Dyadic International Inc Q2 FY2020 Earnings Call

Good evening, ladies and gentlemen, and thank you for holding. Welcome to the Dyadic International’s Second Quarter 2020 Financial Results Conference Call. Currently, all participants are in listen-only mode. My name is Jerry, and I will be your conference coordinator for today. As a reminder, please note that this call is being recorded. At this point, I would like to turn the call over to Ping Rawson, Dyadic’s Chief Financial Officer. Please go ahead, Ms. Rawson.

Thank you, Jerry. Good evening, everyone, and welcome to our second quarter 2020 earnings call. Our press release with Dyadic International’s second quarter 2020 financial results was issued earlier today. The press release on Form 8-K and Dyadic’s Quarterly Report on Form 10-Q have been posted to the SEC and Dyadic’s website. On today’s call, our President and CEO, Mark Emalfarb, will give a review of the business and corporate accomplishments for our second quarter of 2020, including a brief summary of our research and business development efforts. I will follow with a review of our financial results in more detail. We will then provide you with an opportunity to ask questions. Matthew Jones and Ronen Tchelet will join Mark and me to answer your questions. At this time, I would like to inform you that certain commentary made in this conference call may be considered forward-looking statements, which involve risks and uncertainties, and other factors that could cause Dyadic’s actual results, performance, scientific or otherwise, or achievements to be materially different from those expressed or implied by these forward-looking statements. Dyadic expressly disclaims any intent or obligation to update any forward-looking statements, except as required by law. For more information about factors that may cause actual results to be materially different from forward-looking statements, please refer to the press release we issued today as well as risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, particularly in the section titled Risk Factors. This information can be found in our other filings with the SEC when available. With that, I’d like to turn the call over to Mark. Mark?

Thank you, Ping. Welcome, everyone, and thank you for joining our second quarter conference call. I hope that you and your family are safe during these difficult times. I’m pleased to report that we have made terrific progress on multiple fronts in the second quarter, further advancing and strengthening our diverse and growing portfolio of opportunities by adding new top-tier collaborations in both the animal and human health fields. We’re expanding our commercial reach in large and growing addressable markets while continuing to report exciting and new scientific data and progress. We are involved in a number of collaborations helping combat the COVID-19 pandemic. These developments reinforce the broad application potential of our C1 technology, as well as some of its key attributes, including high productivity and low cost of goods. The continued growth of our company has added to our visibility in the investment community with our recent inclusion in the Russell 2000 and 3000 indices, providing us the opportunity to further broaden our shareholder base. Our management team remains highly energized by the significant number of opportunities available to us, supported by best-in-class scientific partners and our ongoing R&D collaborations, funded partially or fully by our partners, our objective and diverse pipeline of potentially high-return projects. In response to COVID-19, we have taken the necessary health and safety measures to protect our employees, lab teams, and partners around the world who, for the most part, have been working remotely. We are fortunate that beyond those changes in the way we conduct our daily work, COVID-19 has had minimal impact on the company’s ability to continue our progress. Tonight, I would like to provide some additional color on some of our most recent business and development and scientific accomplishments and conclude with comments on the S-3 registration statement we filed today. We continue to advance and grow our diverse portfolio of business opportunities, as we further develop and improve our C1 technology platform to meet the different needs of the markets we are serving. We entered into a number of fully funded research collaborations in animal health and human health, as well as infectious diseases. In animal health, we entered into two new fully funded collaborations with two of the leading animal health companies, designed to demonstrate the C1 technology platform for expression and production of their proteins for companion and farm animal diseases. We are now working with all of the top four global animal health companies, as well as another global animal health company. We entered the animal health market in 2019 and have been on a steep growth trajectory over the past 18 months. Regarding human health, we entered into a fully funded R&D collaboration with another one of the top five global pharmaceutical companies for human health. Under this agreement, Dyadic will be expressing two different types of therapeutic compounds. Additionally, we are in discussions with a number of other pharmaceutical and biotech companies, including continuing our discussions with Sanofi to fund follow-on new research collaborations. In the area of infectious diseases, in the ZAPI program, we were successful in expressing an additional antigen, the RVFV antigen at high levels, approximately 1,200 milligrams per liter. ZAPI reported that baculovirus was unable to express this antigen stably. This is another example of C1’s potential hyper productivity to express certain difficult-to-express antigens that may be needed to combat the current and future pandemics and other biological threats. Furthermore, we have successfully stably expressed the HA protein in our influenza collaboration with Oslo University. Samples of this protein will be sent to Oslo University for their evaluation and further characterization. Regarding COVID-19, the company has a number of ongoing COVID-19 vaccine collaborations globally, which have opened certain opportunities at various stages of development, including a newly fully funded vaccine research collaboration entered into earlier this week. As announced on February 25, we joined the global fight against the coronavirus outbreak by expanding our collaboration with the Israel Institute for Biological Research, the IIBR, to explore the potential of Dyadic’s industrially proven C1 gene expression platform to express gene sequences in recombinant vaccine candidates. I’m proud to say that in approximately two months since we received COVID-19 gene sequences, we have successfully expressed a number of high-producing stable C1 cell lines that efficiently expressed the receptor binding domain, the RBD, of the SARS-CoV-2 spike protein, which are being used to express the vaccine candidate for both the IIBR and the European COVID-19 vaccine programs. The IIBR has reported they started their mice trials with the C1-expressed RBD plus an adjuvant about a month ago. According to the report from Dyadic via the IIBR, their C1 vaccine candidate generated high neutralizing antibody titers. Accordingly, we anticipate that the IIBR will start hamster studies earlier than originally forecasted. A second animal trial in an established Syrian golden hamster model using the C1-expressed RBD of the SARS-CoV-2 spike protein in collaboration with EU scientists and institutes we’ve been working with from the University of Utrecht, Erasmus Medical Center, University of Veterinary Medicine Hannover, TiHo, and CR2O, a global CRO, is expected to start shortly, pending certain regulatory approvals to begin this animal study. As reported previously, we are also working with Ufovax, a Scripps Research spinout, and the company was selected by the Frederick National Laboratory to engineer Dyadic’s patented and proprietary C1 cell lines to produce several COVID-19 vaccine candidates which will be utilized by the Vaccine Research Center of the National Institute of Allergy and Infectious Diseases, NIAID, at the National Institutes of Health. Both the Ufovax and the Frederick National Laboratory research programs are currently in earlier stages of development. Based on the excellent expression and stability results to date, as well as the initial but promising in vitro and in vivo data, we provided samples of the C1-expressed RBD SARS-CoV-2 spike protein antigens to the Frederick National Laboratory for their evaluation and for a variety of other interested potential opportunities. Earlier this week, the company entered into another fully funded SARS-CoV-2 vaccine research collaboration with a small, respected biotech company that has promising biomanufacturing technology that may help facilitate the production of vaccines and drugs regionally or even domestically, potentially making access to vaccines and drugs in certain remote areas of the world more affordable and accessible. This collaboration, along with certain others, has the potential to expand beyond COVID-19, where C1 may be beneficially used to develop and manufacture other vaccines and drugs combating infectious diseases and for other human health applications. We are in discussions with several other companies that could potentially lead to opportunities for partnerships globally related to COVID-19 and future infectious diseases, pandemics, epidemics, and other biological outbreaks. In our glycoengineering program, we have generated C1 cell lines that may be used to produce monoclonal antibodies and other proteins with human-like glycoforms, such as G0, G2, G0F, and G2F. We are now working on leveraging a 14X protease deletion work in the non-glycoengineered C1 strains. We’ve generated cells with fifty-fold lower protease activity in the 4X C1 strain by reducing the extracellular protease background in one or more of the glycoengineered C1 strains. This development aims to further generate C1 cell lines, leading to the production of higher amounts of more stable vaccines and drugs, providing us with additional prospects for collaboration, drug development, and eventual commercialization. Today, Dyadic filed a shelf registration statement on a FORM S-3 with the Securities and Exchange Commission for future offerings of up to $50 million of Dyadic’s common stock. In addition, Dyadic established an at-the-market offering, ATM offering program under which it may sell shares of its common stock for aggregate gross proceeds of $50 million. The shares will be offered through Jefferies LLC, which will act in its capacity as sales agent. The company’s balance sheet and cash position are very strong, with adequate financial resources to continue our near- and longer-term business plans. However, management believes it’s prudent to have an effective registration statement in place, which will provide the company with quick access to the capital markets in order to respond quickly to future business opportunities should they arise. With that, I will turn the call over to Ping to review our financial results.

Thank you, Mark. Before I begin my discussion, I’d like to provide you with a few key business and financial highlights. Dyadic’s financial position remains strong with approximately $32.1 million in cash and investment-grade securities, including accrued interest with no debt. Our cash balance at quarter-end is higher than we typically report due to the low interest rates currently available for investments. Our cash burn for the quarter and six months was $1.9 million and $4 million, respectively, in line with previous quarters. I will now discuss our operating results in greater detail. We ended the quarter with cash and cash equivalents of approximately $11.8 million, compared to $4.8 million at December 31, 2019. In addition, the carrying value of short-term and long-term investment-grade securities, including accrued interest at June 30, 2020 was approximately $20.3 million, compared to $31.2 million at December 31, 2019. Turning to the income statement, research and development revenue for the quarter increased to approximately $524,000, compared to $391,000 for the quarter ended June 30, 2019. We reported an increase in the cost of research and development revenue for the second quarter of approximately $624,000, compared to $322,000 for the quarter ended June 30, 2019. The increase in revenue and cost of research and development revenue for the three months ended June 30, 2020 reflected nine ongoing research collaborations compared to four collaborations for the same period a year ago. The increase in provisions for contract losses reflected the activities of one biopharmaceutical collaboration research project. Research and development expenses for the three months ended June 30, 2020 increased to approximately $1,116,000, compared to $818,000 for the same period a year ago. The increase primarily reflected the cost of additional internal research projects. There were no research and development expenses related party for the quarter ended June 30, 2020, compared to approximately $336,000 for the same period a year ago. The decrease was due to the completion of the research service agreement with BDI in June 2019. General and administrative expenses for the three months ended June 30, 2020 decreased 21.2% to approximately $1,475,000, compared to $1,871,000 for the same period a year ago. The decrease principally reflected reductions in non-cash share-based compensation expenses of $165,000, executive compensation costs and accrued incentives of $150,000, legal and NASDAQ uplisting expenses of $102,000, business development and investor relations costs, including travel expenses of $24,000, offset by increases in insurance premium and outside service costs of $45,000. Our interest income for the three months ended June 30, 2020 was approximately $147,000, compared to $266,000 for the same period a year ago. The decrease was primarily due to the low interest rates and yield on the company’s investment-grade securities. The net loss for the second quarter of 2020 was approximately $2,651,000, or $0.10 per share, essentially flat with $2,696,000, or $0.10 per share reported for the same period a year ago. Now we are looking at the six months ended June 30. Research and development revenue increased to approximately $840,000, compared to $793,000 for the six months ended June 30, 2019. R&D expenses for the first six months of 2020 increased to approximately $1,872,000, compared to $1,511,000 for the same period a year ago. The increase in revenue and cost of research and development revenue for the six months reflected 10 ongoing research collaborations compared to seven collaborations for the same period a year ago. The increase in provision for contract losses reflected activities of one biopharmaceutical collaboration research project. Again, there were no research and development expenses related party for the six months ended June 30, 2020, compared to approximately $726,000 for the same period a year ago. The decrease was due to the completion of the previously mentioned research service agreement with BDI in June 2019. G&A expenses decreased 5.2% in the first six months to approximately $3,129,000, compared to $3,299,000 for the same period a year ago. The decrease principally reflected reductions in executive compensation costs and accrued incentives of $220,000, legal and NASDAQ uplisting costs of $125,000, non-cash share-based compensation expenses of $68,000, offset by increases in insurance premium of $147,000, business development costs and investor relations cost of $47,000 and other increases of $49,000. Our interest income for the six months ended June 30, 2020 was approximately $315,000, compared to $533,000 for the same period a year ago. The decrease was primarily due to the lower interest rate and yield on the company’s investment-grade securities. Again, our net loss for the six months ended June 30, 2020 was approximately $4,866,000, or $0.18 per share, flat with $4,871,000, or $0.18 per share reported for the same period a year ago. With that, I will turn the call back to the operator, Jerry, to open up for Q&A.

Thank you. We will now begin the question-and-answer session. The first question comes from John Vandermosten, Zacks International Research. Please proceed.

Thank you, and good afternoon, everyone. Thanks for taking my questions. I want to get a sense of how you might structure a deal with one of your larger partners that wanted to take C1 to the clinic with the intention to commercialize. What might be some of the things you’d look for in something like that? There’s usually some upfront milestone and royalty type of deal. But are there specific parameters that you’d look for to take it to that next stage?

Well, I think we’re open to virtually any type of parameter based on who the party is. If the party is a big pharma company versus the government of Israel or the European scientist group that is actually a program that we’re embedded with. So we would be looking for a pharmaceutical company or HHS, BARDA funding from some other governmental agencies to assist us with funding to get into Phase I, Phase II, and possibly Phase III, so upfront cash milestones and royalties from a pharma partner. The key here now is going to be once we get this animal data finished, the mice trial data that’s in Israel will be done within about a month, and then they will be going into, I believe, hamster trials. Animal data is going to be very, very important. We are confident that our vaccine candidates, particularly those two advanced programs, are performing very well based on in vitro and now in vivo data in mice. What differentiates us from anyone else is our ability to produce billions of doses very affordably all over the planet. So hopefully, that will help out there. So those things are in motion, and we have many conversations going with various parties, including some of the big names you might be aware of.

Thanks for that, Mark. Animal health has been significant for Dyadic. The great thing about that is it has a faster pathway to market on the regulatory side. Who is closest to moving toward a commercial-type approach? Can you share what category they are in or any other information you can provide?

Well, we’re dealing with all four of the top global animal health companies, right, and another fifth just started. Two of them just got going. One of them, we’ve been working with for a long time and that company is certainly ahead in terms of data. They’ve got multiple animal health products that they’re having us express. We hope that sometime late this year or early next year, one or more of those products will move into animal studies towards commercialization. That’s when we would expect one or more of those companies to move forward.

Great, great. And the ATM, that’s a great way to pick up cash over time. Have capital needs changed? What’s behind that? And how do you envision using that to fund further developments?

Yes, I’m glad you asked that question, since as the largest shareholder, I’m very mindful of any ownership dilution for all of us. We continue to have a strong balance sheet, demonstrating that we are disciplined allocators of our capital while building a robust portfolio of opportunities across a diverse group of markets, including animal health, COVID-19, and human health. Our S-3 is in place to allow us to remain opportunistic while maintaining financial flexibility as future business opportunities may arise. I wouldn’t take the fact that we have an ATM in place to imply that we must use it, only that it provides flexibility and was recommended as a smart thing to have by a variety of bankers.

Okay, great. It wasn’t that long ago when you were actually buying stocks. My sense is it’s just there for a need that arises unexpectedly. Thank you, Mark and Ping, for taking my questions.

Thank you, John.

Thank you very much for taking my questions, and congrats on another successful quarter. I want to ask my first question on the partnership portfolio. How many ongoing pharmaceutical partnerships do you have? If Sanofi decides not to carry or advance the C1 technology, do you plan to disclose the data from that project? Can you do so based on the partnership terms?

Yes. First of all, let me let Matt sort of answer the question, because he is the business development guy, and then I can chime in. Matt, do you want to pick that one up?

Yes, sure. Ahu, we obviously have a number of collaborations. As Mark already mentioned, we don’t list all the names. But the important thing is that for each collaboration, they are all trying to enable different kinds of conversations. We’re not a one-trick pony. It’s great that COVID has put us into conversation too. We really believe passionately that we can make a massive difference here. We have a series of fully funded R&D collaborations with a number of top 25, top 50 global pharma companies. Under those agreements, we expressed different types of amino acid sequences and compounds and we look forward to reporting where we can. Your question on Sanofi around how we promote or publish certain data sets, that’s a conversation that we have with our partners. Where it makes sense to stakeholders on both sides, we look to do that. Where there’s a regulatory filing in the near future, we would look to do that then, of course, and we are encouraging these kinds of discussions. We’ve also had significant success in showing very powerful efficacy from the C1 expression platform, which we are eager to share when we have the opportunity.

To add, we have numerous opportunities beyond those we currently have that we believe will materialize by the end of the year, if not Q1. We are still waiting for Sanofi to respond, while having ongoing discussions on which potential molecules they might have us work on and bring forward. We expect them to come back to us in Q3 or early Q4. We are confident that there are several opportunities coming in, with multiple discussions ongoing across various segments.

Thank you, Matthew and Mark, for clarifying that. My follow-up question will be on the corona vaccine side. You currently have five collaborations and that’s expected to expand. I was wondering if you have any in-house efforts to develop any of those vaccines. Also, at what stage are these collaborations? When do we expect to see any data? Are we looking more at a next year timeline?

First of all, the Israeli IIBR and the European collaborations are deeply involved with our C1 platform and also our gene sequence being utilized there. We have a significantly deeper involvement than in the case of Ufovax, where it’s their gene sequence and we’re just the expression host. We’ve had very promising preliminary data coming out of the mice trials and other in vitro experiments. The IIBR has done in vitro experiments and other groups have reported favorable results as well. We are seeing good progress. We sent samples of our C1-expressed vaccine candidate, which has demonstrated high yielding capabilities to the Frederick National Laboratory for their evaluation. We actually believe that this product is the right candidate for efficacy and the ability to rapidly produce quantities that can meet global demand effectively and affordably.

Yes, I think that what we have now is the antigen that we developed, the RBD of the spike protein. We are seeing good results so far and continue to qualify it for the next steps. We are conducting animal studies now, and the interim results show promise. We're looking forward to continuing with this effort and hope that other companies will realize the benefits of C1.

Okay. Thank you very much for taking my questions.

Good afternoon. Thanks for taking my question. Mark, I thought that IIBR was already into hamster studies. Is that not true?

The IIBR is advancing two different vaccines at the moment: a viral vaccine and our C1 vaccine. From what we understand, they initially started with the viral vaccine and may eventually pursue both. They can produce dramatically higher amounts much quicker and lower cost with our platform, meeting the population's needs significantly faster.

Thank you for the clarifications. Earlier, you mentioned expectations from Sanofi in the near term. What’s the latest with them?

As I mentioned earlier, we have had discussions with them; they’ve expressed interest in moving forward. With the pandemic and summer break in Europe, they are assessing their options. We hope to get an update from them in Q3. We’re still very hopeful about getting potential candidates into C1 for future progress.

Is there a possibility to have a vaccine product from one of the collaborations by the end of the year, or is Q1 of 2021 more realistic?

It’s challenging to predict timelines since we don’t control the decision-making of collaborators. In any case, we aren’t expecting our own vaccine to emerge as a final product from any collaboration by the end of this year or even mid-next year at the earliest.

Thank you very much, and good luck ahead.

Thank you.

I’m showing no further questions at this time. I will now turn the call back over to Mr. Emalfarb for closing remarks. Please go ahead, sir.

Underpinning the many accomplishments we’ve discussed today is a highly collaborative and coordinated effort, both among our employees and our scientific and business partners. I want to thank all of them for their extraordinary efforts during these difficult times. Our goal remains to cost-effectively enable the development and manufacture of biopharmaceuticals, thereby making medication more affordable and accessible globally to all. We believe that our industrially proven C1 gene expression platform, which is faster and more efficient than many of the other platforms, will help us and our collaborators achieve our respective goals. Thank you, everyone, for dialing in today, and we appreciate your ongoing support. Stay safe.

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines, and thank you for your participation.