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

[Operator Instructions] Presenting on behalf of Cann Group today, we have the CEO, Peter Crock; CFO, Deborah Ambrosini and COO, Shane Duncan. The presentation today will last approximately 15 minutes, followed by the Q&A session thereafter, finishing by 10:00 a.m. Eastern Time. To begin, I'll hand it over to Peter. Please go ahead.

Terrific. Thanks, Matt, and welcome, everyone. I'm very pleased to be able to be here on Zoom to give you a half year update, after what's been an incredibly challenging end to 2021 for everyone with COVID on a number of fronts. But really pleased to be able to provide you with an update today. Joined with me is Deborah Ambrosini, our CFO, who joined us in September of '21. and Shane Duncan, who you've -- most of you will have met before as our Chief Operating Officer. So today, we'll run you through a number of topics to bring you up to date, and I will start off by handing over to Deborah to give us an update on the financial results. Thanks, Deborah.

Thanks, Peter, and good morning, everyone, and welcome to the presentation. Revenue for the half year we're please to say grew to $3.2 million, which was up $3.1 million or 193% from the prior corresponding period. The company also received an R&D tax incentive during the period of $2.2 million. We received that in December '21 related to the 30 June 2021 period. This can be seen in the other income line. The company was also able to increase the fair value of its investment in Zalm after the purchase of this investment by Rua during the period. And that revaluation can also be seen in other income line. Operating expenses during the period in line with expectations as revenue increased during the period. The loss for the half year was $8.28 million, which was down 11.9% in the prior corresponding period after the increase in revenue and the decrease in financial expenses during the period. The company closed the period with cash of $10.68 million, which was up $7.5 million on the prior period after completion of successful capital raising activities during the half year. The company will continue to monitor its expenses and cash positions very closely going forward into the next half year. And now I'll hand over to Shane Duncan, who will talk about the operations of business.

Thanks, Deb, and good morning, everyone. Thanks for tuning in. As Deb mentioned, the commercial side of the business had a significant increase in revenue and sales and production this half versus the corresponding half last year. A lot of that has been driven by the increase in the number of B2B customers and the traction they're gaining with their execution of their sales strategies. And we've also signed a number of new supply agreements. We achieved a very significant step, which I'll talk more about in a minute around getting the upgrade to our Southern Facility to allow us first time to be a manufacturer of finished product. So we can produce and distribute API and also medicinal cannabis products under that GMP license. Peter will touch in a minute how quickly we're moving towards completion of the Mildura facility, which also includes the Satipharm capsule manufacturing equipment that we brought in from Switzerland last year and now at the point of commissioning and commencing our first batches and also talk in a minute about the progress we're making on our first registered product. In terms of -- as I said, we've got that GMP license. We've commenced manufacturing our first batches of flower that we ordered -- from orders that we received in the first half of the financial year. We've increased that number of customers. As I said, we're up to 19 customers, B2B customers at the moment. And those customers have driven this change in the number of oil bottles, particularly being the only range we've had available of finished product in the first half from 3,800 bottles to over nearly 16,000 bottles in the first half of FY '22. And we're seeing -- we've got forecast and forward orders, we will see that increased significantly to another 40,000 bottles we estimate for the rest of the financial year. And now we have that GMP license we'll pack off, at the moment, we're estimating at least 300 kilos of dried flower products for the balance of the financial year. GMP manufacturing step capability, our Southern Facility, is a transformational commercial opportunity for us. It's part of the capital raise that we closed last year to raise funds to convert part of the facility into this higher specification room to pack and finish and release dried flower products. There has been significant demand for flower both here in Australia -- GMP flower here in Australia and also in the overseas medicinal cannabis markets. And this places us really well to have this first licenses capability and will be able to get into the manufacturing of these finished products as we prepare for unlocking more capacity in Mildura, particularly, but also we're utilizing the 1.5 tonnes of capacity that we have at the Southern Facility at the moment. And those first batches have been packed, and they'll be released in the next couple of weeks. We'll move now to the Satipharm products. So just a quick reminder. We purchased the Satipharm business last year. Satipharm is a capsule form of medicinal cannabis products. So it's a patent-protected product that allows a more elegant delivery and more efficient delivery of the medicine into the bloodstream. And with time we've got some data on file around this product that we've been able to utilize in our registration process. So we have -- we're well advanced in the preparation of many parts of the dossier. We announced the other day that we now have ethics committee approval to commence our Phase III, our final phase of this registration dossier and registration program. We've had a pre-submission discussion with the TGA about our registration strategy. We've got some good comments and feedback from the TGA around our program, which will help streamline and also inform what we do in terms of getting ready for that submission of the dossier. And all the parts are now ready. We've got the clinical trial product release. It's ready for patient supply. The clinical trial sites have been selected and they're ready to commence recruiting patients in March this year. From the U.K. and European side of the business, our Satipharm commercial business in general, we have had some delays in getting some uplift on sales in the U.K., particularly as some regulatory hurdles, food safety, U.K. have put some regulations in around the quality and purity and the data supporting the CBD products that will be available in Europe. That information is due to be released in the coming weeks, but that hasn't held back a number of U.K. retailers looking to take the Satipharm product forward. So we have commitments to take the product forward now. A couple of customers are looking to make the Satipharm product their anchor product for the CBD category, primarily around its advanced delivery characteristics and benefits, and we continue to expand the range. We're launching a 25-milligram product into the SAS program here in Australia. So that will give us a 25- and 50-milligram dose strength into the Australian market, and that will be important particularly starting new patients and also using -- treating patients who need a lower dose of CBD for some of the conditions that they are being treated. I mentioned earlier that we've got the line installed, and we're manufacturing those initial batches from the Mildura facility. That will also extend to THC containing products throughout the rest of this financial year, and they'll be available for sale into the SAS market later in the calendar year '22. And as I said, it's a patent-protected technology. We think it allows us a real differentiation when we get to being a registered product that's sitting on a pharmacy shelf. It will be -- our estimation is it will be the first of the advanced delivery products. So very familiar product form for patients and something that will be very easy for them to comprehend the dose form and stay compliant. And all of this will lead to -- we're anticipating very strong revenue growth for Satipharm over the balance of the financial year. But that's all for me. I'll hand back to Peter now who's going to give you an update on how we're progressing to completion of the Mildura facility.

Terrific. Thanks, Shane. And just drilling on this photo for a minute. Someone did say maybe the other day when you see landscaping works happening around the building site, you're very close to completion, and that's exactly where we are with Mildura. For what had been a very challenging half year with COVID and limitations around what could happen with construction on site construction numbers. Thankfully, we qualified for and got an exemption, and we're able to work under a critical infrastructure project banner with the Victorian government to keep the program largely on time. The progress we've made is really exciting, and we're getting ready to take handover from the principal contractor. As we've reported before, we've been in parallel commissioning and running through with both laboratory and production capability on site. Through the half year in the run-up to Christmas, we had the ODC on site for their inspection. And I'll update you shortly around the regulatory environment, but that was a key step for us. And we've also had the TGA conducted a virtual audit of the facility as a subsequent event in January. So the license process continues and from the ODC side, we're working through the permit process. We've mentioned before that we're using our Southern Facility to initiate material that's going to be shipped up to Mildura by way of mother plants that have already been established at Southern. And as soon as we get our permit, they'll be moved in. And we're also preparing the first commercial crops that will come in. So we'll be taking the cuttings at Southern, but moving them in straight into [ vegetable-driven ] and commercial crop production as soon as we have access to the site under the ODC permit. The other side -- or in fact, I'll just move on to photos around what we're doing with our laboratory. So this will be a TGA GMP laboratory that inspection has been undertaken in January, and we're working through the response to that now, and that process is underway. Our manufacturing suite has also been commissioned, and this was also part of the TGA inspection. And we've been able to initiate and we've started engineering batches with the Satipharm line that we see. From a cultivation perspective, the fit out, and we're looking on the right-hand side here of the mother room and getting that process underway and handling units operational and the controlled systems for environment all being commissioned at the moment. So the next 6 months in this next half is going to be very exciting in terms of bringing Mildura to life with plants in the system. The TGA capability around both our lab and manufacturing extraction and manufacturing capability. And as Shane mentioned before, bringing the Satipharm capsule production online once we have that GMP license that we can move from engineering into full production batches with GMP. So we keep banging on about the regulatory progress and the whole regulatory environment we're working is absolutely critical for this industry. So in the first half, achieving our GMP license for the Southern Facility has absolutely been critical and a great feather in the cap for the team having done that, and it is now operational, and we've got the first material going through and to be released from the product -- the product will be released shortly. On the Mildura facility front, as I've said, both the ODC and TGA have been across what we're doing there. From an ODC perspective, they implemented their single license came into effect on the 24th of December last year. and Cann has now been issued a single license, which covers all of our facilities. So Southern, Northern and Mildura are all operating under a single license and the permit process is following through that now. From an industry perspective, just to change gears and talk about what's happening, these highlights from the FreshLeaf Analytics report that was published at the end of the half last year. We have seen the market in Australia and the overall segment moved forward with -- they were putting the overall market at a $200 million market in Australia. We've seen the patient numbers grow through the SAS scheme, and that's become more streamlined and we're seeing the patients pick up. In terms of -- there was a lot of noise last year around the S3 low-dose CBD product coming -- becoming available over the counter. And that is expected to see patients move in that direction, but that will only be once products make it through that whole regulatory process. But that's underway. And as Shane said, we're making great progress with that. What we are seeing coming and has been announced by the TGA is that they are going to change the regulatory landscape here in Australia, particularly around imported products having to meet the same level of GMP that Australian producers are bringing forward. So that's important. We've said all along for doctors and patients to have confidence in the products that they're getting access to and they understand how they've been produced, that's going to be really important. And it will be an interesting year ahead, I think, in terms of -- well, as FreshLeaf have pointed it out, in terms of what's going to happen around R&D and potential industry consolidation in this space. In terms of what that means for Cann, it's exactly why and what we've done in setting up and what we're up to with our capability and capacity coming online and that being fully integrated with GMP through to finished dose forms of flower, oil -- formulated oils and capsules in our Satipharm. The expansion of the range that Shane talked about is going to be important in that, Cann holds the global rights to the patented technology for delivering cannabinoids in the form that we produced through Satipharm, and we'll be doing that here in Australia, which is really important. And I've mentioned the TGA changes as well. The requirement to produce at scale and certainty of supply is absolutely critical and Cann is set up and obviously well placed to service that requirement here in Australia. So in terms of the outlook for the second half, we're keeping a strong focus on sales and production. We expect momentum to continue both here in Australia and internationally. The regulatory focus for us has been key the whole way through and having those licenses in place here in the Australian environment, but also for key export markets is a key focus for us, bringing Mildura online and starting production is very exciting, and that's coming in this half. And we're obviously going to be ramping up what we're doing through our Southern Facility as well now that, that pathway has been open to us. And the S3 registration process and this final clinical trial that we're starting in March is really exciting. So as I've said, with Cann and we've talked before about our pillars of growth that capacity and more importantly, the capability, having that foundation in place and being able to leverage that is absolutely critical. And doing that all the way through to finished dose form capsules products and also active pharmaceutical that we can supply in our B2B model as well is really important. Business development and our focus on revenue is key for us. And so that both domestically and internationally remains a key focus. Reliance on partners here and internationally is key and them having confidence in what we can supply is absolute. The registered products, we know that's going to be really important long term in terms of how patients access products. So having access to an S3 product that is absolutely key to what we're doing. But following through behind that with our product pipeline, both from a Satipharm perspective, but even further back into our genetics and accelerated breeding program. We've actually seen the first of our candidates come out of that breeding program and now operational, and we're currently cultivating in our Southern Facility, and that product is being made available through the dry flower process that we've brought online there. So an exciting 6 months ahead and the future beyond that. Matt, I'll hand back to you now for any questions we might have.

Thanks very much for that, Peter. And to Deborah and Shane as well. We'll now jump into the Q&A segment of the webinar. [Operator Instructions] First, we've got some questions that came through via email. So Shane, this one would be for you. Why are you concentrating on registering a CBD product first rather than a THC product?

Thanks, Matt. And it's a good question, given our capacity to produce equal quantities of both. What's really important is speed to market and being one of the first products on the shelf in this -- particularly in Australia and this S3 regulatory framework that was announced by the TGA. We had information data on file previous trials that allowed us to accelerate the completion of a dossier and get that product registration underway and that dossier completes. So that became our focus. In parallel, we're also using the Satipharm manufacturing line to create THC containing capsules, and we will release those, as I said earlier, towards the back end of this calendar year. From a registration process, we continue to look at how we would evaluate that particular product form for a condition or a disease. So it's not off the table. We're just focused on something that is the fastest to market, which also drives capacity and facility utilization, either a registered product will use many tons of raw material and manufacturing capacity out of the facility which is really important to us as we bring that additional capacity online and we're looking for a quick uptick or a steady uptick in revenues over the next few years.

Thank you, Shane. Another one I'll assume will be for you, does Cann have any active TGA clinical trials? And if so, what is the trial ID?

So we do have a number of clinical trials where Cann are supporting. They will already be on the Australian and New Zealand clinical trial register. In terms of a Cann sponsored trial, this registration trial that we've just announced that has ethics approval has been allocated a clinical trial number. And I would expect that, that will appear on the Australia, New Zealand clinical trials register in the coming days.

Thank you, Shane. Next question is, how is Cann positioning itself to capitalize on the likely increase in market demands for over-the-counter and prescription medicines that can assist with higher anxiety levels and aid better sleep?

Another good question. So the S3 clinical trial has a primary endpoint, and this is -- this will be for an OTC or a pharmacy-only medicine for CBD only, has a primary endpoint in sleep and then secondary endpoints around quality of life. And I think everybody would agree that sleep does drive our ability to cope and improving sleep does have additional benefits on coping, and how we tolerate our pain and a range of other things. So this clinical trial will have -- again, we're aiming for a primary endpoint around sleep and then secondary endpoints around coping with stress, possibly anxiety. So that program is important for the CBD side of things. On the THC side of things, one of the really important parts of the SAS program is being able to treat patients and gather data on the impact of particularly mixes and blends of CBD and THC on treating symptoms of anxiety. And one of the really unique things that Cann has is that due to the capacity that we have and the raw material -- access to raw materials to put into manufacturing is that we can change ratios and blends and creates some bespoke formulations as we get more data about what's working. A lot of patients are being treated with oils at the moment and a drop of this and a couple of drops of CBD and 2 drops of THC. And as we get more data around what those ratios look like, we have the ability to create those bespoke formulations, whether it be in an oil or also in a capsule. And we're certainly looking at how we utilize that capsule technology because no doctors and patients prefer to take 1 or 2 tablets a day versus a few drops of oil. So the future we see in medicinal cannabis and particularly treating some of these conditions is in these different ratios of CBD and THC, preferably in a capsule form.

Thanks, Shane. The next question, what is Cann doing to look at opportunities within the market based on possible research findings that certain CBD derivatives can help prevent COVID-19?

I've got a [ chip ] on that one Shane. With an industry add-on as well, the question has come up before. I think whilst there's some interesting science going on, what we do want to avoid is the idea that cannabinoids or cannabis can be talked up as a miracle cure across everything. So yes, there's work occurring in that space, but -- and we're well placed from our research background capabilities to be involved, but we wouldn't want to be pumping up a new COVID cure on the back of COVID right now -- on the back of cannabis, sorry. Anything to add to that, Shane?

I think it's one of those ones you take a watching brief is that if we believe it will help, obviously, we'd have products ready to be able to use by patients that we think it may help.

The next question is, what will be the catalyst to increase the share price in your opinion? Peter, that will be one for you?

Matt, we'll continue to focus on what we're delivering on. That's absolutely critical that our efficiencies, our path to revenue, getting the facility running and operational is our key focus and the share price will look after itself.

The next question is, it looks like at least one capital raise will be required in the next 6 months. Any idea how much this will be for? I'll throw that to you, Deborah.

Thanks, Matt. There's been no decisions made on any capital raising activity at this time. As I mentioned earlier, we'll continue to closely monitor our expenses and cash flow position going forward. But at the same time, we'll continue to focus on the completion of the Mildura facility, progression of the Schedule III trial and registration of the associated product and also continuing to increase the sales revenue with our existing products now.

The next question is, what is the size of the cultivation area at the Southern Facility and annual production capacity?

So that one, Matt, our Southern Facility has around 200 square meters of flowering capacity and a nominal 1,500 kilos production per year. At the moment that's being adjusted with preparing plant material to send up to Mildura. But the scale of Mildura, our cultivation area up there under glass is 3,200 square meters that gives you an idea of where we're heading and why we're focused on that.

The next question is when operating Stage 1A at capacity, how many staff will be working at Mildura and how many of those will be cultivators?

So we've talked before about the opportunity -- the employment opportunities in Mildura, we believe will be up towards 140 staff working in Mildura, but that's across the whole facility from cultivation right through to GMP, lab technicians and manufacturing and the like. But from an opportunity around the cultivation space, it will probably be somewhere around 40 that will be part of the cultivation team up there.

The next question is, when does management expect to be cultivating Stage 1A at capacity?

So we're moving into getting that fully operational this coming half and the focus is on how we're going to optimize cultivation through the facility. So there's a number of factors that need to be balanced there to get producing optimally, but we expect that in the next financial year.

And the final question, how much will it cost to expand to Stage 1B, therefore, doubling capacity?

Yes. So going from 1A to 1B takes us from 12,500 to 25,000 kilos nominal capacity. The cost of doing that isn't linear compared to what we've invested in, in fact, a lot of the investment to date in Mildura has included a number of the services and functionality that we were acquiring can expand into Stage 1B with -- it will be a lower level of capital investment required to get to that stage. So it has been designed though, so that we can keep Stage 1A fully operational while we expand capacity into Stage 1B and 2 beyond that.

Thank you for that. We're almost at time. So Peter, I'll hand back to you for a closing comment.

Thanks, Matt, and thanks, everyone, for joining. And in fact, I was going to start by saying thank you to the Cann team in what has been an incredibly hard environment to operate in for everyone, and we're definitely not alone in this, but the effort that's gone into having us ready to take occupancy of the facility and get operational now has been incredible. Our teams had to work right through the Christmas period to cover off what we were required to do for both the ODC and the TGA and the benefits of that now come through, though, with what is going to be a really exciting future for us, both in the second half and beyond. The capability and capacity we've talked about is absolutely critical to providing medicines to Australian patients and into international markets as well that can be trusted and we can ensure that we've got continuity of this supply available. So exciting future ahead with that. We've got the R&D program behind as well, which allows us to ensure that we're setting this up, and we've said all along, we're not here to be a commodity cannabis producer, differentiated products and high-value products that we can produce that make a difference in people's lives is really exciting and to see the momentum that is still behind medicinal cannabis and the growth ahead of us is really exciting. So we'll focus, obviously, on becoming fully operational here. The focus on revenue is also a key one, very exciting future ahead for us, though, and look forward to keeping you abreast of progress as we continue. So thanks for your time today, and look forward to updating you in the future. Thank you. Thanks, Matt.

Thanks, everyone. That does conclude the presentation for today. Thanks for joining, and you can now disconnect.