Q2 earnings transcript Microbix Biosystems Inc. (OTCQX:MBXBF) Q3 2023 Results Conference Call August 14, 2023 11:00 AM ET Company Participants Deborah Honig - Investor Relations Cameron Groome - Chief Executive Officer and President Kenneth Hughes - Chief Operating Officer James Currie - Chief Financial Officer Deborah Honig Good morning. Thanks everyone for joining us today. We are going to have a review of Microbix's Q3 numbers, as well as an update on some of the catalysts that happened over the past quarter. With me as always, I have Cameron Groome, CEO, Kenneth Hughes, COO, and Jim Currie, CFO. We won't be working off a presentation. There will be quite a bit of Q&A in the session. But this presentation will contain forward-looking statements, which you can find on the presentation on the website, which has been updated after the quarter. And as I mentioned, there will be Q&A, so feel free to enter those in the bottom of your screen, or you can email them to me. With that out of the way, I would like to introduce Cameron. Hi, Cameron. Cameron Groome Good morning, Deborah. Thank you very much and thank you for joining us as I think, Jim and Ken. Q3 was relatively noisy quarter, so I thought we would take some time this morning to unpack the results as well as touch on some of the milestones we achieved over the months since our last investor call in mid-May around our Q2 results. And one of the first things I would bring to the four would be our execution of an alliance for Kinlytic urokinase, our drug asset that was announced on May 16th . And this partnership really achieves our goal of fully funding the return of Kinlytic with the use of third-party funds and resources, so that we are not in any way leading away resources from Microbix's informations, but rather adding to them and our partners on that alliance Sequel Pharma is a portfolio company one of the world's leading private equity investors in life sciences. And well, we are not allowed to mention who that is. Anyone intrepid enough to do a little digging can probably sleuth that out and it is worth of course, mentioning that they have conducted considerable due diligence around Kinlytic and liked what they saw. There is one gating matter that we need to pass before they fully turn on the taps, which would involve an investment of totaling about 50 million Canadian, about $35 million prior to the re-approval or the supplemental BLA approval to enable sales to begin on this project. So that is some pretty meaningful sums, and that is to determine and make certain that the FDA has not vastly changed its pre-COVID position on the project. And we will know that outcome by the end of November, I expect, which should lead to further revenues to Microbix from upfront milestone payments, as well as the reversal of the impairment that we took on this asset going into COVID at the end of fiscal 2020. So we are very pleased with the outcome of this partnership agreement and we certainly hope you are too. And maybe I ask Ken to elucidate a little bit on the nature of the interactions going forward. Kenneth Hughes Yes. Sequel is a highly sophisticated group well, finances already discussed and with them deep understanding of biologics and biological drugs and so the due diligence was very detailed and very collegial and ended up in a good place. We will be indeed reconfirming the council that FDA provided to us in 2017, before we move forward. There is no reason to believe it will change, but, you know, there are vague reason in this, and so we will, it is a milestone that we need to get to. But the analytics have moved on. The product is every bit as, as good as it ever was, and the market is crying out for thrombolytics at the moment. And there are rises in clots in is an aging population, a post COVID population, and there are shortages of other, the other thrombolytic TPA in the marketplace. And we would be actually going head to head with that. So that is a great poll. We have also heard from the European regulators who one have an interest in this too. So we are moving forward the relationship with Sequels is extremely collegial. In fact, we are already visiting and this, and next week we are actually going to visit the CRO that we will be working with in terms of the analytics. So we are getting ahead of the curve here. Everybody expects a fine outcome and that we are moving forward from there. As Cameron says, detailed due diligence, we have been involved in this file for a long time. Microbix will be supporting their technical and scientific team and we will be paid to do that actually, so cost recovery so we will not be bleeding any resources from Microbix. Whatsoever as we realize it is a very important product and bring it back to the marketplace. Cameron Groome Thank you very much, Ken. Jim, maybe I can ask you just to touch on a little bit of some of the accounting entries and funds flows that we may see from what that we did see and what we may see from Kinlytic going forward if the FDA responds positively as we hope and expect. James Currie Sure, Cameron. In Q3, we saw recognition of a million dollars worth of million U.S. of revenues with just over 1.3 million in revenues in Q3 related to a two million cash upfront payment that we received. one million of which is returnable if they decide if the, our partner decides not to proceed, which we are not anticipating at this point in time, but we can't recognize that until we have gained their approval to proceed, which will happen after the FDA guidance meeting. We also had to recognize, there was a advisory fee that was associated with the signing of the agreement, a portion of which $250,000 was payable upon the initial signing of the agreement. So that was booked in Q3 as well. So as we go forward and again, it is entirely dependent upon the timing of the approval from our partner of the FDA guidance, which can go as late as, I guess it is November the 14th is the latest, but it could be sooner than that. So when we do -. Cameron Groome I think Jim, I would say end of November rather than this specific day, but, thank you. Go ahead. James Currie Okay. We will see, once we see that payment, what will happen and that approval, there will be two things that happen. One, we will recognize the million dollars of deferred revenue that from the initial upfront payment, and we will also recognize another $2 million of, from the milestone payment that will be due at that point in time. Offsetting that slightly will be, an additional advisory fee that was payable upon FDA guidance, and we are expecting to see that each of these, it could be as early as Q4, but fiscal Q4 or early Q1 - fiscal 2024. We will also, then - it will then move into an agreement where we will see with the confirmation of the proceeding moving forward with this product. We will also, from an accounting standpoint be required to, we reverse our impairment on this asset that we did a couple of years back. And we will at that point in time reverse the better part of CAD3.1 million, which was what we had impaired back a couple of years-ago. So that will show up as a credit a below the operating income line credit when that reversal takes place. And again, that is going to be based upon the timing of the FDA guidance and approval as well. Cameron Groome Jim, I think it is worth mentioning that there is a maximum level. Certainly we view the asset with this positive guidance is worth a lot more than $3 million, but we are limited to the recovery of what we would previously written off in the fourth quarter of 2020 fiscal, as to what it can be marked up to. But there is a sponsored research analysis on Kinlytic that has been now made public and urge everyone to read that by KRC insights discussing what Kinlytic is the nature of the market on Kinlytic and its potential impact today and going forward for Microbix. So, some good reading that we had there. Sorry, Jim, go ahead, please. James Currie And beyond that, there will obviously - there will be milestones in the future based upon the progress of getting FDA approval for this, for Kinlytic. Obviously that will take time, before we are starting to see the royalties that we royalty stream that we expect to see as we move forward. Cameron Groome Very good. Great. Well, thank you. Certainly, we will have time for further questions about the Kinlytic project as we move into the Q&A portion of this meeting. And from here, just say, this is very material for us and I think it is very material for folks health to have a very effective thrombolytic returning to market in a few years time. During Q3, we also announced multiple areas of progress with our caps programs, specifically for disclosures across June and July. The first being June 13th disclosure on work we have done on antimicrobial resistant sexually transmitted infections research results posted at the ASM Microbe conference, the American Society of Microbiology. So this is again peer reviewed poster presentations of results with our partners. We also announced on June 20th a novel program with one of our proficiency testing and accreditation agency partners, lab quality of Helsinki, Finland, the World's Spur. We announced with them the world's first program for qualifying labs to do testing for genital ulcer diseases, which is very important that labs have appropriate proficiency and accreditation to do those sorts of tests. Then in early July, we announced that Microbix is supporting the National Cervical Cancer Screening Program of the Netherlands, which is one of the countries in the world, leading the move from 1950s Pap testing technology is frontline screening, where you are actually waiting for cells to be transforming or have transformed into cancer to detect cancer at an early stage, rather moving five-years or more upstream and saying, do you have a high risk type of HPV infection that may lead to cancer some years from now. So a real big leap in the quality of care and are caps for high risk strains of HPV have been selected to support that program across that country. And that is just the kind of thing that we are looking to do to lock in ongoing streams of revenues associated with our caps and really assert technical leadership. And we also announced at the AACC or American Association of Clinical Chemistry, major industry meeting takes place every year. Just been rebranded the American Diagnostics and Laboratory Medicine Conference, but everybody still will know it as AACC for some years. But we announced and presented data of novel 4-plex STI, Sexually Transmitted Infection Test Controls at that meeting, extremely well received. So all of these programs becoming revenue generators for our company and incrementally building our sales and caps as well as demonstrating our technical leadership to industry. And finally, another major achievement in the quarter that I will ask, Jim and Ken to add further color on is achieving the go lives on our - both our new enterprise resource planning or ERP software systems that control everything from and track everything from initial raw materials, inventory ordering to collect collection of receivables. So the control system for the whole business as well as our electronic faulty management system software upgrades, moving from countless binders of batch records paper documentation, which we have done very effectively, but becomes impractical as we expand the scope of activities and the frequency of production. So both these big achievements that we announced we were targeting and have now achieved the go lives that were announced on August 4th. And maybe I can ask, Jim to talk a little bit about the ERP system importance and, and Ken, I can ask you to touch on the eQMS. A - James Currie Thanks, Cameron. I guess technically the ERP was, this quarter being the fourth quarter, but because we just announced it, we just went live a couple of weeks ago and, it is been an interesting process, preparing for the, the go live and since go live. I think it is incredibly important for us as Cameron identified that, and we have repeated that we are looking for, excuse me, for a hundred million in revenues within the five-year period. And the likelihood of being able to do that with the systems that we have had in place historically was probably not as strong. So that it became essential for us to improve our systems. And broader from a manufacturing and financial, I'm looking forward to the getting a lot more information out of the system and being able to do a lot more analytics and be able to provide our team with guidance both tactically as strategically based upon that information. So that is as I say, it is early stages, but I could already see the access to the data being much more readily available than it was with our previous systems. Cameron Groome Thank you very much Jim. No, I think that is great. And Ken, could you dive in a little bit on the eQMS side? Kenneth Hughes Sure. And we have talked a lot over the last little while about capacity building and future proofing of this company. We are a well regulated company, ISO 1345, ISO 9001. We are regularly audited and we have passed that superbly with an, essentially a paper-based system. And that system is really as stretched as it could possibly be at the place we are now. And so we announced the intention to futureproof and build capacity in this area and that is exactly what we have done. To Jim's point to allow us to build 50 million, a 100 million and beyond, there was no way we could do that with the systems we have. And now we have these systems in place and we are going to continue to realize efficiencies as we move forward. So our manufacturing is now under a electronic quality management system is going to continue from the end testing as well and quality control. This is going to create great efficiencies and data integrity going forward and allow us to build our portfolio. We are still a small and medium sized company with a very complex portfolio of products. So we need to have the necessary systems to manage that properly and to allow their growth as we stop being a small, medium-sized company and start being a medium big company. And we have to have the system to do that. So I'm very pleased and thrilled that we put together an excellent IT group. We have been working closely with all the departments to implement the eQMS and the ERP upgrades necessary to allow us to continue our growth in the next little while. And that is why it is so important and pivotal to what we are trying to achieve. Cameron Groome I thought now maybe Deborah, we would move over to touch upon the results for Q3 and unpack those a little bit. We had a quite acceptable top-line of 5.5 million in revenues just shy of our all time prior record of 5.6 million. But this being achieved without any DxTM revenues. So we, the revenues were comprised of 4.2 million of sales from ongoing sales of caps and antigens. Add to which was added 1.3 million of revenue recognition from the milestone first half of the first milestone on Kinlytic. However there were a spate of relatively unusual expenses associated with the quarter that totaled 2.2 million that pulled us into a net loss for the quarter. And just going through those a little bit by order of magnitude, the largest was our decision to take a write down of our DxTM inventory and we will go into a little bit about why we did so. But that totaled close to a million dollars followed by some adverse sales mix looking at Q3 over Q2, that meant a lower margin by about $0.5 half million on sales mix Kinlytic transaction expenses and fees and expenses that Jim mentioned of about 400,000 and some IT and FX matters totaling about - IT expenses and FX expenses foreign exchange totaling about 300,000. So you had about 2.2 million in negative variants associated with the quarter, and those were what led to a net loss Q3 on essentially the same operating revenues of Q2 whereby we achieved breakeven results. So it is a frustrating quarter in many ways, but not a negative C change in terms of direction of business. Jim, maybe I can ask you to dive a smidge deeper into that and just speak to it a bit. James Currie Sure. One of the - on the margin side of the business, we can see quite significant swings depending, especially in our antigens business. We can see quite significant swings depending on what products we are shipping, as the margins differential between some of the products are quite large. Q2, we had a very favorable product mix, and it just happened in Q3 that we had a very unfavorable product mix and that accounted for a fair chunk of margin impact somewhere in the neighborhood of $400,000 during the quarter. On the operating expense side, IT expenses, especially year-over-year, we were not spending much on the IT front a year-ago, versus where we are today, not only in staff, but as well in terms of subscription fees as well as consulting fees for the implementations of the new programs. And the exchange FX exchange while again is, we try and do some hedging on our U.S. dollar side of things, not a 100% and that we saw a strengthening the Canadian dollar against the U.S. dollar, and that impacts our fairly high amount of U.S. dollar receivables that we have got at any point in time and or U.S. cash that we have in the bank. So that presented an FX loss versus an FX gain in the previous period. Also within the operating expenses was the fee related to the Kinlytic deal of $330,000 plus legal fees associated with that were both total about 400,000 bucks. So there is some one-time stuff sitting in the operating expenses that we wouldn't have typically seen. So while all things were favorable in Q2 at a similar non-Kinlytic level of revenues, the swing from both were quite wide between the quarters. And hopefully I don't expect that to repeat in Q4. Cameron Groome Yes, we are seeing by division, our antigens or ingredients business is effectively back at pre-pandemic levels running in the range of 2.5 million to three million a quarter, you will recall in 2019 that that had been around the 12 million a year revenue mark and then dropped as low as just under eight million. So, of a hit by about a third from the pandemic. That is come back quite strongly, but as Jim mentions, there is quite a bit of revenue or margin fluctuation depending on the product mix within that unit. With caps, we are continuing to lock in customers and very much poised for growth. And I know this is certainly a source of confusion if not frustration for many shareholders, but we are hearing quite a bit of FDA backlog on approval of instruments and assays. I don't have independent substantiated data on that, but this is what we are hearing from our customers and that has a knock on effect to us. So we have been kind of thus far seeing that 1.5 million a quarter caps range and we are really pushing hard with our customers as their instruments and assays get approved, that we will see a break above that level, but has been a source of delay on the regulatory side with that. And then DxTM is really a problem child for us in the portfolio. And we were selling product to Public Health Ontario, whose objectives were through university health networks, whose objectives were very much aligned with the policy objectives for security supply of the provincial government. And that was handed back to other procurement groups that have no such strategic outlook on security of supply and frankly returned to the same importers from whom they be