Khiron Life Sciences Corp. (OTCQX:KHRNF) Q3 2022 Earnings Conference Call November 30, 2022 11:00 AM ET
Company Participants
Alvaro Torres – CEO and Co-Founder
Helen Bellewood – Interim CFO
Franziska Katterbach – President-Europe
Operator
[Call Starts Abruptly]
speakers’ remarks, we will conduct a questions-and-answer session, a quick one, about six minutes and all participants can submit questions via the chat and the Q&A function on the webcast.
On the chat with me today are Alvaro Torres, CEO and Director; Helen Bellewood, CFO; and Franziska Katterbach as Khiron European President.
Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of Khiron Life Sciences Corp. and all of its representatives on this call. The statements made on this call will contain forward-looking information that involves risks and uncertainties. Actual results could differ materially from our conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in producing forecasts and projections are detailed in the forward-looking information. Additional information about those material factors and assumptions are contained in Khiron Life Sciences’ filings with the Canadian and provincial securities regulators. They are available on SEDAR website at sedar.com.
To provide a brief agenda, we will start with a discussion of the quarterly financial results. We then will move into the operational highlights in each market that will drive growth and we will wrap the call with the Q&A session.
I will now hand you over to Alvaro Torres, Khiron CEO.
Alvaro Torres
Hello. Good morning, everyone, and thank you so much for being with us this morning. Our third quarter was marked by overall revenue decrease in medical cannabis in Colombia. This was due to a temporary interruption in prescriptions that are covered by insurance during the length of period in the new government transition. Let me begin by saying that although this temporary pause in prescriptions covered by insurance has caused a short-term reduction in our top-line, the new Government of Colombia has publicly and internationally declared the cannabis industry to be a major driver for growth for the country. This is evidenced by the fact that the government and the new Congress have fast-tracked legislation to legalize adult-use cannabis that would have been unthinkable under previous conservative leading governments.
As this temporary resolved, the company continues to grow in its other markets in Latin America and Europe. Europe has become the fastest growing and sizeable market for Khiron. The integration of Pharmadrug, the ongoing growth of Zerenia, the prescriptions in the UK, the introduction of new products in Germany and the UK, and the recent entry into Switzerland are building blocks towards the leadership we want to achieve in Europe.
In the rest of Latin America, I’ll say particularly in Brazil, the company keeps on executing and breaking new regulatory milestones. Just recently, we became one of the very few companies to import and sell high THC products in the market. Coupled with our continuous growth in patient consults in Zerenia in the City of Rio de Janeiro, we look at Brazil as one of the fastest growing markets for our company in the quarters to come and beyond.
In Peru, we are evolving our product portfolio from a compound pharmacy model that we have had for the last two years to a type of therapeutic pharmaceutical line. We have recently begun sales of our new high THC registered product Khiriox, which is now being distributed into retail pharmacies, and showing great prospects for growth and differentiation. This is improving our gross margins and will allow us to create new regulatory paths towards markets like Brazil with improving margins.
And lastly, before I leave it to Helen to discuss the financial results, I would like to emphasize that most recently, our company was approved a working capital loan by one of Colombia’s largest investment grade banks, despite the short-term situation in the country with regards to insurance coverage. This is because traditional lenders believe in our strong business model. They believe in the support of the new government with regards to the cannabis industry and medical cannabis. And I think, most importantly, our evolution from a cannabis producing company to a healthcare focused platform that is able to generate strong margins and continue to grow in normal circumstances, and as of course as well the discipline we’re showing with regards to our cash management and our recurring expense reduction.
So with that, we’ll leave it to Helen to continue the financial review. Thank you so much, and I will join you back in a little while. Thank you so much. Helen, please.
Helen Bellewood
Hi, everybody. So I’m going to talk about the financial results for Q3. Firstly, talking about revenue and gross margin. For the third quarter we reported revenues of $3.4 million, broadly flat when you compare it to quarter three of 2021. However, it was $1.1 million down when compared to Q2 of this year. As highlighted by Alvaro, the interruption of insurance covered prescriptions in Colombia are the primary cause of this reduction in revenue. We also had adverse fluctuations in foreign exchange rates that contributed a reduction of $300,000. Also, as a result of the changes in Colombia, the proportion of medical cannabis revenue dropped to 47.4% of total revenue, compared with 58.3% in the last quarter. This trend will continue into Q4. As of today, we await the formalization of the government’s financing framework for medical cannabis, which will enable prescriptions to resume.
It’s worth noting though that medical cannabis sales in Q3 of 2021 represented only 34% of total revenue, demonstrating that despite the situation in Colombia, the Corporation continues to grow its medical cannabis business in other territories, predominantly Europe.
In Europe, revenues of $0.9 million were up 141% year-on-year. This increase is driven by the UK market where sales continue to grow. In Germany, sales remained on hold during quarter three following the acquisition of Pharmadrug. The acquisition was completed in August and sales in Germany resumed in Q4 2022. Gross profit before fair value adjustments fell to $1.4 million. That was down $0.8 million from quarter two, again due — primarily due to the reduction in revenue in the quarter. That has been offset by cost reduction programs that have happened across the Corporation.
Gross margin also fell to 48% compared to 50.2% in quarter two of this year. This is a result of the lower sales in Colombia, which typically attract a higher margin. The margin in Colombia was 76%, which is one of the highest in the industry, thanks to our efficient supply chain. Medical cannabis represented 72.7% of Khiron’s total gross profits before fair value adjustments.
Operating expenses of $5.2 million were $300,000 lower than Q2 of 2022 and $1.1 million lower than the quarter three of last year. This has been as a result of a Group-wide cost reduction program. Corporation expects to see further reduction in cost over the remainder of 2022 as cost savings continue, and those already achieved are recognized for a full quarter.
The net change in cash and cash equivalents was a reduction of $7.2 million for the year-to-date, as of 30th of September 2022. When the impact of capital raising activities are excluded, there was an outflow of $11.1 million, which is $5.3 million lower than last year. This is a result of increased revenues in comparison to the prior year, and also the decreased costs and active management of working capital across the Group.
So now I’m going to talk about medical cannabis segment. So medical cannabis revenues grew 32.9% when compared to Q3 of last year, again driven by the growth in Europe, offset by a 10.9% reduction in LatAm revenues year-on-year. In Q3 of 2021, 30.9% of medical cannabis revenues were generated in Europe. This has risen to 53.7% in Q3 of 2022. While some of this growth can be attributed to the reduction in medical cannabis revenues in Colombia, it’s largely due to the significant growth seen in the UK market.
In the medical cannabis segment, gross profit before fair value adjustments dropped to $1.1 million, that’s down 46% from quarter two of this year and flat year-on-year. Gross profit, as mentioned earlier, gross profit in this segment is driven primarily by Latin America.
Europe, in Europe, gross margin for medical cannabis was 56% driven by the higher purchasing power of European patients as compared to Latin America. This is offset by the higher cost of cannabis production within Europe. With the acquisition of Pharmadrug in Germany, the Corporation expects to increase its gross margins through the addition of distribution margins and to continue increasing its sellout volumes in Germany through 2022 and beyond. And again, just to reiterate, the reduction in medical cannabis overall gross margin from 76% to 67% is due to the increase in the proportion of sales in the lower margin European market.
Let’s now move on and talk about health services segment. So the Corporation recorded revenues of $1.8 million in the health services segment in quarter three, fairly flat in comparison to quarter two, due to a reduction in high value medium complexity neurological surgeries in Colombia. But that’s offset by an increase in revenue in the UK Zerenia clinics. The healthcare segment made a gross profit of $0.3 million in quarter three, representing a gross margin of 17%. This compares to a $0.25 million gross profit in quarter three of last year and a 13% gross margin for the segment. This increase in gross margin is attributable to the growth of the Zerenia clinics in the UK and various cost reductions across the Group.
Moving on to talk about EBITDA and net loss. Corporation recorded an adjusted EBITDA loss of $2.8 million in the third quarter. This compares to an adjusted EBITDA loss of $3.7 million in quarter three of last year. This is a reduction of 24% and the lowest adjusted EBITDA loss recorded for the Corporation. This is a direct result of the continuous decrease in general and admin costs, which will continue throughout 2022 and beyond.
Corporation recorded a net loss of $3.6 million in the quarter and a comprehensive loss of $4 million. This compares to both a net loss and comprehensive loss of $3.3 million in the same quarter of last year, reflecting the volatility in foreign exchange rates impacting on the Corporation’s results.
Moving on to balance sheet and cash position. As of the 30th of September 2022, the Corporation’s cash outflow on operating activities was $9.8 million, compared to an outflow of $15.2 million in the comparable period of 2021. Net cash was $1.9 million at the end of the quarter. The reduction in operating cash flow is as a result of actively managing the working capital cycle, improving collection times for the Corporation’s accounts receivable and extending payment terms on its accounts payable, whilst also reducing overall general and administrative costs.
At the end of Q3, the Corporation had $32.3 million in total assets, excluding goodwill with more than $10.5 million in land, buildings and equipment, high quality medical cannabis inventory of $9.8 million and healthy accounts receivables with credit worthy clients in Colombia and Europe of $4.5 million and only $0.6 million in financial debt.
I will now hand you back to Alvaro, our CEO; and to Franziska, our European President provide more details of our Q3 operational highlights
Franziska Katterbach
Thank you, Helen. I guess it’s me now from Europe. So good morning and good afternoon from Germany, I would like to give you the overview about Europe. And I will start with the general update on our European operations during the last quarter up until today.
In August of this year, we completed the acquisition of Pharmadrug Production GmbH, which is establishing our European and German pharmaceutical distribution capabilities. Just as a small recap, Pharmadrug is licensed Schedule 1 narcotics distributor that operates under European GMP and GDP and is located in Germany. With Pharmadrug, our Khiron ecosystem now contains an importer, distributor, manufacturer and exporter of controlled substances, such as cannabis. Consequently, from now on, all our European sales are run through Pharmadrug. Generally, this new setup with Pharmadrug required the updating of all our narcotic licenses in Germany and the UK. And this is why the launch of several new products in Germany and in UK that were originally planned for Q3, were pushed to Q4. But these updates of licenses were a one-off setup process which we managed to handle successfully.
Finally, we restarted our Khiron product sell-out through Pharmadrug in Germany in late Q3.
With that, our new product portfolio now comprises all the three chemotypes from THC dominant, THC-CBD balanced to CBD dominance in different dosage formats, including extracts and dried flower and both irradiated and non-irradiated flowers. Why is that so important? Because this gives prescribers and also patients in Germany and in UK additional options to find the right product in our Khiron product suite.
This month of November also marks our first year anniversary of Zerenia clinics in UK and also in November, we just started the — our medical cannabis sales in the Swiss market with the first successful sale and export of two our cannabis flowers, which is just one of the accomplishments which was only possible with our new Khiron-Pharmadrug ecosystem. Overall, our branding of Khiron Europe towards prescribers and patients is continuously strengthened by the publications of studies in professional journals, and the presentation of such at convoc, presses and relevant platforms. One example is our flower product study. That is one hallmark for us because it is the first study that we conducted only in the UK with only our products.
Let’s move now on to Germany. Germany is seeing an average selling price of Khiron products of CAD11.87 per gram, which is the gross margin from 57.3%. This is an increase from our average selling price of CAD8.8 per gram at a gross margin of 53%. And this is also attributable to the new ecosystem with Pharmadrug. In Germany, as I already mentioned, we restarted our Khiron medical cannabis product sales through Pharmadrug in late Q3 through Pharmadrug and this acquisition enables us now to directly sell to pharmacies without the need of a third-party distributor. Hence we recognize already bigger gross margins.
The acquisition was closed in August, and it was closed with the Clearance Certificate required under German foreign trade regulations that we obtained. Due to cartel law and gun jumping rules, we were legally obliged to not start any commercial or regulatory activities until this point in time. This is why we could only revamp our sales after that. This is also the delay in sales. As I already mentioned, all European medical cannabis sales are now run through Pharmadrug.
I will now move on to the UK. Our UK average selling price is at CAD9.4 with a gross margin per gram of 63.6%. In Q3, we generated $0.8 million in medical cannabis revenues just in the UK. With over 90 kilograms of dried flowers sold, not only import but sold during this quarter, we have sold almost the same volume in Q3 of this year than in the entire year of 2021.
Our growing product portfolio still contains the best or one of the best-selling high THC predominant cannabis flowers, our 20/1, which with we did the study which I mentioned the flower KHIRON.
We still keep addressing the untapped potential in the UK with our education, medical cannabis products and clinical services, which are increasingly used by patients and medical practitioners. As I already mentioned, our first clinic in Zerenia — Zerenia in the UK that is run out of London, opened in November 2021 and literally today, one year ago, we’ve seen our first patients. Since then we work towards a patient retention and conversion rate of over 90% which is attributable to our highest service level and patient satisfaction.
In Q3 2022, Zerenia Clinics UK continues to grow with 21% of growth quarter-over-quarter from quarter two to three in a competitive market where consumers have a reduced disposable income as a result of global economic crisis.
Thanks for listening to me and I hand over to Alvaro.
Alvaro Torres
Thank you, Franzi. Thank you for the introduction on Europe and Germany, UK. We’re very excited about the prospects of what we’re doing over there. I would like to finalize with these final thoughts and then thank you all for joining our call. First, our company has encountered a significant short term challenge in this quarter that we will surpass shortly. We have moved — we have behind us our cannabis-friendly government, thousands of patients whose life has improved because of what we do, and a business model that has been exported to other countries like Latin America and Europe because it’s unique and it’s sustainable.
A year ago, we were a Colombia-based company with aspirations to go beyond to other Latin American markets and Europe. Today, we have established ourselves in Europe with our own distribution company in Germany, our own clinics in the UK, growing product portfolio, new markets such as Switzerland and growing patient base, which allows us to diversify our geographic risk.
And lastly, we continue to streamline our recurring expense, actively managing our working capital and evolving from a cannabis company to a healthcare focused platform that is now able to apply institutional investment grade private banks to provide funding for our working capital, despite the temporary situation in Colombia. And I believe this is because of our strong and proven business model; and I think most importantly, the credibility that the new government has when it comes to supporting the cannabis industry in the short-term and beyond.
So with that, I will begin on the Q&A. I apologize if we do not get through all the questions today, 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 going through some of the questions. First one is about the growth in Europe and the sales in UK and the impact of Pharmadrug. I think Franzi has addressed this question and the prospect of continued growth in UK and Germany with our new platform of Pharmadrug and how important it is for the long-term future of the company.
And we have Franzi, question of what is the market environment for medical cannabis in Switzerland? And to what channels is Khiron product being prescribed and sold?
Franziska Katterbach
Yes. Thank you, Alvaro. So Switzerland is a very new market. It just opened up in August of this year, and the legal framework is comparable to Germany. So the product is dispensed at pharmacies and prescribed mandatorily by a doctor as a narcotic. So our products are sold in the pharmacy against a qualified prescription. What is also very interesting and why does it make it very similar to the model we have in Germany? There is a chance that the patient gets a reimbursement from the health insurance. As it’s a very nascent market still, patients will have to fight for it at the beginning. But what is good is that the law generally provides and allows for that. And this is why it can become a very interesting market.
Alvaro Torres
Thank you so much, Franzi. A question regarding the timeline for Colombia to be back on that in regards to the medical coverage.
We cannot really right now establish a definite timing. What I can say with confidence is that every step that the government needs to make to stratifying the insurance coverage is being made and that we actually have a short-term — very short-term expectation to have definite protocols regarding how these medical insurance should happen. I think what’s important to understand is that, first of all, this is very cannabis-friendly government was placed in the middle of a decision that was not in their plans to how to take. And secondly, that medical cannabis is here to stay. We have no more than 10 — we have serviced more than 35,000 patients in Colombia, we have seen the results, we have made publications. In the atmosphere of Colombia, medical cannabis is barely a medication. There are still insurance companies who are still covering it right now.
And I think, as we were — we are talking with some of the other regional governments, cities like the City of Bogotá, are actively pursuing medical cannabis programs as we speak. So this short-term transition, while the government does the review, I think we believe that it’s going to be a very short time. But of course, a definite timeline, a specific, due to the sensitivity of this information and the decisions are being made, we cannot provide at this time.
Next question regarding on the loan that I mentioned. For the past six to eight, nine months, we have always tried to show that we have a very robust business model that’s based on that healthcare platform that’s able to bring in patients that are suffering from pain, from neurological conditions from sleep disorders, and that we can use medical cannabis on our clinics by selling a very high gross margin product and generating profits this way.
One of the biggest challenges, as you all may be aware, is that the financial institutions are very wary about this industry. But the fact that the company and Zerenia particularly is positioned more as a healthcare company allows us to have those types of conversations going through the compliance processes which are quite complex; but most importantly, showing a very robust business model. Even with this short-term issue that we’ve been facing the last couple of months. In the end for us, this is a validation of our business model, a validation of what Khiron has been working on for the last few years, it’s a validation of what Zerenia does, the client base that we have, the health of our accounts receivable; and for us to be able to open this door, the private banks, investment grade banks, that offer us working capital that can increase as we start medical cannabis process. And we started the medical cannabis insurance covers. I think it gives us a lot of positivity regarding what the bank industry can look at companies that are focused on healthcare like Khiron.
This will be three year, four year type of loan. Needed rate, interest rates are according to the Colombian market. You’ve seen traditional plain vanilla loans. There is nothing very exotic about these. But the most exciting part I guess is that is one of the first things being done and we are very proud of the fact that we are opening these store not only for us, for our future but for the rest of the industry.
A question, Franzi, regarding the — more upon Pharmadrug out of Switzerland. So we already answered that.
Franziska Katterbach
Maybe let me pick up on this general question. So our licensing in Pharmadrug is unlimited. So it’s a Schedule 1 license so we could potentially register any product. We started off with registering our own products. We sell better Khiron products. And we also explore opportunities where we open Pharmadrug as an access platform as well for other brands where we think it could be complementary to our offering.
Alvaro Torres
A question regarding overall health of our accounts receivable. One of the reasons why the financial institution has decided to open this for us is because of the health of the accounts receivable that we have, the quality of the clients that we have and the name, and the fact that we have and we continue to grow the number of patients that come to our clinics. Last year, in our clinics in Colombia, we saw over 100 — close to 100,000 patient consults from January to December. This year until October we have already seen more than 125,000 patients. That you have a business model that’s all about the ability to offer services and products that patients need and more patients want. That allows us to improve the quality of our clients and the quality of our receivables. The validation that we feel that we have with this institutional loan allows us to know that we have a very healthy accounts receivable, that we have a very good relationship with our clients regarding our collection and actually we have been improving it continuously since the beginning of the year.
Alvaro Torres
So I see no — most of the questions we have answered. I really appreciate everybody’s time today and thank you to the team for being so open about our operations. We are very thankful for the time and have a great day, everybody. Good morning. Bye, bye.
Franziska Katterbach
Bye, everybody.
Helen Bellewood
Bye.
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