dyai20210930

dyai20210930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______

Commission File Number: 000-55264

DYADIC INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		45-0486747
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

140 Intracoastal Pointe Drive, Suite 404
Jupiter, Florida		33477
Address of Principal Executive Offices		Zip Code

(561) 743-8333

	Registrant’s Telephone Number, Including Area Code
		N/A
	Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐						Accelerated filer ☐

Non-accelerated filer ☒						Smaller reporting company ☒

						Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, par value $0.001 per share			DYAI			The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s Common Stock as of November 9, 2021 was 28,079,157.

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of the Federal securities laws, particularly under Item 2 “Management’s Discussion and Analysis”. All statements other than statements of historical fact are forward‑looking. Examples of forward-looking statements include, but are not limited to, statements regarding industry prospects, future business, future results of operations or financial condition, future liquidity and capital resources, our ability to implement our agreements with third parties, management strategies, our competitive position and the COVID-19 pandemic. Forward-looking statements generally can be identified by use of the words “expect,” “should,” “intend,” “anticipate,” “will,” “project,” “may,” “might,” “potential,” or “continue” and other similar terms or variations of them or similar terminology. Dyadic International, Inc., and its subsidiaries caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. Forward-looking statements involve many risks, uncertainties or other factors beyond Dyadic’s control. These factors include, but are not limited to, (1) general economic, political and market conditions; (2) our ability to generate the required productivity, stability, purity, performance, cost, safety and other data necessary to carry out and implement our biopharmaceutical research and business plans and strategic initiatives; (3) our ability to retain and attract employees, consultants, directors and advisors; (4) our ability to implement and successfully carry out Dyadic’s and third parties’ research and development efforts; (5) our ability to obtain new license and research agreements; (6) our ability to maintain our existing access to, and/or expand access to third party contract research organizations in order to carry out our research projects for ourselves and third parties; (7) competitive pressures and reliance on our key customers and collaborators; (8) our ability, and the ability of the contract research organizations with whom we are currently working with, to advance vaccine candidates into, and successfully complete, preclinical studies and clinical trials; (9) the commercialization of our vaccine candidates, if approved; (10) the pharmaceutical and biotech industry, governmental regulatory and other agencies’ willingness to adopt, utilize and approve the use of the C1 gene expression platform; (11) the risk of theft, misappropriation or expiration of owned or licensed proprietary and intellectual property, genetic and biological materials owned by us and/or Danisco US, Inc. and VTT Technical Research Centre of Finland Ltd; (12) the speculative nature and illiquidity of equity securities received as consideration from sub-licenses; (13) our expectations concerning the impact of the novel coronavirus identified as “COVID-19” on our business and operating results; and (14) other factors discussed in Dyadic’s publicly available filings, including information set forth under the caption “Risk Factors” in this Quarterly Report and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021 (as amended on Form 10-K/A on July 27, 2021). We caution you that the foregoing list of important factors is not exclusive. Any forward-looking statements are based on our beliefs, assumptions and expectations of future performance, considering the information currently available to us. Before investing in our common stock, investors should carefully read the information set forth under the caption “Risk Factors” and elsewhere in this Quarterly Report, in our Form 10-K filed with the SEC on March 30, 2021 (as amended on Form 10-K/A on July 27, 2021) and in our other SEC filings, which could have a material effect on our business, results of operations and financial condition. The forward-looking statements contained in this Form 10-Q are made only as of the date hereof, and except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Quarterly Report to conform these statements to actual results or to changes in our expectations.

PART I

Item 1.

Financial Statements

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	*September 30, 2021*			*December 31, 2020*
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	13,660,611		$	20,637,045
Short-term investment securities		9,087,199			8,457,452
Interest receivable		74,793			112,247
Accounts receivable		179,632			294,199
Prepaid expenses and other current assets		569,965			280,555
Total current assets		23,572,200			29,781,498

Non-current assets:
Equity investment		284,709			284,709
Other assets		6,143			6,225
Total assets	$	23,863,052		$	30,072,432

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	957,802		$	1,013,099
Accrued expenses		842,450			489,756
Deferred research and development obligations		162,680			123,016
Total current liabilities		1,962,932			1,625,871

Commitments and contingencies (Note 4)

Stockholders’ equity:
Preferred stock, $.0001 par value:
Authorized shares - 5,000,000; none issued and outstanding		—			—
Common stock, $.001 par value:
Authorized shares - 100,000,000; issued shares - 40,332,659 and 39,747,659, outstanding shares - 28,079,157 and 27,494,157 as of September 30, 2021, and December 31, 2020, respectively		40,333			39,748
Additional paid-in capital		100,322,444			98,013,079
Treasury stock, shares held at cost - 12,253,502		(18,929,915	)		(18,929,915	)
Accumulated deficit		(59,532,742	)		(50,676,351	)
Total stockholders’ equity		21,900,120			28,446,561
Total liabilities and stockholders’ equity	$	23,863,052		$	30,072,432

The accompanying notes are an integral part of these unaudited consolidated financial statements.

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2021*			*2020*			*2021*			*2020*
Revenues:
Research and development revenue	$	692,929		$	416,361		$	2,090,541		$	1,256,004

Costs and expenses:
Costs of research and development revenue		392,544			266,929			1,612,810			1,169,351
Provision for contract losses		—			112,433			—			187,388
Research and development		1,901,548			986,054			5,918,888			2,857,670
General and administrative		1,692,837			1,643,493			4,994,458			4,772,117
Foreign currency exchange loss (gain), net		30,002			(16,240	)		76,080			26,317
Total costs and expenses		4,016,931			2,992,669			12,602,236			9,012,843

Loss from operations		(3,324,002	)		(2,576,308	)		(10,511,695	)		(7,756,839	)

Other income:
Interest income		3,202			76,809			49,772			391,779
Other income		1,605,532			—			1,605,532			—
Total other income		1,608,734			76,809			1,655,304			391,779

Net loss	$	(1,715,268	)	$	(2,499,499	)	$	(8,856,391	)	$	(7,365,060	)

Basic and diluted net loss per common share	$	(0.06	)	$	(0.09	)	$	(0.32	)	$	(0.27	)

Basic and diluted weighted-average common shares outstanding		28,079,157			27,482,157			27,754,597			27,467,051

The accompanying notes are an integral part of these unaudited consolidated financial statements.

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Nine Months Ended September 30, 2021
	Common Stock				Treasury Stock						Additional			Accumulated
	Shares		Amount		Shares			Amount			Paid-In Capital			Deficit			Total
December 31, 2020		39,747,659	$	39,748		(12,253,502	)	$	(18,929,915	)	$	98,013,079		$	(50,676,351	)	$	28,446,561
Stock-based compensation expense		—		—		—			—			421,071			—			421,071
Issuance of common stock upon exercise of stock options		60,000		60		—			—			115,740			—			115,800
Net loss		—		—		—			—			—			(3,294,949	)		(3,294,949	)
March 31, 2021		39,807,659	$	39,808		(12,253,502	)	$	(18,929,915	)	$	98,549,890		$	(53,971,300	)	$	25,688,483
Stock-based compensation expense		—		—		—			—			446,120			—			446,120
Issuance of common stock upon exercise of stock options		525,000		525		—			—			869,815			—			870,340
Net loss		—		—		—			—			—			(3,846,174	)		(3,846,174	)
June 30, 2021		40,332,659	$	40,333		(12,253,502	)	$	(18,929,915	)	$	99,865,825		$	(57,817,474	)	$	23,158,769
Stock-based compensation expense		—		—		—			—			457,209			—			457,209
Issuance of common stock upon exercise of stock options		—		—		—			—			(590	)		—			(590	)
Net loss		—		—		—			—			—			(1,715,268	)		(1,715,268	)
September 30, 2021		40,332,659	$	40,333		(12,253,502	)	$	(18,929,915	)	$	100,322,444		$	(59,532,742	)	$	21,900,120

	*Nine Months Ended September 30, 2020*
	*Common Stock*				*Treasury Stock*						*Additional*		*Accumulated*
	*Shares*		*Amount*		*Shares*			*Amount*			*Paid-In Capital*		*Deficit*			*Total*
December 31, 2019		39,612,659	$	39,613		(12,253,502	)	$	(18,929,915	)	$	96,105,851	$	(41,351,078	)	$	35,864,471
Stock-based compensation expense		—		—		—			—			426,939		—			426,939
Issuance of common stock upon exercise of stock options		100,000		100		—			—			174,900		—			175,000
Net loss		—		—		—			—			—		(2,214,139	)		(2,214,139	)
March 31, 2020		39,712,659	$	39,713		(12,253,502	)	$	(18,929,915	)	$	96,707,690	$	(43,565,217	)	$	34,252,271
Stock-based compensation expense		—		—		—			—			436,613		—			436,613
Issuance of common stock upon exercise of stock options		23,000		23		—			—			55,720		—			55,743
Net loss		—		—		—			—			—		(2,651,422	)		(2,651,422	)
June 30, 2020		39,735,659	$	39,736		(12,253,502	)	$	(18,929,915	)	$	97,200,023	$	(46,216,639	)	$	32,093,205
Stock-based compensation expense		—		—		—			—			400,680		—			400,680
Issuance of common stock upon exercise of stock options		—		—		—			—			68		—			68
Net loss		—		—		—			—			—		(2,499,499	)		(2,499,499	)
September 30, 2020		39,735,659	$	39,736		(12,253,502	)	$	(18,929,915	)	$	97,600,771	$	(48,716,138	)	$	29,994,454

The accompanying notes are an integral part of these unaudited consolidated financial statements.

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	*Nine Months Ended September 30,*
	*2021*			*2020*
Cash flows from operating activities
Net loss	$	(8,856,391	)	$	(7,365,060	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,324,400			1,264,233
Amortization of held-to-maturity securities, net		254,193			282,123
Gain on investment in BDI		(1,605,532	)		—
Foreign currency exchange loss (gain), net		76,081			26,317
Changes in operating assets and liabilities:
Interest receivable		37,454			223,306
Accounts receivable		72,051			(141,698	)
Income tax receivable		—			500,616
Prepaid expenses and other current assets		(289,481	)		(141,550	)
Accounts payable		(47,033	)		(61,651	)
Accrued expenses		352,713			50,745
Deferred research and development obligation		39,664			75,211
Net cash used in operating activities		(8,641,881	)		(5,287,408	)

Cash flows from investing activities
Purchases of held-to-maturity investment securities		(11,283,940	)		(14,677,156	)
Proceeds from maturities of investment securities		10,400,000			36,761,000
Proceeds from the sale of BDI equity interest		1,605,532			—
Net cash provided by investing activities		721,592			22,083,844

Cash flows from financing activities
Proceeds from exercise of options		985,550			230,810
Net cash provided by financing activities		985,550			230,810
Effect of exchange rate changes on cash		(41,695	)		11,791
Net (decrease) increase in cash and cash equivalents		(6,976,434	)		17,039,037
Cash and cash equivalents at beginning of period		20,637,045			4,823,544
Cash and cash equivalents at end of period	$	13,660,611		$	21,862,581

Supplemental cash flow information
Cash received from income tax refund	$	—		$	505,616

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Notes to Consolidated Financial Statements

Note 1: Organization and Summary of Significant Accounting Policies

Description of Business

Dyadic International, Inc. (“Dyadic”, “we”, “us”, “our”, or the “Company”) is a global biotechnology platform company based in Jupiter, Florida with operations in the United States, a satellite office in the Netherlands and predominantly three research organizations performing services in the Netherlands, Finland and Israel. Over the past two plus decades, the Company has developed a gene expression platform for producing commercial quantities of industrial enzymes and other proteins, and has previously licensed this technology to third parties, such as Abengoa Bioenergy, BASF, Codexis and others, for use in industrial (non-pharmaceutical) applications. This technology is based on the Thermothelomyces heterothallica (formerly known as Myceliophthora thermophila) fungus, which the Company named C1. The C1 technology is a robust and versatile fungal expression system for the development and production of enzymes and other proteins.

On December 31, 2015, the Company sold its industrial technology business to Danisco USA (“Danisco”), the industrial biosciences business of DuPont (NYSE: DD) (the “DuPont Transaction”). As part of the DuPont Transaction, Dyadic retained co-exclusive rights to the C1 technology for use in all human and animal pharmaceutical applications, and currently has the exclusive ability to enter into sub-license agreements (subject to the terms of the license and to certain exceptions). Danisco retained certain rights to utilize the C1 technology in pharmaceutical applications, including the development and production of pharmaceutical products, for which it will be required to make royalty payments to Dyadic upon commercialization. In certain circumstances, Dyadic may owe a royalty to either Danisco or certain licensors of Danisco, depending upon whether Dyadic elects to utilize certain patents either owned by Danisco or licensed by Danisco.

After the DuPont Transaction, the Company has been focused on the biopharmaceutical industry, specifically in further improving and applying the proprietary C1 technology into a safe and efficient gene expression platform to help speed up the development, lower production costs and improve the performance of biologic vaccines and drugs and other biological products at flexible commercial scales. Currently, the Company is involved in multiple funded research collaborations with animal and human pharmaceutical companies to leverage its C1 technology to help develop products such as innovative vaccines and drugs, biosimilars and/or biobetters. The Company is also working on several COVID-19 related vaccine and antibody opportunities, including its proprietary COVID-19 vaccine candidate, DYAI-100, towards a first-in-human Phase 1 clinical trial.

Effective April 17, 2019, our common stock began trading on the NASDAQ Stock Market LLC’s NASDAQ Capital Market, under the symbol “DYAI”.

Impact of COVID-19

The outbreak of COVID-19 has led to adverse impacts on the U.S. and global economies and created uncertainty regarding the potential impact to the Company’s employees, operations, and research projects.

Some of our employees are still working remotely. The extent to which the COVID-19 pandemic will directly or indirectly impact our business will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) and its variants and the actions taken and the level of success to contain or treat the SARS-CoV-2 virus and its variants, the economic impact on local, regional, national and international business partners and markets, delays or disruptions in our on-going research projects, and unavailability of the employees of the Company or third-party contract research organizations with whom we conduct business, due to illness or quarantines, all of which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, vendors, industry, and workforce. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of economic recession or depression that has occurred or may occur in the future. Given the daily evolution of the COVID-19 outbreak and the ongoing response to curb its spread (including government travel and meeting restrictions), currently we are not able to accurately estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.

We rely on our existing cash and cash equivalents, investments in debt securities, and operating cash flow to provide the working capital needs for our operations. We believe that our existing cash position and investment in investment grade securities will be adequate to meet our operational, business, and other liquidity requirements for at least the next twelve (12) months. However, in the event our financing needs for the foreseeable future are not able to be met by our existing cash, cash equivalents and investments, we would seek to raise funds through public or private equity offerings, and through other means to meet our financing requirements. Additionally, the Company may decide to fund all of a Phase I clinical trial to demonstrate the safety in humans of a protein produced from the C1 expression platform in humans. There is no assurance that external funding will be available at acceptable terms, if at all, and the Company may, therefore, self-fund these vital projects.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, including the accounts of the Company and its wholly owned subsidiaries, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted pursuant to such rules and regulations. All significant intra-entity transactions and balances have been eliminated in consolidation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and footnotes as of and for the year ended December 31, 2020, included in our Form 10-K which was filed with the SEC on March 30, 2021 (as amended on Form 10-K/A on July 27, 2021).

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation of all periods presented. The results of the Company’s operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Since concluding the DuPont Transaction, the Company has conducted business in one operating segment, which is identified by the Company based on how resources are allocated, and operating decisions are made. Management evaluates performance and allocates resources based on the Company as a whole.

Use of Estimates

The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions. Such differences could be material to the consolidated financial statements.

Concentrations and Credit Risk

The Company’s financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investment securities, and accounts receivable. At times, the Company has cash, cash equivalents, and investment securities at financial institutions exceeding the Federal Depository Insurance Company (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) insured limit on domestic currency and the Netherlands’ FDIC counterpart for foreign currency. The Company only deals with reputable financial institutions and has not experienced any losses in such accounts.

For each of the three months ended September 30, 2021 and 2020, the Company’s revenue was generated from eight customers. For the nine months ended September 30, 2021 and 2020, the Company’s revenue was generated from thirteen and twelve customers, respectively. As of September 30, 2021 and December 31, 2020, the Company’s accounts receivable was from five and nine customers, respectively. The loss of business from one or a combination of the Company’s customers could adversely affect its operations.

The Company conducts operations in the Netherlands through its foreign subsidiary and generates a portion of its revenues from customers that are located outside of the United States. For the three months ended September 30, 2021 and 2020, the Company had five and three customers outside of the United States (i.e. European and Asian customers) that accounted for approximately $478,000 or 69.1% and $169,000 or 40.6% of the revenue, respectively. For the nine months ended September 30, 2021 and 2020, the Company had seven and six customers outside of the United States that accounted for approximately $1,599,000 or 76.5% and $609,000 or 48.5% of the revenue, respectively.

As of September 30, 2021, the Company had four customers outside of the United States (i.e. European and Asian customers) that accounted for approximately $180,000 or 100% of accounts receivable. As of December 31, 2020, the Company had seven customers outside of the United States that accounted for approximately $123,000 or 41.6% of accounts receivable.

The Company uses several contract research organizations (“CROs”) to conduct its research projects. For the three months ended September 30, 2021 and 2020, two and one CROs accounted for approximately $1,982,000 or 97.2% and $1,129,000 or 99.5% of total research services we purchased, respectively. For the nine months ended September 30, 2021 and 2020, three and one CROs accounted for approximately $6,621,000 or 96.9% and $3,602,000 or 96.9% of total research services, respectively. As of September 30, 2021, two CROs accounted for approximately $768,000 or 80.2% of the accounts payable. As of December 31, 2020, one CRO accounted for approximately $690,000 or 68.1% of the accounts payable. The loss of this CRO or a combination of the Company’s CROs could adversely affect its operations.

Cash and Cash Equivalents

We treat highly liquid investments with original maturities of three months or less when purchased as cash equivalents, including money market funds, which are unrestricted for withdrawal or use.

Investment Securities

The Company invests excess cash balances in short-term and long-term investment grade securities. Short-term investment securities mature within twelve (12) months or less, and long-term investment securities mature over twelve (12) months from the applicable reporting date. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. The Company’s investments in debt securities have been classified and accounted for as held-to-maturity. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized over the life of the related held-to-maturity security. When a debt security is purchased at a premium, both the face value of the debt and premium amount are reflected as investing outflow. Other-than-temporary impairment charges, if incurred, will be included in other income (expense).

The Company’s investments in money market funds have been classified and accounted for as available-for-sale securities and presented as cash equivalents on the consolidated balance sheets. As of September 30, 2021 and December 31, 2020, all our money market funds were invested in U.S. Government money market funds. The Company did not have any investment securities classified as trading as of September 30, 2021, or December 31, 2020.

Accounts Receivable

Accounts receivable consist of billed receivables currently due from customers and unbilled receivables. Unbilled receivables represent the excess of contract revenue (or amounts reimbursable under contracts) over billings to date. Such amounts become billable in accordance with the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project.

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Substantially all of our accounts receivable were current and include unbilled amounts that will be billed and collected over the next twelve (12) months. There was no allowance for doubtful accounts as of September 30, 2021, and December 31, 2020.

Accounts receivable consist of the following:

	*September 30, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Billed receivable	$	46,992	$	130,532
Unbilled receivable		132,640		163,667
	$	179,632	$	294,199

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	*September 30, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Prepaid insurance	$	504,690	$	204,988
Prepaid research and development expenses		40,411		—
Prepaid expenses - other		24,060		72,403
Prepaid taxes		804		3,164
	$	569,965	$	280,555

Accounts Payable

Accounts payable consist of the following:

	September 30, 2021		December 31, 2020
	(Unaudited)		(Audited)
Research and development expenses	$	767,723	$	904,572
Legal expenses		174,012		24,496
Other		16,067		84,031
	$	957,802	$	1,013,099

Accrued Expenses

Accrued expenses consist of the following:

	*September 30, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Employee wages and benefits	$	410,780	$	447,881
Research and development expenses		344,900		28,508
Other		86,770		13,367
	$	842,450	$	489,756

Revenue Recognition

The Company has no pharmaceutical products approved for sale at this point, and all of our revenue to date has been research revenue from third-party collaborations and government grants. The Company is expected to generate future revenue from license agreements and collaborative arrangements, which may include upfront payments for licenses or options to obtain a license, payment for research and development services and milestone payments, in the form of cash or non-cash considerations (e.g., minority equity interest).

Revenue related to research collaborations and agreements: The Company typically performs research and development services as specified in each respective agreement on a best efforts basis, and recognizes revenue from research funding under collaboration agreements in accordance with the 5-step process outlined in ASC Topic 606 (“Topic 606”): (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue when we satisfy a performance obligation by transferring control of the service to a customer in an amount that reflects the consideration that we expect to receive. Since the performance obligation under our collaboration agreements is generally satisfied over time, we elected to use the input method under Topic 606 to measure the progress toward complete satisfaction of a performance obligation.

Under the input methods, revenue will be recognized on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation. The Company believes that the cost-based input method is the best measure of progress to reflect how the Company transfers its performance obligation to a customer. In applying the cost-based input method of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill the performance obligation. These costs consist primarily of full-time equivalent effort and third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations.

A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

Revenue related to grants: The Company may receive grants from governments, agencies, and other private and not-for-profit organizations. These grants are intended to be used to partially or fully fund the Company’s research collaborations, including opportunities arising in connection with COVID-19 that the Company is pursuing with certain collaborators. However, most, if not all, of such potential grant revenues, if received, is expected to be earmarked for third parties to advance the research required, including preclinical and clinical trials for SARS-CoV-2 vaccines and/or antibodies candidates.

Revenue related to sublicensing agreements: If the sublicense to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue allocated to the license when technology is transferred to the customer and the customer is able to use and benefit from the license.

Milestone payments: At the inception of each arrangement that includes development, commercialization, and regulatory milestone payments, the Company evaluates whether the achievement of the milestones is considered probable and estimates the amount to be included in the transaction price. If the milestone payment is in exchange for a sublicense and is based on the sublicensee’s subsequent sale of product, the Company recognizes milestone payment by applying the accounting guidance for royalties. To date, the Company has not recognized any milestone payment revenue resulting from any of its sublicensing arrangements.

Royalties: With respect to licenses deemed to be the predominant item to which the sales-based royalties relate, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its sublicensing arrangements.

We invoice customers based on our contractual arrangements with each customer, which may not be consistent with the period that revenues are recognized. When there is a timing difference between when we invoice customers and when revenues are recognized, we record either a contract asset (unbilled accounts receivable) or a contract liability (deferred research and development obligations), as appropriate. If upfront fees or considerations related to sublicensing agreement are received prior to the technology transfer, the Company will record the amount received as deferred revenue from licensing agreement.

We are not required to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

The Company adopted a practical expedient to expense sales commissions when incurred because the amortization period would be one year or less.

Research and Development Costs

Research and development (“R&D”) costs are expensed as incurred. R&D costs are for the Company’s internally funded pharmaceutical programs and other governmental and commercial projects.

Research and development costs consist of personnel-related costs, facilities, research-related overhead, services from independent contract research organizations, and other external costs. Research and development costs, including related party, during the three and nine months ended September 30, 2021 and 2020 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Outside contracted services	$	1,700,280	$	846,564	$	5,396,227	$	2,431,200
Personnel related costs		174,856		131,553		472,605		394,706
Facilities, overhead and other		26,412		7,937		50,056		31,764
	$	1,901,548	$	986,054	$	5,918,888	$	2,857,670

Provision for Contract Losses

The Company assesses the profitability of our collaboration agreements to provide research services to our contracted business partners and identifies those contracts where current operating results or forecasts indicate probable future losses. If an anticipated contract cost exceeds anticipated contract revenue, a provision for the entire estimated loss on the contract is recorded and then accreted into the statement of operations over the remaining term of the contract. The provision for contract losses is based on management's judgment and estimates, and where applicable, is recorded when such loss is deemed probable to occur and is reasonable to estimate.

Foreign Currency Transaction Gain or Loss

The Company and its foreign subsidiary use the U.S. dollar as its functional currency, and initially measure the foreign currency denominated assets and liabilities at the transaction date. Monetary assets and liabilities are then re-measured at exchange rates in effect at the end of each period, and property and non-monetary assets and liabilities are converted at historical rates.

Fair Value Measurements

The Company applies fair value accounting for certain financial instruments that are recognized or disclosed at fair value in the financial statements. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

	•	Level 1 – Quoted prices in active markets for identical assets or liabilities.
	•	Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	•	Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The Company’s financial instruments included cash and cash equivalents, investment in debt securities, accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred research and development obligations and deposits. The carrying amount of these financial instruments, except for investment in debt securities, approximates fair value due to the short-term maturities of these instruments. The Company’s short-term and long-term investments in debt securities are recorded at amortized cost, and their estimated fair value amounts are provided by the third-party broker service for disclosure purposes.

Non-Marketable Investments

The Company also holds investments in non-marketable equity securities of privately-held companies, which usually do not have a readily determinable fair value. Our policy is to measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer such observable price changes may include instances where the investee issues equity securities to new investors, thus creating a new indicator of fair value, as an example. On a quarterly basis, we perform a qualitative assessment considering impairment indicators to evaluate whether these investments are impaired and also monitor for any observable price changes. If indicators of impairment exist, we will prepare a quantitative assessment of the fair value of our equity investments, which may include using both the market and income approaches which require judgment and the use of estimates, including discount rates, investee revenues and costs, and available comparable market data of private and public companies, among others. Valuations of such privately-held companies are inherently complex and uncertain due to the lack of liquid market for the company’s securities. In addition, such investments are inherently risky in that such companies are typically at an early stage of development, may have no or limited revenues, may not be or may never become profitable, may not be able to secure additional funding or their technologies, services or products may not be successfully developed or introduced into the market.

Income Taxes

For the nine months ended September 30, 2021, there were no provision for income taxes or unrecognized tax benefits recorded. As of September 30, 2021 and December 31, 2020, deferred tax assets were approximately $12.6 million and $9.4 million, respectively. Due to the Company’s history of operating losses and the uncertainty regarding our ability to generate taxable income in the future, the Company has established a 100% valuation allowance against deferred tax assets as of September 30, 2021 and December 31, 2020.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other revenue, expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income (loss) under GAAP. The Company does not have any significant transactions that are required to be reported in other comprehensive income (loss), and therefore, does not separately present a statement of comprehensive income (loss) in its consolidated financial statements.

Stock-Based Compensation

We recognize all share-based payments to employees, consultants, and our board of directors (“Board of Directors”), as non-cash compensation expense, in research and development expenses or general and administrative expenses in the consolidated statement of operations based on the grant date fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are recorded as they occur.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common stock shares outstanding during the reporting period. Diluted net loss per share adjusts the weighted average number of common stock shares outstanding for the potential dilution that could occur if common stock equivalents, such as stock options were exercised and converted into common stock, calculated by applying the treasury stock method.

For the three and nine months ended September 30, 2021 and 2020, the effect of the potential exercise of options to purchase 4,824,215and 4,650,390 shares of common stock, respectively, were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 will be effective for the Company beginning in the first quarter of 2023. The Company does not expect ASU 2016-13 to have a material impact on our consolidated financial positions, results of operations, and cash flows.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments of this update simplify the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The Company adopted ASU 2019-12 on January 1, 2021, and adoption of ASU 2019-12 did not have any material impact on our consolidated financial positions, results of operations, cash flows and related disclosures.

Other pronouncements issued by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant to our consolidated financial statements.

Note 2: Cash, Cash Equivalents, and Investments

The Company’s investments in debt securities are classified as held-to-maturity and are recorded at amortized cost, and its investments in money market funds are classified as cash equivalents. The following table shows the Company’s cash, available-for-sale securities, and investment securities by major security type as of September 30, 2021, and December 31, 2020:

	*September 30, 2021 (Unaudited)*
				*Gross*		*Gross*
	*Level*			*Unrealized*		*Unrealized*
	*(1)*	*Fair Value*		*Holding Gains*		*Holding Losses*			*Adjusted Cost*
Cash and Cash Equivalents
Cash		$	1,486,993	$	—	$	—		$	1,486,993
Money Market Funds	1		12,173,618		—		—			12,173,618
Subtotal			13,660,611		—		—			13,660,611
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽³⁾	2		9,079,410		—		(7,789	)		9,087,199
Total		$	22,740,021	$	—	$	(7,789	)	$	22,747,810

	*December 31, 2020 (Audited)*
				*Gross*		*Gross*
	*Level*			*Unrealized*		*Unrealized*
	*(1)*	*Fair Value*		*Holding Gains*		*Holding Losses*			*Adjusted Cost*
Cash and Cash Equivalents
Cash		$	149,015	$	—	$	—		$	149,015
Money Market Funds	1		20,488,030		—		—			20,488,030
Subtotal			20,637,045		—		—			20,637,045
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽³⁾	2		8,473,461		22,473		(6,463	)		8,457,451
Total		$	29,110,506	$	22,473	$	(6,463	)	$	29,094,496

_________________

Notes:

(1) Definition of the three-level fair value hierarchy:

•

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities

•

Level 2 - Other inputs that are directly or indirectly observable in the markets

•

Level 3 - Inputs that are generally unobservable

(2) Short-term investment securities will mature within 12 months or less, from the applicable reporting date.

(3) For the three months ended September 30, 2021 and 2020, there was no premiums paid to purchase held-to-maturity investment securities. The premiums paid to purchase held-to-maturity investment securities was $283,940 and $221,156 for the nine months ended September 30, 2021, and 2020, respectively. The premiums paid to purchase held-to-maturity investment securities was $282,946 for the year ended December 31, 2020.

The Company considers the declines in market value of its investment portfolio to be temporary in nature. The Company’s investment policy requires investment securities to be investment grade and held to maturity with the primary objective to maintain a high degree of liquidity while maximizing yield. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of September 30, 2021, the Company does not consider any of its investments to be other-than-temporarily impaired.

Note 3: Research and Collaboration Agreements, Sublicense Agreements, and Investments in Privately-Held Companies

BDI

On June 30, 2017, the Company entered into a strategic Research Services Agreement (the “RSA”) and a Service Framework Agreement (the “SFA”, and together with the RSA, the “R&D Agreements”) with Biotechnology Developments for Industry in Pharmaceuticals, S.L.U. (“BDI Pharma”). BDI Pharma, together with VLP The Vaccines Company, S.L.U. (“VLPbio”) are both subsidiaries of Biotechnology Developments for Industry, S.L., a Spanish biotechnology company (“BDI Holdings” and together with BDI Pharma and VLPbio, “BDI”).

The Company paid EUR €1.0 million (the “RSA Initial Payment”) in cash to engage BDI to develop designated C1 based product candidates and further improve the C1 manufacturing process, in consideration of which Dyadic also received a 16.1% equity interest in BDI Holdings and a 3.3% equity interest in VLPbio. Under the RSA, BDI is obligated to spend a minimum amount of EUR €936,000 over two years for the research and development project. If the research and development activities produce a product that is selected for additional development and commercialization, then Dyadic would share with BDI a range of between 50% and 75% of the net income from such selected product, depending upon the amount of BDI’s aggregate spend in the development of the selected product, with a minimum aggregate spend by BDI of EUR €1 million for a 50% share and EUR €8.0 million for a 75% share. If BDI does not enter into an agreement with Dyadic for such additional development and commercialization of the selected product, then Dyadic will pay to BDI EUR €1.5 million of the net income from Dyadic’s commercialization, if any, of the selected product (“Benefit Sharing for Selected Product”). The provision related to Benefit Sharing for Selected Product survives upon the completion of the project and termination of the RSA. Under the SFA, Dyadic agreed to purchase from BDI at least USD $1.0 million (the “SFA Commitment”) in contract research services specified by Dyadic over two years from the closing of the BDI transaction.

The Company concluded that BDI is not a Variable Interest Entity (“VIE”), because BDI has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest. Additionally, Dyadic is not the primary beneficiary of BDI as Dyadic does not have the power to control or direct the activities of BDI or its operations. As a result, the Company does not consolidate its investments in BDI, and the financial results of BDI are not included in the Company’s consolidated financial results.

The Company performed a valuation analysis of the components of the transaction and allocated the consideration based on the relative fair value of each component. As the fair value of BDI equity interest was considered immaterial, the RSA Initial Payment of approximately USD $1.1 million (EUR €1.0 million) was accounted for as a prepaid research and development collaboration payment on our consolidated balance sheet, and both the collaboration payment under the RSA and the SFA Commitment of USD $1.0 million paid by Dyadic were expensed as the related research services were performed by BDI. In June 2019, BDI completed its services under the RSA and the entire amount of the RSA Initial Payment was expensed. Dyadic had fulfilled its SFA commitment in 2019.

On July 26, 2021, the Company entered (i) a Sale and Purchase of Shares Agreement under which the Company agreed to sell its 16.1% equity interest in BDI Holdings, and (ii) a Sale and Purchase of Shares Agreement under which the Company agreed to sell its 3.3% equity interest in VLPBio (together the “BDI Sale”). In connection with the closing of the BDI Sale, the Company received approximately $1.6 million, net of transaction and legal expenses in August 2021. The gain generated from the BDI Sale was recorded in other income.

In connection with the BDI Sale, the Company also entered into an amendment to the Service Framework Agreement (the “Amended SFA”) with BDI Pharma. Under the Amended SFA, the Company maintains the right to engage in research and development projects at BDI Pharma until June 30, 2025, with the non-compete term extending to June 30, 2030, without any other material terms and conditions changed.

Novovet and Luina Bio

On April 26, 2019, the Company entered into a sub-license agreement (the “Luina Bio Sub-License Agreement”) with Luina Bio Pty Ltd. (“Luina Bio”) and Novovet Pty Ltd (“Novovet”). Under the terms of the Luina Bio Sub-License Agreement, the Company has granted to Novovet, subject to the terms of the license agreement entered into between the Company and Danisco US, Inc. on December 31, 2015, a worldwide sub-license to certain patent rights and know-how related to Dyadic’s proprietary C1 gene expression platform for the exclusive and sole purpose of commercializing certain targeted antigen and biological products for the prevention and treatment of various ailments for companion animals.

In consideration of the license granted pursuant to the Luina Bio Sub-License Agreement, Dyadic received a 20% equity interest in Novovet (“Novovet Up-Front Consideration”) in accordance with the terms of Novovet’s Shareholder Agreement, and will receive a percentage of royalties on future net sales and non-sales revenue, if any, which incorporates Dyadic’s proprietary C1 gene expression platform.

The Company evaluated the nature of its equity interest investment in Novovet and determined that Novovet is a VIE, because Novovet does not have sufficient equity to finance its activities without additional financial support from third party investors or lenders. However, the Company is not the primary beneficiary of Novovet as Dyadic does not have the power to control or direct the activities of Novovet that most significantly impact the VIE. As a result, the Company will not consolidate its investment in Novovet, but account for under the equity method investment, given that it has the ability to exercise significant influence, but not control, over Novovet.

To date Novovet has not raised the capital required to move this opportunity forward, and therefore, the Company has not transferred its C1 technology to Novovet. Therefore, the Novovet Up-Front Consideration received under the Luina Bio Sub-License Agreement, in the form of a 20% equity interest in Novovet, does not yet meet the revenue recognition criteria under ASC 606. The Company will account for its investment in Novovet and the related income under the equity method of accounting, when and if the transfer of its C1 technology is completed and Novovet receives adequate financing required to commence its research and development activities. The Company intends to terminate the Luina Bio Sub-License Agreement in 2021 should Novovet be unable to raise the required funding.

Alphazyme

On May 5, 2019, the Company entered into a sub-license agreement (the “Alphazyme Sub-License Agreement”) with Alphazyme, LLC (“Alphazyme”). Under the terms of the Alphazyme Sub-License Agreement, the Company has granted to Alphazyme, subject to the terms of the license agreement entered into between the Company and Danisco US, Inc. on December 31, 2015, a sub-license to certain patent rights and know-how related to Dyadic’s proprietary C1 gene expression platform for the purpose of commercializing certain pharmaceutical products that are used as reagents to catalyze a chemical reaction to detect, measure, or be used as a process intermediate to produce a nucleic acid as a therapeutic or diagnostic agent.

On June 24, 2020, the Company entered into an Amended and Restated Non-Exclusive Sub-License Agreement (the “Amended Sub-License Agreement”) with Alphazyme. Pursuant to the Amended Sub-License Agreement and in consideration of Dyadic’s transfer of its C1 technology, Alphazyme issued 2.50% of the Class A shares of Alphazyme to Dyadic, and Dyadic became a party to the Alphazyme Limited Liability Company Agreement pursuant to which the Company has agreed to certain customary rights, covenants, and obligations. In addition, and subject to achieving certain milestones, Alphazyme is obligated to pay a potential milestone payment and royalties, based on net sales, if any, which incorporate Dyadic’s proprietary C1 gene expression platform.

On December 1, 2020, the Company entered into an Amended and Restated Limited Liability Company Agreement with Alphazyme (the “Amended Alphazyme LLC Agreement”). Under the Amended Alphazyme LLC Agreement, Alphazyme obtained an additional capital contribution and Dyadic’s ownership was diluted to 1.99%.

The Company evaluated the nature of its equity interest investment in Alphazyme and determined that Alphazyme is a VIE due to the capital structure of the entity. However, the Company is not the primary beneficiary of Alphazyme as Dyadic does not have the power to control or direct the activities of Alphazyme that most significantly impact the VIE. As a result, the Company does not consolidate its investment in Alphazyme. The Company reports its investment in Alphazyme under the cost method of accounting, given that it does not have the ability to exercise significant influence or control.

For the year ended December 31, 2020, the Company recorded a gain of $284,709 from its investment in Alphazyme resulting from a third-party capital contribution obtained by Alphazyme. As of September 30, 2021, the Company does not consider its investment in Alphazyme to be impaired.

IDBiologics, Inc.

On July 8, 2020, the Company entered into a Common Stock Purchase Agreement (the “IDBiologics Agreement”) with IDBiologics, Inc (“IDBiologics”). IDBiologics is a private biotechnology company focused on the development of human monoclonal antibodies for the treatment and prevention of serious infectious diseases. The Company was founded in 2017 and seeded by Vanderbilt University Medical Center in response to the repeated threats of epidemics around the world, including Ebola in West Africa and Zika in the Americas. IDBiologics is developing a portfolio of monoclonal antibodies against SARS-CoV-2, influenza and Zika viruses.

Pursuant to the term of the IDBiologics Agreement, on July 8, 2021, Dyadic received 129,661 shares of IDBiologics’ common stock, which represent 0.37% of IDBiologics’ outstanding equity, upon the completion of a feasibility study performed by Dyadic. Dyadic provided services including the use of Dyadic’s C1 technology to express a SARS-CoV-2 monoclonal antibody which IDBiologics licensed from the Vanderbilt Vaccine Center. The Company determined not to record the basis for its equity interest in IDBiologics because the fair value amount is considered immaterial.

The Company evaluated the nature of its equity interest in IDBiologics and determined that IDBiologics is a VIE due to the capital structure of the entity. However, the Company is not the primary beneficiary of IDBiologics as Dyadic does not have the power to control or direct the activities of IDBiologics that most significantly impact the VIE. As a result, the Company does not consolidate its investment in IDBiologics.

For the three months ended September 30, 2021, approximately $76,000 of research and development revenue was related to IDBiologics. For the nine months ended September 30, 2021, approximately $132,000 of research and development revenue was related to IDBiologics.

Note 4: Commitments and Contingencies

Legal Proceedings

We are not currently involved in any litigation that we believe could have a materially adverse effect in our financial condition or results of operations. From time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers immaterial, individually and in the aggregate. The Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The requirement for these provisions is reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable and costly. Protracted litigation and/or an unfavorable resolution of one or more of proceedings, claims or investigations against the Company could have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations.

Note 5: Share-Based Compensation

Description of Equity Plans

The 2011 Equity Incentive Plan (the “2011 Plan”) was adopted by the Company’s Board of Directors on April 28, 2011 and approved by the Company’s stockholders on June 15, 2011. The 2011 Plan serves as the successor to the Company’s 2006 Stock Option Plan (the “2006 Plan”). Since the effective date of the 2011 Plan, all equity awards were made from the 2011 Plan, and no additional awards will be granted under the 2006 plan. Under the 2011 Plan, 3,000,000 shares of the Company’s common stock were initially reserved for issuance pursuant to a variety of share-based compensation awards, plus any shares available for issuance under the 2006 Plan or are subject to awards under the 2006 Plan which are forfeited or lapse unexercised and which following the effective date are not issued under the 2006 Plan. In accordance with the provisions of the 2011 Plan, the Board of Directors approved an increase of 1,500,000 shares to the plan on January 1, 2019, and 2020.

At our 2021 Virtual Annual Meeting of Shareholders (“Annual Meeting”) held on June 11, 2021, shareholders approved the Company’s 2021 Equity Incentive Award Plan (the “2021 Plan”), which was adopted by the Board of Directors on April 9, 2021. The 2021 Plan increased the number of shares available for the grant of stock options, restricted stock awards and other awards by 3,000,000 in addition to the number of shares remaining available for the grant of new awards under the 2011 Plan as of April 16, 2021. The 2021 Plan became effective as of the date of the Annual Meeting and as of September 30, 2021, no additional awards were granted under the 2011 Plan.

As of September 30, 2021, the Company had 4,824,215 stock options outstanding and an additional 4,363,386 shares of common stock available for grant under the 2021 Plan. As of December 31, 2020, there were 4,638,390 stock options outstanding and 2,134,211 shares of common stock available for grant under the 2011 Plan.

Stock Options

Options are granted to purchase common stock at prices that are equal to the fair value of the common stock on the date the option is granted. Vesting is determined by the Board of Directors at the time of grant. The term of any stock option awards under the Company’s 2011 Plan and 2021 Plan is ten years, except for certain options granted to the contractors which are one or three years.

The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the award as if the award was, in substance, multiple awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the following:

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury rates with securities approximating the expected lives of options at the date of grant.

Expected dividend yield. The expected dividend yield is zero, as the Company has never paid dividends to common shareholders and does not currently anticipate paying any in the foreseeable future.

Expected stock price volatility. The expected stock price volatility was calculated based on the Company’s own volatility after the DuPont Transaction. The Company reviews its volatility assumption on an annual basis and has used the Company’s historical volatility since 2016, as the DuPont Transaction resulted in significant changes in the Company’s business and capital structure.

Expected life of option. The expected life of option was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The Company uses the weighted average vesting period and contractual term of the option as the best estimate of the expected life of a new option, except for the options granted to the CEO (i.e., 5 or 10 years) and certain contractors (i.e., 2 or 3 years).

The assumptions used in the Black-Scholes option pricing model for stock options granted during the nine months ended September 30, 2021 are as follows:

Risk-Free interest rate			0.13% - 0.85%
Expected dividend yield			—%
Expected stock price volatility			54.52% - 60.53%
Expected life of options (in years)			2.00 - 6.25

The following table summarizes the stock option activities during the nine months ended September 30, 2021:

SEC Form 10-Q filed by Dyadic International, Inc.