Dyadic International, Inc. (DYAI) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to Dyadic International's 2018 Year-end Financial Results Conference Call. [Operator Instructions]. My name is Adam 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 Accounting Officer. Thank you. You may begin.

Thank you, Adam. Good evening, everyone, and welcome to our 2018 earnings call. A press release with Dyadic International's 2018 year-end financial results was issued earlier today. The press release on Form 8-K and Dyadic's 2018 annual report on Form 10-K have been posted to the SEC and OTC Markets websites as well as Dyadic's website. On today's call, our President and CEO, Mark Emalfarb, will start with a review of our 2018 accomplishments, a summary of our research and business development efforts and outline our plans for 2019. I will follow with a review of our financial results in more detail. We'll then provide you with an opportunity to ask questions. Matthew Jones, our Chief Commercial Officer; and Dr. Ronen Tchelet, our VP of R&D, will also join Mark and I 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 statement, 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 those 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, 2018, particularly in the section entitled 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, please go ahead.

Thank you, Ping. Good evening, everyone, and welcome. 2018 has been an outstanding year for Dyadic on many fronts and our momentum has continued into the first quarter of 2019. I'm extremely pleased that Dyadic is now a fully registered reporting entity subject to the requirements of Section 13(a) of the Securities and Exchange Commission. On January 17, 2019, the company filed an application to list its common stock on NASDAQ, and we expect our application will be approved by NASDAQ provided we maintain a minimum stock price requirement and clear the outstanding comments. In addition to the foregoing, we have accomplished a great deal over the past year on the business development front and, more importantly, on the scientific front. A bit later in the call, I will highlight some of the scientific progress we made in further developing our C1 gene expression platform. We continue to gain momentum and awareness within the pharma and biotech industry regarding the potential for our C1 gene expression platform to potentially disrupt the status quo and helping to speed up the development, lower production cost, improve the performance of biological vaccines and drugs and flexible commercial scale. And our recent stock price is evidence that we are starting to be noticed by the investment community. In selling our industrial enzyme business to DuPont for $75 million 3 years ago, we developed a strategy to focus on applying our C1 gene expression platform for use in the biopharmaceutical industry. Our many accomplishments since then confirm that we're making solid progress in our transformational journey applying the power of industrial biotech to biologic vaccines and drug development and biomanufacturing. We started to apply our C1 platform technology to try and produce biologic products other than vaccines and drugs. In the first quarter of this year, we initiated a few additional internal research projects, including engineering C1 to try and express adeno-associated viral vectors, AAV, which has been reported as expensive and in short supply. We and others in the industry believe that we will be successful in developing our C1 cell line into a next-generation protein expression and production system, as evidenced by the number of collaboration agreements we've been able to enter into in 2018 and in the first quarter of 2019. After completing the DuPont transaction, management set a time frame of approximately 2.5 years for determining whether we could generate data that would allow us to be able to build significant value for our shareholders by further developing C1. 2018 has been a transformational year in our progress, and our management believes our scientific and business development accomplishments to this date support continuing on this journey. Management position is supported by the fact that the market capitalization has increased since the beginning of 2018, and we're starting to create additional shareholder value and interest from investors and also more importantly from the industry, both biotech and biopharma, from our progress to date. On the business development front, 2018 was a very good year and 2019 is already starting off to an excellent start. In 2018, we entered into 9 proof-of-concept research collaborations to produce different types of biologic vaccines and drugs of interest for human and animal health applications, including Sanofi-Aventis, Mitsubishi Tanabe Pharma, Israel Institute of Biologic Research, IIBR, and another top 20 pharmaceutical company and 2 top-tier academic institutions: the Structural Genomics Consortium, SGC, a part of the University of Oxford; and the Fraunhofer USA Center for Molecular Biotechnology. In addition, we signed 2 new funded proof-of-concept research collaborations with 2 additional top 25 pharma companies in the first quarter of 2019. In addition, we are in various stages of negotiations for proofs of concept, research programs and potentially other forms of collaborations with large and small pharmaceutical and biotech companies, who, like ourselves, are encouraged by the data and progress we have made. Our Chief Scientific Officer, Dr. Ronen Tchelet, and Matthew Jones, our Chief Commercial Officer, and I have been attending, presenting and showcasing the scientific progress we have made with C1 throughout 2018 and including at the beginning of 2019, as recently as Bioprocessing West and BIO-Europe in the last few weeks. During industry conferences and the meetings with various pharma, biotech and government agencies, we are encouraged by their response to the data that we're sharing with them. These efforts have resulted in the company securing more than 100 confidential disclosure agreements, CDAs, and several dozen material transfer agreements to date, which have led to the previously announced research agreement and a variety of other potential collaboration and research discussions with several of the top global biopharmaceutical and biotech companies. To date, our research, which is being conducted with our Prime CRO and BDI, has delivered new and improved C1 strains, genetic tools, improved fermentation and downstream processes and other technologies which have helped us establish pharmaceutical and biotech collaborations, which we expect will ultimately drive shareholder value. As we previously reported, we entered into a multiyear, strategic and development agreement, including a potential commercialization agreement with biotechnology development for industry, BDI , a Spanish biotech company, to further advance Dyadic's proprietary C1 technology in the development of next-generation biological vaccines and drugs. Our relationship with BDI adds much-needed additional research and development and scale of capabilities and provides a potential development of both internal and external products from designated C1-based product candidates. I'd like to now briefly summarize some of the progress on the scientific front we have made to develop further our C1 platform. We demonstrated that C1 can be used to express high productivity levels of different classes of biologics, including monoclonal antibodies, mAbs; antibody fragments, Fabs; bi-specifics, Fc-fusions and vaccines. We demonstrated further increased levels of productivity of certolizumab, as high as 2.6 grams per liter per day or 12 grams per liter in 4.5 days. We've demonstrated high levels of expression of a second Fc-fusion protein of 12.2 grams per liter or 1.70 grams per liter per day. We further improved protein stability and productivity by eliminating additional targeted C1 protease genes. We expanded our proprietary C1 protease library, further increasing the number of C1 expressed proteases to more than 50. Further, C1 universal host cell improvement. We improved protein stability, productivity in C1 host cells by developing a C1 host production strain with 9 protease genes deleted. We were successful in demonstrating high productivity of certolizumab in a single-use bioreactor, or SUB, as a proof of concept for the use of single-use bioreactors for manufacturing various products. We began to develop a C1 downstream purification process for certolizumab. We demonstrated further success in reaching high and promising expression levels of a specific antigen against the Schmallenberg virus SBV, in the ZAPI project. The target level of the antigen against SBV was initially stated by ZAPI to be 100 milligrams per liter. As we previously reported, we were able to express this antigen at 720 milligrams per liter or 7x the initially stated expression later -- level. I'm pleased to share with you that we now have made further improvements, making sure we can double the already very high previous level of 720 milligrams to 1,780 milligrams per liter, now 17x initially stated expression level. If you'd like to see more information about this, I suggest you review the slide deck on the ZAPI project on the company's website under our Media Center, on the Presentations tab. The 2 other expression hosts used in the ZAPI program didn't even reach 100 milligrams. At best, one reached 50 milligrams per liter, half of the target, but we're now reaching 17x the target. We continue to make progress on the glycoengineering of C1 to impart human glycosylation to C1 expressed glycoproteins. We successfully reached the Phase I milestone in the fully funded primary metabolite research program we began at the start of last year. In Q1 2019, a PCT application titled, Production of Flu Vaccine Produced from Myceliophthora thermophila C1, was published. Also, in Q1, we initiated additional internal research projects, including a research project to express adeno-associated viral vectors, AAV, which is reportedly in short supply and high demand and is too costly. These, among other scientific progress we continue to make, are important achievements and we are confident that along with other anticipated scientific advances and continued progress in our internal and external research projects, will go a long way, continuing to further increase shareholder value. I will now turn the call over to Ping Rawson, our Chief Accounting Officer, to discuss our financial results

Thank you, Mark. At December 31, 2018, cash and cash equivalents were approximately $2.4 million compared to $5.8 million at December 31, 2017. The carrying value of investment-grade securities, including accrued interest as of December 31, 2018, was $39.1 million compared to $43.3 million at December 31, 2017. As of December 31, 2018, there were approximately 26.7 million shares outstanding. This is after purchases of approximately 1.6 million additional shares at a weighted average price of $1.40 per share in open market transactions under our stock repurchase program during the year of 2018. Net loss for the year ended December 31, 2018, was approximately $5.7 million or $0.21 per basic and diluted share, compared to a net loss of $2.1 million or $0.07 per basic and diluted share for the year ended December 31, 2017. The change was primarily due to the receipt of a litigation settlement of $4.4 million in 2017. Research and development revenue for the year ended December 31, 2018, increased to approximately $1.3 million, compared to $758,000 for the year ended December 31, 2017. Cost of research and development revenue for the year ended December 31, 2018, increased to approximately $1 million compared to $680,000 for the year ended December 31, 2017. The changes in revenue and cost of research and development revenue reflect 2 research collaborations completed in 2017 and new research collaborations started in 2018. Interest income for the year ended December 31, 2018, increased 58.1% to approximately $895,000 compared to $566,000 for 2017. The increase in interest income reflects higher yield on the company's investment-grade securities, which are classified as held-to-maturity. Provision for contract losses for the year ended December 31, 2018, was $0 compared to approximately $221,000 for 2017. The provision for contract losses recorded in 2017 was associated with the company's extended involvement in the ZAPI program. R&D expenses for the year ended December 31, 2018, increased to approximately $2.1 million, compared to $1.8 million for 2017. The changes primarily reflect the cost of additional internal research activities with third-party contract research organizations. R&D expenses related party for the year ended December 31, 2018, increased to approximately $1.2 million compared to $438,000 for 2017. The increase reflects the research and development costs related to the company's R&D agreement with BDI, which started in July 2017. G&A expenses for the year ended December 31, 2018, decreased 10.1% to approximately $4.5 million compared to $5 million for the year before. The decrease primarily reflects reductions in litigation costs of $541,000, legal costs of $236,000 and share-based compensation expenses of $158,000, partially offset by increases in business development and investor relationship costs of $217,000 and SEC registration-related costs of $215,000. Foreign currency exchange loss for the year ended December 31, 2018, was approximately $21,000 compared to a gain of $249,000 for 2017. The change reflects the reduction in cash balance carried in euro and the currency fluctuation of the euro in comparison to the U.S. dollar. For 2019, we expect our G&A cost to be essentially flat. Depending on how many internally developed research projects that we will fund and how fast we will push them, we expect our total cash burn for 2019 will be in the range of $8 million to $10 million. Next, I will provide you with an opportunity to ask questions. Matthew Jones and Dr. Ronen Tchelet will be joining Mark and I to answer your questions. [Operator Instructions]. Now I'd like to turn the call back to our operator to take your questions. Adam?

[Operator Instructions]. Our first question comes from the line of John Vandermosten from Zacks Investment Research.

Congratulations on the share price above $3. I think that satisfies the NASDAQ requirement. And the first question that I had was just on that -- what else is needed to secure that listing on the NASDAQ exchange?

Yes, Ping, do you want to field that? Or do you want me to?

Sure, I can take it. Thank you, John, for the question. And yes, we are very happy about the price movement in the past couple of months with all the support that all the shareholders had. I think we just received a new round of questions and comments from the NASDAQ staff late -- very late on Monday. So we are in the process of preparing all the answers to their questions. It seems quite intense. I think Mark and I will have to spend some time this coming week even though we both have a busy schedule with investor conferences in New York in the upcoming week, but we definitely will devote a lot of time to answer those questions as soon as possible. Obviously, they're not going to give us a time line if they're going to have another round of questions or not, but they are very supportive and they are willing to take even questions whenever we are ready to submit to them. They're even -- to take a look at it. So unfortunately, I cannot give you a time line in terms of how long it will take, but I can say that they are very happy about the process and the answers we already submitted. It's just a matter of going through this process. Mark, do you have anything to add on?

No, I think that -- they obviously got overburdened by the government shutdown, I believe, because it took them quite a while to answer the last questions we sent in. But like you mentioned, I think, this Monday, like 4:00 in the evening, just before the close of the day, we got a list of questions and we're already starting to address those. I know that out of -- almost 1/3 of them, I've already given answers to, and we're working on the last 2/3.

Yes, they did mention they are very busy recently given the workload, and I think a lot of new IPOs are in the pipeline. So they're just very buried with all the work or reviews they are forming.

Okay, yes, that makes sense. I guess they got backed up for the whole month of January. A follow-up question is a little bit more broad. There's been a bunch of gene therapy deals that have taken place recently and you have that AAV program that you're developing right now. And I'm wondering, does -- do all these deals taking place and this interest in big pharma -- or increased interest from big pharma change the value and importance of the AAV program?

We believe that the AAV being produced today in baculovirus and yeast are being done at levels that are creating pressure on supply and, obviously, high costs. And in the programs we've worked on, for example, in the Sanofi Pasteur HA program, we worked against baculovirus. In the ZAPI program, we worked against baculovirus. We were able to produce multiple times, higher levels. Now if we're able to produce AAV, which we hope will be the case and we've already started that program in January, then we expect to be able to make it at larger amounts at lower cost and help alleviate the bottleneck and the problems and hopefully be able to pick up the business. So it's relatively new for us. And I think quite frankly, the industry is just finding out and getting a peek that we're actually even doing this because it's just something brand new. Do you want to add anything to that, Matt or Ronen?

Well, yes, Matt here. So happy to comment but more generally. I think to John's question, yes, we've seen some large lab companies invest in the CDMO space, particularly in the viral cell gene therapy spaces. And they're very big -- in a big purchase ticket there. There are many others -- I'm just myself today being -- presenting that C1 platform to this community. And clearly, it's of interest. So I think we're very pleased at our focus on that program. There are, of course, other types of opportunities in the marketplace that this platform of ours can lend itself to. So we're mindful of that. I think that in terms of valuation on those deals, they are for companies that have a sort of CDMO, if you like, revenue structure. And you've seen perhaps some announcements from the big players in the last -- because of the -- they believe backing that gene therapy space. And I think we saw the same. I think it's the -- it's part of the future of health care and we're making sure C1 is ready to address it.

Our next question comes from the line of Ahu Demir from NOBLE Life Science Partners. Perhaps your line may be on mute. Ahu Demir from NOBLE Life Science Partners, you're now live.

Apologies. Yes, my line was on mute. Congratulations on the stock run-up year-to-date and all the progression that you have made. So a few questions. Are we expecting any BD deals meant for this year? Any other collaborations that we are looking to establish maybe first half of 2019? Could you provide some color on that?

Yes, it's a great question and it's a question you can appreciate that Mark, Ping, Ronen and I receive regularly. I'm not going to speak about future, non-disclosed deals. What I can say to you is the share price today, I believe, and the other attraction to our platform, given its speed to produce proteins, its cost of goods play, the comment earlier about the applications of which C1 can talk to, not just in human health but also in animal health, you can guess that we are not leaving many stones unturned. That's the job. I think though for C1, we're very considerate. We're very careful about the spend of our R&D programs. We manage those very carefully, as we do with our BD spend, and you've seen that in the results that Ping carefully manages. I think that we are mindful that we try to have conversations with companies that have cash and opportunity. That's clearly a place we want to spend our time and focusing on, and we absolutely expect to be able to talk more to the markets around our activities later this year. So stay tuned.

Okay. That's great.

Now let me add some more color to that. I think that our pipeline is bulging at the moment to some degree. Now whether these capture legal departments, we have a variety. We stated we're negotiating potential deals as we speak today, all the way to starting new deals. And a lot of those are with big pharma and some of those are with biotech. Some are in animal health. Some are in human health. Some of those are with CDMOs that are contract manufacturers that a lot of these pharma companies are saying, "Well, find us a CDMO that will run C1." And we -- that will even accelerate things faster. So we just say stay tuned, but yes, we expect more deals to be done and we expect at least 1 or 2, maybe more, even in Q2 to be announced.

Okay, that's great. We're very excited and waiting for the new deals. And my follow-up question would be to Ronen or to Mark. Are we still on track to get the glycoengineering done by year-end as you plan to continue with BDI research and development, CRO facilities, to continue the research for next year?

Yes, I'll let Ronen handle that.

Yes, obviously. I think that -- first of all, I think we are doing here a very good progress in the glycoengineering work, which gives us a lot of confidence that we should be able eventually to have C1 to produce protein with, say, a glycoprotein structure. And obviously, we would like to continue our collaboration with BDI because we see the value that they are giving us, especially from a patient, and also in the development of some proteins that are part of our pipeline for the future.

And I think, to note, Ahu, like we announced today that we had a patent published on the influenza -- not a patent application that became public. There's -- sometimes, we have scientific breakthroughs but we don't announce them and publicize them until we can protect them from an IP perspective. So there's things...

Sure, understood.

So there's things in the work that we might have already filed applications on and that we will file applications on that you guys won't see until a long time after those become public.

[Operator Instructions]. Our next question comes from the line of Scott Henry from Roth Capital.

Mark, my question would be, your technology and its efficiency and speed would seem to lend it well to the area of biosimilars. Is that a category that you're looking at near term and long term?

We're looking at biosimilars more so at BioBetters because we're going to have a different human pattern than a biosimilar. But yes, of course, I mean, certolizumab, nivolumab, those involve billion-dollar-plus products that we're working on, and those are just examples. And if we can deliver on those examples, there's a dozen more products that can come out of the pipeline either on our own or in conjunction with partners. And more likely than not, it will be in conjunction with partners.

And as a follow-up, could you talk a little bit about how a partnership would typically look and how we would evaluate that? I mean, would it be largely back-end royalties or, I imagine, in combination with milestone? And just how can we think about that business model.

Yes. So I think that it's a very flexible business model. I'll give you an example, could be upfront cash called an access fee where they would give us a check upfront, research milestones, commercial milestones and royalties. It could be where they pay you a bigger access fee upfront and less royalties down the road or somewhere in between. It could be small companies that don't have the cash and end up giving us a piece of equity in their business and milestones and royalties as they develop the products. So it's pretty wide and diverse, and those discussions are going on, on a variety of different fronts with small to large companies. And so we'll see how that actually shakes out. But in any case, it's going to create, we believe, significant value. And it could be partnerships where we actually get small funding upfront while we get a piece of the action going forward. So there's all kinds of things in discussions and negotiations we're having and I'm sure that we will have.

Ladies and gentlemen, I am showing no further questions at this time and would now like to turn the call back over to Mr. Emalfarb for closing comments.

Thank you. 2018 has truly been a transformational year for Dyadic. Looking ahead, we are very confident in our ability to generate meaningful scientific results coupled with increasing interest in using our C1 technology in various areas of biopharma industry. We believe this will position us for continued growth in 2019 and beyond. I'd like to take this opportunity to thank our very hard-working employees and consultants, our dedicated Board of Directors, our research partners, our collaborators and our shareholders for their support. Thank you all who have taken the time to participate on today's conference call.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day.