insider share buying. I think ever since we founded this company, myself and most of the insiders of the company have continued to buy shares at every single price level. We participated in the last financing. And as you know, personally, I have never sold a single share of Khiron. I think we have a tremendous team in Latin America, Europe and Canada. We are all very committed to the success of this company because we know that what we’re doing is also generating a lot of good for people in these regions. This is not just about selling cannabis. It’s about improving the quality of life of people. I think that’s very rewarding. And we will see the rewards of that. So of course, any chance that we have, as insider and myself as a CEO to be able to continue to be on the market, we will do so.
We believe in this company, we believe in the future. We believe that every single measure that we’re taking right now is all to get us to a sustainable profitable net. And the discipline that we have shown and that the Board has also allowed us to have the reduction of expense, the reduction of salaries, all of these measures that we have taken, we continue to make, are all to show our shareholders that we believe in this and that we are here for the long term. So thank you so much for that question. We will continue to do so as we can.
Regarding the gross margins, the acquisition of Pharmadrug, I would say, I think Franzi already touched on that, and she may complement what I’m saying. But from a very general standpoint, what we are now going to be able to do is to sell our products, our own products with a distribution margin versus what we were doing last year, which was selling it at the wholesale margin. So instead of selling for 6 yield on 40 grams — or $0.40 a gram, we will be able to sell anywhere from 8 to 9 yields a gram. So that margin that we will keep, that’s going to be very important for us. And this is just, I think, the reason why we acquired Pharmadrug. But as Franzi just mentioned, the opportunities for synergies and to improve margins for us in the short and long term are going to be very great.
We are changing our business model because we believe that having more access to pharmacies is going to increase our top line and, of course, increase our gross margins. And coupled with the discipline we’ve been taking on our expenses, I think we are in the right path towards that profitability.
So regarding the projections for the year, I mean, last year, we sold almost $12 million for 2021. In the first half of this year, we already exceeded 9.1. So when we look at what we can do this year, we’re looking at very high revenue revenues, particularly once Pharmadrug starts to really kick-in in Q4. But I think there are very few companies that can already start projecting to double their revenues or be at 75% of last year’s revenues in the first half of the year. We are very confident that Brazil, Colombia, UK, Germany will continue to grow and that we will start to see and with the fruits of all these efforts in Q4 of 2022.
So without giving a specific number we have, we’re looking at a range that can allow us to get to that cash neutrality. And we are only the first half of the year already exceeding sales by 63%. So I think the next — second half of the year is going to be a lot more positive. We have to continue reducing our expenses. We have to continue thinking about long-term growth. And I think our strategies in Brazil and Germany with Pharmadrug are going to start to play very good results for us very soon.
So yes, I believe we are on track on the guidance that we have published earlier. And I think this quarter shows that we are now taking the cost discipline that we need to be able to get to those levels as we expected. So the discipline the company has taken all the way from the Board down to the smaller operations in Peru are showing that we can do, we can get a lot more done with less, that we have a very unique business model, that we have tremendously high gross margins. And these are the type of strategies that we set out years ago that’s going to make us very successful in the future. We’re going to get Khiron to be a leader in the regions in Latin America and Europe, that we are very confident that we will continue to execute that we will continue to grow. We’ll continue to try to spend less and that will continue to provide us with a very good outlook for the future.
Alvaro Torres
So with that being said, I think we’ve tried to answer as many questions as possible. I would like to thank everybody for joining us today, Helen, Franzi and everybody who helped to set up this call, Paola. Thank you so much. Looking forward to chatting with you in the future, and have a great day. Goodbye. Thank you.
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