I always enjoy speaking with Alvaro Torres, Chief Executive Officer of Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF). Since Chris Naprawa was engaged as President a year and one half ago, he assumed responsibility for the capital markets and investment banking out of Toronto leaving Alvaro free to concentrate on the operational side out of Bogota, Colombia. This arrangement has worked very well.
Alvaro Torres is the person most responsible for putting Khiron to- gether. Alvaro has over 15 years of experience in the Latin American market, including infrastructure projects and project finance, manage- ment strategy, team development, and mergers and acquisitions. Al- varo holds a Masters of Engineering and a Masters of Business Admin- istration and has overseen the development of projects totalling over $1 billion in capital expenditures. He was instrumental in growing the Colombian subsidiary of a major Canadian engineering firm from two people to over 2,000 in three years. Alvaro is a founder, the Chief Ex- ecutive Officer and a director of KHRN.
The important message I got from this conversation with Alvaro is “The cannabis bear market is great for Khiron,” my words not his. In the first part of this interview, we discuss what is going on in Colombia. From this interview I hope you will see what I see – a company building a business from the ground up paying attention to the essentials of production and marketing. To reach this conclusion, I started by asking Alvaro, “If we were talking in November 2020 and looking back at the previous year, what would we be talking about?”Torres: I think we would be talking about many things but at or near the top of the list might be Colombia, how the regulations got sorted out and how Khiron was able to sell medical cannabis into the Colombian market. This is our first market, the one where we started and are most advanced and where we have been proving the concepts that we will carry out to other markets in Latin American, the United States and Europe. I am very glad we made the decision last year to raise capital so we don’t have to go through all the cash crunches other people are having.
Ohashi: How much cash do you have and what is your run rate?
Torres: Last quarter we reported cash of over $50 million so it is down from there but still a very healthy level. Given our burn rate, we can go for almost two years running our full business plan. If I see something that makes me think cash will be a problem for us, we will reduce our run rate. Today it is not a problem and not foreseeable but we are being careful with capital spending items that aren’t crucial to our short term plans.
Ohashi: Please share some of those plans with us.
Alvario: I think you will see that we have shifted some time and capital to marketing. When we acquired the ILANS (Latin American Institute of Neurology and the Nervous System) clinics, we decided it was important to educate the doctors and patients about the medical benefits of cannabis. When we look back from a year out, we will see that our commitment to Colombia has paid off. When I see the ILANS clinics, the consultations between doctors and patients outside the clinics and the requests for medical cannabis, I know we are going to be in a strong revenue mode in Colombia for medical cannabis over the next year. Right now we are waiting for two things. Actually one thing because INVIMA (Instituto Nacional de Vigi- lancia de Medicamentos y Alimentos), the Colombia National Food and Drug Surveillance Institute, re- cently published their guidelines that gives us clarity on the testing we have to do on products before we begin to market them. We have already started that testing. Next we await our quotas I expect will be awarded soon.
A year from now, we will look back and see these things happened and we built a revenue base in Co- lombia based on medical products alone. We will look back and see we have built a model based on Colombia that we can take and use in other parts of Latin America. Our opportunity is we have the capital on hand and we can proceed with our marketing plans through this difficult stock market period while competitors might be stalled. This means that instead of say, eight companies that might have products on the shelves, a year from now it might only be three. With less competition, perhaps things will happen faster for us.
So it may not matter too much to us what is happening in the cannabis industry and the cannabis stocks in Canada because that is not the business we are targeting. We are moving toward having branded consumer products. That was our business plan when we started and we haven’t strayed from that. Ohashi: From a regulatory perspective in Colombia, you said you were probably 95% of the way to com- pletion. How long will it take to complete the other 5%?
Torres: A week ago there were two things pending. One is the INVIMA guidelines that I mentioned earlier. So we are in the process of scheduling a visit by their inspectors. Now that we know what the requirements are we have started getting ready for them. Approval should be shortly after the inspection and we can start to sell medical preparations based on CBD right after that. That is all the regulation we need to deal with in this respect. After that we can test our product to make sure we are within the regulations. So the last 5% we’re waiting for today is for the government to assign commercial quotas for the companies. This should happen hopefully by the end of the year or early in the new year. That will allow us to produce THC. Give the plants three months to grow the first commercial harvest and one more month for testing. By early in the second quarter of 2020 we should be able to produce and sell medicinal products based THC under the current medical regulations. So this will mean we can begin using these products for inflammatory pain and epilepsy, for example.
Ohashi: ...and you already know who your first patients are going to be...
Torres: Right. The first patients we will be treating are through the ILANS clinics and we already know who those first 1,000 patients will be because it has been prearranged with the regulator. In the meantime, we will continue to do what we have been doing all along - develop patient demand. One month ago, we finished our medical educational program for doctors and we will follow up with two months of training so they will know how to prescribe our products. When the medicine and the patients are ready, the doctors will also be ready.
Ohashi: I just want to make sure the growing is going well, the lab, the extraction is all working well? Torres: All of that is great. The plants are growing well. The lab is fine. Extraction is working and we have some inventory stored in the vault. Our first facility produces eight tons a year but again it was built so that we could learn how to operate properly. So now we are starting to build two smaller greenhouses that will cost around $300,000 each and with what we’ve learned we can increase the yields from the new facilities.
We are talking to other companies to see if they can supply us with more CBD flower so we can continue to extract oils.
Ohashi: So that’s Colombia medical. How is everything else going?
Torres: If you look at our Consumer Packaged Goods (CPG) area, Kuida® is generating double digit growth on the sell out and the numbers are still low but what we expected. Don’t forget, no one has ever sold CBD-based cosmetics before so education of the consumer is important.
What I look at is the results from the sell out and same store sales. So when I see double and triple digit sales growth, I know our shift in marketing is working. We believe a new product like this needs a variety of different spokespersons rather than one so this is a change we are making. We are getting shelf space and now we are moving to several spokespersons who appeal to different age groups, different needs, and so on. The initial feedback on the idea from the distributors is very positive.
In our marketing, Kuida® is a higher end product and sold in the higher end stores. But these same dis- tributors have more middle price point customers and they cannot put the same Kuida® products on those shelves. In addition, we don’t want them to because it diminishes our Kuida® brand. So over the past six months, we have been developing a new product line for the mass market, lower price point product consumer. It will appeal to a much larger market. It can be sold by distributors that have a mass appeal
®®
customer base. So we will position it differently from Kuida . Next year we will have Kuida across the
higher end retailers and a new brand across more mass market stores.
At the same time we are going to try to appropriate the “hemp” product idea in Colombia where it doesn’t
exist right now. The way we are thinking about it is we want the stores to open a hemp section just like
an organic foods section. That’s where our new line will fit in. If you look at Argentina, Brazil, Mexico and
Peru, for example, the regulatory issues are much less for hemp-based products than for CBD-based
® Kuida .
Ohashi: Anything else?
Torres: We are also opening a new clinic with the first one to open soon. We don’t want patients to think cannabis will cure everything. We believe it should be used together with other forms of treatment. It should be part of an integrated healthcare solution. It can be a co-helper or a substitute but you have to work with other solutions as well. We will also open this clinic up for consultations where the patient pays directly.Conclusion: If all KHRN had going for it was the Colombian activities described in Part I of my interview with Alvaro Torres, there would be many, many opportunities for investors and shareholders. But this is only the beginning of the story. In Part II of the interview, Alvaro will tell us what they have planned in other parts of the world including Latin America, the United States and Europe. The chart to the left shows KHRN over the previous year and, in my opinion, does not reflect a fair value
assessment of the company Alvaro is describing. The stock today is a little lower than when KHRN first began trading on the TSXV although the market cap, of course, is higher. But eighteen months later, for around the same $.80 per share price, you can get all of last year’s expectations already realized and next year’s potential about to come.