BioHarvest Sciences Inc. (BHST) Earnings Call Transcript

Good morning, and welcome to the BioHarvest Sciences Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now hand the call over to Justin Meiklem, Head of Investor Relations. Please go ahead.

Greetings, and welcome to the BioHarvest Sciences third quarter 2026 financial results conference call. With us on the call this morning are Dr. Zaki Rakib, Chief Executive Officer; and Bar Dichter, Chief Financial Officer. Before we begin, I'd like to remind you that management will be making projections and forward-looking statements on the call today regarding future events. Any statements that are not historical facts are forward-looking statements. These statements are made pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We encourage you to review BioHarvest Sciences SEC filings, including the company's most recent Form 6-K, which identify risks and uncertainties that may cause future actual results or events to differ materially. These filings can be found on the company website as well as the SEC's website at www.sec.gov. Please note that the forward-looking statements made during today's call speak only to the date they are made, and BioHarvest Sciences undertakes no obligation to update them. And with that, I would like to now turn the call over to Dr. Zaki Rakib, Chief Executive Officer of BioHarvest.

Thank you, Justin, and thank you all for joining us. Our third quarter results reflect a period of deliberate transition. We took a more selective approach to customer acquisition for VINIA, scaling back lower return activities. We also concentrated our CDMO resources on advanced programs with near-term manufacturing potential. Those decisions affected revenue in the quarter, while lower CDMO development revenue also weighed on consolidated gross margin. We are aligning our capital allocation and operating expenses with our commercial priorities. Preserving cash liquidity is our foremost near-term priority. We intend to grow VINIA with better economics and focus our CDMO development capabilities on programs that we believe can reach manufacturing sooner. BioHarvest Botanical Synthesis platform technology enables us to produce plant-based ingredients without growing the plant itself. We apply that technology through our VINIA products business and our CDMO development and manufacturing business. Our task now is to translate the capabilities we built into better operating results and stronger cash economics. Today, we'll explain the quarter's results and the priorities shaping our plans for 2027. Cash preservation is central to those plans alongside the investments required to advance our most important commercial opportunities. Bar will begin with the financial results, and I'll then discuss our business priorities. Bar?

Thank you, Zaki, and good morning, everyone. I will provide you with a summary of our financial results. A full breakdown is available in our SEC filings and in the press release that crossed the wire before market opened today. Please note that all figures are in U.S. dollars unless stated otherwise. Revenues for the third quarter of 2026 were $7.9 million compared to $9.1 million in the same year ago quarter. The decrease reflects our planned shift to profitable growth in the product business unit and the timing of CDMO development revenue. Cost of revenue was $3.6 million compared to $3.5 million for the same period last year. Gross profit in the third quarter of 2026 was $4.2 million or 54% of total revenue as compared to $5.6 million or 61% of total revenue in the same year ago quarter. The change reflects the mix of revenue in the quarter, which was weighted towards the product business unit revenue with a lower contribution from higher-margin CDMO development revenue. R&D expenses totaled $1.8 million for the third quarter of 2026 compared to $1.4 million for the same period last year. The increase was primarily driven by higher technology development expenditures within the CDMO service business unit due to the need to accelerate the development of the rare fragrance composition in light of the supply agreement that was signed. Sales and marketing expenses totaled $4 million for the third quarter of 2026 compared to $4.1 million for the same period last year. G&A expenses totaled $1.5 million for the third quarter of 2026 compared to $900,000 for the same period last year. The increase is primarily driven by a onetime income of $400,000 recognized during the third quarter of 2025, which offset expenses in the comparative period. Net losses for the third quarter of 2026 totaled $3.3 million or $0.15 per basic and diluted share compared to a net loss of $2.5 million or $0.14 per basic and diluted share for the same period last year. Adjusted EBITDA loss, a non-IFRS measure, totaled $2 million compared to $400,000 for the same quarter last year. Under the 2 lens approach, the adjusted EBITDA loss of the CDMO services division is $1.4 million and $600,000 for the product division for the third quarter of 2026 compared to a loss of $200,000 and $200,000 in the same year ago quarter, respectively. Cash and cash equivalents together with bank deposits as of September 30, 2026, totaled $12.5 million compared to $11 million as of September 30, 2025. I would like now to turn the call back to Zaki.

Thank you, Bar. I want to begin with VINIA. Our objective is to build a business that can grow while making a stronger contribution to the company's financial position. That requires us to be more selective about how we acquire customers, improve retention and evaluate marketing investment against contribution margin. Towards the end of the second quarter, we began implementing changes to VINIA's marketing and sales strategy to improve profitability. We deliberately reduced customer acquisition activity where returns did not meet our objectives. We anticipated a moderate decline in revenue as part of that transition, and we expect the benefits of these changes together with revenue growth to begin becoming evident in the first quarter of 2027. In September, we launched single-dose VINIA Daily Chews. This format complements our existing portfolio and broadens customer choice. It has so far shown all the hallmarks of a premium high-value winner. Turning to the CDMO. We are concentrating development resources on a smaller group of programs with a clearer path to manufacturing and commercialization. During the quarter, we prioritized the rare fragrance program for which a supply agreement has been signed over progress on other development projects. This allocation of resources reflected our assessment of the program's future profitability potential and contributed to the limited external development revenue recognized in the quarter. We recognize the near-term financial impact of that decision. The commercial rationale is to focus our technical resources where we believe they can generate the greatest long-term value. The outcome will depend on successful development, production readiness and execution with our partners. In August, we signed our CDMO division's first manufacturing and supply agreement. This exclusive agreement extends an existing development program for a rare high-value plant-based fragrance ingredient. The source plant is endangered because of overharvesting and habitat loss. The ingredient is among the world's most valuable fragrance raw materials with premium grades commanding prices above tens of thousands of dollars per kilogram. Our program seeks to provide a manufacturing pathway using Botanical Synthesis. We completed Stage 1 in March and initiated Stage 2 in May. Stage 2 is expected to be completed within 6 months to 9 months of its initiation. The supply agreement provides for anticipated production of 20 tons of the fragrance composition, and we anticipate that limited production could begin in the first half of 2027, subject to successful completion of development. As described in our earnings release, we estimate that the agreement could generate $20 million to $30 million of revenue over 2027 and 2028. This is an estimate tied to the expected execution of the program and the timing and amount of revenue remains subject to development and commercial execution. Our 2027 priorities include completing development of 3 advanced projects, the rare fragrance ingredient, the Saffron compound and the natural sweetener molecule for Tate & Lyle. We also aim to license our unique developed molecules assets. Turning to our manufacturing strategy. We intend to add manufacturing capacity gradually in phases aligned with demonstrated demand. This approach is designed to preserve cash while supporting commercial requirements. We also plan to reduce fixed operating costs, including through consolidation of development sites in 2027. Let me now address our updated outlook for 2026. The actions we began taking at the start of the third quarter have changed our expectations for this year as we position the business for 2027. We have revised full year VINIA direct-to-consumer revenue guidance to $31 million to $32 million. As stated in the release, the direct-to-consumer adjusted EBITDA outlook remains unchanged. For external CDMO revenue, we now expect $1 million to $1.5 million for the full year with an adjusted EBITDA loss of $4 million to $5 million. Accelerating the fragrance program has required a greater allocation of development resources, affecting the pace of other revenue-generating development activity. On a consolidated basis, we now expect full year 2026 revenue of $32 million to $33.5 million and an adjusted EBITDA loss of $5.5 million to $7.5 million. Our immediate focus is to improve execution with the resources we have, advance the CDMO programs we have prioritized and strengthen the economics of VINIA. We understand that investors will assess our progress through results, and we look forward to reporting against those priorities. Thank you for your continued interest in BioHarvest. Operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Matt Hewitt from Craig-Hallum Capital Group. [Operator Instructions] Your next question comes from the line of Sean McGowan from ROTH Capital Partners.

Are you able to hear me?

Yes, we are.

Just checking. Yes. I guess my first question is I'm a little puzzled on capital allocation. I saw in the filing that subsequent to the quarter, you repurchased some shares. And yet the discussion strategically seems to be about cash preservation. So why is buying back stock the best thing to do with cash at this point when it looks like we're deferring some opportunities because you're trying to preserve cash? Can you help me with that?

The question is well taken. And at the time when the decision was made for buyback of shares, we have felt that a certain limited allocation of financial resources for that purpose was adequate. Ultimately, we have -- what we have done so far in the market has been very, very moderate, and we don't intend to employ or deploy a lot of financial resources for that purpose in line with the strategy we have for cash preservation. So you're not going to see any depletion of cash at any accelerated rate whatsoever as a result of the buyback program.

Okay. And then a follow-up, could you help us with what you expect to be the timing during next year of some of the cash flow related to the CDMO contracts? That seems to be an important thing. Like when do you start getting some of that cash in?

We expect to see a revenue next year on the CDMO side from 3 different sources. There will be some more development revenue coming from the existing programs that we have. And we've been clear about those programs, the sweetener program, the Saffron program and the continued development effort on the fragrance program. So there's still some more development revenue that are coming to BioHarvest within that particular program. We also expect to be able to license at least one of our existing molecules that we've already developed, and that would generate an additional significant amount of revenue. As far as the revenue from manufacturing of the fragrance, which is the most likely scenario to take place in terms of non-VINIA manufacturing, we expect to generate revenue in the second half of next year. The amount of that revenue depends on the timing of the completion of the development program. So I'm not ready yet to guide with specifics for that program, but we do expect with very high likelihood to generate revenue from that program. Potentially, one of the molecules that we license, if that license takes place earlier and all work has been completed, for example, with one of the products that we announced the completion of the regulatory part, it could lead to additional manufacturing revenue towards the last quarter. And we are adjusting our manufacturing capacity to be able to meet the demand by, albeit limited, but to meet that demand in 2027. And obviously, additional capacity would be created in 2028 at a moderate pace compared to what we thought earlier, and that is also in line with our cash preservation program of not building too much capacity earlier than it is required, and that helps us managing our cash and yet delivering on all commitments we have to customers and for the growth of VINIA.