dyai20220930

dyai20220930_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, 2022

☐	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, 2022 was 28,563,100.

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	24
Item 4.	Controls and Procedures	24

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	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
Signatures		26

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 cautions readers that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking information. 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 and other service providers 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 and other third-party service providers with whom we are currently working with, to advance product candidates into, and successfully complete, preclinical studies and clinical trials; (9) the commercialization of our product candidates, if approved; (10) the pharmaceutical and biotech industry, governmental regulatory and other agencies’ willingness to adopt, utilize and approve the use of our fungal based microbial protein production platforms and our other technologies; (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, and contract research organizations that we engage with; (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 29, 2022. 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 29, 2022 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, 2022*			*December 31, 2021*
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	6,739,117		$	15,748,480
Short-term investment securities		7,461,884			4,511,780
Interest receivable		43,873			94,375
Accounts receivable		235,368			277,831
Prepaid expenses and other current assets		448,208			375,830
Total current assets		14,928,450			21,008,296

Non-current assets:
Investment in Alphazyme		284,709			284,709
Other assets		6,003			6,117
Total assets	$	15,219,162		$	21,299,122

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	777,238		$	1,547,953
Accrued expenses		987,891			709,560
Deferred research and development obligations		445,044			151,147
Deferred license revenue, current portion		176,471			147,059
Total current liabilities		2,386,644			2,555,719

Deferred license revenue, net of current portion		220,588			352,941
Total liabilities		2,607,232			2,908,660

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 - 40,716,602 and 40,482,659, outstanding shares - 28,463,100 and 28,229,157 as of September 30, 2022, and December 31, 2021, respectively		40,717			40,483
Additional paid-in capital		102,836,563			101,026,496
Treasury stock, shares held at cost - 12,253,502		(18,929,915	)		(18,929,915	)
Accumulated deficit		(71,335,435	)		(63,746,602	)
Total stockholders’ equity		12,611,930			18,390,462
Total liabilities and stockholders’ equity	$	15,219,162		$	21,299,122

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,*
	*2022*			*2021*			*2022*			*2021*
Revenues:
Research and development revenue	$	835,480		$	692,929		$	1,983,636		$	2,090,541
License revenue		44,117			—			202,941			—
Total revenue		879,597			692,929			2,186,577			2,090,541

Costs and expenses:
Costs of research and development revenue		602,847			392,544			1,418,702			1,612,810
Research and development		743,585			1,901,548			3,917,245			5,918,888
General and administrative		1,383,433			1,692,837			4,753,162			4,994,458
Foreign currency exchange loss, net		13,205			30,002			23,578			76,080
Total costs and expenses		2,743,070			4,016,931			10,112,687			12,602,236

Loss from operations		(1,863,473	)		(3,324,002	)		(7,926,110	)		(10,511,695	)

Other income:
Interest income		54,300			3,202			87,277			49,772
Other income		—			1,605,532			250,000			1,605,532
Total other income		54,300			1,608,734			337,277			1,655,304

Net loss	$	(1,809,173	)	$	(1,715,268	)	$	(7,588,833	)	$	(8,856,391	)

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

Basic and diluted weighted-average common shares outstanding		28,391,894			28,079,157			28,302,332			27,754,597

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, 2022*
	*Common Stock*				*Treasury Stock*						*Additional*		*Accumulated*
	*Shares*		*Amount*		*Shares*			*Amount*			*Paid-In Capital*		*Deficit*			*Total*
December 31, 2021		40,482,659	$	40,483		(12,253,502	)	$	(18,929,915	)	$	101,026,496	$	(63,746,602	)	$	18,390,462
Stock-based compensation expense		—		—		—			—			453,791		—			453,791
Issuance of common stock upon exercise of stock options		35,000		35		—			—			42,315		—			42,350
Net loss		—		—		—			—			—		(2,491,665	)		(2,491,665	)
March 31, 2022		40,517,659	$	40,518		(12,253,502	)	$	(18,929,915	)	$	101,522,602	$	(66,238,267	)	$	16,394,938
Stock-based compensation expense		—		—		—			—			454,500		—			454,500
Net loss		—		—		—			—			—		(3,287,995	)		(3,287,995	)
June 30, 2022		40,517,659	$	40,518		(12,253,502	)	$	(18,929,915	)	$	101,977,102	$	(69,526,262	)	$	13,561,443
Stock-based compensation expense		—		—		—			—			499,919		—			499,919
Issuance of common stock upon exercise of stock options		198,943		199		—			—			359,542		—			359,741
Net loss		—		—		—			—			—		(1,809,173	)		(1,809,173	)
September 30, 2022		40,716,602	$	40,717		(12,253,502	)	$	(18,929,915	)	$	102,836,563	$	(71,335,435	)	$	12,611,930

	*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

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,*
	*2022*			*2021*
Cash flows from operating activities
Net loss	$	(7,588,833	)	$	(8,856,391	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,408,210			1,324,400
Amortization of held-to-maturity securities, net		37,094			254,193
Gain on investment in BDI		—			(1,605,532	)
Foreign currency exchange loss (gain), net		23,579			76,081
Changes in operating assets and liabilities:
Interest receivable		50,502			37,454
Accounts receivable		(14,837	)		72,051
Prepaid expenses and other current assets		(70,051	)		(289,481	)
Accounts payable		(716,964	)		(47,033	)
Accrued expenses		278,331			352,713
Deferred research and development obligation		293,897			39,664
Deferred license revenue		(102,941	)		—
Net cash used in operating activities		(6,402,013	)		(8,641,881	)

Cash flows from investing activities
Purchases of held-to-maturity investment securities		(8,487,198	)		(11,283,940	)
Proceeds from maturities of investment securities		5,500,000			10,400,000
Proceeds from the sale of investment in BDI		—			1,605,532
Net cash (used in) provided by investing activities		(2,987,198	)		721,592

Cash flows from financing activities
Proceeds from exercise of options		402,091			985,550
Net cash provided by financing activities		402,091			985,550
Effect of exchange rate changes on cash		(22,243	)		(41,695	)
Net decrease in cash and cash equivalents		(9,009,363	)		(6,976,434	)
Cash and cash equivalents at beginning of period		15,748,480			20,637,045
Cash and cash equivalents at end of period	$	6,739,117		$	13,660,611

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 company based in Jupiter, Florida with operations in the United States and a satellite office in the Netherlands, and it utilizes a number of third-party consultants and research organizations to carry out the Company’s research and development activities.

The Company’s proprietary gene expression and protein production platforms are based on the highly productive and scalable fungus Thermothelomyces heterothallica (formerly Myceliophthora thermophila). Our lead technology, C1-cell protein production platform, is based on an industrially proven microorganism (named C1). The Company has also developed the Dapibus^TM filamentous fungal based microbial protein production platform to enable the rapid development and large-scale manufacture of low-cost proteins, metabolites and other biologic products for use in non-pharmaceutical applications, such as food, nutrition, and wellness.

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-cell protein production platform for use in all human and animal pharmaceutical applications, and currently the Company has the exclusive ability to enter into sub-license agreements (subject to the terms of the license and to certain exceptions) for use in all human and animal pharmaceutical applications. Danisco retained certain rights to utilize the C1-cell protein production platform 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 in by Danisco.

The Company has been focused on the animal and human biopharmaceutical industries, specifically in further improving and applying the proprietary C1-cell protein production platform into a safe and efficient protein production 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.

The Company’s lead product, DYAI-100, also known as C1-SARS-CoV-2 RBD vaccine, is a novel receptor-binding domain (RBD) recombinant vaccine, highly expressed in C1-cell protein production platform in prevention of COVID-19. The Company anticipates starting a phase 1 clinical trial in South Africa in late 2022 to assess the safety, reactogenicity, and immunogenicity of the C1-SARS-CoV-2 RBD vaccine, administered as a booster, in healthy volunteers.

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.

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 remain uncertain 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. Currently, these have not materially impacted our development timelines and we continue to adapt to the current environment to minimize the effect to our business. However, given the daily evolution of COVID-19 and the ongoing response to curb its spread (including government travel and meeting restrictions), we may experience more pronounced disruptions in our operations and impact to our results of operations, financial condition, or liquidity in the future.

Liquidity and Capital Resources

We rely on our existing cash and cash equivalents, investments in debt securities, and operating cash flows 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 has been self-funding our DYAI-100 vaccine candidate research, pre-clinical, regulatory and CMC guidance, CMC manufacturing and regulatory filings for the anticipated Phase 1 clinical trial in South Africa to demonstrate the safety of a protein produced from the C1-cell protein production platform in humans. There is no assurance that external funding will be available at acceptable terms to continue advancing our DYAI-100 vaccine candidate beyond a Phase 1 trial if such trial is successful.

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, 2021, included in our Form 10-K which was filed with the SEC on March 29, 2022.

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, 2022 and 2021, the Company's revenue was generated from eight customers. For each of the nine months ended September 30, 2022 and 2021, the Company’s revenue was generated from thirteen customers. As of September 30, 2022 and December 31, 2021, the Company’s accounts receivable was from four and eight 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, 2022 and 2021, the Company had four and five customers outside of the United States (i.e., European and Asian customers) that accounted for approximately $133,000 or 16.0% and $478,000 or 69.1% of the revenue, respectively. For the nine months ended September 30, 2022 and 2021, the Company had six and seven customers outside of the United States that accounted for approximately $509,000 or 25.6% and $1,599,000 or 76.5% of the revenue, respectively.

As of September 30, 2022, the Company had two customers outside of the United States (i.e., European and Asian customers) that accounted for approximately $43,000 or 17.8% of accounts receivable. As of December 31, 2021, the Company had four customers outside of the United States that accounted for approximately $157,000 or 56.4% of accounts receivable.

The Company uses several contract research organizations (“CROs”) to conduct its research projects. For the three months ended September 30, 2022 and 2021, three and two CROs accounted for approximately $1,352,000 or 99.5% and $1,982,000 or 97.2% of total research services we purchased, respectively. For the nine months ended September 30, 2022 and 2021, three CROs accounted for approximately $4,146,000 or 97.4% and $6,621,000 or 96.9% of total research services we purchased, respectively. As of September 30, 2022 and December 31, 2021, three and two CROs accounted for approximately $714,000 or 91.9% and $1,312,000 or 84.8% of the accounts payable, respectively. The loss of one 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).

As of September 30, 2022 and December 31, 2021, all of our money market funds were invested in U.S. Government money market funds. 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. The Company did not have any investment securities classified as trading as of September 30, 2022, or December 31, 2021.

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, 2022, and December 31, 2021.

Accounts receivable consist of the following:

	September 30, 2022		December 31, 2021
	(Unaudited)		(Audited)
Billed receivable	$	30,600	$	101,175
Unbilled receivable		204,768		176,656
	$	235,368	$	277,831

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	*September 30, 2022*		*December 31, 2021*
	(Unaudited)		(Audited)
Prepaid insurance	$	382,045	$	326,712
Prepaid expenses - various		55,075		45,839
Prepaid research and development expenses		10,920		—
Prepaid taxes		168		3,279
	$	448,208	$	375,830

Accounts Payable

Accounts payable consist of the following:

	September 30, 2022		December 31, 2021
	(Unaudited)		(Audited)
Research and development expenses	$	725,216	$	1,363,889
Legal expenses		17,616		27,675
Other		34,406		156,389
	$	777,238	$	1,547,953

Accrued Expenses

Accrued expenses consist of the following:

	*September 30, 2022*		*December 31, 2021*
	(Unaudited)		(Audited)
Research and development expenses	$	634,951	$	194,250
Employee wages and benefits		258,130		405,758
Other		94,810		109,552
	$	987,891	$	709,560

Revenue Recognition

The Company has no pharmaceutical products approved for sale at this point. All of our revenue to date has been research revenue from third-party collaborations and government grants, as well as revenue from sublicensing agreements and collaborative arrangements, which may include upfront payments, options to obtain a license, payment for research and development services, milestone payments and royalties, 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. Depending on how the performance obligation under our license and collaboration agreements is satisfied, we elected to recognize the revenue either at a point in time or over time by using the input method under Topic 606 to measure the progress toward complete satisfaction of a performance obligation.

Under the input method, revenue will be recognized based on 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.

Customer options: If the sublicensing agreement includes customer options to purchase additional goods or services, the Company will evaluate if such options are considered material rights to be deemed as separate performance obligations at the inception of each arrangement.

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, 2022 and 2021 were as follows:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2022*		*2021*		*2022*		*2021*
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Outside contracted services	$	550,750	$	1,700,280	$	3,302,911	$	5,396,227
Personnel related costs		186,993		174,856		593,258		472,605
Facilities, overhead and other		5,842		26,412		21,076		50,056
	$	743,585	$	1,901,548	$	3,917,245	$	5,918,888

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, 2022, there were no provision for income taxes or unrecognized tax benefits recorded. As of September 30, 2022 and December 31, 2021, deferred tax assets were approximately $15.7 million and $13.0 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, 2022 and December 31, 2021.

Other Income

The other income recognized during the nine months ended September 30, 2022 was related to a settlement payment we received from the termination of term sheet of a proposed license and collaboration.

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, 2022 and 2021, the effect of the potential exercise of options to purchase 5,281,097 and 4,824,215 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, 2022, and December 31, 2021:

	September 30, 2022 (Unaudited)
				Gross		Gross
	*Level*			*Unrealized*		*Unrealized*
	*(1)*	*Fair Value*		*Holding Gains*		*Holding Losses*			*Adjusted Cost*
Cash and Cash Equivalents
Cash		$	654,971	$	—	$	—		$	654,971
Money Market Funds	1		6,084,146		—		—			6,084,146
Subtotal			6,739,117		—		—			6,739,117
Short-Term Investment Securities⁽²⁾
Corporate Bonds⁽³⁾	2		7,397,900		—		(63,984	)		7,461,884
Total		$	14,137,017	$	—	$	(63,984	)	$	14,201,001

	*December 31, 2021 (Audited)*
				*Gross*		*Gross*
	*Level*			*Unrealized*		*Unrealized*
	*(1)*	*Fair Value*		*Holding Gains*		*Holding Losses*		*Adjusted Cost*
Cash and Cash Equivalents
Cash		$	1,377,094	$	—	$	—	$	1,377,094
Money Market Funds	1		14,371,386		—		—		14,371,386
Subtotal			15,748,480		—		—		15,748,480
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽³⁾	2

SEC Form 10-Q filed by Dyadic International Inc.