Kane Biotech Inc. (KNE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Kane Biotech Second Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Steve Kilmer, Investor Relations. Thank you, and please go ahead, sir.

Thank you. Good afternoon, everyone. I would like to remind you that some of the statements on this conference call contain certain forward-looking information and statements within the meaning of securities law, which may not be based on historical facts, including, without limitation, statements containing the words believes, should, may, plan, will, estimate, predict, continue, anticipate, potential, intends, expects or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different than any future results, events or developments expressed or implied by such forward-looking statements. Such factors, include, among others, the company's stage of development, level of product revenues, additional capital requirements, risks associated with the completion of clinical trials and obtaining regulatory approval to market the company's products, the ability to protect its intellectual property and dependence upon collaborative partners. These factors should be considered carefully and readers -- and listeners are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements are made as of the date hereof, and the company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments. I'd now like to turn over the call to Ray Dupuis, Chief Financial Officer of Kane Biotech, to discuss our second quarter 2020 financial results. Ray?

Thank you, Steve, and thank you, everyone, for your support and interest in Kane Biotech. We're delighted to have you join us on the call today. Before I turn the call over to Marc for an update on our commercial activities, I'd like to provide a brief update on our second quarter 2020 financial results. To streamline things, all the numbers I will mention have been rounded and are therefore approximate. The following figures are all in Canadian dollars. For the 3-month period ended June 30, 2020, the company recorded total revenues of $267,000, a 21% increase compared to $221,000 for the same period in 2019. Total revenues include $36,000 from license and royalty and $232,000 from product and services revenues. The increase in second quarter 2020 revenues is primarily due to a 79% increase in product sales as a result of higher online sales and a larger customer base. This was partially offset by a $9,000 or 32% decrease in royalty payments from Dechra due to lower customer demand in the veterinary channel as a result of the COVID-19 pandemic. Gross profit for the second quarter of 2020 was $116,000, 40% higher compared with the 3 months ended June 30, 2019, due to higher product and services revenues. Second quarter 2020 operating expenses were $711,000, a decrease of 31% compared to $1.036 million in the 3 months ended June 30, 2019. The decrease in operating expenses is largely due to government assistance recognized in the quarter related to the United States Department of Defense MTEC award as well as spending reductions and COVID-19 pandemic-related government assistance. The company recorded a second quarter 2020 loss from operations and finance costs of $505,000 or nil per share compared with a loss from operations and finance costs of $993,000 or $0.01 per share for the same 3-month period in 2019. As of June 30, 2020, Kane Biotech had cash of $239,000. During the second quarter, as a result of the COVID-19 pandemic, the company experienced both decreased demand for its products in the pet specialty and veterinary channels and interruptions to its manufacturing supply chain due to reduced workforces and shortages of raw materials. Despite these challenges, the company realized a 21% increase in quarter-over-quarter revenues, as I mentioned earlier, including 52% higher revenues in June 2020 versus June 2019 and a 49% decrease in its quarter-over-quarter loss from operations and finance costs. Finally, during the quarter, our shares were reapproved and recommenced for trading on the OTCQB Venture Market under the ticker Symbol KNBIF. We believe this upgrade from the Pink Open Market will help us to both increase the visibility and support our efforts to grow our U.S. shareholder base. With that, I'll now turn the call over to Marc.

Thank you, Ray, and thank you, everybody, for being here on the call and listening online. In the second quarter, despite the challenges we faced due to COVID, Kane continued to make significant progress towards positioning itself as the biofilm company. I've said it before, and I think it's important I say it again, biofilms are an important problem in a number of areas, whether it be oral health, skin care, wound care, film processing, water systems, agriculture, and the list goes on. Today, most of the biofilm research is done in universities with little emphasis on commercialization. And Kane wants to be the one to take the best of the best of these technologies and deploy them in several markets. Because we cannot be all things to all people or markets, Kane will be putting in place key market-specific strategic partnerships. We are already working at identifying potential partners in a few key markets, and these partners are looking to stick a claim in biofilms and understand that by partnering with Kane, that will allow them to do this. Now turning to what happened during the quarter. I think we can all agree that the key highlight of the quarter was our -- in our human health business, where we were delighted to announce the receipt of the U.S. Department of Defense Medical Technology Enterprise Consortium Research Award or MTEC Award. This award will provide USD 2.7 million in nondilutive funding, nonreimbursable for the continued clinical development of DispersinB to treat biofilm-mediated antimicrobial resistance in non-healing chronic wounds. This is a significant award for Kane Biotech, both because of its value and especially because of the validation it provides for our wound care technology. We believe this award underscores the importance of eliminating biofilms to address non-healing chronic wounds. The MTEC award will support our pursuit of an optimal regulatory path that will enable reimbursement, mitigate risk for future partners and increase the value of a licensing agreement, in addition to funding further clinical development. This funding as well as our interest-free loan from the Canadian government through western economic diversification means we have now secured approximately CAD 7 million in non-dilutive funding for this program. To further support this program, we welcome renowned wound care and biofilm expert, Dr. Gregory Schultz from the University of Florida as a scientific adviser. Dr. Schultz is a Director of the Institute for Wound Research and Professor of Obstetrics and Gynecology at the University of Florida. His research has focused on wound healing, developing therapies that reduce excessive scar formation and the role that bacterial biofilms play in chronic wounds. Dr. Schultz insight and guidance will be an invaluable -- will be invaluable as we continue to advance our DispersinB and coactiv+ programs. I can't say enough how important it is to have Dr. Schultz on board. I think there are 2 people in the world that know -- that really know biofilms, and he's 1 of the 2. So I think we're extremely happy to have him on board. Now turning to our Animal Health business. During the second quarter, we leveraged the expertise of our Chief Veterinary Officer, Dr. Jean Gauvin; and our Chief Scientific Officer, Dr. Gordon Guay, to initiate an extensive online marketing strategy with new in-depth insight into pet oral care video and blog series. Our goal is to increase our customer base by educating pet owners to be problem and solution aware, converting them into customers, and then ultimately, to ambassadors of our brand. We will also be adding an online e-commerce store for direct sales of all our Animal Health products -- product lines in Q4 2020. During the quarter, we launched our silicon spray form shampoo for dogs and cats by distributing more than 1,500 free samples to consumer. The shampoo received rave reviews. Feedback collected during the quarter will be used to make minor improvements to the product formulation and packaging, and we expect to have a new product run ready in time for a Q4 2020 launch through the pet retail channel and our online partners. In May, we concluded the consumer product test for our anti-biofilm shampoo, which received overwhelmingly positive results, even on an unoptimized product. Based on these results, we believe our anti-biofilm shampoo will fill an unmet need for efficacious products for scalp conditions, including dandruff, atopic dermatitis and seborrheic dermatitis or eczema. We continue to prepare for the launch of our anti-biofilm shampoo in Canada in Q4 2020 via direct-to-consumer sales and plan to initiate a similar consumer product test on a larger scale in the U.S. by the end of the year. Having received numerous requests for other products containing coactiv+, we have developed a scalp detoxifier and a shampoo bar to go with our shampoo. These products are formulated to breakdown bacterial and fungal biofilms as well as the accumulation of precipitated shampoo films, helping to reduce skin irritation and other symptoms associated with chronic skin condition. The detoxifier recently passed the human repeat [ in soap ] patch test allowing us to add claims dermatology -- dermatologically tested and safe for skin on our packaging. We recently conducted -- we plan to conduct an extensive Phase II consumer trial both in Canada and the U.S. in Q4 2020 and are poised to officially launch the products under the Derma KB Biofilm brand on our own e-commerce site mid-Q4 2020. In summary, the transformative DoD MTEC Award well positions us to continue clinical development of our DispersinB technology in addition to identifying the optimal regulatory path as well as license and commercialization partnership opportunities for this program. We're looking forward to launching our human anti-biofilm shampoo in Canada and subsequent in the U.S., followed by additional products containing coactiv+ plus under our Derma KB Biofilm brand. In our Animal Health business, we continue to work at putting in place key strategic partnerships and rolling out our online marketing strategy, which has been extremely well received by both consumers and specialty retailers. This ends our prepared remarks for today. With that, we're happy to take any questions you might have. Operator?

[Operator Instructions] And our first question comes from the line of Don Nicolson with DJ Nicolson Planning.

I'd like to pick up on your comments about not being everything to everybody in terms of market penetration and things like that. So if I was to put my thinking cap on and focus on what you've talked about, I'm sort of seeing Animal Health, Human Health and Wound Care is kind of givens. Are there more than 3 areas where you've had some time to have a retreat, to planning retreat and focus on where you want to go? Is there more than 3 areas that...

Yes. Sorry. No, I think, Don, there are a number of other areas where biofilms are an important problem. We're still a small company. And to accelerate the expansion into new markets, as I mentioned briefly -- and I'll get into more detail. What we're looking to do is really partner with some key strategic partners. So in Animal Health, we've been working closely with an animal health company that's interested not only in our products but in our portfolio. And we'll be -- I'm hoping announcing shortly a -- in the next 30 to 90 days, I'd say, a partnership with them to expand our commercialization efforts and provide more capital to accelerate the development of our -- the commercialization of our products and the development of our portfolio. We're looking to do the same thing in Wound Care. And as we prove out the efficacy of our shampoo and our other human health products, we're looking to do the same thing in our consumer goods division as well. That being said, and that's really been the focus of what we've been working on. We're -- because I think there's, right now, a lot of opportunity for growth in those 3 areas, and where we've got some -- the best preliminary data, I'd say, to demonstrate the efficacy of our products. So there's other areas. So there's other areas, but those are the 3 key areas that we're going to be focusing on certainly over the next 12 months.

Okay. Got you. And has that come out -- has that been organic? Or have you had a focused group or peer review of those 3 area, like an independent third-party dialogue saying, yes, those are the areas we want to go at or you've corroborated that organically? Or is it just sort of invalidated as you go?

Well, so, Don, I came in, as you know, there a couple of years ago. But Kane was founded in 2001, and we've been working on biofilms since 2001. And we've mainly been doing R&D. I mean, we had started to dabble a little bit in Animal Health. I think we've accelerated that, and we're now ready to move to the next level in that phase. But -- sorry, to get back to your question, and I want to -- sorry, Chief -- our VP of R&D, Nanda Yakandawala has been doing -- has developed a number of products and a number of applications for our technology. And we felt that, well, we had an Animal Health business that we continue to grow. We felt Wound Care offered the biggest opportunity for our technologies. And we had other products in the pipeline, such as our shampoo that investors such as David Kemp from ITG had used a number of times and really pushed us to have other -- to have a broader base of consumers test out. So we sent out 1,500 samples. We had 800 people try the shampoo. And the results are very, very clear. They're overwhelming. And we were able to do that consumer trial, 800-person consumer trial for a few dollars per user. So I mean I think that we've been mainly focused on areas where there's a lot of interest from strategic partners and dabbling a little bit on the side of what we have that's been formulated, that's been developed that we -- that's got some good efficacy and trying to see if those present good market opportunities. And so far, the shampoo seems to provide some real good results. So I think our Animal Health business are growing sales, are clearly show the opportunity. I think the non-dilutive funding, especially the MTEC DoD grant for Wound Care clearly shows the need for an antibiofilm technology and shows that Kane's technology is very promising. And finally, the shampoo, the consumer trial we were able to do shows that there's a real need for our product and that our product shows a lot of promise. So there's -- yes, I hope that answers your question there. I don't know, but I think that's...