BioHarvest Sciences Inc. (BHST) Earnings Call Transcript & Summary

Greetings, and welcome to the BioHarvest Sciences Third Quarter 2024 Corporate Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we begin the formal presentation, I'd like to remind everyone that the statements made on today's call and webcast, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described on the call. Please refer to the company's regulatory filings for a list of associated risks, and we would also refer you to the company's website for more supporting industry information. In addition, throughout today's call, the company may refer to adjusted EBITDA, a non-IFRS financial measure, which it believes provides helpful information to investors about the performance of the business on an ongoing basis. A reconciliation of adjusted EBITDA to its most directly comparable IFRS financial measure is included in today's earnings release, which is available on the BioHarvest website under the Investor tab. On our call today is Chief Executive Officer, Ilan Sobel; Chief Financial Officer, Bar Dichter; and Chairman and CDMO Business Unit Head, Zaki Rakib. I would now like to turn the call over to CEO, Ilan Sobel. Ilan, the floor is yours.

Thank you, operator, and good afternoon, everyone. I'm pleased to welcome you to today's third quarter 2024 Corporate Update conference call and our first formal earnings call as a public company, a very exciting milestone marking our new normal following our uplisting to the NASDAQ Global Market earlier this month under the ticker BHSC. This reflects years of relentless innovation, commitment and operational momentum as well as the trust and confidence of my fellow shareholders. This NASDAQ listing represents a pivotal step in broadening our reach, building credibility and securing our position as an industry thought leader. For those new to our story or joining us for the first time, I would like to introduce our company and background. BioHarvest Sciences is a biotech innovator and inventor of botanical synthesis, a proprietary process to synthesize plant-based molecules. Botanical synthesis provides consistent, reliable, economically viable and patentable potent molecules for the next generation of nutraceutical, cosmetics, pharma and nutrition solutions. We have invested over $100 million in 15 years developing our patented botanical synthesis technology platform, providing a compelling alternative to chemical synthesis or biologics by enabling the production of non-GMO by phyto-medicinal molecules, both small and complex, turning thousands of plants into predictable, reliable sources of new therapeutic molecules without growing the underlying plant itself. Botanical synthesis allows for the perpetual creation of consistent botanical molecules, mirroring, magnifying and multiplying the active ingredients and uniquely requiring a physical plant only one time, giving us the ability to address unmet market needs, both with our own BioHarvest products and by developing molecules for industry partners. This is ultimately our North Star, developing molecules with the highest lifetime value and the largest global impact for the good of both our shareholders and the world. Utilizing this technology, our Products division commercialized VINIA, a red grape-derived nutraceutical product that we currently sell direct-to-consumer by subscription, which comprises the majority of our $22-plus million in revenues over the trailing 12 months. VINIA is a proprietary nutraceutical containing the entire matrix of red grape polyphenols, including piceid resveratrol. The botanical synthesis process increases piceid resveratrol concentration by at least 100x versus regular grapes, a principal health-benefiting compound in red grapes. Our breakthrough red grape cell powder significantly increases dilation of arteries and increases blood flow, which enhances delivery of oxygen and nutrients to cells, tissues and organs and the removal of toxins from the body. The growth of our VINIA subscriber base is largely due to high customer satisfaction rates and low churn rates as evidenced by our 4.8 out of 5 average rating from nearly 7,000 verified online reviews. VINIA is patent-protected with 3 peer-reviewed studies and 8 scientific studies. And the product is available in the U.S. and Israel as we now look at expansion into the Canadian market following recent regulatory approval. We also have additional regulatory efforts underway in other key strategic markets. VINIA has served as a proof of concept and market acceptance of our botanical synthesis process, validating the demand for products created using the inherent advantages of botanical synthesis. As part of our VINIA Inside strategy, we are now scaling our red grape molecule across multiple new high-margin verticals in the next 24 months in products, including hot beverages, where we've already successfully launched our VINIA Superfood coffee and as of earlier today, our VINIA Superfood teas. As well, we will be moving into hydration powders and skin care products in 2025. And we will repeat the VINIA playbook with our Olive and Palmer Granite cells over the coming years, addressing consumer needs through amplifying the active ingredients created by the cells and then expanding across additional beverages and other products. Taking our technology and what we have learned with botanical synthesis and VINIA, we have added a services division and now offer industry partners access to botanically synthesized molecules via contract development and manufacturing organization or CDMO model. As a CDMO, we can leverage our expertise in botanical synthesis to develop patentable plant-based molecules for third-parties to solve some of the most pressing problems facing the industry today. In addition to generating revenue with our research initiatives for CDMO customers, this business unit provides another incredible avenue towards monetization in the form of royalties on future commercial sales for any molecule we develop, providing significant long-term upside for the business. Our CDMO business unit allows pharmaceutical, cosmeceutical, nutraceutical and nutrition industry leaders the opportunities to partner with us to utilize our botanical synthesis process technology through a typical CDMO contracting model. This enables the development and manufacturing of both patentable plant-based small molecules and complex molecules. Our botanical synthesis process can develop both simple and more complex molecules, otherwise known as biologics, which have a number of unique advantages for the industry, including lower cost of development and manufacturing, a much faster speed of development and non-immunogenic properties that enhance safety. Perhaps most importantly, we can produce molecules that others are scientifically incapable of producing, particularly at scale and in an economically viable manner. This allows us to seize opportunities nobody else can, addressing unmet needs in the health industry across pharmaceutical, nutraceutical, cosmeceutical and nutrition verticals. From a financial perspective, the CDMO business can deliver sufficient biomass of a targeted molecule to facilitate clinical trials for other tests in as little as 9 to 15 months, with full-scale commercial production able to begin in as little as 20 to 24 months for an incredibly cost-effective, nonrecurring engineering expense, which we do make a healthy margin on of between $1.8 million to $2.5 million for the end-to-end process. Should the customer decide to proceed with producing the developed molecule at industrial scale following successful completion of the aforementioned development process, we would enter a royalty-based payment model for industrial manufacturing of the molecule in our facilities. We already have announced 2 signed CDMO customers and are actively developing game-changing molecules for them. As it stands today, we have a highly focused pipeline of impactful prospective customers, some of which we expect to announce in the very near term. I'd like to stress that who we decide to partner with on the CDMO front is very critical. And our deals all reflect our thoughtful and measured approach to only allocating our research bandwidth to impactful CDMO customers with the highest probability to deploy world-changing molecules. This is particularly important as the bulk of our monetization potential comes on the back end in the form of royalties on future commercial sales on any molecule we develop, which could provide a recurring revenue base over the long term. Now let's talk about our performance in the third quarter. We made continued progress in the third quarter in both our product and CDMO service divisions. Third quarter 2024 revenues grew 101% year-over-year to $6.5 million, driven by continued strong VINIA sales. We have seen significant growth on our core nutraceutical capsule business, combined with additional VINIA Inside products such as our hot beverage lineup, which are expected to continue to drive consistent revenue growth in 2025 as our VINIA Superfood coffee begins to scale and with the exciting launch of our VINIA Superfood functional tea lineup today. Our focus on margin optimization and driving efficiencies across the organization drove a substantial 1,200 basis point increase in gross margins, which grew to 57% in the third quarter of 2024 as compared to 45% a year ago. In the quarter, we put significant efforts on the digitization of all of our critical biological manufacturing metrics. The result of these efforts is we today have a state-of-the-art biological manufacturing facility, which is fully digitized and has allowed us to see a step change in efficiency and optimization of our production, which we believe will be reflected in our go-forward gross margin profile, which we believe is likely to move into the 60% range in the coming quarters. Whilst we drove 1,200 basis points improvement in margins in the third quarter versus a year ago, our aggressive margin growth was impacted somewhat due to higher air freight expenses and the delaying of other cost-saving measures. As we move into the first half of 2025, we are well positioned to see notable improvements as we implement ongoing margin optimization initiatives and reap the benefits of our investments in growth with incremental new VINIA Inside products such as functional coffees and teas, all of which address an incremental consumer base at an attractive margin profile. In addition, we have locked in much of our downstream distribution costs for next year, such as packing and handling while concurrently realizing greater economies of scale from shipping, which when taken together, provide a clear line of sight into future costs and ultimately, profitability. The business today has strong growth momentum, and I want to specifically stop and talk about our growth model for 2025. Our growth model is guided by the principle of balancing growth with profitability while achieving scale. We have elected to achieve adjusted EBITDA profitability at around $11 million to $12 million in revenue per quarter, which we feel based on the momentum we have will be realized in the second half of 2025. This balancing approach allows us to continue to make important investments in 3 critical areas, which will act as major catalysts to our business in the near future. One, increasing our product portfolio in the direct-to-consumer business. This means broadening the footprint of our red grape cell molecule to new customers, increasing scale and conversion in our funnels and ultimately driving further reduction of acquisition costs per new customer. Two, investing in R&D to drive critical process improvements, which we call Botanical Synthesis 2.0 to improve manufacturing gross margins. And three, developing AI capabilities for our CDMO customers. In the longer run, our growth model is targeting a 20% adjusted EBITDA margin for our products business, and we believe we can target higher levels in the future for the CDMO business over time. I'd like to elaborate a little more on how we plan to accelerate growth on our core capsule business and prioritize new direct-to-consumer product launches over the next few quarters. In addition to the VINIA Superfood tea portfolio launched today in tea sachets, in Q1 2025, we will launch VINIA Superfood English breakfast and Matcha Green Tea in K-Cups to complete our VINIA Superfood tea portfolio. In the first quarter, we will also launch the first Superfood espresso coffee in an espresso compatible pod to complete our play to bring disruptive functionality to the coffee category. The first half of 2025 will also see the launching of our VINIA Pro lineup, targeting active consumers 20 to 45 years of age who are looking for all the benefits of improved blood flow to increase their physical performance and body recovery during sporting and exercise activities. In Q2, we will launch our VINIA Pro chews, which will contain a double dose of VINIA in each chew in our new athletes formula, where we have developed with our partner a unique chew, which can hold 800 milligrams of our VINIA red grape cell molecule. Lastly, we plan to launch our VINIA Pro Super blood flow hydration solution at the end of Q2, early Q3 to disrupt the $13 billion hydration category to complement our unique strategy of disrupting major categories with superior science, superior clinical trial backed efficacy and superior taste. These activities really demonstrate the significant lifetime value of our molecules based on their efficacy and ability to play across multiple delivery systems and categories, giving consumers superior health and wellness benefits that they are craving across multibillion-dollar categories whilst allowing our business to drive accretive margins. Before I provide my closing remarks, I'd like to turn the call over to our CFO, Bar Dichter, to review our financial results for the quarter ended September 30, 2024. Bar, over to you.

Thank you, Ilan. I share your excitement of the NASDAQ listing milestone that we just crossed. Good afternoon, everyone. I will provide with a succinct review of our financial results. A full breakdown is available on our SEC filings and in the press release that crossed the wire after market close today. Please note that all figures are in U.S. dollars unless stated otherwise. Revenue for the third quarter, which exceeded our revenue guidance has increased 101% to $6.5 million as compared to $3.2 million in the third quarter of 2023. The increase was largely driven by growth in VINIA subscribers, which grew 128% year-over-year. Gross profit increased 157% to $3.7 million or 57% of total revenues in the third quarter of 2024 as compared to $1.4 million or 45% of total revenues in the same year ago quarter. The increase in gross margin was primarily a result of the benefits of increased manufacturing scale, improved manufacturing yields and cost reduction in downstream packaging costs. Total operating expenses for the third quarter totaled $5.8 million, an increase of 67% versus the year ago quarter. The increase in operating expenses was primarily due to increases in marketing spend of our VINIA product line, expenses related to our new VINIA product initiatives and higher expenses from our CDMO services division. Net losses for the third quarter of 2024 totaled $2.7 million or $0.16 per basic and diluted share as compared to a net loss of $1.7 million or $0.13 per basic and diluted share in the same year ago quarter. Adjusted EBITDA loss, a non-IFRS measure, totaled $2 million in the third quarter of 2024 as compared to an adjusted EBITDA loss of $1.7 million in the same year ago quarter. Cash and cash equivalents as of September 30, 2024, totaled $2.8 million as compared to $5.4 million as of December 31, 2023. Looking ahead to the fourth quarter of 2024, we expect to realize revenues of at least $7.2 million. We believe that we are well positioned for a high level of operational execution in the fourth quarter and beyond. I would like now to pass the call back to Ilan to offer some closing remarks, after which we will begin our Q&A session.

Thank you, Bar. And for all our shareholders listening on the call, I hope that's given you some really strong perspective to the performance of the business in the third quarter. We, as a management team, have significant confidence in the ongoing momentum continuing into the fourth quarter and in our strategies to take our momentum to the next level in 2025. And I'm now going to hand the call back to the operator to begin our question-and-answer session. Operator, over to you.

[Operator Instructions] And our first question today will come from Hunter Diamond of Diamond Equity Research.

Congratulations on the results. My first question, with vinia.com revenue growing quickly from subscriptions and retention rates pretty high and new product launches, what's the strategy to continue increasing the retention rates going forward?

Thank you, Hunter. Look, we're very fortunate that we have 2 forces of growth, both being vinia.com as well as Amazon. Amazon business continues to grow at significant double-digit growth rates in addition to our vinia.com business. And it's always good to have a healthy balance. And in our case, it's like 80% of our revenues coming through vinia.com and roughly 20% through Amazon, and that's a really healthy balance to have. In the vinia.com business, we've really accelerated our growth of subscribers. This is a major focus for us. You'll see the way we design the website and our pricing structure incentivizes people to move towards subscription because we understand that once people move on to subscription, given the efficacy and the performance of our VINIA red grape cell molecule, we're able to really drive continuity and a long, what we would call in the industry lifetime value of these consumers. What we've also done now, and I encourage you to go to the website, vinia.com today, you start to see us building this out that in addition with our new delivery mechanisms, anchored in our Superfood coffee that's performing extremely well for the business, and as I speak to you today, we've sold roughly $1.5 million direct-to-consumer on our VINIA Superfood Coffee. And remember, right now, at this stage, we haven't leaned, in with any intensive advertising behind our Superfood coffee. It's kind of like tailing on the back of our core capsule business. And what you'll see now is with the launch of our VINIA Superfood functional tea business, you'll start to see a website that really has multiple choices for consumers that allows us to trade consumers up, that allows us to increase the overall size and dollar check rate of each bundle. And ultimately, this is going to help us ensure that we're providing multiple different entry points and continuation points for consumers to stay with VINIA, making sure that VINIA really matches with their lifestyle needs and their preference for different delivery mechanisms. This is going to really help us continue to improve retention rates. And our retention rates today are industry-leading already. And in addition, what we really focused on in the last 6 months is around education, continuing to educate consumers on the mechanism of action on how VINIA works, on understanding more about our technology and how our technology works, the botanical synthesis manufacturing process and really educating the consumer. These factors, combined with the additional choices, we believe will continue allowing us to drive the double-digit growth in subscription base and ensure that we're maximizing our retention levels.

Great. Makes perfect sense. And then going back to the CDMO, maybe you discussed it a little bit, but maybe discuss what you see as the long-term goals, the kind of growth you're expecting? And then maybe if there are industries or segments that are the low-hanging fruit you're seeing right now for initial customers?

Well, we are very lucky that we have with us tonight, sitting next to me Dr. Zaki Rakib, our Chairman and Vice President of the CDMO -- president of the CDMO, I should say. So I'm going to ask, I'm going to hand that question over to Zaki to answer that question.

Thank you, Ilan, and thanks Hunter for asking the question. So just a statement that I wanted to make to start with is we're really happy. I mean we're really happy with the progress that was made in the CDMO since really its launch, it was earlier this year. And maybe I wanted to emphasize 3 particular fronts in which we felt that significant progress was performed. So despite actually the late arrival of the source plants and the 2 projects that we started in 2024, we are actually proceeding very well, and there's a very good and strong prospect of moving from Stage 1 to Stage 2 on the CDMO. As you know, Stage 1 is the first stage with a higher risk where we develop the fundamental bank of cells or cell bank and then moving to the liquid media stage in Stage 2, which is also higher in terms of revenue and with less risk compared to the first one. So we're happy with what we've been achieved so far in Stage 1, and we look forward for the move to Stage 2. That has been quite critical and further demonstrates the success of botanical synthesis that has been achieved so far. So we haven't had any failure as of yet with any plant that we try to perform botanical synthesis on. So that was further assurance of the capabilities of the technology. What we've also done in this year is expecting many more projects to come in subsequently in the subsequent year. We have been building an infrastructure tools that we need. Many of them are software tools, so the CDMO development, but also some hardware in the form of robotics. So people who are familiar with our technology would know that we use petri dishes in large quantities to experiment. So the ability to fill them, handle them automatically using robotics is now being included in the mix of tools that we've been developing. And third was -- which I'm sure is quite the most important part of your question is the pipeline. And so what's the prospect? So the pipeline is very strong. I mean this type of CDMO contracts, especially with top-tier companies across all 3 industries and the 3 industries are pharma, cosmeceuticals and nutrition. Across all 3 industries, there's a very strong pipeline, very encouraging. I mean if I have to quantify it, I would say -- and I will be speaking in terms of bookings and the size of the bookings, I would say from the current already in 2024 pipeline and the type of prospects we see to come to fruition and agreements, I look at those contracts yield deals of north of $10 million in booking in 2025. The reason why we talk in more bookings now is because of the time when the project starts depends on the arrival of -- given the experience that we have this year on the arrival of the source plant. Some of the plants that need to be sourced, as we know, come from certain countries, which we need the whole process of the importation, and we always do ethical sourcing. So that's the reason. So all in all, very good progress. We're very happy and significant deals in the horizon. And like Ilan said earlier, there will be some announcements in the short term.