Cibus, Inc. Q3 FY2023 Earnings Call

Good afternoon, and welcome to the Cibus Third Quarter 2023 Results Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the conference over to Wade King, Chief Financial Officer. Sir, please go ahead.

Thank you, and good afternoon. This is Wade King, the Chief Financial Officer of Cibus. I would like to thank you for taking time to join us for Cibus' third quarter 2023 financial results and corporate update conference call and webcast. Presenting with me today is Rory Riggs, our Co-Founder, Chief Executive Officer and Chairman; and Peter Beetham, Co-Founder, President and Chief Operating Officer. Before we begin the conference call, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to Cibus' SEC filings for a list of associated risks. This conference call is being webcast. The webcast link along with our press release and corporate presentation are available on the Investor Relations section of cibus.com to assist in your analysis of the business. With that, I would now like to turn the call over to Mr. Riggs. Go ahead, Rory.

Thanks, Wade, and welcome to everybody on the call. I'll begin by highlighting several of our recent business and commercial updates. Then Peter and I will walk you through where we are and where we are headed. Lastly, Wade will finish with a brief discussion of the financials. The goal of this format is to provide you with an educational overview of our business, its pipeline and their prospects. So that you're better equipped with a solid foundation to better understand our company and to track our events and progress. With that, I'd like to discuss some of our recent business and commercial updates. Since going public in June of this year, we have been laser-focused on driving our evolution from an R&D company to a commercial company. As part of this transition, we underwent a strategic alignment in October, aimed at bringing enhanced focus to our primary commercial goal, which is furthering the advancement of our commercial activities. All of our resources and operations are now centered on completing the launch of our initial traits. Importantly, our three developed traits, Pod Shatter Reduction often referred to as PSR in canola, HT1 Herbicide Tolerance number one and HT3 Herbicide Tolerance number three in rice, as well as the advancement of our soybean platform and bolstering the development of our advanced traits, Sclerotinia Resistance and HT2 in both canola and soybean. Notably, our realigned efforts have captured this focus and priorities. I'll speak to our progress on each of these traits a little later on. Concurrent with our strategic realignment, we have also implemented some necessary cost reduction measures with the objective of preserving capital resources for the advancement of these five traits. We believe that refocusing on our strength and top priorities will position us well to achieve our strategic objectives in a more timely manner, and we're working hard to make sure that happens. So let me take you to our five trait, three crop business model. Although royalties haven't started yet, our commercialization efforts are well underway, centered around advancing five traits with applications in three major crops: rice, canola, and soybean. Combined, we believe this represents an addressable market opportunity of over 250 million acres and over $1 billion in potential royalties across canola, rice, and soybeans. We believe that this five trait, three crop model is just the beginning of what our capabilities can ultimately address. One of our key accomplishments by our scientists has been their mastery of oligonucleotide-directed mutagenesis, our single-cell editing technology, and production system supporting each crop platform. For many, the even bigger accomplishment is the fact that with this technology platform, the team at Cibus has been able to generate a product pipeline of five important traits. Three of these traits are fully developed, have multiple years of successful field trials, and strong intellectual property. Importantly, for each trait, we now have a strong customer base. In addition, Cibus has built two crop platforms at canola and rice, as well as being close to a third crop platform in soybean. Our soybean platform has been under active development for several years, and we expect to have the soybean platform operational in Q4 2023. Now that we have these three traits developed and we've been commercializing them through a high-throughput editing process, accelerating our development timeline, we are very excited about the prospects for these three traits. In this process, we edit our customers' proprietary germplasm and then transfer their germplasm back to them with our trait. We can now execute this process very quickly, allowing the customer to accelerate their commercialization process. Once satisfied and the results are confirmed, then the customer develops a registration dossier, initiates its marketing plan, bulks up its seed inventory, and ultimately distributes the seed to farmers, at which point the royalties begin being paid to Cibus. We consider our first trait product to be our Pod Shatter Resistant trait, PSR. It strengthens the seeds around canola seeds, which protects the crops in extreme weather conditions. We have shown PSR's efficacy in multiple field trials. Based on these field trials, we now have 10 different customers that we estimate represent over 20 million acres of Canola WOSR. We have now edited these crops and have started returning to customers their leaked germplasm with our PSR trait. As we have stated, we expect to complete transfers to six customers in 2023, and additionally, we expect in 2024 to transfer the remaining customers and increase our market penetration with additional customers. We estimate that the annual trait royalties from PSR could be approximately $200 million annually. In addition to PSR, the two developed traits are HT1 and HT3 in rice. They are important genetic traits for herbicide tolerance or weed management. Over 95% of canola, soybean, and corn currently utilize GMO-based herbicide traits for weed management. Rice has never had GMO traits. This is why these two traits are in high demand in rice. We have already transferred our first HT1, HT3 traits in rice to Nutrien for the North American market. We now have three customers who we believe represent over four million acres in North and South America. We expect additional customers in North America and South America in 2024. We estimate that the annual trait royalties from HT1 and HT3 in rice could be approximately $150 million a year. These HG traits are now fully developed and validated, and similar to our work in PSR, we'll be tracking the progression of customers' commercial lines that will generate our future royalties streams. The progression of these three traits has accelerated significantly in 2023. We are shipping additional traits back to customers and are also adding new customers across both canola and soybean. We look forward to updating you on the progress of these three traits and these two crops over the preceding quarters. In addition to our developed traits, our two advanced traits are critically important. They are both multi-crop traits, meaning they have potential efficacy across multiple crop types. The first advanced trait is HT2 or herbicide-resistant number two for weed management. Because of the extensive overuse of certain modes of action over the last 20 years, many weeds have become resistant to those herbicides. For crops like canola and soybean, there is extensive demand for new broad-spectrum herbicides and associated herbicide traits that target broadleaf weeds. That is the market for HT2. We expect important greenhouse results next summer for this trait. Because of its demand in both canola and soybean, we believe it has the potential to be the first gene-identified trait to exceed 100 million acres. For perspective, the industry estimates that GMO-based herbicide traits are utilized currently on over 300 million planted acres. The second advanced trait is for sclerotinia or white mold resistance. Sclerotinia is the most damaging disease in canola and one of the major diseases impacting soybean. As a disease trait, this is not a single mode of action trait. In order to be durable, this trait needs to address multiple parts of the disease condition. If successful, this would be the first major disease trait that will be applicable to multiple crops. If this trait is successful and deployed across both canola and soybean, we believe that this trait has the potential to be the largest gene-edited trait to date. The development of these two traits have progressed well in 2023. Over the next years, we will track the progression of these two traits also and their advancement to customers, commercial alliance, and to their royalties payments. These traits and their royalties payments will be a significant component of our economic base and profitability. We will follow this progress on a quarterly basis very closely. Soybean is the last component of our five trait, three crop business plan. We have had significant progress in completing our soybean single-cell editing platform. As we have stated, we still believe that we will complete development of this platform in FY 2023. Over the next few years, we will track the progression of our soybean business. Once we have achieved our platform, we expect to have significant growth in soybean customers, based on initial discussions we have had to date. This is a large 200 million plus acre crop in just North and South America. Many of the major soybean seed companies are already customers of Cibus and other crops. We believe that soybean will be a major contributor to our economic base going forward and a central pillar of the growth of gene editing in agriculture. As is clear, our five trait, three crop model is the central focus of our corporate strategy. We intend to track the progression of each trait as it is deployed into elite germplasm, and the progression of each will be central to our quarterly updates going forward, as each trait by crop combination starts generating royalties revenue.

Thank you, Rory, and good afternoon to everybody. As Rory just mentioned, Cibus' five trait, three crops model is at the forefront of agriculture's analog to digital moment. We say that because with these gene-edited traits, we are fundamentally changing the scale and speed of trait development in crops. The technologies behind our Rapid Trait Development System (RTDS) allows us to edit a single cell extracted from plants that represent the best plant genetics in the industry. We term this as elite germplasm. The edited cells from that elite germplasm are then regenerated into an identical elite germplasm with the targeted edits. This really is the key point of differentiation at Cibus from other gene editing technologies. With it, we have significantly reduced the time and expense of bringing new trait innovations to seed companies. Our focus continues to be scaling and accelerating customers' gene-edited elite genetics. Here's how high-throughput gene editing, aka our trait machine works. Once we secure approval from the seed company to edit their germplasm, and we physically receive the germplasm from them, the development of a product begins as it enters the trait machine. As we shared last quarter, we opened the first high-throughput semi-automated gene editing facility. As Rory mentioned, we are excited to see our first customers edit their germplasm transfers in 2023. This new facility is set to deliver additional product at scale and acceleration over the next 24 months. It's important to note that when we add a new trait to our portfolio, we don't have to invest in an entirely new machine. Instead, we simply use a new set of editing reagents. When we add a new crop to the platform, we just add in plug-and-play automation solutions while applying years of plant tissue culture experience to facilitate any changes that may be required. The relative simplicity of our design and the efficiency that it allows is the basis for our rapid development, while also helping curtail significant CapEx investments as we scale and accelerate our business. When we receive our customers' elite germplasm, it is processed and run through our trait machine. Once the molecular confirmation of the edit is complete, we validate the quality of that edit, the efficiency of the trait, and ensure the elite line is identical to what we initially received, with the sole exception of the edits we make. This quality assurance is absolutely critical for our customers. We then proceed to generate a small supply of seeds to hand back to the customer, so they can begin their commercialization process. We envision this entire process lasting between 18 to 24 months. It is important to note that at Cibus, our early work on our developed traits has been completed in growth rooms, greenhouses, and field trials over many years to showcase the process prior to entering the high-throughput editing process with customers' genetics. This early work we have completed provides excellent guidance for our customers on how we can accelerate their commercial process. Cutting down what has historically been a decade-long process to a few years is truly revolutionary and underpins our strategy to build a scaled, high-margin, high free cash flowing business. Back to you, Rory. Thank you.

Thanks, Peter. In summary, our commercialization efforts are well underway and are centered around advancing five traits with applications in three major crops, rice, canola, and soybean. Combined, we believe this represents an addressable market opportunity of over $1 billion in royalties, and our three crop five trait model is just the beginning of what our capabilities can ultimately address. In addition to the five trait, three crop commercialization process, there are other elements that are also important to our commercialization efforts. The summer in agriculture is a key time for field studies and this year we had an extensive field trial schedule for each of our traits. We also worked with our customers in the fields, as we work together to launch our three developed traits. Additionally, in the third quarter, we established our first multi-locational field network for sclerotinia white mold resistant testing of various modes of action that are progressing through our pipeline. This field performance network is critical to advance and demonstrate the efficacy of existing and additional modes of action for sclerotinia resistance. 2023 has also been a key year in the development of a new global regulatory regime for gene editing technology, specifically gene editing technology that does not use transgenes. In the recent years, we have seen the introduction of policy enabling the use of gene editing without the use of transgene in multiple countries around the world. Most recently, on July 5, the EU College of Commissioners adopted the European Commission proposal on the Regulation of Plants obtained from New Genomic Techniques, often referred to as NGTs. The proposed regulation identifies conventional-like category NGT products that would be regulated as conventional varieties. This brings the EU closer to that of trading partners in North and South America, Australia, and Japan. In the proposal, the Commission highlights the potential of NGTs to contribute to more sustainable agriculture, climate resilience, and food security. Under this proposal, products from Cibus' gene editing platform would be considered conventional-like. The EU is important for many reasons. First, it is a critical bellwether for the rest of the world. Second, it represents over 100 million acres that have not had access to GMO trait technologies. And third, there are approximately 20 million acres of winter oilseed rape grown in Europe, which ties directly into our own strategy. Our PSR trait has been developed for this market, and we began field trials for this trait in the U.K. in 2023. The market is also suitable for our other advanced traits within our canola pipeline. These are major steps in the progression of our products and technology on a global basis. We will continue to monitor and update the progress on these regulatory advances as they occur, but we're on target for gene editing technology to be a globally approved methodology for advancing plant traits. Now I'll pass the call on to Wade to briefly review our financials.

Thank you, Rory. Looking at our financials for the third quarter; cash and cash equivalents was $31.9 million as of September 30, 2023. We believe our cash and cash equivalents will enable us to fund planned operating expenses and capital expenditure requirements into the first quarter of 2024. R&D expense was $17.5 million for the third quarter of 2023 compared to $3 million in the year ago period. The increase was primarily related to increased lab supply and facility expenses, an increase in employee headcount, and an increase in stock-based compensation expense for restricted stock awards. SG&A expense was $8.8 million for the third quarter of 2023, compared to $3.2 million in the year ago period. The increase was primarily related to an increase in headcount, increased consulting and legal fees, and an increase in stock-based compensation expense for restricted stock grants. Non-operating expense was $0.9 million for the third quarter of 2023, compared to non-operating income of $0.3 million in the year ago period. The decrease was due to changes in the fair value of the liability classified Class A common stock warrants. Net loss was $34.5 million for the third quarter of 2023, compared to a net loss of $6 million in the year ago period. For additional details about our financials for the third quarter of 2023, please refer to our press release and filings with the SEC. That concludes our financial discussion. Rory, back to you for your closing remarks.

Thanks, Wade, and many thanks to everyone for listening in. I can't tell you how excited we are to see what the future brings for Cibus. We believe that we are at a historic inflection point where we can, for the first time, bring rapid innovation to an industry that's hungry to solve the world's food shortages. With tailwinds from an improved regulatory environment and breakthroughs in trait development, our experienced team at Cibus is executing on the opportunities ahead of us as we continue to advance the deployment of our traits to our customers' elite germplasm to enhance their product offerings for the benefit of their farmer customers. We really look forward to updating you on the next call. Operator, that concludes our prepared remarks. You may now open up the call for Q&A.

And our first question is from Bobby Burleson from Canaccord. Please go ahead.

Thank you. Hi, Rory and team. So, I guess, my first question is just around helping us understand how to prioritize some of the efforts currently underway. So, if we can just look at some of the commercialization progress that you guys announced that took place over the quarter. Maybe help us rank that in terms of significance by total addressable market opportunity or time line or both?

Thanks, Bobby, that's a great question. We have these five traits; you totally realize they're prioritized. Our priority is really these three developed traits. And so, the emphasis here is to say what happened in the last quarter to get rice further along? What happened in the last quarter to get pod shatter further along? I'll let Peter talk to some of it. But because of the work we've done in rice, we now have really big demand in Latin America. We've already signed one big customer, which we think represents plus or minus 3.5 million acres. We have a number of others right in the target. Real progress has been in the development we've done with the commercial customers. These are customers who are now in the process of sending us their germplasm and us putting our traits in their germplasm. Our goal is over the next year to be able to take these germplasms, get them back to them with their traits so they can launch it. The progress, hopefully, you'll follow is the contracts we're signing and acreage to go with it and how fast we can turn around these germplasms. The goal in this business is to get these germplasms in people's crops so they can bulk up alone. We're part of the launching process. When we ship back, we'll have a pretty good sense of the time when they bulk up and when they go. As for pod shatter, what's really interesting is that we have 10 traits we've edited and we're in a different process of launching back. The big thing in pod shatter is our ability to conduct field studies and work with the customers on those trials. We have a model where all three of these traits will be ready for planting around the same time. For each one of these things, we need to clarify what we're doing to get them ready for that time and be able to say whether things got delayed, but more importantly, tell you why we're encouraged by where they are and how to think about revenues. Peter, do you want to add something on plants and field studies?

I do. Thanks, Bobby, for the question and thanks, Rory. I think the best way to think about our progress, and I'm going to specifically talk about canola pod shatter, is that, as Rory mentioned, we have 10 customers whose genetics, and I've mentioned it on the call, elite germplasm in our hands, and we're in the midst of transferring back to them. So far in 2023, we've transferred two of our customer lines back. The whole group of elite genetics that we have in our hands equates to accessing as much as 20 million acres over time. So what's exciting for us is that those transfers are starting to occur. The field trials that we're doing with canola hybrids possessing pod shatter traits were very successful this last summer. We're excited to see the traits in the field in customer genetics. This winter, we'll be looking at canola hybrids in winter nurseries and really move to that next level of pre-commercialization performance evaluation in 2024.

And then, Bobby, the other thing, we're so focused on these three crops and three traits, we just can't ignore that we are really excited about soybeans. We're doing it in GDM germplasm, but we are thrilled that we'll be able to finish that this year. Once we do that, it presents a big opportunity that suddenly — we believe once people see our single-cell model that regenerates back into a plant in soybean, that we have many customers who are in the soybean business. There is a tremendous opportunity to expand this business. Does that answer your question?

Yes, that's very helpful. Yes, that's great. And then just a follow-up. Obviously, this EU draft on their proposed regulatory treatment of what I was calling NGTs, but I guess, there are lots of acronyms, sounds very positive. And I'm wondering, can you kind of draw a parallel between what they're talking about doing and what Canada has already done? And then, I guess, where is the demand coming from in the EU? Is this something that's been kind of in the works for a long time to change these regulations? Are they constrained in some ways, food security-wise or re-evaluating how they're regulating other aspects of your food system and this is being pulled along with it?

Thanks Peter, let me take the overview and then let you go to specifics with the customers. I think it'd be helpful for them to understand the actual customers we have in canola and how broad our demand is from the canola customers and that we can now do studies in the U.K. The biggest shock we have is that the U.K. has been under a three-year process to change their laws so that gene editing, which doesn't include transgenes, gets treated as conventional breeding. There is a significant consensus across Europe that productivity has declined due to a lack of GMOs. They need this law. When they did their safety study, they determined our technology was safe, and they proceeded. It surprisingly took place roughly three months sooner than we initially expected. In our press release, we mentioned it would go to Parliament in July, but they are now moving forward faster than we thought, and we are excited about it. This is a critical moment for us all. The U.K. passing this law, allowing us to conduct field studies there, is significant as it advances the products we plan to grow in Europe. Peter, do you want to discuss the customers further?

Yes, exactly, Rory. I think, Bobby, your question around this is really on point because it's clear that the EU is trying to accelerate this regulatory move, which is unusual for them. A number of our customers are based in Europe and are very excited about the opportunity to bring traits to market. The whole of Europe is a 100 million acre market that hasn't seen much innovation in the last 30 years. To the point about improving sustainable agriculture, climate resilience, and food security, those are significant drivers for regulatory change. The tailwinds for bringing improved products to the marketplace are viewed positively by our customers. The fact is, we already have three of our customers' genetics and trials in the U.K. over the winter into spring of 2024. That's a first for canola, winter oilseed rape. We are thrilled to see that alignment globally, and regulations harmonizing around the world. This opens up global markets for Cibus.

We have several customers under contract already. The remarkable thing to consider is that this 100 million acres has never had a wheat trade before. Now we have three traits ready to offer, which represents a significant opportunity for us.

No, that's a great additional color. And to be clear, this also would cover imports into the EU.

Yes, that is correct. The key to these laws is that once you establish that, each time we develop a trait, it will be treated like conventional breeding when entering Europe. For those unfamiliar with it, Europe considers GMO products almost like drugs and takes three to five years for approval. This means everything we develop will have clear export approval, and it could be a significant milestone for the industry. It will also greatly impact our soybean market. We'll introduce new traits...

Yes, understood, so, yes, this could be huge. And maybe just looking at where there is GM technology, existing in germplasm, is there interest just due to the speed at which you can introduce a trait, and at the lower cost where you'll potentially be stacked on some of these GM seeds as a significant part of what you're doing over time?

It is indeed. However, regarding pod shatter, they lack that trait. This is not simply about speed. The reality is that our team has developed real traits. The first part is that we have viable traits, and speed is a significant factor; if you send us your germplasm in canola, now that Peter and Greg have figured out how to take a single cell from that germplasm, edit it, and grow it. Once you send us your germplasm, we can have your trait ready for field trials in 18 to 24 months. Peter, do you want to elaborate on that?

Yes, absolutely. Bobby, you have identified an important point. Our long-term industry experience reveals that GMO technology has its limitations. It's like outdated technology. Introducing gene-edited traits results in valuable market additions. There are markets with barriers for getting GMOs that gene editing allows us to breach, while there are other locations, primarily in North and South America, where we will stack traits onto existing genetics. The expansion and opportunities are vast. Furthermore, gene editing can tackle traits such as resistance to diseases and pest issues where previous technologies failed. This not only opens up global markets but also provides opportunities to develop traits that could not be addressed with prior methods.

Well, thank you, Peter. I'm going to let somebody else ask a question here because I realize that's four or five in a row. Thank you.

All good. But, Peter, while he's breaking, can you tell them about India? India is such a big marketplace for both soybean and rice.

Yes. I think India has nearly 100 million acres of rice. While it's a very fragmented market, it has a huge appetite for traits. Recently, Bayer released that they are targeting 20% of that market; around 20 million acres fall under what they refer to as the direct seeded market in India. This highlights the demand for a trait like herbicide tolerance—critical for direct seeded rice. India is a prime market for both rice and canola traits.

And our next question is from the line of Laurence Alexander with Jefferies. Please go ahead.

Hi, good evening. This is Kevin Estok on for Laurence. Just one question for me. To what extent has the volatility... yes, so to what extent has the volatility in the ag market, I guess, distracted customers from research partnerships or change your timetable and milestones for next year?

I'll give a little bit, and I'll leave it to Peter regarding the volatility in the markets. The good news is that we're genuinely focused on traits that are already developed. We are concentrating on what we can bring to market now. We haven't seen a decrease in demand but rather an increase, as customers recognize the actual traits we have available for purchase. Peter, do you want to respond?

The volatility is indeed present. However, the role of traits is critical for the seed industry's growth and increasing farmers' productivity. There's a growing appetite for our traits, as customers wish to incorporate improved genetics, allowing farmers to enhance their yield potential and profitability. Therefore, unexpectedly, the volatility actually drives the demand and need for technologies like Cibus is bringing to the table.

It's a differentiation between strict yield and specific trait enhancements, which has been intriguing, I think.

And Mr. Riggs, there are no further questions at this time. I will now turn the call back to you for closing remarks.

Thanks, Tim, and thanks for the questions. I think that our goal in these calls now is to help you understand the progression. We have actual traits. Because of that, every quarter, like this was the field study quarter, we can track how well we are toward our goal of having this in the field being accessed by farmers. The things we've really talked about are: 1, besides mapping our progression, the two big things everybody's going to see is, can we do soybean and get it off? That’s just a significant value moment for us. And two, Europe seems to be accelerating. As quickly as we can motivate things in Europe, we become a real three-crop, five-trait business model, and we become truly global. We're really excited about it. The most important part is just to understand our progression and to follow it. If you have any more questions, please call. It’s a thrilling time for us to track. Peter, you want to add anything? I think that’s a good summary.

I think that’s a good summation, Rory. Definitely an inflection point for where we are. Cool.

Thanks, guys. Thanks, Tim. I think we're done.

That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.