Khiron Life Sciences Corp. (KHRNF) CEO Alvaro Torres on Q1 2022 Results - Earnings Call Transcript

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Khiron Life Sciences Corp. (OTCQX:KHRNF) Q1 2022 Earnings Conference Call May 31, 2022 10:00 AM ET

Company Participants

Alvaro Torres - CEO and Co-Founder

Franziska Katterbach - President-Europe

Swapan Kakumanu - CFO

Conference Call Participants

Venkata Velagapudi - Research Capital

Aaron Grey - Alliance Global Partners

Fred Gomes - ATB Capital


Well, good morning to everyone, who has taken again - taken the time to join our call. My name is [Vinita Ferris], and I'll be the conference moderator today.

At this time, I'd like to again welcome everybody who's taken out their time this morning to join the Khiron Life Sciences Q1 2022 Earnings Conference Call. You'll notice that you have been to put on a mute. You're able to participate, however, by asking questions. There's a chat modification if you're joining us online or a question-and-answer tab that you should be able to access and you can type in any questions that you have, we'll try our best to get to them, and hopefully, there may be already be addressed within the top that they'll be given.

I'd also like to quickly direct your attention to our forward-looking statements. These statements are being made on behalf of Khiron Life Sciences and all of its representatives on this call. The statements made on this call will contain forward-looking information that involves risks and uncertainties, including those introduced by COVID-19 pandemic. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts or projections in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward information are contained in Khiron Life Sciences filings with the Canadian and provincial securities regulators, which are available on the SEDAR website at If you'd like a forward link to SEDAR, please let me know in your comments I'll happily provide it to you.

At this time, I'm going to introduce - I'd let you know a quick start. We're going to be starting a discussion with the quarter financial results. And after that, we'll dive into key catalysts in each market that will drive growth. We'll wrap it up with a Q&A session.

Mr. Alvaro Torres, Khiron's CEO, will begin your conference.

Alvaro Torres

Thank you, Vinita. Thank you, everybody, for joining us today. My name is Alvaro Torres, I am the CEO and Co-Founder of Khiron Life Sciences. Thank you so much for joining us today.

We will be discussing our financial results for the first quarter of 2022. I think overall, that these results continue to show - how strong our patient-focused strategy is in Latin America and Europe. We are breaking significant revenue on gross profit milestones in the Medical Cannabis business.

We had revenues exceeding CAD4.6 million, including a record revenue of $2.6 million in Medical Cannabis. That's a 470% increase year-over-year and a 32% quarterly growth in the Medical Cannabis revenue. This is driven mostly by the strong demand in the U.K.

and by the continuous post-holiday growth in Colombia during the first quarter. I think one of the unique aspects of our business is our high and sustainable gross margins, which are over 75%. And one of the things we're most proud of this quarter is that not only our medical cannabis sales exceeds 50% of the overall sales of the company, but also that Europe, which for now is the U.K. and Germany, represents 53% of all medical cannabis revenue compared to only 10% in Q1 2021.

And this is, I think, a recognition to the entire strategy of being patient focused, of thinking about how to improve the quality of life of patients, knowing how to export that sustainable model. And now that we're showing these results and such a diversified revenue, we are very confident coming into 2022 and beyond that we can become and we are becoming a leader in the international medical cannabis market.

As we get closer to breaking the milestone of 10,000 bottles per month in Colombia, we look forward to selling more than 150,000 bottles in Colombia. In 2022, we will continue to introduce new SKUs to our current portfolio and increase availability of products in the U.K.

and in Europe. We expect to surpass 500 kilograms of products sold for 2022. And today, we also announced the acquisition of our European EU-GMP certified German pharmaceutical manufacturer and wholesaler, which expands our European footprint that makes Khiron one of the very few companies that is licensed in Latin America and Europe.

I will ask Franziska Katterbach later to talk about - our President for Europe, to talk about this acquisition and the amazing milestones we have reached in Europe. So it's been, I think, a very good quarter. We are selling more. We have a larger gross profit.

We're spending less cash. We are decreasing our expenses, and we are in the path to profitability very soon. I think with the strategy that the company set out to do a couple of years ago of being able to be a top-selling brand, we are doing that exactly as we thought we were going to do, and I think the best times for the company are ahead of us.

So with that, Swapan, our CFO, will go over the financial review of the company for Q1. Then I will return, give you some outlook on what's happening in Latin America. And then I will ask Franzi to do the same in Europe.

And then I will summarize before we go into Q&A. So thank you, everybody, very much. Swapan, please, if you may, let's talk a little bit about the financial review.

Swapan Kakumanu

Thank you, Alvaro. Good morning, everyone. I'm going to spend - my name is Swapan Kakumanu. I'm the Chief Financial Officer of Khiron.

I will try to go over some very high-level highlights and provide you some background of the recent completed Q1 2022 results. Revenue and gross profit, overall, in Q1 2022. Khiron recorded a revenue of $4.6 million, a 64% increase from Q1 2021 and 28% quarter-over-quarter as revenues from Medical Cannabis surpassed $2.5 million for the first time. In Q1 2022, Medical Cannabis segment represented 57% of total revenues compared to 20% in Q1 2021, a trend that we expect will continue to increase over time.

Gross profit before fair value adjustment grew to $2.1 million, up 96% from Q1 2021, driven primarily by its 75% gross margin Medical Cannabis business. In 2021 and in Q1 2022, Medical Cannabis represented 57% of total revenues and 92% of Khiron's total gross profit before fair value adjustments.

Expenses, in this I include - we include general and administrative costs, selling and marketing, promotion and research and development costs together as expenses, in Q1 2022, decreased by 13% to $6.1 million from Q1 2021, mainly driven by reduction in general and administrative, corporate governance expenses, salaries and share-based compensation.

The corporation expects to see a further reduction in cost of D&O insurance for the rest of 2022. The net change in cash and cash equivalents of negative $3.3 million for Q1 2022 compared to a negative $8.6 million in Q1 2021. And at the end of Q1 2022, we ended up with a $5.1 million of cash in the bank.

Now I'll go a little bit into the segments or the product revenue lines. Medical Cannabis. Medical Cannabis revenues grew, as Alvaro said, 470% compared to Q1 2021 and 32% quarter-over-quarter driven by strong demand in U.K. and continuous post-holiday growth in Colombia during the quarter.

In Q1 2022, Medical Cannabis revenue from Europe represented 53% of total medical revenues compared to only 10% in Q1 2021. This growth is attributed to increase in new patient acquisition, patient retention, doctor prescriptions and growing patient average spend on medical cannabis across all our markets. In the Medical Cannabis segment, gross profit before fair value adjustments grew to $2 million, up 390% from Q1 2021 and almost double quarter-over-quarter.

Gross profit in the segment is driven primarily by Latin America, which represented 57% of Medical Cannabis growth profits. Europe gross margins for Medical Cannabis was 60%, driven by higher purchasing power of European patients as compared to Latin America, offset by higher cost of cannabis production within Europe.

Now Health Services. The corporation recorded revenue of $2 million in the Health Services segment in Q1 2022, up 23% from Q4 2021, but 12% lower than Q1 2021 due to reduction of high value medium complexity neurological surgeries in Colombia. Appointments of such high-end services are subject to patient and insurance company availability and remaining COVID-19 restrictions.

The corporation is actively engaged with institutional clients to increase availability of such procedures and looks to return to pre-pandemic levels during 2022. Looking at our Health Services segment, which includes the revenues and costs from ILANS and Zerenia health centers, the company got in Q1 2022 a gross profit of $0.15 million, representing a gross margin of 8% compared to $0.6 million gross profit and a 25% gross margin for the segment in Q1 2021. This reduction in gross margin is attributable to a 13% gross margin in Health Services in Colombia due to lower high-value medium complex neurological services in Colombia and the initial cost of new Zerenia clinic in U.K.

Throughout 2022, the corporation expects gross margins in Colombia to improve as scheduling of such procedures have shown increases in the past. Expenses. Expenses - again, as I defined about general and administrative costs, selling and marketing and research and development costs, in Q1 2022, decreased by 13% to $6.1 million from Q1 2021.

This is driven, as explained, by a reduction of 12% in growth - in G&A costs compared to Q1 2021, largely due to the significant reduction in corporate governance expenses and share-based compensation.

The corporation expects to see further reductions in the D&O insurance, as I said above. This decrease is offset by an increase in professional fees mostly related to the distribution of warehouse fees paid in Khiron's distributions in Europe due to the growing sales of medical cannabis in that region and medical staff professional fees in Brazil.

Although in Q1 2022 salaries expense was reduced by 24% compared to Q1 2021, this expense item increased 16% compared to Q4 2021 due to employee severance costs in Latin America and increases in sales and marketing employees in Europe.

Now EBITDA and net loss. The corporation recorded an adjusted EBITDA loss of a negative $3.1 million loss in the first quarter of 2022 compared to an adjusted EBITDA loss of $4 million in Q1 2021, resulting in a reduction of 24% in the adjusted EBITDA loss, and the lowest adjusted EBITDA loss ever recorded for the corporation.

This is a result of continuous growth in the high-margin Medical Cannabis segment and continuous decreases in the G&A, which will continue throughout 2022.

The corporation recorded a net loss of $5.4 million in the first quarter of 2022. In Q1 2022, the company recorded higher revenues and higher gross margin profits before fair value adjustments as well as lower expenses than Q1 2021, which were offset by the positive impact of unrealized gain in fair value of bio assets in Q1 2021 and the negative impact of unrealized loss on warrants and higher finance costs in Q1 2022.

Now quickly, I'll summarize the balance sheet and cash position. The corporation's cash used in operating activities in Q1 2022 was $2.8 million compared to operating activities use of $8.2 million in Q1 2021 and approximately $5.4 million in Q4 2021. And this has resulted us with a net cash of $5.1 million on our balance sheet at Q1 2022. This is a result of active management in working capital cycle, improving collection times for corporations, accounts receivables and extending payment terms on its accounts payables while reducing overall G&A costs and increasing our high gross margin Medical Cannabis business.

At the end of Q1 2022, the corporation had $37.6 million in total assets, excluding goodwill, which more than - with more than $9.4 million in the land and buildings, high-quality medical cannabis inventory of $8.1 million, a pretty good accounts receivable with good creditworthy clients in Colombia and Europe of $4.4 million and only around $0.8 million in financial debt.

With this in mind, I will return this back to Alvaro, our CEO, to provide the next details on our Q1 2022 operational highlights and potential revenue growth. Thank you.

Alvaro Torres

Thank you, Swapan. Thank you, everybody.

So I think the results of Q1 2022 continue to showcase the success of our very unique patient-focused strategy. I mean the company continues to grow in its high gross margin Medical Cannabis business in every market that we're in. We are diversifying our revenue, and we are now truly one of the real international companies multiply licensed in Latin America and Europe. In the end, we will continue to grow across all our markets because we have - we sell high-quality products that patients need.

Every day, we acquire more patients than the day before. We improve our patient retention. We increase the monthly average expenditure per patient in all the markets, and we make very high gross margins by doing this.

Our potential for growth with the infrastructure that we have invested on that we have right now across Latin America and Europe is huge. And our high gross margin business is very unique. We have established our footprint in key markets where growth will be very high like Colombia, U.K.

and Germany. And we are able to grow. And I think this Q1 of 2022 shows that, that we're able to grow while we're reducing our cash outflow, that we continue to reduce our EBITDA losses. That gives us good visibility to EBITDA neutrality in the short-term future. Every operational metric we use in our company continues to grow. We are really an international company right now.

Our European sales - the fact that Europe is growing so much, the fact that it's more than 50% of our revenues, these are strategies that we set forth a couple of years ago, and today we're starting to see the first stages of what can be accomplished with the strategy that we have. In Colombia, where we started our company, we will continue to focus on expanding the first-mover advantage that we have here. Insurance coverage is allowing access for more patients, and the company is building very strong evidence on the benefits of medical cannabis.

As of April of this year, April 2022, Khiron had sold in Colombia more than 30,000 bottles at a price of CAD57 to CAD60 compared to almost 50,000 bottles sold in the entire 2021. In the country: 30,000 by April, 50,000 in the entire 2021.

As Khiron continues to get closer to the milestone of 10,000 bottles per month, we look forward to surpassing 150,000 bottles by the end of this year, maintaining the same high gross margins and the same pricing structure.

In Peru, we aim to introduce the first-ever THC shelf-ready branded medical cannabis product, which will be exported directly from Colombia during 2022. Even though Peru only accounts for 5% of Khiron's Latin American sales, I believe that the introduction of this product is going to significantly increase sales in this country because patients will have more access and readily accessible products in any pharmacy across the country.

In addition, we expect to obtain permits for both CBD and THC branded products, which are called Alixen and Khiriox, to Peru that could open the possibility of exporting to other Latin American countries, such as Brazil, which would eventually reduce our operating cost, improve margins and increase sales. As you all know, we started selling in Brazil last year.

We are currently undergoing the construction of our first Zerenia medical cannabis clinic in Rio de Janeiro. Initially, we were expecting to complete this in the first half of 2022, but we aim to finish the initial stages of construction and inaugurate this facility in junction with the import - or the permit import of high-THC into Brazil from Colombia.

I think when those two things happen, we'll be able to look at Brazil as a very significant country for the company to be able to add a lot more patients, a lot more doctors and a very unique product that has a lot of evidence that are being built in Colombia and in Latin America and in the rest of the world.

For Khiron, as you know, Mexico represents a great opportunity to leverage our unique knowledge of medical cannabis. We have announced a partnership with Teleton, one of Mexico's most renowned medical cannabis networks. And we are currently undergoing similar partnerships with other health service institutions all across the country of Mexico.

Right now, we are currently waiting for the import permits to be able to look for products that we can introduce into the market.

And although some of these are not under our control, on the side that we can control, which is the partnerships and the go-to-market strategy that's so unique to Khiron, we continue to move forward on that. And if we are able to deploy that strategy, as we did in Colombia, Mexico and Brazil will be tremendously big markets for us, just like Europe is right now.

We are actively managing the working capital cycle. We are improving collection times for the company's accounts receivable. We're extending payment terms on the accounts payables. We're reducing overall general and administrative costs.

And we're increasing our gross margins, the more that we sell every day in Colombia, Peru and Brazil, U.K. and in Germany. And I think special attention is to be made on Germany and U.K. and Europe as we continue to grow in a market that we started only a year ago or so. I think the team has been doing a tremendous work. Today, we made a significant announcement for us in terms of what it means for Khiron as a licensed producer and distributor in Europe.

And with that, I will ask Franzi, the President for Khiron Europe, to talk a little bit more about our success in Europe, our success in the U.K. and what our goals are with this new acquisition. So Franzi, please, if you could.

Franziska Katterbach

Yes, of course. Thanks, Alvaro. I hope you can hear me all okay. So hello, [Foreign Language] to everyone. My name is Franziska Katterbach, and I'm the President of Khiron Europe. As Alvaro already mentioned, today is really an exciting day for us.

And yes, I want to share some more information with you. And yes, let's start with the U.K. first. In the first quarter of this year, Europe, which means the U.K. and Germany, represented more than 50% of all the Medical Cannabis revenues of Khiron compared to 10% in the same quarter of last year. Only in this quarter, we surpassed our first $1 million in Medical Cannabis revenues in the U.K.

alone. What we did is we sold more than 110 kilograms of dried flowers in the U.K. and we increased the volume of our sellout in the U.K. in this quarter by more than 240% compared to the entire year of 2021. In the U.K., more than 95% of our Zerenia clinics U.K. patients become medical cannabis patients.

And our growing product portfolio in the U.K. includes our high-THC cannabis flower, the KHIRON 20/1, which is one of the best-selling high-THC flowers in the overall U.K. market.

And now, finally, I'm very glad and excited to showcase our most recent announcement related to the improvement of our value chain in Germany through the acquisition of an EU-GMP certified German pharmaceutical manufacturer and wholesale, Pharmadrug Production GmbH, Rostock in the north of Germany.

This is a very exciting acquisition for us, because for me, it adds the final missing puzzle piece to our European footprint. This acquisition accelerates our growth strategy in Europe and enables us to control another very important piece of the value chain for our products by gaining direct access to the German pharmacies.

This acquisition is a huge strategic milestone for us comparable to the one we did last year - at the end of last year when we opened our Zerenia clinics in the U.K. Pharmadrug GmbH is an experienced player in the European pharmaceutical market, and this acquisition will help us to significantly expand our Khiron footprint in Europe. So maybe summarizing it at a glance.

What does it mean for us in Europe? On the one hand, on the regulatory side, this acquisition will provide us with a European importing, manufacturing and distribution center for cannabinoid medicines with EU-GMP certification. With that, we will get direct access to the pharmacies.

And this is a very important part because this means to us that we keep the distribution margin in-house by cutting out the man in the middle. This will obviously have a direct positive impact on our revenue growth and gross margins as we will recognize the revenues from the sale to the pharmacies rather than the pre-wholesale prices. This overall advanced setup from a regulatory side will expedite or build out of our product portfolio to untap the still huge European patient potential.

And we will bring new products to the market very soon, starting with our full spectrum extracts to Germany and the United Kingdom. So what does that mean? We expand our product portfolio to new dosage formats like oral solutions because this will enable us to grow our patient base to patients who either cannot or do not want to use dried flower. Our European team is super excited to join forces with our new colleagues from Pharmadrug, who will bring additional valuable expertise in the European and German pharmaceutical market.

Taking a very careful look in the future, owning this complexities of the supply chain in Germany to thousands of pharmacies makes us very well prepared to any regulatory change in the future, be it on the medical side or on the recreational side.

And with that, I will hand over back to Alvaro. Thanks.

Alvaro Torres

Thank you, Franzi. Thank you so much for that.

I think it's amazing what we've been able to do in Europe. And I think particularly this last announcement continues to show that we are very serious about the region, that we know how to build the market there. And as you said, Franzi, we're just adding up the last mile that we needed to continue to grow our business in such an important market. Before we go into Q&A, I'd like to finish with the following regarding 2021 and our financial results for this first quarter.

As you all know, in 2021, we made decisions to dispose of noncore businesses, particularly Kuida and our [indiscernible] Uruguay. I think that this has allowed us to focus on the profitable sales growth in Latin America and Europe, and we are very focused right now on continuing to grow that and get to the cash flow neutrality that we have aimed for, for quite some time. But the more we keep selling high gross margin products in these markets, the closer we are to that. This quarter, we're selling more.

We are generating more gross profits. We're reducing our expenses, and we are better managing our cash. And so as we continue to do this, we are focused on improving revenue collections from our accounts receivable, which stood at $4.4 million versus a cash outflow of $3.3 million.

So this is one of the first quarters where our accounts receivable are actually higher than the cash that we had to spend for the quarter, is the lowest cash we spend since the last three years. Most of our collections come from insurance companies in Colombia. And we need to continue to reduce our cash outflows and expenses.

And I think for a company like Khiron with such little debt, with such healthy accounts receivable, with creditworthy partners, with a good level of fixed assets that are unencumbered and with a diversification of revenue, it allows us to look for alternative ways to continue to work on our working capital and improving the availability of working capital, which we are looking for preferably in the form of debt for which we are currently talking to several institutions to be able to continue working and increasing our working capital so that we can continue to grow.

As more and more institutions and more investors look at our revenue growth and look at our reduction of expenses, this starts looking like a company that understands that being patient focused is paying off.

As you may or may not know, and we pointed out in our MD&A, ILANS, which is our company in Colombia, is already showing that our business model is very unique, that you can be EBITDA net income neutral and positive by focusing on acquiring patients and retaining them. In this Q1 of this year, ILANS has already become EBITDA positive. And the second half of this year, we expect it to start becoming net income positive.

And the more that happens, the more options and availability we have to be able to improve our working capital through instruments such as debt, which we are working on right now. I think our company is executing extremely well in these difficult times, but we will continue to do so because we are employing a strong financial discipline, we are focusing on achieving EBITDA neutrality very soon and we have assets and we have operations and we have revenue-generating operations with very high gross margins that will allow us to look for alternative ways to continue to increase our working capital.

So with that, I will begin on our Q&A. I want to congratulate all the team at Khiron, who has been doing a tremendous job and fantastic. Q2 will be looking even better than Q1 because we sell more and more, because we have more patients, because we have more retention, because we can - every patient is buying more and more every month, and they're doing it in every region where we are working on.

And the more that we can continue to sell these high gross profit margin products, the more that we can continue to acquire and retain patients, that is the key to sustainable growth and sustainability of profitability for the company.

I think we are all seeing it very close. And the more that we can continue to improve our working capital, our accounts receivable, our collections and look for ways such as debt instruments to be able to improve that working capital, we will be able to get to the point where we want to be, where it's being - continuing to become a leader in Latin America, the leader in countries like the U.K., now with this acquisition in Germany, one of the leaders in Germany.

And we're doing it in a very unique way, being able to generate a - create a fantastic brand, which is one of the few brands that's selling now in multiple countries in different continents.

So with that, I will begin on the Q&A. I apologize if we don't get through all the questions today. But again, as usual, please feel free to reach out to our Investor Relations at, and we will promptly relay any unanswered questions you may have.

Question-and-Answer Session


[Operator Instructions] With that, I'm going to allow a few people to speak. We do have a few analysts on the call. So we've got Venkata - and I do apologize if I have mispronounced that - from Research Capital. I'm going to be adding you to the line. We have Aaron Grey, who is from AGP, and Frederico from ATB Capital.

So I'm going to be moving you in. You'll be able to speak. I just ask that you try to take some turns and give everybody a chance to answer. If you see your name move over, you could unmute yourself and ask a question.

Venkata Velagapudi


Alvaro Torres

Hi Venkata, how're you?

Venkata Velagapudi

Hi Alvaro, thanks for taking my questions. So I am - I have some questions about Pharmadrug. As you mentioned, Khiron is getting direct access to pharmacy stores in Germany. So do you have any idea about the number of pharmacy stores? A ballpark number is fine.

Franziska Katterbach

Yes. Happy to answer that question. So in Germany, as you might know, it's a very fragmented market in terms of pharmacies. So we don't have the booths or something like that. And the actual number of pharmacies last year was between 18,000 and 20,000 pharmacies, independent - mostly independent pharmacies. So there is not a chain of pharmacies in Germany. This is the access which we would get with Pharmadrug.

Venkata Velagapudi

Okay. And I have one more question about the new regulation related to mandatory insurance in Colombia. I think this quarter, most of the revenue growth is coming from Europe, specifically U.K. So when do you think the positive impact will be felt in Colombia?

Alvaro Torres

Well, Venkata, we're already feeling it. But we have to - and as you can see in the MD&A, we are crossing right now 10,000 prescriptions per month. And to be fully in perspective, we started in March 2020, we sold nine units. So obviously, insurance is having a big impact. I think this Q2 will have a lot more growth than we saw in Q1.

And of course, it's all because of the lower - slower January month, where most people are on holidays. As you know, Colombia is a Catholic country. People take more than 15 days of holidays in January.

But as we are now in the middle, ending the second - two-third of the month, insurance coverage is becoming a tremendous important part for our business. I mean more than 80% of the patients today get into insurance. And what that increases is, of course, patient retention. So what you'll see in Q2 is that continuous impact, that positive impact.

I think Q1, we grew particularly because of the return back on February and March. January is usually always a slower month because of the holidays. But that I think just has a reflection on the nature of vacations in Colombia. But this quarter and onwards, insurance company - insurance coverage will continue to play a big role.

I mean if you look at the - not only are we - it's more - in April, we have 40% of the patients that came to the clinics, left their prescription. And almost every prescription - every patient that left bought two units per month.

That's compared to a year ago when it was almost 25% of the patients with only 1.2 bottles at most. So every day - because of the insurance coverage, more people come to the clinics, more people leave with their prescriptions and more people are buying more units per month.

So you'll start seeing that more of an impact this quarter particularly because we opened the new clinics, but also taking into consideration that January is half a month. So that usually has somewhat of a negative impact. But even with that, in the month of March, we almost doubled what we sold in December. So I think just a minor January setback.

But that's probably going to happen every year. It's a very seasonal type of business. But it's all because of insurance coverage.


Sorry. Aaron Grey, would you like to pose your question, sir?

Aaron Grey

Can you guys hear me, okay?

Alvaro Torres

Hi, Aaron how're you. Yes, I hear you.

Aaron Grey

Hi, how're you doing. Thanks. I want to piggyback off that last one a little bit, just speaking towards the Colombia - your competitive marketplace. When we think about Khiron, one of things that we look at is how it kind of controlled more of the value chain than what you might see in other markets, more specifically being your clinics.

Whereas you see other markets a lot of effort needs to be made towards educating the physicians and otherwise and it's really an expensive and slow ride to growth, whereas the clinic model in Colombia seems to have gotten some traction. So with that, I want to know in terms of how you think the competitive landscape evolves in terms of other competitors looking to utilize clinics as you've seen some kind of go out of the prescription route going straight to the doctors in Colombia.

So how do you feel like that kind of somewhat of a moat you guys have now will kind of hold in Colombia? Or if others might try to encroach, especially as you see maybe some of the international markets not developing as fast as they might like with their product on hand in Colombia?

Alvaro Torres

That's a very good question. And I hope when I'm answering, I'm sounding as real as I can. Because what's happening today in the Colombian market, particularly since we are the ones who created that being the first company to sell it, this clinic approach that we came up with is not something that is being replicated all across.

And as you're selling now 10,000 units a month, of course, it becomes harder for anybody else to try to replicate that model with that success, that quickly. I think today what happens was that, we are - as you know, we are very focused on how to improve the access to the patient in every value chain. So it's also: How do you deliver it in a home?

What's the service level like? How do patients feel when they go to the clinic in person or digitally? Why do we open a new clinic in the outskirts of Bogota? To improve the patient's quality of life so they don't have to take 1.5 hours bus back and forth to go to the doctor. So the more we think about that, we're always trying to get ahead of what that patient is going through, so we can improve that life.

And I think in Colombia, even though it's been covered by insurance, to go to that extra mile takes today a lot more money than it took Khiron, and certainly it's going to take a lot longer than it took us to do this. So I mean, in the end, I think the expectation is that one day cannabis - medical cannabis would be so mainstream that we will be able to sell and everybody will be able to sell to external doctors.

I don't see that happening in the next year or two years to be significant. And our key relationship is with insurance companies. And I think the one relation we've been able to build is to showcase cannabis not just as another product, but as a real disruptor to the high cost of taking care of patients using opioids. And that is a different type of conversation that we're having. It's not about how cheap can you sell cannabis.

It's how better you can improve their economics and the health of the patients. So - I mean, we do have the first-mover advantage. We have to work very hard to make sure that stays there. And it stays there because we continue to think about how to make it more accessible. The Colombian market is very big. There are 6 million people there with chronic pain and neurological conditions.

Our clinics still have a capacity of 400,000 consults per year. Last year, we did 110,000 with 40% of them leaving with cannabis. So we have a lot of room to grow. And that way, we can sort of just keep thinking about being the leaders in the market. So it's a very big market. We know there's money.

Other companies were looking and trying to look at our business model. Our business model is really all about an obsession with service, and that is sometimes very difficult to recreate.


Frederico, please - here you go - Frederico, please, I'm sorry, go ahead.

Fred Gomes

Thank you. Congrats, Alvaro and team. A great quarter there. I guess my first question - just coming back to the Pharmadrug acquisition. What kind of impact can we expect in your SG&A and also in your margin profile? I understand that you're going to capture more margin just by owning the distribution, but I imagine that you're also providing services to other companies, internal distribution. So what should we expect in terms of the impact on your financials there?

Franziska Katterbach

Yes. So maybe I can start answering that. So with Pharmadrug, we, as you correctly pointed out, get the ability to capture all the margin in-house. So what that means in terms of numbers. When we sell our product, every ground we're selling, 20% to 30% we have to pay to our distributor.

This margin will be kept in-house. The SG&A profile of Pharmadrug is they're very asset light. So they fit perfectly into our asset-light strategy, which we have all over Europe. So what we're seeing is we will capture the margin of our own product, but on top of that, Pharmadrug is already distributing products like Bedrocan, which comes from the Dutch government. And we also have the ability, whenever it makes sense, to also carry other products of other LPs and to bring them to the market and get their distribution margin as well.

Fred Gomes

So a last question for me. I guess just on your capital position, how comfortable are you with it? And then in terms of obtaining some nondilutive financing, I guess you've talked about that before. But just how confident are you in terms of getting that over then?

Alvaro Torres

Well, Frederico, I think today, overall as a company, we are comfortable with being very disciplined in our fiscal management. We know we are getting our revenues. We know it takes time for us to collect them. But we also know that we're showing the right trends regarding growth, regarding profitability, and as I said to you, in Colombia, with the ILANS already meeting the first months where we have positive net income.

That means that today now that we have visibility and profitability and neutrality, we can look from nondilutive solutions. And we can be very encouraged that we will - we are obtaining preliminary term sheets so that we can look at those different types of financing for working capital. As I said to you before, now that this is a company that is this quarter has spent less than it has owed.

And if we were in any other industry, this would have been solved a long time ago, just - any other industry already has very different ways for the working capital. We are in the cannabis industry, so always very tough. And we are expecting to show more results than other industries.

But now that we are showing that, now that we're doing it, now that the operations in certain countries are starting to be profitable and starting to show positive net income, we can have comfort regarding our ability to look for nondilutive financing that is going to help us to get to where we want to be.

Now of course, that means that we have to continue to be very disciplined and very conservative. But I always think that's very good for business if we can be conservative, if we can be disciplined, we can keep growing ourselves, we don't go crazy with our expenses. If we can show lenders and we can show investors that there's a path to that neutrality, to that profitability, I think better times will be ahead. We don't have a large cushion, where we can just see it and say, well, what can we wait for? This is a moment of execution.

This is a moment of sales. But we also have to look for the future, we also have to be bold, which is why we did this acquisition with Pharmadrug because we know that with discipline and with boldness we can be a very important play in the future without losing sight that we need to continue to fund the working capital, that this company sells more everyday than the day before. And that we really have no debt. This is a company that's been able to fund itself through equity, of course, and been able to sell now. And the last 12 months are showing that we know how to sell a high gross margin product.

And the more we sell of that, the less losses we'll have and the less cash we'll have to burn. And we just have to be more disciplined about it. But the fact that we are already in discussions with lenders that are looking at our business in a serious manner, that gives us a lot of comfort that we are in the right business and we just have to continue to be disciplined.


Alvaro, with that, I believe if you'd like to make any closing comments or answer any other questions that are in the Q&A.

Alvaro Torres

No. Well, thank you, everybody, again. Thank you, Vinita. Thank you to everybody who asked some questions. Again, I would just reiterate that this quarter, this company continues to show that we have a unique strategy.

That we have always talked about the power of patient acquisition, and that power shows every month that we are acquiring new patients in every market. We are retaining more patients the day before. They're spending more month and month. We gained tremendously high gross margins that are very difficult to see outside our company. And if we are prudently managing our expenses and net cash, we'll be able to get to the cash flow neutrality that we have thought about. And lastly, I think this acquisition that the team has managed to close is going to be very transformational for our company.

We are now one of the few companies that's fully licensed in both countries to sell medical cannabis. We are not a growing company. We are not interested in expanding our growing facilities. We're interested in getting to the last mile to make sure that those patients who are looking for these alternatives have a better solution, and that obsession with access that we have in Colombia, in Peru, in Brazil, in U.K., now we have it in Germany.

And I think the team is going to have - we're going to have a lot of work to do in the quarters ahead of us, but we are very motivated with the results that we're seeing with the stories from patients that we see. Medical cannabis is not a fad. It's not a trend.

It's here to stay. And I think in that conversation internationally, Khiron will be and is becoming a true international player. So thank you, everybody, for your time today. Thank you to everybody in the team at Khiron. And have a great day, everybody. Thank you.

Franziska Katterbach

Thank you.

Swapan Kakumanu

Thank you, everyone.


Thank you, everyone. If you have any questions, please don't hesitate to go to our website and submit a question, or do so on this link. And I'll check with them and try to e-mail you back. Have a good morning.

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