kneat.com, inc. (KSI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the kneat.com Fourth Quarter and Year-end December 31, 2019 Updates and Results Conference Call. Please be advised that today's conference call is being recorded. My name is Hugh Kavanagh. I am CFO at kneat. I am joined today on the call by Eddie Ryan, our CEO. At the conclusion of our comments, we will allocate some time to take questions from sell-side financial analysts. Eddie will begin with his comments, and then I will go on to some financial highlights. Before we begin, I would like to remind you that except for historical information that comments in today's conference call contain forward-looking statements, including statements regarding Kneat's future financial outlook and financial performance, market growth, the release date for and benefits from the use of Kneat solution, our strategies and general business conditions. Any forward-looking statements contained in this conference call are based upon Kneat's historical performance. And its current plans, estimates and expectations are not a representation that such plans, estimates or expectations will be achieved. These forward-looking statements represent Kneat's expectations as of today. Subsequent events may cause these expectations to change. And Kneat disclaims any obligation to update the forward-looking statements in the future. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including our quarterly results and limited operating history, which make it difficult to predict future results; our expectation for future growth for our revenues; unauthorized access to our customer data; dependence on revenue from new customers; the rate of adoption of our SaaS model; acceptance of our applications and services by customers; loss of one or more customers; adverse changes in general economic or market conditions, particularly in the life sciences industry; delays or reductions in information technology spending, particularly in the life sciences industry, including as the result of mergers in the life sciences industry; the development of the market for enterprise cloud software, particularly in the life sciences industry; competitive factors, including, but not limited to pricing pressures, industry consolidations, entry of new competitors and new applications and pressure and market initiatives by our competitors; our ability to manage our growth effectively; changes in sales that may not be immediately reflected in our results due to the revenue recognition criteria under international financial reporting standards. Further to these risks, these forward-looking statements do not include a full assessment or a reflection of the unprecedented impact of the COVID-19 pandemic occurring in the first quarter of 2020 and the ongoing and developing situation resulting in direct global and regional economic impact. This has resulted in significantly economic uncertainty. And even though the company have today's experienced no significant impact on its operations, any potential impact on the future is difficult to understand or measure at this time. Further information on potential risks that could affect actual results will be included in other filings Kneat makes on www.sedar.com. The press release, the MD&A and consolidated financial statements are posted on our website. And if you wish to receive a copy of any of these documents, please do not hesitate to contact us. And finally, take note that we will take questions only from sell-side financial analysts. Eddie will now start with his comments, Eddie?

Thank you, Hugh. Welcome, everybody. By way of refresher, let me take a moment to remind you of what we do at kneat. We are excited because we are truly delivering a game-changing technology to solve the big challenges associated with paper-based processes within the life sciences industry. Our initial focus is on the manual and labor-intensive validation work processes, where there is an estimated initial addressable market of USD 600 million in annual recurring revenues. Validation is a large problem for pharmaceutical biotech and medical device manufacturers. They must comply with stringent regulations, which are governed by bodies such as the U.S. Food and Drug Administration. Our compliant software platform is allowing them to digitize their processes, provide remote management capabilities and remove paper completely. Kneat is purpose-built to facilitate compliance for these highly regulated processes. The stringent regulatory requirements mean that generic software cannot address the compliance challenges adequately. Kneat delivers compelling value. Our customers are reporting productivity increases of more than 100% and cycle time reductions of up to 50%. In addition, they are achieving a higher level of debt integrity compliance and business continuity, which are key considerations. Our customers have written white papers documenting their experience, and they are sharing this data within the industry. I'm very pleased to report in the progress that our team has made during the year ended December 31, 2019, is highlighted by our revenue growth, which is up 202% and, in particular, our SaaS revenue, which is up 545% over 2018, and our ongoing success in winning new top tier customers. We are executing on our plans and gathering good momentum in the market. Within our market, the drive for greater efficiency, improved data integrity and higher compliance standard is becoming an ever-increasing priority. We see this reflected in our global customers as they move to digitize their many validation work processes. To date, we have signed 15 large global companies, including a significant number of the top 10 big pharma companies. Within this customer base, we have more than 400 sites into which our software can be scaled, up from 15 sites in early 2018. Customers who have gone live are expanding Kneat Gx to new work processes and new sites. And as reflected in our revenue and our recent announcements, an increasing number of customers are adopting our SaaS platform. It gives the Kneat team great pleasure to know that we're becoming trusted by more and more of the largest global health care companies to address their challenges. Success in breeding success and excellent customer references, coupled with a strong sales and marketing effort is driving a healthy sales pipeline. Based on customer feedback, our R&D team continues to build out our software platform, and we are very excited about what they are delivering. We continue to enhance our SaaS model, which is leading to its increasing adoption. In May 2019, we hosted a very successful inaugural customer summit in the U.S. and most of our customers are represented there. We provide a great opportunity to demonstrate upcoming features and plans to our customers and get their feedback. It was our intention to host a similar event in quarter 2 2020. However, due to the COVID-19 pandemic, we have postponed the event until further notice. During the year, we continued to hire across all functions with a strong focus on development and professional services to support our increasing number of customers. We also focused on building out our support team in the U.S. In December, Kneat signed a lease agreement to expand its head office footprint within the National Technology Park in Limerick, Ireland. The additional office space will accommodate up to 100 Kneat employees, complementing the existing lease offices also located within the National Technology Park in Limerick. We are pleased to have Hugh Kavanagh join the team as CFO in September. Hugh brings a wealth of financial experience from both the software and life sciences industries and broad funding experience. We're equally pleased to have Rory Cameron join our Board of Directors in May. Rory has over 15 years of strategic experience in the software industry and an extensive background in mergers, acquisitions and go-to-market operations. In response to COVID-19, we transitioned to remote working for all our employees in early March. Our operations from software development through to product release, delivery and customer service are now operating effectively online. We have stopped all business travel and every customer interaction is now 100% online. The long-term impact of COVID-19 on our business is difficult to assess fully at this time, and we continue to monitor the situation closely. Generally, it is business as usual for the majority of our markets. A small proportion of our prospects are slowing their business decisions temporarily. But on the other hand, others are accelerating their decision to go paperless because of the increased business continuity benefits that it can deliver. We have received messages from several customers, highlighting the business continuity benefits of Kneat Gx during this pandemic. Kneat Gx is enabling their staff to continue many aspects of their validation activities remotely and allowing global contributors to collaborate in the process in real time. This has reinforced the benefits of Kneat Gx over the manual paper-based systems that it is replacing for these customers. At the beginning of March this year, we closed a short-form prospectus offering, including the full exercise of an over allotment option, resulting in aggregate gross proceeds of $12.65 million. As well as this, we also completed a non-brokered private placement for gross proceeds of $1.83 million. The company intends to use the net proceeds of the offering and the private placement for growth initiatives, working capital and general corporate purposes. Our plan going forward is to continue to expand out across the more than 400 sites within our existing customer base, continue to add new top tier customers, continue to build out the Kneat Gx platform and our support capabilities globally. This concludes my review and comments. I will now hand you back to Hugh, and I will be back for questions and answers later, after with my closing statements. Hugh?

Thank you. Thanks, Eddie. For the financial review, please keep in mind that all the numbers I would be discussing are in Canadian dollars. Revenue for the 3 months ended December 31, 2019, was $1.4 million. This is an increase of 200% from the $0.4 million in the same period in 2018 and year-to-date revenues totaling $3.95 million or up 202% over the previous financial year. SaaS license fees which are one of our recurring revenue streams were $0.34 million for the 3 months ended December 31, 2019. This was an increase of 620% compared with the fourth quarter in 2018. And SaaS license revenue fees for the year ended 2019 were $0.84 million, which is an increase of 545% compared with 2018. Gross margin for the 3 months -- for the 3 months ended December 31, 2019, was $0.65 million. This was an increase from the $0.17 million in the same quarter in 2018. This increase was mainly driven by an increase in revenue, which I referred to earlier. Net loss for the fourth quarter of 2019 was $1.12 million as compared with a net loss of $0.62 million for the same period in 2018. The increase in the net loss was primarily due to an increase in salaries and benefits related to higher headcount on our professional services and development teams. In addition, the amortization of the intangible assets and noncash expense increased over the prior year due to continued investment in our platform. As a reminder, we have filed our financial statements and MD&A on SEDAR, and they are also available on our website. This concludes my remarks. We are now ready to take sell-side financial analyst questions. To ask a question, please use the hands up feature available on the go-to webinar control panel. There should be a slide showing the image of the hands up feature in your go-to webinar control panel now. Once you have selected the hands up icon, I will introduce you, and you can ask your question using the microphone on your computer. Please note that only attendees with microphones will be able to ask questions at today's session.

Our first question today comes from the line of Gavin Fairweather at Cormark. Gavin, you may have yourself muted there, so you may need to unmute yourself. And then you can go ahead with your question.

Congrats on all your progress. So I just wanted to -- I got a few questions. Just to start out, in terms of the big client that you won in September of last year, can you give us kind of a quick update on how their implementation is progressing. I think the lead site went live kind of late last year. Can you just give us an update on where they are?

Yes. Thanks for your question, Gavin. So there's a couple of large clients started out late last year. And so they're all scaling, all those customers are scaling right now.

So the November, December ones as well?

Correct, yes.

Okay. Great.

So they're all deployed live and moving on to additional processes and additional sites at this point in time and other planning going on as well with them.

Okay. That's great to hear. So I mean, you talked about the 400 plants in the client base. Can you provide us an update in terms of the number of plants that are currently live or?

Yes. So I haven't got that figure to hand, right? But generally speaking, we're moving forward with all the -- most of these sites would be part of the big client base. And generally speaking, we're moving forward all our large clients at this point in time.

Yes. And Eddie, I might just add, in terms of Gavin's first question, I suppose I'd say is that, as Eddie mentioned there we've had a number of signings towards the end of the year. The one in September is scaling, but in fact, some of the ones later is actually -- is probably progressing or is moving more quickly even than the one in September.

That's good to hear. I mean, you put a release with an update on COVID not too long ago. And one of your comments was that it's a bit of a mixed bag. You're seeing a few select clients being maybe a bit more cautious in deferring some purchasing decisions, whereas others are accelerating things. Just to be clear, I mean, is that comment related both to existing clients? And how does that translate or transfer to prospects within your sales pipeline?

Yes, that's a good question, Gavin. So generally, it's not affecting our existing clients at all. If anything, our existing clients are realizing the value of Kneat, it's becoming more accentuated for them and are seeing the benefit of the remote management capability. So I would say, if anything, I'm saying, we're seeing a more of an accelerated approach from existing clients. Where it is affecting a little bit, in a small proportion of the prospects that are there, just because they're in the throes of continuity management. They don't have the time to pursue a new initiative. But then on the flip side of that, we're also seeing some customers in the pipeline, which are saying, we have to get this done faster so that we can manage our way through this crisis. And they don't know how long it's going to last. So it's a mixed bag, by and large. And in general, it's all positive from Kneat's perspective.

Okay. I've got a few more, but I'll pass the line right now just to see -- to open up for other questions.

Okay. Okay, Gavin, I'll put you back on mute. And our next question comes from the line of [ Nick Tandani ] from Mackie. Nick, I just unmuted you now.

I just wanted to go back to your previous comments about deployments. How should we think about the outlook of the deployments in calendar 2020, especially given what's happened in the past month with COVID, are you seeing a bit of a skew towards SaaS or towards on-prem? And how has that shifted in the last month or so?

Yes. That's a very good question, Nick. And there is, by and large, I would say, SaaS is the order of the day. It is becoming more and more so. There's very little prospects now really discussing on-prem anymore. And I think what's happened has reinforced that. The ability to be live anywhere in a SaaS environment is very appealing so -- and from the customer's perspective, to the first part of your question, from the customers' perspective, we are seeing customers realizing that, oh, I can now do this work remotely when, in the past, I had to be on-site or we had to have people from different sites at the same site. Now I don't have to have that anymore. So it's really reinforcing this business continuous capability of Kneat. And also the fact that you're removing paper from the process. So in the past, paper would be touched by many, many people and reviewed and approved by many, many people. So you now have that gone out of the equation. And it's also a pandemic continuity capability or a risk mitigation factor. So yes, we see movement towards SaaS, and we see that has been in line with where we are going with our business as well.

Right. Right. Makes sense. And in terms of the pricing environment, there has been some data out there from some of the other kind of cloud providers talking about customers either asking for discounts or payment deferrals, are you starting to see that? Or it's kind of a bit too early in your sort of ramp to be thinking about that just yet?

We're not experiencing that at all, Nick. There's nobody asking us for discounts. There's always a negotiation around pricing. But we've never -- we're not seeing any -- nothing -- right now is different to what it was last year, for example, regarding pricing from our perspective.

Okay. Great. And just one last one before I pass the line here. How should we think about the cost base in calendar 2020 and the cash burn as well?

Yes. So we will continue to progress with -- we're cautiously optimistic, and we will hire key hires as going forward in a cautious manner, monitoring the situation all the time. So there is going to be some increases in our costs over that time. And -- but we will be cautious and balance the books effectively.

Okay. Nick, so Gavin, I'll pass back to you again, as you have your hands up. Also just to note yourself muted.

Okay. I was hoping you can just expand upon kind of Nick's last question. Can you just talk about the areas of investment? Obviously, the balance sheet is very strong here. So can you just talk about where you feel like you might need to bulk up in terms of hiring either by functional area or by region?

Yes. But nothing really changes. It's continuous -- continuous growth in all the areas, really. But R&D development is still going to be a focus. SaaS development is also a focus, professional services to deal with the increasing number of customers in our pipeline and that we are engaging right now in the deployments. And also, again, Gavin, enhancing our U.S. -- our U.S. operations. And also more engaged with partners along the way as well. So there's going to be general spending in most functions.

Okay. And then maybe just lastly for me. You mentioned something that piqued my interest in terms of your software enabling more kind of remote validation activities. Can you just expand on that in terms of how the process can change after implementing your software. Obviously, the people -- the test engineers that are on the floor of the plant, obviously, still need to be there. But can you just expand upon all the other activities that can now be conducted remotely through your software?

Yes. A lot of the preparation work, the management of the process, the visibility into the process and the development of test protocols in this area, they can do all of this now remotely and do it very collaboratively where they can all see what's going on in real time. It's real-time information available to all the stakeholders. And then when the protocols, et cetera, are prepared, it can be quickly released to those who need to execute them in the field, but also some executions are being done also on the IT side of the business, which is a large part of it. The validation in that area can be done remotely, where you don't have to go to site. So -- but on the equipment and the process and the cleaning, in that, you still have to be on site, but you can reduce your time out on the site by using this collaboratively. So you have -- you're going to have less people on the sites that you need right now. And all that's collaborative ability to managers from center headquarters and stuff like that as well.

Thanks, Gavin. Nick, actually, you have -- [ Nick Tandani ], you have your hand up again. So I'll pass over to you.

Just one last one for me. Hugh, when we last spoke a few weeks ago, it sounded like you were in the process of sort of bulking up some of the internal processes at Kneat itself and given the sort of curveball that we've gotten with COVID, how has that impacted scaling up some of the internal processes at Kneat because you mentioned you've gone to a full year remote work environment, obviously. But what's the impact of that change on bulking up some of the internal processes at Kneat?

Yes no, thankfully to say there's been no impact whatsoever. I mean, as Eddie mentioned, we are all working remotely. However, people are working as normal. We have the systems and networks, et cetera, to do that. And it's proceeding as to plan sort of implementing new systems and so on. So no impact. Okay. And Gavin, I see you have your hand up again. So Gavin Fairweather again yourself mute and I will unmute you. Okay, Gavin. Go ahead.

Sorry, I didn't mean to have my hand up there. It's my first time using this app. Sorry about that.

So at this point, there doesn't seem to be any further questions. So that concludes our question-and-answer session. So I would now like to turn back to Eddie for his closing remarks.

Okay Thank you. Thanks, guys, for your questions. In summary, we are very pleased with the progress we have made in 2019, and we are very proud of the Kneat team as they continue to develop quality-compliant software, continue to win top-tier customers and continue to provide excellent end-to-end customer service. At Kneat, it gives us great pleasure to be trusted by some of the largest global healthcare companies, to support them in their mission to bring their life-enhancing and life-saving therapies to their customers. We are very proud of the relationships we are building with these global companies. Before I finish, thanks to our shareholders, our partners and our team for their ongoing support and belief in what we do. We look forward to the journey ahead. Thank you for your attention.

Thank you, and that ends today's call.