Cann Group Limited (CAN.AX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Cann Group Limited Annual General Meeting. I would now like to hand the AGM over to your first speaker today, Chairman, Mr. Allan McCallum. Thank you. Please go ahead.

Good morning, everyone. My name is Allan McCallum, and I'm Chairman of Cann Group Limited, and I will be chairing today's Annual General Meeting. Today, we are very pleased to welcome you to our virtual AGM held on a platform provided by our share registrar, Link Market Services Limited. We hope that holding a virtual meeting will assist to curb the spread of the COVID-19 virus and encourage greater participation and engagement amongst our shareholders. Regardless of where you are, I hope all of you are staying well as we continue to navigate the challenges associated with COVID. I ask that all attendees, please take note of the disclaimer that is provided in relation to today's presentation. Today's meeting has been properly convened. It has been called by a Notice of Annual General Meeting dated the 22nd of October 2020, and sent to shareholders by the Company Secretary in accordance with the company's constitution. I note that there is a quorum present, and I declare the meeting open. The agenda today will consist of the formal 2020 Annual General Meeting. I will introduce the Board and our CEO and will ask our Company Secretary to outline some of the technical aspects of our online meeting format. I will address the meeting, and then I will ask Peter Crock, our Chief Executive Officer, to address the meeting. We will then move to the formal items of business listed on the Notice of Meeting. Shareholders will have an opportunity to ask questions of the Board and the company's auditors after that. I would now like to introduce my fellow directors and other company personnel who are at today's meeting: Deputy Chairman, Mr. Philip Jacobsen; Mr. Doug Rathbone, AM; Mr. Geoff Pearce; and Ms. Jenni Pilcher. Also today -- with us today are Mr. Peter Crock, our chief Executive Officer; and Ms. Geraldine Farrell, our Company Secretary. I also welcome Mr. Alan Finnis, representing William Buck, the company's auditors of the 2020 financial report. I'll now hand over to our Company Secretary, Ms. Geraldine Farrell, who will introduce some of the technical aspects for the conduct of this meeting, and we will then commence the business of the meeting. Thanks, Gerry.

Thank you, Mr. Chairman. Shareholders who are in attendance today have logged in through the virtual meeting website. At the top of the web page, there are 3 boxes to ask a question and get a voting card. If you wish to vote or ask a question at the meeting, you will need to provide your shareholder details or your proxy details to access these parts of the meeting. Once you have provided your details, you will see an electronic voting card with all of the resolutions to be voted on by shareholders at this AGM. The Chairman will ask everyone to submit their votes at the end of the meeting. Once the Chairman has described the resolutions, there will be questions from telephone participants. And if there are any online questions, any questions will be addressed. Once those questions have been addressed, the Chairman will ask shareholders to vote on a poll on the resolutions using electronic voting cards and submitting them. The voting card remains eligible until the voting has closed 5 minutes after the close of the AGM. Once voting has closed, all voting cards, both submitted and unsubmitted, will automatically be submitted and cannot be changed. At the end of the AGM, a red bar with a countdown time will appear at the top of the webcast and slide windows advising the remaining voting time available to shareholders. You will only be able to ask a question online after you have registered. [Operator Instructions] Only shareholders of the company, proxyholders or authorized company representatives in the case of corporate shareholders are entitled to make comments or ask questions on business put to the Annual General meeting or to vote on the resolution. All other attendees are guests and are welcome as observants. If the online platform has any technical difficulties during this meeting, I will notify the Chairman. If this happens, the Chairman may choose to call a short recess of the meeting to address the issue. If you have any difficulties, I also ask you to refer to the virtual meeting online guide that was circulated with the Notice of Meeting or to dial the helpline that is indicated on the meeting page. I will now hand back to the Chairman to address the Annual General Meeting.

Thank you, Gerry. It has, without doubt, been an extraordinary 2020 for not only the Cann Group, but for all of us in both the business and personal context. COVID-related disruption and delay has impacted progress on several key fronts, including regulatory approvals, commercial activities and our planned debt financing. The business has also had to adapt work practices to ensure we safeguard the health and well-being of our employees while continuing to progress some of our important R&D programs and maintain production and manufacturing schedules. Despite these challenges, the company has remained steadfast in its focus on continuing to position Cann Group as an industry leader in medical cannabis. We remain confident that our vertically integrated business-to-business model will enable us to generate sustainable growth and strong shareholder returns. Despite some delays in sales in the first part of this financial year, the company remains on track to achieve its forecast revenue target for financial year '21 and to establish itself as a leading producer in Australia of GMP-certified product that meets international standards. While the past year has seen some volatility in supply and demand on a global basis, there continues to be strong evidence of growing awareness, support and demand for safe, high-quality medical cannabis treatments both here in Australia and in the expanding number of legal overseas markets. The number of prescribing medical professionals and patients continues to rise and the body of medical evidence supporting the use of medical cannabis across a variety of indications continues to strengthen. Cann Group's investment in producing product to the highest standards and navigating the complex and often changing regulatory frameworks that exist around the world places us in a strong position to successfully access markets and build commercial momentum with our distribution partners. The support of shareholders, via the capital raising in July/August, also places the company in a strong financial position to execute on expansion plans, including the development of our state-of-the-art production facility near Mildura. Our announcement this week that National Australia Bank is supporting the company with debt financing to assist with the construction of Mildura is a very significant milestone in terms of our growth plans. Last month, we saw the sell-down and exit of Canada-based Aurora Cannabis, which had taken a cornerstone shareholding at the 2016 IPO. For any of you who have closely followed Aurora over the past 12 months, you will be aware of the considerable challenges they have faced and their stated objectives to focus on their own business. In that respect, their decision to exit the shareholding in Cann Group was not a total surprise. Importantly, the technical service agreement between the 2 companies remains in place and the work being undertaken at Mildura by greenhouse design firm, Aurora Larssen Projects, has not been impacted. As with most developing industries, we expect to see some rationalization and consolidation in the medical cannabis sector as markets continue to develop and various business models are tested. We will watch those moves closely with a view to identifying any opportunities that we believe will strengthen Cann Group's prospects. It's important to note, however, that the company's prime focus will remain on executing the strategy we have in place and delivering on our revenue and growth projections. The next 12 months is a critical business for the -- a critical period for the business and one in which we have the opportunity to firmly establish Cann Group as an Australian industry leader. On behalf of the Board, I'd like to thank Peter and his management team, and all Cann Group employees, for their efforts over the past 12 months, and I would like to, again, thank shareholders for your ongoing support. I'll now hand over to Peter for the CEO's address. Thank you, Peter.

Thank you, Allan. And I would also like to add my welcome to those shareholders who are joining us for this AGM. As Allan has said, the business has faced some unprecedented challenges during 2020 as we navigated the restrictions associated with a global pandemic while progressing our research and development programs, our production and manufacturing schedules, our global regulatory clearances, our commercial activity and our debt financing objectives. Pleasingly, we've made important progress on all of those fronts, while also ensuring the health and well-being of our people and taking measures to reduce our base operating costs. The COVID-related impacts have been felt most significantly in the regulatory area, where delays have been experienced in securing the relevant approvals and clearances for exporting our oil-based products to overseas-based customers. This, in turn, has impacted the timing of some first half sales. It should be noted, however, that our projected revenues for the current year were always heavily weighted to the second half. I'm pleased to report that we have made some important recent progress on the regulatory front and that should allow us to start shipping to both Germany and the U.K. in the next month. In addition, we have lodged relevant regulatory applications in New Zealand that should be approved in time to allow the start of export sales to our New Zealand distribution partner Zalm Therapeutics early in the new year. With the anticipated release of over 10,000 bottles for supply to our export customers in the next 2 months, this will be the largest export of Australian grown and manufactured GMP medicinal cannabis product to date. This is an important milestone, demonstrating a proven capability to deliver at scale. Having achieved this milestone, the company will be able to fulfill the large orders forecast by our customers for the second half of fin year '21. We remain confident that we're on track to achieve our forecast $15 million in revenues for the current financial year. We have taken additional measures to streamline and grow our business in Europe. We have developed a strategic collaboration with our German supply partner, iuvo, to create a single supply pathway into Europe. This partnership will streamline our access into European markets by leveraging iuvo's position as Germany's largest independent medicinal cannabis distributor. iuvo will take the lead on business development activities as it continues its expansion into other European markets where medicinal cannabis programs are opening up. The establishment of a single point of entry into Europe via iuvo addresses the challenge of having to meet separate regulatory requirements for multiple customers in different markets. We are now completing the process of consolidating our existing European offtake customers under the new arrangements with iuvo. With the U.K. proceeding down the path of leaving the European Union, we will continue to maintain our important supply and distribution arrangements with LYPHE Group. The U.K. market is developing quickly with the number of prescribing doctors and patients growing rapidly month-on-month. Cann is supporting LYPHE Group's participation in the Project Twenty21, which aims to recruit up to 20,000 medicinal cannabis patients by the end of 2021. Project Twenty21 is in patient registry, providing access to medicinal cannabis while simultaneously gathering data on treatment efficacy. Launched in November last year, it is the largest medicinal cannabis recruitment initiative in Europe and currently has enrolled more than 8,000 patients through clinics and independent prescribers. Domestically, we continue to supply our Australian partners with the volume ordered and prescribed to Australian patients growing steadily each month. Financial year-to-date, we've shipped over 2,000 bottles to our Australian partners. As the Chairman has said, Cann Group has a clear vision to be Australia's leading producer of GMP-certified product for both domestic and international supply. Our strategy to initially focus on a business-to-business supply model ensures the quickest pathway to scaled supply and supports the business case for our planned Mildura expansion. As we achieve a sustainable revenue base, and the efficiencies that come with larger scale production, we will have options to extend into direct-to-consumer markets. We have ongoing product development programs that will support that transition, and we will be in a position to launch unique and proprietary formulations. We announced yesterday that we have secured final credit approval for a $50 million construction debt facility with the National Australia Bank. This is a standard construction drawdown facility, which converts to an 8-year amortization loan. We are currently finalizing documentation and expect to have everything executed within the next month. The approval of our debt funding clears the path for a restart on our new facility at Mildura. We will remobilize construction at the site in February, and we are targeting a commissioning of the first stage of Mildura with an annual 12,500 kilogram production capacity in November next year, with the first material to be processed and released by the end of the first quarter of calendar year 2022. The Mildura facility will deliver substantial technology and efficiency gains; the scale and cost base to ensure Cann is globally competitive; and a substantial uplift in margins as we transition from using alternate source biomass to Cann's local cultivation. I look forward to keeping shareholders updated on progress with this important project over coming months. As I mentioned earlier, we have taken steps to reduce the base operating costs of the business as we transition to a sustainable revenue base. Capital requirements and cash flow management remain a key focus at Cann. In the recent 4C cash flow statement for the September quarter, we showed around $2.4 million per month in total costs. That included some one-off expenses and accumulated manufacturing costs from the first half of the year. Our current monthly expenditure is running at $1.65 million, excluding CapEx. This can be further broken down into 3 main buckets. Our monthly corporate/overhead costs are $665,000. That number was substantially reduced when we restructured our workforce last year and has remained reasonably steady since. Our costs for producing product, which includes cultivation and third-party manufacturing, is around $865,000 per month. We are producing biomass, resin and oil products to satisfy current orders and customer-led expectations for the rest of the year. The third area of expense is research and development, where we spend around $112,000 per month. Our R&D programs have been closely reviewed to ensure we are prioritizing our investment in this area. Over the past 12 months, these programs have yielded some important and exciting outcomes that will contribute significant value to our business and reinforce our position in plant-based precision medicines. In partnership with Agriculture Victoria, we are continuing to generate chemotypic, genotypic and phenotypic data on our genetics to optimize our accelerated breeding program. This will lead to the development of novel cultivars with improved yields and/or chemotypic profiles. As part of our involvement in the ARC Research Hub for Medicinal Agriculture at La Trobe University, valuable data is also being generated on how plant physiology and nutrient status impact on cannabinoid profiles and on plant yield and disease resistance. Our key genetics have been maintained as sterile tissue cultures and novel methods of extracting cannabinoids and terpenes are under investigation. The projects will deliver improvements in production costs, risk mitigation for our genetics and new intellectual property. Our partnership with CSIRO is delivering improvements in cannabinoid analysis techniques and manufacturing processes, some of which have already been transferred into Cann's commercial operations, leading to improved cost of production and reduced footprint at our new Mildura facility. We have also been able to incorporate outcomes from the multidisciplinary research program being undertaken by the New South Wales DPI Cooperative Research Centre Program, in which Cann is the lead commercial partner. These outcomes are being applied at our Northern production facility to achieve improvements in propagation, root establishment, shorter crop cycle times and higher yields. Projects investigating disease and pests of cannabis have commenced and will lead to effective integrated pest and disease management strategies for implementation in our commercial facilities. And our work with the Monash Medicines Innovation Centre on the development of novel formulations and new medicines is also progressing positively and will lead to the creation of pipeline assets and new IP. These projects represent important investments in the future value of our business and help us establish competitive advantage. I'm also pleased to report on progress in the clinical trial to assess medicinal cannabis for symptom management in people with advanced cancer, in which Cann is partnering with the Olivia Newton John Cancer Research Institute and Austin Health. Phase I of the trial is focused on the titration and safety of administering a new formulation of medicinal cannabis, which has been supplied by Cann Group in late September. The product is from a strain that was initially developed by Agriculture Victoria. It's a full spectrum cannabis extract that contains both CBD and THC formulated into an oil that is taken up to 3 times a day. Should the Phase I study demonstrate safety and tolerability of the drug, Phase II, a double-blind, randomized, placebo-controlled trial, we'll see the enrollment of 108 participants with advanced cancers subject to meeting trial-specific eligibility criteria. We are pleased to be participating in this trial because it's important that we continue to build a solid body of evidence via rigorously controlled clinical trials to support the use of medicinal cannabis in cancer treatment and in other indications. As the Chairman has noted, awareness of and demand for quality, GMP standard medicinal cannabis, continues to grow on a global basis. While further work is required to help streamline regulatory clearances and patient access, our confidence in the future growth and value of this industry continues to strengthen. The next 12 months will be a critical period for the company as we look to deliver on our revenue targets; expand our supply agreements; proceed with state-of-the-art Mildura facility and progress the product formulation programs that we have underway. We have a dedicated team of capable people who will help ensure we achieve those objectives, and I would like to acknowledge their steadfast commitment during this challenging period. To close, I would like to also thank shareholders for their loyalty and support. I will now pass back to the Chairman.

Thank you, Peter. We'll now move to the formal business. Ladies and gentlemen, we now come to the formal matters requiring resolution, which are outlined in the Notice of Annual General Meeting. I will take the Notice of Meeting of the 2020 Annual General Meeting of Cann Group Limited dated 22nd of October 2020, as read, and I will now proceed with the items of business. Copies of the Notice of Meeting are available from the company's website under the Investor tab. In accordance with the resolution of the Board and as set out on the proxy form sent with the Notice of Meeting, I note that I intend to vote all undirected proxies appointing me as a proxy in my role as Chairman in favor of all resolutions. In accordance with Rule 38.2 of the company's constitution, I have determined that a poll be held in respect of all resolutions to be put to this Annual General Meeting. Voting on each of the resolutions will be conducted by way of a poll, and the results of the voting on such resolutions will be announced to the ASX promptly after the meeting. As noted by the Company Secretary, shareholders attending the meeting online will be able to cast their vote using the electronic voting card received when online registration is validated. Please refer to the virtual meeting online guide or use the helpline specified. Item 1 of the Notice of Meeting, financial statements and reports, does not require a vote. The financial statements and reports. To receive the financial report, directors' report and the auditor's report for the company and its controlled entities for the financial year ended 30th of June 2020. There is no vote on this item. Section 314 of the Corporations Act requires a public company to provide shareholders financial report, the directors' report and the auditor's report of each financial year. The annual report, which contains this information for the financial year ended 30th of June 2020, is available for download from the company's website, and a link is included under the Investors tab. Resolutions to be voted on. Now moving to those resolutions to be voted on, I have determined that each resolution set out in Items 2 to 9, inclusive of the Notice of Annual General Meeting, will be decided by a poll. Resolutions that are subject of voting today may only be voted on by shareholders, proxyholders, and shareholder company representatives. I appoint Jim Kompogiorgas of Link Market Services as returning officer to conduct the poll and report the results of the poll to me. I also appoint Mr. Alan Finnis of William Buck, the company's auditor, to act as a scrutineer. As noted in the Notice of Annual General Meeting, I intend to vote all undirected proxies as proxy in my role as Chairman in favor of each resolution. The proxy votes that have been submitted will be set out on the slides shown for each resolution. Resolutions 2 to 8 set out in the Notice of Annual General Meeting are to be considered as ordinary resolutions and, as such, must be approved by a simple majority of the votes cast by shareholders entitled to vote and voting on these resolutions. Resolution 9 is a special resolution and, as such, must be approved by at least 75% of the votes cast by shareholders entitled to vote and voting on the resolution. The adoption of the Remuneration Report. To consider and, if thought fit, to pass this nonbinding advisory resolution as an ordinary resolution, I now move that pursuant to and in accordance with Section 250R(2) of the Corporations Act, the Remuneration Report for the financial year ending 30th of June 2020, as set out on the Pages 19 to 25, inclusive of the annual report, be adopted. The resolution and summary of the proxy votes received prior to the meeting appear on the slide. This vote is advisory only and does not bind the company or its directors. However, the Board will take the outcome of the vote into consideration when reviewing the company's remuneration practices and policies. Resolution 3 is the re-election of Director. Resolution 3 concerns the re-election of one of our directors, Mr. Geoffrey Pearce. I now move that Geoffrey Ronald Pearce, a Director who retires from Office in accordance with Rule 50.2 of the Company's Constitution and being eligible for re-election, be re-elected a Director of the company. The resolution and summary of the proxy votes received prior to the meeting appear on the slide. Resolution 4, re-election of Director, concerns one of our directors, Ms. Jenni Pilcher. I now move that Ms. Jennifer Lee Pilcher, a Director who was appointed to fill a casual vacancy in accordance with Rule 49.1 of the Company's Constitution until this Annual General Meeting and being eligible for a re-election be re-elected as a Director of the company. The resolution and the summary of the proxy votes received prior to the meeting appear on the slide. Resolution 5 is the approval of issue of new shares to CSIRO. Resolution 5 concerns the approval of the issue of new shares to CSIRO as further detailed in the Explanatory Memorandum, which accompanies the Notice Meeting. I now move that for the purposes of Listing Rule 7.1, shareholders approve the issue of the Commonwealth Scientific and Industrial Research Organization up to a maximum of 90,000 fully paid ordinary shares in the capital of the company pursuant to the terms and conditions of the Share Purchase Agreement in relation to the provision of research and development services to the company from CSIRO under the Reserve Service Agreement during the quarter ended on 30th of September 2020. The resolution and a summary of the proxy votes received prior to the meeting appear on the slide. Resolution 6 is the approval of the long-term incentive plan. Resolution 6 concerns the approval of the company's long-term incentive plan, the details of which are further set out in the Explanatory Memorandum accompanying the Notice of Meeting. I now move that pursuant to and in accordance with Listing Rule 7.2, Exception 13, and Section 259B(2) and 260C(4) of the Corporations Act, the Cann Group Limited 2020 long-term incentive plan and the grant of and issue of all securities under the long-term incentive plan on the terms and conditions set out in the Explanatory Statement, are approved. The resolution and the summary of the proxy votes received prior to the meeting appear on the slide. Resolution 7, employee -- approval of the employee share contribution plan. Resolution 7 concerns the approval of the employee share contribution plan, the details of which are further set out in the Explanatory Memorandum accompanying the Notice of Meeting, I now move that pursuant to and in accordance with a Listing Rule 7.2, Exception 13 and Sections 259B(2) and 260C(4) of the Corporations Act, the Cann Group employee share contribution plan and the grant of and issue of all securities under the employee share contribution plan on the terms and conditions set out in the explanatory statement, are approved. The resolution and the summary of proxy votes received prior to meeting appear on the slide. Resolution 8 concerns the approval of the employee share gift plan, the details of which are further set out in the Explanatory Memorandum accompanying Notice of Meeting. I now move that pursuant to and in accordance with Listing Rule 7.2, Exception 13, and Sections 259B(2) and 260C(4) of the Corporations Act, the Cann Group employee share Gift plan and the grant of an issue of all securities under the employee share gift plan on the terms and conditions set out in the Explanatory Statement, are approved. The resolutions and summary of the proxy votes received prior to the meeting appear on the slide. Resolution 9, approval of the additional 10% placement capacity. Resolution 9 concerns the approval of an additional 10% placement capacity for 12 months, the details of which are further set out in the explanatory memorandum accompanying Notice of Meeting. I now move that for the purpose of Listing Rule 7.1 and for all other purposes, approval is given for the issue of equity securities and that term is defined in the Listing Rules, totally up to 10% of the issued capital of the company at the time of issue, calculated in accordance with the formula prescribed in listing rule 7.1A.2. The resolution and summary of the proxy votes received prior to meeting appear on this slide. To remind everyone, this resolution is a special resolution requiring an approval of 75% or more of the votes cast on the resolution by shareholders. Questions. We now ask if there are any questions for the Board or the company representative, including any presents for the company's auditor in relation to the annual report -- the period ended 30th of June 2020. If you have not already done so, you may submit your questions at this point, either online or by phone. [Operator Instructions] And in relation to questions specific to a resolution, the questions raised should relate directly to the matter being considered. I will now take online questions.

Mr. Chairman, we have 1 online question. The question is, I see you have reiterated your $15 million sales forecast for this financial year, but how sure are you of that given small sales so far?

Thanks for that question. I'll ask the CEO to address that question. Peter? Thank you.

We've -- definitely in this year, there's no doubt that Cann has a heightened sense of urgency about where we're going on our medicinal cannabis journey. What we've found this year is that COVID has made it difficult to get others, particularly in the regulatory area, where we, in fact, have no ability to influence their decision in the decision-making process, to share our sense of urgency. Our stability program, which has been running to ICH GMP standards, has also been a rate-limiting step, and we can only start moving towards meaningful volumes once we've established a minimum 12-month shelf life for labeled product. For that reason, we always knew revenues were going to be heavily weighted into the second half, and that hasn't changed. The shipment of over 10,000 bottles to Europe in -- to Europe and the U.K. in the next month or so are important first deliverables that will flow into product in the second half.

Thanks for that, Peter. We have further questions, please?

The next question is, after the 12,500 kilogram production plant is completed, what is the plan for expansion beyond that? And do you have revenue forecast for the next 5 years?

We're not providing guidance over the next 5 years at this stage, but we're definitely looking at aligning our production capacity out of Mildura with future requirements. And that includes a plan that will allow us to move into Stage Ib, which would take us up to 25,000 kilograms, and then beyond that, to other requirements as we can match demand with supply.

Thanks, Peter. Further questions?

Next question is what is the relevance to current and potential customers of the build-out of Mildura?

The main question we're getting from customers is certainty of supply. And so in terms of being able to align and ensure that we've got consistency and certainty of supply is absolutely key to us with the Mildura capacity and bringing that online.

Thanks very much, Peter.

The next question, Mr. Chairman, is, when does the company expect to be profitable? And what is the dividend payment policy?