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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Kane Biotech's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] The conference is being recorded today, November 30, 2020. I'd like to turn the conference call over to Ray Dupuis, Chief Financial Officer for Kane Biotech. Please go ahead, sir.

Thank you. Good afternoon, and welcome, everyone, to Kane Biotech's quarterly earnings conference call. We're delighted to have you join us on the call today. This call will cover Kane's financial and operating results for the third quarter ended September 30, 2020 along with a discussion of some of our recent highlights and goals for the remainder of 2020 and beyond. Following our prepared remarks, we will open up the conference call to a question-and-answer session. Our call today will be led by Kane's Chief Executive Officer, Marc Edwards. But before we begin our formal remarks, I would like to remind everyone 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 fact, including, without limitation, statements containing the words believe, should, may, plan, will, estimate, predict, continue, anticipate, potential, intend, expects or other 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 from 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, lack of product revenues, additional capital requirements, the 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, independence upon collaborative partners. These factors should be considered carefully, and readers 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 any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to future to reflect future results, events or developments. With that, I will now discuss our third quarter 2020 financial highlights. To streamline things, all the numbers I will mention are rounded and are therefore approximate. The following figures are all in Canadian dollars. Revenue from product sales in the 3 months ended September 30, 2020 was just under $287,000, an increase of 48% compared to just over $194,000 in the 3 months ended September 30, 2019. This is due to higher online sales and a larger customer base in the current period. Gross profit for the third quarter of 2020 was just over $129,000, an increase of 11% compared to just over $116,000 for the quarter ended September 30, 2019. The increase in gross profit is primarily related to higher product revenues. Total operating expenses for the quarter ended September 30, 2020 were just over $1.247 million, an increase of 37% compared to just over $912,000 for the same period in 2019. The increase in expenses is mostly related to legal costs associated with the Animalcare agreement, which was finalized during this period. Loss from operations and finance costs for the third quarter of 2020 was just under $1.041 million, an increase of 25% compared to a loss of just under $822,000 for the quarter ended September 30, 2019. At September 30, 2020, the company had cash of just over $1.272 million. The company recently announced that it had entered into a 1-year credit agreement with Pivot Financial Inc. for a non-revolving term loan in the aggregate amount of $1.480 million. The credit facility will be used by Kane Biotech for funding research and development relating to eligible government reimbursable expenditures, expenses related to STEM Animal Health and general working capital purposes. I'd now like to turn the call over to Marc to discuss our recent highlights as well as our ongoing business and operational objectives. Marc?

Thank you, Ray. I'd like to begin by thanking our employees, our strategic and research partners for all their hard work during a global pandemic and going above and beyond. Secondly, I'd like to thank our support of shareholders particularly those who are able to make it on the call today. My view of Q3 2020 is that this was a pivotal period in the history of Kane Biotech, as we executed a major step in our commercialization strategy late in the third quarter. I want to take a quick minute to give an update on our strategy and why we believe it's the right direction for Kane and really just a quick blurb on really to take this back to basics. So really at the base, Kane is a company that develops products that prevent and disperse microbial biofilm. And really bacteria can be found in either planktonic, which is free floating state or in a biofilm. In a biofilm, bacteria can thrive in very hostile environments and survive attacks by host immune systems, antimicrobials antibiotics, whether you have bacteria trying to attach to -- where you have bacteria trying to touch the surface of biofilm. Because these biofilms are market or industry-agnostic and our technologies have applications in -- against biofilms in general and not applications necessarily in each specific market, our technologies have potential applications in a wide variety of markets. Now we do recognize that we can't be all things to all people. So we've decided to create industry-specific commercialization vehicles. The objective of the commercialization vehicles is to significantly accelerate the commercialization of our technologies by creating a business in collaboration with a strategic partner, who is a market leader in the respective industry. They will not only provide market access -- the strategic partner will not only provide market access, but capital as well to help grow the business, and that allows us to bring in a dedicated leadership team. We announced in September -- now the first step on that -- towards creating those commercialization vehicles, we announced that September that Kane would enter into joint venture with U.K.-based Animalcare Group to create STEM Animalcare. As part of the deal, the Animalcare Group invested $5 million for a 1/3 equity stake in STEM and the right to commercialize our products in the veterinary channel outside of the Americas. This opens us up to the European market and creates a new royalty stream for Kane, building on our great partnership with Dechra veterinary products. Following on from that exciting announcement, we are truly fortunate that Kevin Cole accepted the role of President and CEO of STEM. Kevin is well-known within the Animalcare market and is the right person to drive this business forward. With that said, I'm pleased to introduce Kevin Cole on our call today. Kevin?

Thanks, Marc. Let me just kick it off by saying STEM Animal Health has tremendous growth potential. And just from a macro perspective, the Animal Health market has been growing globally over the past decade at about a 5% CAGR. And that growth rate is projected to accelerate. There are a number of drivers. We can't get into all of them on the call today, we just don't have the time, but ultimately, there is that growth that is projected to accelerate. The other thing that we keep in mind is that STEM Animal Health technology, again, Bio Kane, the current product portfolio, potential product offerings are in categories that are expected to outpace the growth of the total Animal Health category, and that is true for the next decade, when you take a look at where the next decade is going to go in Animal Health, and it's an exciting time to be a part of this. Overall, there are positive tailwinds for the Animal Health business. Now from that business and from a shareholder value perspective, STEM Animal Health is -- it's in the process of creating value. During my career, I've worked in human oral care and animal health oral care. And I am truly excited about the potential and to really be a part of unlocking the value and the application of the technologies. We are taking steps to do so. We've matched the market, prioritized the business units within STEM, and we're allocating those resources accordingly, so that we are either solidifying the foundation or we're creating the foundation that STEM Animal Health has the ability to then profitably capitalize and scale up the business. We're moving that forward. And really, really, I look forward to future calls where we've got the ability to update you on some of the progress, but for the time being, that's it from me, and I'll turn it over to you, Marc.

Thank you very much, Kevin. We look forward to hearing more from you and the growth you create for STEM and our shareholders. Our -- turning to our OTC business, we saw the launch of a U.S. and Canadian trial for our DermaKB products, specifically our shampoo. The trial will include over 4,500 participants, and we expect to convert a significant number of women to Kane customers. We also anticipate owning our online store later this month in U.S. and Canada. So what's next for Kane? The -- we're progressing with our wound care and surgical commercialization vehicle, and we're continuing to make good progress in our search for commercial partner. Biofilms have been front and center in the wound care market, which is valued globally at approximately $22 billion. Our wound care commercialization vehicle would firmly place Kane Biotech front and center as an industry leader in commercialized solutions for biofilms and wound care. As a management team, we're energized and excited about our future business and expected shareholder value. Thank you for your time and interest in Kane. We'll open up the line for questions. Operator, we're ready to take questions.

[Operator Instructions]

Yes. Go ahead, David. Sorry, I'm cutting off the gig. Go ahead, David?

Our first question comes from the line of David Kemp from Independent Holding Group.

It's Independent Trading Group, but that's okay. Your expenses were $1.25 million in the quarter. Do you anticipate that to be the kind of number we should expect going forward or is this more related to one-off items?

Well, as Ray mentioned, there's -- a big portion of that, that was due to legal costs associated with the creation of STEM and the licensing to Animalcare. So the -- I think our expenses should maintain around the $800,000 to $900,000 and depending on what specifically happens during the quarter.

And could I also ask you, the U.S. shampoo trials, when do they conclude?

At the end of the year, we'll wrap them up just before Christmas.

Okay, so we should have an announcement I was -- I guess, early in the new year to discuss those results?

Well, we'll have shipped the samples before Christmas. We'll continue to receive feedback from the consumers up until mid-months, probably in early January, but yes, we should expect to see some results, and I'm -- we're hoping to have the store launch happen next Friday, December 4. So we'll be able to give you some update on the commercial penetration we had with the shampoo sales as we launch -- yes -- because we'll have our first sales happen in this month.

Sure, sure. On the wound care side, would you expect to, I don't know, like start moving it forward in earnest? I know you're looking for a partner in that, but is this a Q1 2021 type endeavor or is it as the year progresses?

I'm hoping that we'll have something to announce before the end of Q2, probably before that, but at the latest before the end of Q2, and we're making significant progress. We've been talking to a number of potential strategic partners and discussions have been going very, very well. There's a lot of interest in our technology. And as I mentioned, biofilm is a big and big issue in wound care. And there are no good solutions today. And I think we've got some very, very promising technologies with some very promising applications in wound care. And we'll -- yes, we're trying to move this forward as soon as possible, but before the end of Q2 at the latest, but hopefully, Q1.

Our next question comes from the line of Don Nicolson from D.J. Nicolson Planning.

We're having a nice windy sunny day out here on the coast, but I want to jump down straight to business. I have 3 questions. First one is, I guess, goes back to the STEM comments. I understand that there's -- 1/3 of the company has been engaged with through the $5 million, does that 1/3 purchase also subscribe to future Kane pipeline products that might be, let's say, invested -- invented over the next couple of years? Do they have access to that or is that a new -- would that be a new contract?

No, that would be -- so STEM will be the commercialization vehicle for all our Animal Health products, and Animalcare will have the right to commercialize those technologies in the veterinary market, specifically in Europe and Asia and Australia and New Zealand.

Okay. So whether they're existing now or they're researched and invented over the next few years, they have access to the pipeline, let's say?

Yes, that's it. So the idea is that Animalcare can guide us as to where the biggest market opportunities are for biofilm-related elements in Animal Health. And then as we develop those products, we can certainly hit the ground running and to get them commercialized.

Okay. Great. And so safe to say that the research component may be tweaked by input from the marketing side as Mr. Cole indicated. Like once you get a sense of the market, it might tweak what you're actually researching, right?

Absolutely. Absolutely. It will be -- the idea is to have these products -- the development of the products be market driven.