Interview with Khiron President Chris Naprawa (TSXV: KHRN)
On August 21, 2019, I interviewed Chris Naprawa, President of Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF). Chris joined KHRN as President a little over a year ago arriving with an extensive capital markets background most recently with Sprott Inc. and as a partner with Sprott Capital Partners. In my opinion, this was one of the key decisions KHRN made last year. It enabled co-founder Alvaro Torres to focus his attention on the operations of the company as Chief Executive Officer while Naprawa used his skill, knowledge, energy and experience to develop the capital markets side of the equation. To pay for what Torres wanted to do, Naprawa arranged the financing. Not only that, Naprawa built an awareness of KHRN within the international retail and institutional investor communities and ensured the company was well financed so that a temporary decline in the stock markets would not impede KHRN’s growth plans or need a highly dilutive financing forced on them. Chris Naprawa has become my main contact at KHRN and one of the reasons I am so enthusiastic about the company’s prospects.
Ohashi: how are you bearing up under the weak cannabis stock markets?
Naprawa: Well it’s been a difficult trend to fight. Just when you think the decline might be coming to an end, we get hit by more bad news. I don’t have to tell you about that pattern. I know of one major, global institutional account that just capitulated. They sold all their cannabis stocks.
Ohashi: Well that’s amazing but it probably means we’re close to the bottom.
Naprawa: Yeah. It often happens that when the big guys bail out, that’s one sign we’re getting closer to a bottom.
Ohashi: If last year was establishing your footprint in Latin America and South America, based on what I’ve seen so far from Khiron, it seems the next 12 to 24 months might see you make a move into Europe. I mean hiring Tejinder Virk as President and Franziska Katterbach as Chief Legal Officer of Khiron Europe was as clear a sign as any. Is that your business plan moving forward?
Naprawa: We said our plan was to dominate Latin America but we didn’t say we aren’t going anywhere else. We have done a lot of work in Europe and due diligence and in the process we learned a lot. We came to the realization that as in the rest of our business, it’s about people. So we started looking. I originally called Tej hoping to get some referrals never thinking that we could get him. So that conversation quickly turned and when it became a possibility, we moved aggressively to get him.
Ohashi: It turns out I met Tej in Europe last year and I think he is a terrific addition. His move reminds me a lot of what you did a little over a year ago. Looking back, I would that worked out very well.
Naprawa: Yes and he brings with him some hand’s on experience in the cannabis industry in Europe. Tej has an exceptional mind and knows how to get things done which is important to us. In the short time he was at Canopy Growth, they did several transactions. He can move around the highest levels of an organization with ease. He seems to embody exactly what we need.
He brings along Franzie who is the Juan Diego Alvarez of Europe. She brought her knowledge and ability to Canopy around a year ago and she was involved in completing six transactions.
So if we combine the business acumen of Tej with the legal knowledge of Franzie, we have a great team to get the job done for us. You will see we stepped up to get them but I think if they had been a small cannabis company in Europe I would have had to pay a lot more to get them.
Ohashi: And like you, they are motivated to produce?
Naprawa: Yes. They see in Khiron what you and I see - a multi-bagger opportunity over the next few years. At a market cap of around $200 million, I don’t think anyone is going to say that Khiron is overvalued and we have a real opportunity to build something special in Europe.
Anticipating your next question, I think Spain is a natural place for us to begin. We know the language, we know the laws, there is a familiarity with the culture and we have relationships. We’ve never been a believer in the hub and spoke model. If you go into southern Spain, there’s an area with 50,000 hectares of greenhouses. It’s sort of the breadbasket of Europe and there are a few families that are dominant there. So we think we can find a way that will get us into the market requiring comparatively little capital combined with lower risk. So we can do there what we’ve done everywhere else, that is, work with experts, mitigate our business risk and manage our capital risk.
Ohashi: Does the Mercosur agreement work into this?
Naprawa: Yes, and that stems from our involvement in Uruguay. Like any agreement there is more work to be done there but it will come. I just saw the final designs for our facilities in Uruguay. Despite the fact that the capital cost is extremely low down there, it will be a state of the art facility. The capital will be going into laboratory and extraction facilities where the returns are much higher and there’s nothing stopping us from sourcing biomass locally as well.
Ohashi: Is it similar in form to Colombia?
Naprawa: It is similar to what you saw but it’s a little more durable because Uruguay has seasons which Colombia does not. So it gets a little colder in the winter which is right now, and a little warmer in the summertime. Understand that in everything we do, we learn a lot. So even in Colombia, our next facility will incorporate the many things we have learned. So the materials that we use will be very similar but the layouts and so on will be more efficient and mitigate operational risks. We can build upon what we have done with what we have learned.
I’m sure some of the Canadian operators that started with a one million square foot facility would like to dial back the clock. I think they would have been better off if they could have started with a smaller facility and build additional operations incorporating what they have learned. That is the advantage we have and I think it will serve us well. The changes will be engineered into our subsequent models in Colombia and Uruguay and elsewhere. We won’t talk about that very much because that knowledge is valuable to any operator. And remember it is still in the back of our mind that when we can be out of the growing business, when there is an assured source of top quality biomass, we plan to move de-emphasize growing.
In Uruguay, we will be starting development and construction work right away with Marco Algorta, our Country Manager. In Colombia, my best guess is in one to three months. All the civil engineering work in Colombia has been done so it’s ready to go.
Ohashi: What about Chile?
Naprawa: We continue to work there and there are a couple of other things available to us that are very interesting and exciting. Rodrigo Azócar who is our country manager there and who you have met has been doing a great job for us there and we are looking to expand his role. But Chile is certainly still moving ahead slowly and deliberately. Oh, there was some positive news out of Brazil that we are still trying to verify but apparently Jair Bolsonaro has said he favours medical marijuana which is the first time we have heard that from the President so that could be very positive.
Naprawa: In Peru, we received our pharmacy license. This is important because to do business in Peru you have to be registered as a pharmacy and we have completed all the regulatory requirements so we are properly established. Rather than re-invent the wheel, Peru has taken the approach that we already have pharmacies regulated so we will leverage on top of that to deal with cannabis. Luis Marquez who looks after Peru is doing a very good job for us there.
Ohashi: Will you continue to move forward in Latin America and South America?
Naprawa: We’ve covered off most of the countries we want to be in at this time. A wild card might be Argentina. Given everything that is going on makes it unpalatable to be there but sometimes that can be the best time to make a move.
Eventually, they are going to have a medical cannabis regime but in the meantime they have bigger problems. But there may be other ways to have a presence that can work for us. My personal bias is negative because of past experience in resource markets. Venezuela is an interesting region. Brazil is an opportunity although they require GMP certified labs for production of certain types of products.
Paraguay has many of the same requirements but they have a well-developed medical market that produces a significant amount of product for Brazil already. So Paraguay is a small market but it may be complementary to Uruguay. We are very much on top of things in Mexico and we see many opportunities there. We’re basically waiting for regulations.
I still think it is very likely that we’ll do something directly in the United States. Our first shipment of the Kuida® brand is expected to be delivered this quarter or early next. We’re going to start off slowly but we believe we can ship Kuida® products from Colombia directly into the United States. It’s a competitive market and it’s expensive but here’s the reality – if you want to acquire a branded cannabis product, the United States is only market where you can do that. It’s also a market where the funding window is closed for now. So that adds up to opportunity for us.
Ohashi: You’re still in good shape funding-wise. Right?
Naprawa: At the end of June we had around $55 million…
Ohashi: …so it hasn’t changed much…
Naprawa: …but that doesn’t mean we haven’t been spending. When you see the quarterly report…no one is going to accuse of being frugal. But we’ve had more warrants exercised to top up our cash.
Ohashi: It sounds a little bit like the strategy of Bruce Linton, formerly at Canopy. He believes you have to strike when the iron’s hot. But at least with Khiron, I can see your spending is careful and well thought out.
Naprawa: I think the Italian acquisition that we passed on showed we are disciplined. We saw something that looked attractive but as we peeled back a few more layers of the onion, it made less and less sense. I mean some people don’t want to face the embarrassment or whatever of not closing an acquisition. But we felt it was the best decision and that’s what we did.
But nobody should interpret that as Khiron being negative on Europe or especially Italy that has had some negative publicity recently. I just spent two weeks there doing due diligence and the tobacco distributors have a stranglehold on distribution in a country where everybody smokes. They have no interest in allowing outsiders into recreational cannabis distribution. They’re not going to let you walk in and do whatever you want. And I’m not talking about the government.
Ohashi: How are the Kuida® products doing? I know you’re getting shelf space but is that translating into sales?
Naprawa: Sales have started. In the first half of the first quarter, we were still exclusive to Farmatodo. Then we started filling the distribution channels and bringing on other stores. So we had modest sales but we’re continuing on now with traditional advertising. I would say most people are buying it right now to find out what it is and if they like it. I met with Elsa Navarro, Skin Unit Director and Rodrigo Durán, head of the Dixie Brands joint venture recently and they have a very strong plan moving ahead. If we can get up toward $2 million in sales in Colombia this year I would be really pleased.
So this is the year we introduce the Kuida® line and the next three years is when we anticipate strong growth in sales. But we are comfortable with what’s happened so far and, as I said, we have a solid plan and we’re moving forward.
Part of the reason we were able to reach a distribution agreement with Grupo Éxito in two months is that most of the other CBD infused producers have only one or two products. Because we have seven or eight we can talk about a platform with more stock keeping units (SKUs) coming and they really like it.
Ohashi: When I was last down to Bogota for a visit, I was left with the impression that there is a consumer education program that has to take place. A lot of that responsibility falls on you leading the way to market but being perceived as the first to market gives you an advantage as well. Once you reach a certain level, it will be very hard for those coming behind you to get market share.
Naprawa: To me the proof is in the pudding. We continue to get more and more stores that want to get Kuida® in their stores and on their shelves. They wouldn’t do unless they think they can sell it. The way I think of it is 2019 is about the plumbing and not the flow because without the plumbing we’ll never get it. We still have to deal with the regulatory issues. We still go in and explain the product to senior people. We often have to assure them it doesn’t get you high.
Ohashi: Let’s just finish our discussion of operations in Colombia. The plants are growing? No problems in the grow facility? Extraction? Lab?
Naprawa: Everything’s fine. The plants are growing and thriving. Our people are getting better as they gain experience. Remember there are two parts to the building at the facility. One is for extraction but the other is the GMP compliant laboratory and it has been a major time saver. If you go to the Gallery on our website you will see the pictures that Paola Ricardo put up late last week. You will see pictures of product growing, harvested, decarboxylated, processed and bottled. (see more pictures here)
Ohashi: I thought I saw someone recently announce they are going to start construction of a GMP compliant lab and said it will be the first in Colombia or Latin America, I think.
Naprawa: Well our lab is GMP compliant and it is up and running. We expect to have our first medical products out this quarter and we’re on track to meet that goal. Some of the product that goes out late this quarter or early next will probably go to the Latin American Institute of Neurology and the Nervous System (ILANS) as part of the new insurance program we announced recently.
Ohashi: This is the program that Alvaro Torres, CEO of Khiron, talked about six months ago. The medical team from ILANS that you acquired last year determines the patient treatment that may or may not include cannabis and simply bills the government plan for the category of “pain management” or whatever it is.
Naprawa: Yes that’s right. This is a trial run that has been approved for four months and 450 patients. When it is completed and if the results satisfy the government, we expect the program will then be extended to four or five more clinics throughout the country. If this happens, it will produce a predictable recurring revenue stream.
Ohashi: You mentioned that ILANS had a record month in July? So ILANS must be on track for $12 to $15 million in revenue this year?
Naprawa: I would say $12 million because we cut out around 20% of ILANS’ services earlier.
Ohashi: Well you’ve got a couple of bullish forecasts out there in the form of target prices of $6.00 by AltaCorp Research and $6.75 per share by Canaccord Genuity…
Naprawa: We’re going to need a better market but the good news is we’ve got the people and we’ve got the cash to accomplish everything we want in the next twelve months. As you know, the markets are a double edged sword. When the Exchange Traded Funds (ETFs) were growing and buying Khiron, everyone loved it. Now if the ETFs rebalancing means they sell are selling shares, everyone hates them. But as we convert all the activities we are engaged in right now to revenues and income, the vagaries of the stock market become less important to us over time.
Also, since I got back from Bogota recently, I am more confident and more enthusiastic about our company and prospects than I have ever been.
I mean in 2018 at this time, we were doing our first raise at $.90 per share and if we told everyone their stock was going to double in a year they would have been thrilled. I know we subsequently did raises higher but our plan is just to keep our heads down and plow ahead. As long as we do that, I am confident the stock price will look after itself and all shareholders will find themselves in a profitable position.
Conclusion: as the interview suggests, KHRN’s fundamentals are in good shape and basically on plan. The company is also well funded. The other comment I would like to make is the Exchange Traded Funds (ETF) are probably adding to the volatility to the cannabis group. When the ETF’s were growing and the cannabis stocks were advancing, it was a positive to be included in a portfolio. But when the cannabis stocks began declining which has been the case for the past 17 weeks according to our numbers, these portfolios decline in value and as a result a portfolio holding can be sold to reduce its weighting. This is a little perverse because a couple of Fridays ago, CannTrust (TSX: TRST) (NYSE: CTST) unexpectedly rose over 40%. It now seems, the scandal ridden TRST had fallen so much in price, its price fell much faster than the rest of an ETF portfolio causing its holding became under-weighted. As a consequence, the ETF purchased shares to restore its position in the portfolio. In effect, it was rewarded for its poor performance. On the other hand, if the price of a stock performs much better than a generally declining portfolio, it becomes over-weighted and an ETF will sell shares.
The one thing that is clear to me is this cannabis stock bear market will end and indications are we are much closer to end of falling stock prices than the beginning. Second, when it ends Khiron will have continued to operate and grow and will stand out as one of the great values in the cannabis group. Within the next 12 to 24 months, I think KHRN will become even more strongly rooted in Latin and South America, have established a foothold in North America via the United States as well as Europe probably through Spain. KHRN is one of those rare companies that the lower its stock goes, the more attractive it becomes.
 Decarboxylation is a process that converts THCA to THC and also reduces the risk of bacterial contamination in extracted products.