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

Thank you for standing by, and welcome to the Cann Group FY '22 Results Investor Webinar. [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 for approximately 15 minutes and will allow for approximately 15 minutes for the Q&A session thereafter. To begin, I'll hand it over to Peter. Please go ahead.

Terrific. Thanks, Matt, and good morning, everyone, and welcome to the 2022 Cann Group Full Year Results Presentation and Business Update. I'd like to start by acknowledging Aboriginal traditional owners from the various and many lands who are joining us from today. Their culture and Elders past, present and emerging. In particular, I'd point out that this photo of our Mildura facility is looking across Ladji Ladji and Barkindji country. For today's presentation, I'm joined by Cann's Chief Financial Officer, Deborah Ambrosini; and our Chief Operating Officer, Shane Duncan, and we'll take you through an update for the business. It's been a big year, another COVID year under our belts for everyone, but we've made progress. And now I'd like to hand over to Deborah to talk through the financials. Thanks, Deborah.

Thanks for the introduction, Peter, and thank you to everyone who is attending today's update. I will now provide a summary of the key financial areas of the company. Revenue for the Cann Group increased to $6.41 million in financial year '22, which pleasingly represented a 49% increase from the prior corresponding period. Other income increased to $4.82 million after including an accrual of $1.8 million to March '22 for the current year R&D rebate. The rebate to the prior financial year of $2.3 million was also received and recorded in financial year '22 period. Operating expenses increased during the year, in line with expectations after the company scaled up its headcount and operations with the completion of its new state-of-the-art facility at Mildura in March 22. Depreciation and amortization also increased after the completion and capitalization of this new facility. The company closed the year with $1.9 million in the bank and access to a further $11.5 million from the newly established working capital facility, which was announced to the market in April this year. I will now hand over to our Chief Operations Officer, Mr. Shane Duncan, who will provide an update on the commercial operations of Cann Group.

Thanks, Deb, and good morning, everyone. As Deb mentioned, we made some good progress on the sales front with 49% growth on the year before. A lot of that has been driven by expanding the range of products that we have available, growth out of the Satipharm, particularly in the U.K., and also growth in the number of customers. So we've lagged a really good foundation over the last 12 months to continue the sales growth into this current financial year. To support this growth, we've expanded the number of business development people on the ground to add greater representation of the cannabis clinic level and also pharmacy level. Most of the revenue has been driven by the formulated oil products, which is -- which will change over the next 12 months. We announced earlier this year that we received a GMP license. It's a good manufacturing practice license to manufacture under our own steam and under our own license finished products that can be prescribed and dispensed to patients. And just in the space between getting that license and commencing manufacturing, that dried flower product represented 15% of our total revenue for the year. This process where we can cultivate dry and then manufacture finished product really does help us drive the margins and diminishes our reliance on contract manufacturers, which again just strips margin out of those sales and helps drive us towards profitability. I'll talk more about Satipharm in a minute, but their net revenue across the business grew 54% versus FY '21. Now this good manufacturing practice licensing capabilities, licensed under the Australian TGA and now across both facilities really allows us to expand our breadth up until that point, we've been a cultivation company and using contract manufacturers for these GMP activities. Now we can do this all under our own steam. So it has quite a breadth of capabilities and products that we can do from primary extraction through to the Satipharm capsules and dried flower products, as I previously mentioned. But also included in that license is the ability to do our own analytical testing and release testing on-site in Mildura, and all of this wraps up into great -- less reliance on those third-party suppliers, greater independence in our manufacturing process and then ultimately better margins from each sale we make. So it's a really important step change to how we do deliver greater margins and greater profitability for our future sales. I'll hand back to Peter now and talk more specifically about the Mildura facility and the progress we've made there.

Thanks, Shane. The delivery of our Mildura facility was definitely a highlight of the year. And for the team to achieve this in the face of the COVID pandemic headwinds we've faced is testament to the effort that's gone into what, in fact, is a series of parallel projects. The facility is now fully operational with commissioning of automation systems ongoing. We have all the requisite ODC licenses in place as well as TGA GMP licenses. The first cider crops have been harvested and have gone into commercial manufacturing, and we're now progressively expanding crops into the full cropping cycle. Early crops show that our conservative yield estimates are being exceeded, which will take us beyond the 12,500 kilograms nominal capacity. Some images here of the Mildura facility, which is -- and interestingly, we made quite a splash recently. You might have seen with the commissioning of the new flowering room. So what we're looking at here is our Mildura that we have. So we're taking from cultivation all the way through to finished dose form manufacturing on site. But in between with the flowering process and everything else, we did, in fact, make a bit of a splash in a global sensation with the pink lights over Mildura that saw some 4.13 billion people read the story across various news outlets. But the Mildura facility being operational, as being a major employer in the district now, is something that we're definitely proud of. In terms of -- and now with these capabilities in place in Mildura from cultivation right through to final dose form manufacturing, we're working on optimizing our production planning process to be responsive to demand opportunities. This includes determining the balance and mix of our own cultivars introducing cultivation of third-party strains, including contract cultivation research for other parties as well. Having the ability to cultivate, process, test and GMP release product out of Mildura is what we've been striving for, and we've now achieved. As we now look forward to what we will launch from this platform, I'll hand over to Shane to take us through on an update of the Satipharm project.

Thanks, Peter. And just some clarity around this image here on the -- that image that was on the left, that's actually part of the manufacturing suite that we purchased as part of the acquisition of the Satipharm business. So they are the microspheres of gelatin and CBD about to head into the drying phase of that manufacturing process. So we are well underway. I think we're 8 or 9 batches into manufacturing at Mildura, and we've got product on stability. And some products that now we've got a GMP license, we'll be heading towards the market in Australia in the coming months. So probably the most significant thing we announced Satipharm over the last 12 months is the registration program for the 25- and 50-milligram capsules into the OTC space here in Australia. So we've mentioned before, it's a long process of a clinical trial and also a registration dossier that will submit to the TGA. And we can report today that we're actually now well over 50% of the patients required for completing the study recruited and on active treatment. We've expanded the number of trial centers. So we've got 4 centers in Australia, and we've now got 3 centers in New Zealand to help accelerate this last phase of recruitment and get that study complete. And on to the next phase, which is the completion of the dossier, which is happening in parallel where the study is executed, all wrapping up to being ready for a submission later this year or early in 2023. Also, we announced earlier this year that we'd entered into an option and evaluation agreement with Haleon, formerly GSK Consumer Healthcare. And I think many people will be aware, it's the largest consumer health care company in the world. They have expressed interest not only in the Australian market but also other markets around the world, taking this Satipharm technology into their suite of market-leading consumer health care products. And those discussions continue. While we make progress on the clinical trial and on the registration program, we continue -- as we previously announced, we continue the commercial discussions about what our licensing and distribution agreement would look like. And we look forward to keeping our investors updated as that gets to a more material point over the next few months. So just moving our attention to our largest market for the Satipharm products at the moment, which is the U.K. We've previously, I think, stated that the CBD as an active ingredient was under review by the U.K. Food Standards Agency, particularly around its safety and drug interactions and those sorts of things. There's a food supplement, active ingredient. And we announced earlier this year that in April, the Food Standards Agency released their list of products that were -- had gone through their review process and were available for continued sale in the U.K. with Satipharm being on that list. So that's certainly taken the hand break off the CBD market in the U.K. And we've started to see the market grow again pleasingly for us. We've had a 54% growth, I think we're #2 in terms of market share within pharmacy hospitals and GP surgeries, which is the segment that we're currently mostly available in and all really good foundation places to see these range of products. They're an anchor brand product for a lot of these retailers. And we're really looking for this range to now expand distribution and subsequently sales over the next 12 months. One important development is from that Australian manufacturing line that we showed earlier is that we're doing the engineering work and the validation work to put THC into these capsules. Up until now, these capsules have just contained CBD and just being food supplements. But with the registration program that we're putting forward and a potential deal with GSK, along with having THC in these capsules, is that we'll see probably for the first time, a truly differentiated and additional cannabis product that covers the spectrum of products available from high CBD, balance formulations and high THC. And our aim is to launch those products early 2023. But I'll hand back to Peter now just to talk about our strategic priorities for the coming year and beyond.

Thanks, Shane. I mentioned earlier the importance of Mildura, as a platform, we are ready to launch on. With that project effectively fully online, we're now able to adjust our resource allocation and focus more strongly on quickly building revenues. Leveraging our scale and capability, we'll see us focus and streamline operations at Mildura, critical to achieving a competitive cost base and cementing the delivery of differentiated value-added products. The Mildura facility is a state-of-the-art controlled environment protected cropping system. And with the work we're doing with the likes of La Trobe University, CSIRO and Ag Vic, we've spoken to them about utilizing the facility as an industrial scale research facility. Leveraging the big data opportunity of following and mapping our commercial production with things like in-line hyperspectral imaging cameras will see us at the forefront of cannabinoid production systems. And of course, our focus on the Satipharm platform and the opportunity of introducing registered over-the-counter product is front and center for the team. As I've said in previous presentations Cann is not setting up to be a supplier of commodity medicinal cannabis. With our Mildura capability now fully online, we're ready and focused on supplying sought after GMP quality Australian product. Regulatory changes from the TGA requiring imports to have GMP equivalents are already changing supply chain pressures and has already led to inquiries for cultivation of proprietary genetics through our facility. Reliability and certainty of supply remains a major issue across the sector, both in Australia and in export markets. And we're now ready to respond to those requirements. Interest in and demand for medicinal cannabis continues to grow. Whilst Australia has followed other markets with an early growth in demand for dried flower, it's clear that mainstream medicine sees doctors looking for more traditional pharmaceutical product forms. Our Satipharm platform is going to be key in that space. 2022 saw us make important progress on all of the foundational building blocks that will underpin our growth. With our Mildura capabilities now in place, we can streamline our operations and focus resources on commercial objectives. We are well placed and striving to deliver results that will see us cash flow positive and appreciate our broad and ongoing shareholder support. In these times of global supply chain uncertainty, we're proud to be delivering on a project that puts Australia and Victoria at the forefront of a new important and exciting area of medicine and patient well-being. And we see the year ahead as a pivotal one for Cann delivering on that promise. Finally, thanks again to the Cann team. Being a startup in a start-up industry is not easy. And we still face challenging times ahead, but we should be proud of what we've achieved as we continue to strive to make a difference in people's lives with access to what can be life-changing medicine. I'll now hand back to Matt, and we can address any questions that have come in. Thank you.

Thank you, Peter, and to Deborah and Shane as well. We'll now move into the Q&A segment of the webinar. [Operator Instructions] First, some questions that came through in advance. The first question I have is for Peter. Approximately what is the forecasted earning capacity of Cann Group at the Mildura facility in its current level of development as well as when it expands the facility?

Yes. Thanks, Matt. And I think the important thing with the capacity that we've now brought online and the certainty of supply, and as I mentioned, with the first crops coming through our conservative capacity out of the facility, we're exceeding our estimated yield from crops coming through. But more importantly, the form in which the product is able to now come through from GMP dried and released flower. So addressing the flower market through to the oil formulation-based products that we've been actively working in, but also with the Satipharm platform going forward means that we're in a really strong position now to deliver on and have the facility operating at capacity and contributing to the group.

A couple of questions related to production, I'll through it to Shane. What was the total amount of dried flower from the first Mildura harvest? And when will Cann achieve full production of 12,500 kilos of dried flower per annum?

Thanks, Matt. Two good questions from someone who's following us very closely. So first few harvests were deliberately -- well, first few crops were deliberately small to help us dial in a lot of the environmental fertigation and controls and processes within the facility. So they are around 40 kilos each. Pleasingly, all of that material is commercial product and is actually being sold to a customer or on its way to a customer. The information that we gathered off the back of those first few crops and then even the subsequent crops that have got going through the facility at the moment are really helping us understand the gaps that we need to reach. We don't cover not a lot of significant things. But typical of a new facility, there are things that we need to look at and improve on, but we're well on the way of scaling up production at the moment. We continue to validate improve. And so it's a continuous improvement process, particularly for this inhalable dried flower product. But early in 2023, we'll be in a position to scale up production to meet what significant demand. The demand globally for dried flower particularly is really high at the moment with companies -- companies and countries looking for high-quality product out of producers like Australia who are under -- who are governed under the TGA regulations for GMP products. So we'd see that in 2023, we'll be pushing the facility up to full capacity.

Thank you, Shane. A couple more questions around the commercial focus of the company that I'll throw to you as well. What is Cann doing right now to establish valuable long-term commercial contracts? And how many confirmed supply contracts for dried flower does the company have?

Yes. Thanks, Matt. So most of our supply contracts are multiyear contracts. Customers are looking very rarely or customers looking to spot by. They are looking for reliable continued supply of high-quality product, which we know we can deliver. So many of our contracts are almost all of our contracts are multiyear contracts, 2, 3 years in duration with options to continue beyond that initial term. I've been mentioned in the presentation earlier that we have 17 customers. All of those customers have dried flower as one of the products that they're looking for. We also have a number of other customers, both here in Australia but also internationally, who we're working through the commercials and supply agreements and those sorts of things to add to that list of customers. But just about every customer we talk to at the moment is looking for dried flower. So the timing is terrific for us as we bring large-scale dried flower GMP production facility online.

Thanks, Shane. I'll direct the next question to Peter. Someone has asked -- a shareholder has asked, I bought Cann shares when the price was at about $0.38 per share. Do we expect prices will ever go this high again? If so, what sort of time frame are we looking at?

Thanks, Matt. And yes, I think the answer is clearly from management's perspective, we're looking to build value into the company, and we're delivering on that. So bringing the Mildura project online and having that as our focus now that we can leverage from and use as a foundation will absolutely see us add value into the Cann position. But also the medicinal cannabis space as it expands in Australia and globally, having a trusted and valuable supplier leading into that, is going to add value in the industry as well as into Cann Group.