Edesa Biotech, Inc. (EDSA) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stellar Biotechnologies Year-end 2015 Corporate Update Conference Call and Webcast. This conference is being recorded today, Tuesday, December 15, 2015. During today's call all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions] I would now like to turn the conference over to Mark McPartland, Vice President of Corporate Development at Stellar Biotechnologies. Please go ahead, sir.

Thank you, operator and good day everyone. We'd like to thank you for joining us today for Stellar Biotechnologies' year-end 2015 corporate update conference call and webcast and our first call as a NASDAQ listed company. Joining me on the call today from Stellar Biotechnologies' senior management team are Mr. Frank Oakes, our CEO and President; Ms. Kathi Niffenegger, our Chief Financial Officer; and Dr. Catherine Brisson, our Chief Operating Officer. Mr. Oakes will provide update on Stellar operations, review our recent achievements, growth opportunities and Ms. Niffenegger will review our consolidated financial results. After the formal presentation, we will be available for answer your questions from the dial-in callers and as the operator has already indicated from the webcast participants as well. I would also like to note that in addition to our press release issued yesterday afternoon, our 10-K annual report for the period ending September 30, 2015, was also filed and is available through the U.S. SEC filing system on EDGAR and the Canadian SEDAR filing system. All documents are also available under the investors section of our website at stellarbiotech.com. Now before I begin, I would like to remind our listeners that today's conference call may include forward-looking statement based on current expectations. Such statements, other than purely historical factual information, including statements relating to revenues or profits or the Company's future plans and objectives or expected sales, cash flows, and capital expenditures constitute forward-looking statements. Forward-looking statements are based on numerous assumptions and subject to all the risks and uncertainties inherent in, among other things, the Company's availability of funds and resources to pursue research and development projects, the successful and timely completion of preclinical or clinical studies by third parties in which the Company's products are utilized, the degree of market acceptance for the Company's products or the Company's degree of market -- or the products in which the Company's products are components, the Company's ability to protect its intellectual property, the volatility of the Company's common share price, the effect of competition, the effect of technological changes and general changes in economic or business conditions. There can be no assurance that such forward-looking statements will provide to be accurate as actual results of future events could differ materially from those anticipated in such statements. Accordingly, listeners should not place undue reliance on such statements, except in accordance with applicable securities laws. The Company expressly disclaims any obligation to update any forward-looking statements or forward-looking statements that are incorporated by reference herein. This conference call does not constitute an offer to sell or a solicitation of an offer to buy any of the Company's securities set out herein in the United States or to -- or for the benefit or account of a U.S. person or person in the United States. Neither the TSX Venture Exchange nor its regulation service provider, as that term is defined in the policies of the TSX Venture Exchange accepts responsibility for the accuracy and adequacy of this conference. Please refer to the documents that we file from time to time in Canada on SEDAR or in the United States on EDGAR, which are also available on our website, for information concerning the factors that could affect the Company. With that taken care of, I would now like to turn the call over to Frank Oakes, President and CEO of Stellar Biotechnologies, for his opening remarks. Frank, begin your --

Thank you, Mark, and good day, everyone. Thank you for joining us here today for the Stellar Biotechnologies 2015 year-end corporate update conference call. I want to start with a brief reminder of Stellar's business and our industry position. Stellar is the leader in the sustainable manufacture of Keyhole Limpet Hemocyanin or KLH. KLH as many of you know is an important immune-stimulating molecule used in wide-ranging therapeutic and diagnostic markets. KLH is both an active pharmaceutical ingredient in many new immunotherapies and development as well as a finished product for measuring immune status. We are positioning Stellar to be the leading company supplying the long-term demand for KLH in the immunotherapy field. We began fiscal 2015 with a specific objective of strengthening and expanding our core KLH business. I am pleased to report on the strong progress we made and to recap highlights from what we believe has been a very successful year for Stellar Biotechnologies. On November 5th, Stellar's common shares began trading on the NASDAQ capital market under the symbol SBOT. NASDAQ up-listing is a testimony not only to our growth and maturation as a public company but also to the hard work of Stellar's team and our commitment to supporting shareholder value. We believe that the NASDAQ listing offers a number of advantages, including broader visibility to the investment community and the potential for increased shareholder liquidity. In addition to NASDAQ listing, Stellar's common shares will continue to trade on the TSX Venture Exchange in Canada. I am pleased to point out that revenue for fiscal 2015 increased by over 100% from the prior year. This growth was driven primarily by increase in production, sales associated with core customers, greater volume, sales under supply agreements, and the promising advancement of clinical trials conducted by our customers. Our Stellar KLH products are now being used as the key ingredient in multiple clinical-stage immunotherapies targeting metastatic breast cancer, ovarian cancer, Alzheimer's disease, systemic lupus, and Crohn's disease. One of our long-term partners is Neovacs S.A. of France. Stellar KLH is a component of Neovacs' Kinoid product candidates, two of which are now in Phase II clinical trials. In 2015, we expanded our agreement with Neovacs in order to ensure adequate supply of KLH as they progress through their trials and to potential commercialization. We expect demand for reliable sources of KLH to continue to grow, both from our existing partners and the broader biotech industry. Stellar intends to be the leader in meeting the demand, and so in preparation, this year we entered into a collaboration to secure an exclusive strategic site in Baja California, Mexico, for the potential development of an additional aquaculture locale and expansion of Stellar KLH production. We believe that this new collaboration will position Stellar to accelerate production to meet anticipated industry growth. We believe that we are positioning Stellar for a strong future with multiple avenues for future sales, as well as a clinical and commercial presence in the broadening range of therapeutic markets. To further strengthen Stellar for the future, we are committed to developing new KLH technologies and expertise. Our development goals are to expand the use of this important molecule and to attract new customers to Stellar KLH. In 2015, our research and development included programs such as the development of functional assays to help companies and our customers identify the best form of our KLH for their unique therapeutic targets; also, enhancements in our aquaculture science and infrastructure and the presentation of data from our ongoing research into potential KLH-based immunotherapies for the treatment of infectious diseases. This has been a successful year of strengthening and expansion for Stellar. Our progress is a reflection of the increased market demand for KLH and, we believe, the growing recognition that Stellar is the leader in sustainable, scalable manufacture of GMP-grade KLH products. I'm particularly proud of our continued growth as a public company, as evidenced by the alliances that we've announced and our up listing to the NASDAQ capital market. I would now like to turn the call over to Kathi Niffenegger, our CFO, who will discuss our financial results in more detail. Kathi?

Thank you, Frank, and thank you, everyone, for joining us on the call today. I will be discussing our fiscal year-end September 30, 2015, financial information. We generated revenue of $759,000 for the fiscal year ended September 30, 2015, an increase of 104% compared to $372,000 for fiscal 2014. The increase in revenue resulted from an increase in the number of customers and associated increase in sales volume, including sales under supply agreements and custom manufactured products. Our expenses for fiscal 2015 decreased to $5.1 million, as compared to $6.1 million incurred in fiscal ‘14. Cost of sales and contract services increased to $581,000 for fiscal 2015, as compared to $469,000 for the prior year, consistent with the increased sales and contract services revenue. We reclassified aquaculture costs to present them separately from cost of sales and contract services since those operating costs are incurred regardless of sales levels. We also began recording inventory on our balance sheet for the first time beginning September 2014, and continuing in fiscal 2015. Due to the early stage of our development in fiscal 2014, all manufacturing costs of production were expensed during that year, increasing the cost of sales and contract services relative to revenue. There were no grant expenses for fiscal 2015, as compared to 37,000 in the prior year due to the closeout of our NSF Phase II/IIb grants in November 2013. Research and development expense was 1.1 million for fiscal 2015, as compared to 2.5 million for fiscal 2014. The decrease was the result of our planned decreased use contract research organization due to a realignment of our focus from internal research and process development to manufacturing our Stellar KLH products in response to increased customer demand. General and administrative expenses increased to 3.2 million for fiscal 2015, as compared to 2.9 million in the prior year. The increase in G&A was affected by the net impact of increased corporate expenses, including legal and audit fees related to our transition to reporting as a US domestic issuer, rather than a foreign private issuer; our NASDAQ application and listing process; increased business development activity and increased investor relations activity; and partially offset by a decrease in share-based compensation. Our net loss for fiscal 2015 was 2.8 million, or $0.36 loss per share, as compared to a net loss of 8.4 million, or $1.11 loss per share, for fiscal 2014. The decrease in net loss of approximately 5.6 million from fiscal 2014 to 2015 was primarily due to significant fluctuations in non-cash gain or loss on fair value of warrant liability, increased revenues, and decreased research and development expenses. The warrant liability occurs because we have warrants with Canadian dollar exercise prices that are treated as derivative liabilities. Each quarter, we adjust the fair value based on the remaining warrants outstanding with those Canadian dollar exercise prices using a Black-Scholes valuation model. Increases in our share price caused a greater warrant liability and a resulting loss on fair value, while decreases in our share price caused a lower warrant liability and a resulting gain on fair value of warrant liability. And although the amounts can be significant, changes in fair value of warrant liability have no impact on our cash flow. We will have no warrant liabilities after January 2016, when the remaining warrants with Canadian dollar exercise prices expire. Our financial position remains strong. Cash, cash equivalents, and short-term investments at September 30, 2015, were 9 million, compared to 13.9 million at August 31, 2014. Net cash used in operating activities during fiscal 2015 was 4.4 million, compared to 4.3 million for fiscal 2014. We expect our current cash position will continue to fund our operating and development programs, as well as upgrades to our facilities, for at least the next 12 months. However, we may seek additional capital through debt or equity raises, as needed, to accelerate the development of our programs in response to market demand or to exploit new opportunities to expand our business. Stellar had positive shareholders' equity of 8 million and approximately 8 million shares outstanding at September 30, 2015, compared to shareholders' equity of 7.7 million and approximately 7.8 million shares outstanding at August 31, 2014. As Mark mentioned earlier, we filed our fiscal year-end 2015 Form 10-K, which includes consolidated financial statements and related management discussion and analysis, on Monday, December 14, 2015. All of Stellar Biotechnologies' current and past reports and filings can be found on the Canadian securities administrators' website, SEDAR.com, or the US SEC website, SEC.gov/EDGAR. They can also easily be accessed from our website, stellarbiotechnologies.com, as financial and SEC reports under the investors section. And please note that as a previous foreign private issuer, prior to fiscal 2014 our past annual reports were filed under Form 20-F and past quarterly financial statements were filed under Form 6-K on EDGAR. And I will now turn the call back over to Frank for closing remarks. Frank?

Thank you, Kathi. I would like to just reiterate key points of our presentation. Growth in revenues continued in 2015, we increased KLH sales, and our business development efforts continued to bring in new customers. Our transition in 2015 to a fully reporting US domestic issuer culminated in the uplist to the NASDAQ capital market, a move that we think was important for our shareholders, both for broader outreach and improved liquidity. Our cash position remains strong and we see an excellent opportunity for Company growth in the year to come. I am very excited by the prospects for Stellar Biotechnologies and want to thank our employees, partners, and shareholders for your part in successful 2015.

Operator, this concludes our formal comments at this time and we would like to open up the call for questions, if you would start the Q&A portion of the call, please.

Thank you, Mark. We will now begin the question-and-answer session. [Operator Instructions] And we will take our first question from Jason McCarthy with Maxim Group.

It sounds like you guys had a very good year, the up listing to the NASDAQ and sales are growing, just a couple of questions. Can you give us a sense for 2016, what KLH sales could look like, maybe some guidance on grams that you are thinking for the next year? And could you give us a sense of what the consumption rate is for a company like Neovacs who are -- they are in a Phase IIb and they are going to initiate several other studies in the coming months. How much KLH do you consume at the Phase II level? And then, maybe what a company like that in lupus consume in a Phase III?

As a public company, we can't speculate on future events, in particular those things that are under the control of our partners, like Neovacs. I think you can look to Neovacs, I know that they have given indications through press releases of the expanding -- their expanding Phase IIb lupus trial. And I do know that they have forecasts of their own for the demands. Those are proprietary, but there are two indicators as to why we're confident in our core KLH business and the potential for fast growth. One is that our sales growth reflects really the increasing demand of KLH as companies advance their clinical trials, companies like our partner Araclon as well as Neovacs. Also, if you look at the pipeline of companies with KLH based immunotherapies in clinical trials and then imagine how many more there may be in preclinical stages, you'll see that the reason that we are excited about the prospect for growing demand. And I think for indications of specific requirements of companies like Neovacs, I think you would have to look to their press releases to get public information with regard to what each one of those trials would require.

And I just want to shift gears. A week or two ago, you had data or an announcement of a poster presentation of a KLH therapeutic vaccine for C. diff which I thought was great data. It was really interesting. And I am curious if -- indications in infectious diseases, these in-house therapeutic vaccines, if you would, is something that Stellar is going to continue to pursue and can we look forward to more preclinical then ultimately clinical data in these other indications, aside from being a KLH supplier to other vaccine companies?

We think that the data from our investment in developing the C. diff immunotherapy is a positive indicator both of the value of that asset and we are in discussions that could result in partnering relationships to further advance that asset. It's also a great indication of the strength that Stellar has in its R&D program to identify preclinical assets, incorporate KLH into an immunotherapy using those targets for specific disease indications and we think that we will continue to work in that to identify potential drug candidates and partners to help advance those drug candidates into clinical development.

Operator, with that, now I am going to take one of our calls from the -- or one of our questions from the webcast participants. And the question is with regard to our expansion in Mexico. Under your current expansion plans in Mexico, can you give us any more detail why this is relevant? And Frank, would you take that question?

Yes, that's a good question. It was, we think, one of the highlights of 2015. As I hope our investors and stakeholders can appreciate, Stellar has advanced its technology for aquaculture production of the source animal. In Ventura County, California, we've developed a state-of-the-art aquaculture facility but there is always inherent risk in being single-site dependent. So both for long-term growth strategy, as well as site redundancy, we think it was critical to acquire a second facility. We are going to go methodically through a two to three year feasibility assessment at that site before we make substantial capital commitments to actually build out commercial scale production facilities, and we hope that site would be available and could be developed coincident with commercial launch of one or more of our partners' drug products so that we can assure both scalability and site security with two production sites. So we think it's a critical asset and a third point from a competitive strategy, we think we have spent a lot of time looking for an appropriate second site. We think this is one of the best sites that we have seen along the coast of North America, and we think having control of that site clearly gives us competitive advantage because it's not available to a competitor. So, we think both for offensive and defensive strategy, we think it was an excellent move both for our shareholders, as well as for our customers.

And then as a follow-up to that, there was an additional. How challenging is the environment in Mexico regarding the government acceptance?

Obviously, working in a foreign jurisdiction, there are always cross-border issues, but at this site in Baja California, our partner, Ostiones Guerrero, has great relationship with the local municipalities and officials, and we have cultivated our own relationships with individuals, such as the Mexican National Secretary of Fisheries and Aquaculture and the regional aquaculture director, to build out very strong political alliances, as well as commercial alliances, to ensure that we can grow in an expeditious manner and have all of the support both, as I said, both commercial and political support to develop this site, and I think there is a great deal of enthusiasm amongst the partners and stakeholders in Baja California to see biotechnology assets developed in that region. So, we think the climate is excellent and political relationships are well established.

With that, Operator, we would like to turn the call back to live call-in participants, if you would start to poll for questions again?

[Operator Instructions] And we’ll take our next question from Brian Marckx with Zacks Investment Research.

Good afternoon, guys, and congratulations on all the great progress. The 10-K notes Axon Neurosciences contributed, I believe it was, 16% of revenue for the year. Does that relate to their Phase I study for their Alzheimer's candidate?

Mark, thanks. I am glad to see that people are reading our 10-K in detail. But yes, Axon was a significant contributor to the growth in Stellar's revenue. And although I can't speak specifically to that relationship, as you can appreciate, many of our commercial relationships are under NDA, but I can point you to Axon's news with regard to what they thought were very promising results from a Phase I clinical trial and the announcement that they intend to pursue their tau protein target for Alzheimer's disease in a Phase II trial that they expect to launch in 2016, and I would think that acquisition of KLH would be more forward thinking toward a Phase II trial, rather than a Phase I trial that has already been completed.

Okay, okay, that's great. Thanks, Frank. That's all I had.

Okay, great, and we appreciate the comments.

Operator, with that, I'm going to take a couple more questions from our webcast participants and we're coming up on the cut-off time we had originally scheduled for the call. But we will take a couple more questions from the webcast participants and then transition from there. So, the next question relates to our margins and looking for some more clarity on our margins. So with that, I am going to pass that to Kathi to address that specific regarding our margins.

Okay. Thank you for that question. I appreciate the opportunity to explain it a little bit more, because I am asked that fairly regularly, looking back at our comparative financial statements. And I mentioned that in 2014 and prior, we certainly have had sales at that point, but we had not had the level and consistency of sales of particular products that, under accounting rules, we would be able to support the assurance of recoverability in the future. So we did not put inventory onto our balance sheet. That means that as we had production, all those costs flowed to cost of sales and contract services, whether or not the products had been sold. And so, it actually would look like a negative margin. I think now in the fiscal 2015 where we are recording inventory on our books, that is a much better assessment of -- you can see the sales and the cost of sales, so that's a better assessment of our margin. Of course, it will vary with the product mix, but you can definitely see that there is positive margin at that point in time and hopefully that explains that for people.

That's great. Yes, I think that covers that. That is very good. So we will take one final question from the webcast participants and this should wrap the call for this time. But the next question is, when will companies that you are working with have positive inflection points and when should we expect such future announcements?

Thank you, Mark. This is Frank and I will take that question. Of course, as I said earlier, we can't speak for other companies, of course, and we can't speculate on future events, but the indicators that we believe are important are these. First, look at the agreements that we have in place now -- long-term contracts, clinical-stage companies in a variety of serious diseases. These show our ability to convert customer inquiries into partnerships. Second, our sales are increasing, which points to growing demand for Stellar KLH. And lastly, look at the pipeline of dozens of KLH-based immunotherapies in clinical trials. All of these will need a reliable, scalable source of GMP-grade KLH. We see this as virtually untapped market potential and we are positioning to be the Company that supplies that market through our own manufacturing capabilities, our site expansion, and growing relationships and alliances with customers. So we think all of these things are great indicators of the future potential for Stellar and its KLH products.

Thank you, Frank. With that, Frank, I would like to just turn it back to you for closing comments, and then the operator, you can take us from there.

Okay. Thank you, Operator. Once again, I would like to thank all our shareholders and key stakeholders who have participated in today's conference call. If you have any additional questions, please feel free to contact either Mark McPartland or myself. Thank you for your continued support and interest in Stellar Biotechnologies over the last year, and we look forward with great excitement to providing future updates on Stellar's progress. Operator?