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

Good day, and thank you for standing by. Welcome to the Kane Biotech Second Quarter 2021 Financial Results Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Lorne Gorber, Kane Investor Relations and Global Spokesperson. Please go ahead.

Thank you, May. Good afternoon, and welcome to Kane Biotech's Q2 2021 Results Call. We're delighted to have you join us. With me to review the financial and operating results for the second quarter ended June 30, 2021, are Kane's CEO, Marc Edwards; and CFO, Ray Dupuis. Following prepared remarks, we will open the lines and take your questions. Before handing over to Marc, let me caution you that our comments and discussions will include forward-looking information within the meaning of applicable securities legislation. Forward-looking information will include, among other things, forecasts and projections, which involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from such forecasts and projections. Therefore, although we believe that anticipated future results, performance or achievements expressed or implied by the forward-looking information are based on reasonable assumptions and expectations, you should not place undue reliance on such forward-looking information. Now I'll hand the call over to Marc Edwards, Chief Executive of Kane Biotech. Marc?

Thank you, Lorne, and good afternoon, everyone. I'm excited about the momentum we're generating for the second half of this year and into 2022. This is the case across all 3 of our strategic pillars: Animal Health; OTC, which has mainly been focused on dermatology; as well as our wound care and surgical business. Both our DispersinB and coactiv+ technologies continue to be recognized for their effectiveness in treating biofilms. As a result, the pipeline of licensing and commercial opportunities continues to grow, and discussions with several potential partners are advancing well. There is more and more awareness about biofilms and the related issues and how well Kane's technologies address these issues. I'll turn it over to Ray now for a summary of the Q2 2021 financials, and then I'll provide a short operational summary and market outlook before taking questions. Ray?

Thank you, Marc. To streamline things, all the numbers I will mention are rounded and are, therefore, approximate. The following figures are all in Canadian dollars. Total revenues in the quarter were just under $279,000, an increase of 4% compared to just over $267,000 in the 3 months ended June 30, 2020. On a revenue category basis, deferred license revenue recognition was higher in the current period due to both the recognition over 10 years of a $500,000 initial payment related to the Animalcare license agreement and the recognition over the remaining life of the Dechra agreement of the USD 125,000 milestone payment received from Dechra in April 2021 related to the successful production of a pilot batch of products by a manufacturer in South America. Royalty revenue was also higher in the current period as the underlying Dechra product sales in the veterinary channel were less impacted by the COVID-19 pandemic in the current period versus the comparative period. Partially offsetting the increases in license and royalties revenue, product revenue decreased from the comparative period due to the permanent U.S. store closures in Q4 2020 of one of the company's major pet retail customers, which resulted in COVID-19 pandemic as well as lower online sales. Product services revenue decreased in the current period due to lower demand from Dechra to contract manufacturing services during the current period. Gross profit for the second quarter of 2021 was just under $84,000, a decrease of 28% compared to just over $115,000 for the quarter ended June 30, 2020. During the current period, provision was taken for inventory obsolescence. Total operating expenses for the 3 months ended June 30, 2021, were just over $1.090 million, an increase of 53% compared to just over $711,000 for the quarter ended June 30, 2020. The increase is mainly attributable to increases in staff, short-term compensation expense and lower government assistance in the current period, partially offset by lower business development and contract research costs in the current period. Loss from operations for the second quarter of 2021 was just over $1.006 million compared to just under $596,000 for the quarter ended June 30, 2020. Cash as of June 30, 2021, was just over $455,000 compared to just over $1.007 million as of December 31, 2020. With that, I will now hand it over back to Marc.

Thank you, Ray. I'm delighted to provide our outlook and recent developments across each of Kane's 3 lines of business. First, in Animal Health, I want to start by saying that we're building a fantastic business in Animal Health. We've brought a great line of pet oral care products. We've proven their efficacy, not once but twice in clinical trials. We've got a great partnership with Animalcare. We had a Board call today and continue to believe that they are and will continue to be a fantastic partner. We have a strong and growing relationship with Dechra that now expands across all of the Americas. And we've got a very strong leader in Kevin Cole as STEM's CEO. Kevin has been organizing STEM to capture market share in shelf space and has taken the opportunity to advance certain investments, both in product line and across supply chain for long-term growth. Now that these investments have been made, we anticipate an acceleration of this business' top and bottom line as it further captures a larger share of the $5 billion pet oral care market. This is a very big market in which we're well positioned with our water additive, toothpaste and chews. In the coming weeks, as we position for 2022, you can expect to see new retail distribution partners and key milestones of licensing agreements being achieved. So again, I think we've built a fantastic Animal Health business and looking forward to doing so, replicating the model in the other verticals in which we operate. So turning to our OTC or dermatology line of business. We're seeing a modest but continued growth in selling directly to consumer via our online website and have recently listed the product on Amazon, both in Canada and the U.S. and believe the product will do very well on Amazon. We'll see, again, modest but early traction we've seen on that platform. We remain -- that being said, we remain largely focused on licensing opportunities in this segment. We're in discussions and getting interest in this business from a number of partners. And when this really becomes interesting is the potential -- is when potential licensing partners want to add our product to their -- our technology to their existing lines. It's a win-win. By leveraging our technologies and adding to an existing line, our partners can significantly increase the efficacy of their own product. And given there's an existing sales base, the ramp-up on royalties being paid to Kane is much quicker. So we're very excited about everything happening in our OTC and dermatology business. And look forward to sharing some news with you before the end of the year. On the wound care side, our third strategic pillar has been our primary focus for the last 2 years, as we believe our technologies can be a game changer in many ways. We're making real progress. And in July, we made some really exciting announcements. First, we announced the plan to expand our wound care and surgical portfolio with an antimicrobial hydrogel based on our coactiv+ technology, We'll be pursuing a 510(k) regulatory route and are aiming to have this product out in the second half of 2022. And then, really, where we've been doing most of our investment is in our DoD-funded and Canadian government-funded DispersinB wound care hydrogel. And we announced a successful preparation of the first batch of our DispersinB wound gel intended to produce in preclinical studies, which will begin this quarter. In addition, we signed a new manufacturing partner with Dow Development Labs to scale up the process and ultimately manufacture under Good Manufacturing Practices, or GMP, for a first in-human proof-of-concept trial, which will begin in the first half of 2022. So these are our significant milestones and are very confident that these will do very well as they get to market. In closing, September will mark my third anniversary as CEO of Kane with more than half my tenure occurring during COVID. So it's a little off the cuff here, but really haven't had the pleasure of seeing Ray face-to-face in over 1.5 years now. That being said, I want to thank all the stakeholders. It's an exciting time in Kane's history. Big things have happened and will continue to happen for the foreseeable future. And I'm proud to represent our great team every day. I also want to thank our Board for their wise counsel. We've made several changes since I've come on board. And each has demonstrated such depth of knowledge and engagement. I sincerely believe it makes me a better CEO. Thank you for your confidence. And May, let's go to questions.