dyai20210331

dyai20210331_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 March 31, 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 each of the registrant’s Common Stock as of May 12, 2021 was 27,554,157.

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	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		31

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information (other than historical facts) set forth in this Quarterly Report contains forward-looking statements within the meaning of the Federal securities laws, which involve many risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. 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. Such forward-looking statements are included under Item 2 “Management’s Discussion and Analysis”. 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 within and/or 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) 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 Form 10-Q and our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021. We caution you that the foregoing list of important factors is not exclusive. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, considering the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Moreover, we operate in a highly regulated, competitive and rapidly changing environment. Our competitors have far greater resources, infrastructure and market presence than we do which makes it difficult for us to enter certain markets, and/or to gain or maintain customers. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should carefully read the information set forth under the caption “Risk Factors” in this Form 10-Q and elsewhere in our Form 10-K filed with the SEC on March 30, 2021 which could have a material adverse effect on our business, results of operations and financial condition.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. 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.

We qualify all our forward-looking statements by these cautionary statements. In addition, with respect to all our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PART I

Item 1.

Financial Statements

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	*March 31, 2021*			*December 31, 2020*
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	13,055,558		$	20,637,045
Short-term investment securities		14,177,441			8,457,452
Interest receivable		157,201			112,247
Accounts receivable		384,963			294,199
Prepaid expenses and other current assets		216,189			280,555
Total current assets		27,991,352			29,781,498

Non-current assets:
Investment in Alphazyme		284,709			284,709
Other assets		6,151			6,225
Total assets	$	28,282,212		$	30,072,432

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,473,813		$	1,013,099
Accrued expenses		277,668			489,756
Deferred research and development obligations		842,248			123,016
Total current liabilities		2,593,729			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 - 39,807,659 and 39,747,659, outstanding shares - 27,554,157 and 27,494,157 as of March 31, 2021 and December 31, 2020, respectively		39,808			39,748
Additional paid-in capital		98,549,890			98,013,079
Treasury stock, shares held at cost - 12,253,502		(18,929,915	)		(18,929,915	)
Accumulated deficit		(53,971,300	)		(50,676,351	)
Total stockholders’ equity		25,688,483			28,446,561
Total liabilities and stockholders’ equity	$	28,282,212		$	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 March 31,*
	*2021*			*2020*
Revenues:
Research and development revenue	$	460,520		$	315,372

Costs and expenses:
Costs of research and development revenue		390,762			278,182
Research and development		1,808,098			755,453
General and administrative		1,554,007			1,653,392
Foreign currency exchange loss (gain), net		28,272			10,867
Total costs and expenses		3,781,139			2,697,894

Loss from operations		(3,320,619	)		(2,382,522	)

Interest income		25,670			168,383

Net loss	$	(3,294,949	)	$	(2,214,139	)

Basic and diluted net loss per common share	$	(0.12	)	$	(0.08	)

Basic and diluted weighted-average common shares outstanding		27,533,268			27,452,490

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

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock				Treasury Stock						Additional		Accumulated
	Shares		Amount		Shares			Amount			Paid-in Capital		Deficit			Total

Balance at 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		—		—		—			—			421,071		—			421,071

Exercise of stock options		60,000		60		—			—			115,740		—			115,800

Net loss		—		—		—			—			—		(3,294,949	)		(3,294,949	)

Balance at March 31, 2021		39,807,659	$	39,808		(12,253,502	)	$	(18,929,915	)	$	98,549,890	$	(53,971,300	)	$	25,688,483

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

DYADIC INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	*Three Months Ended March 31,*
	*2021*			*2020*
Cash flows from operating activities
Net loss	$	(3,294,949	)	$	(2,214,139	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		421,071			426,939
Amortization of held-to-maturity securities, net		63,951			107,256
Foreign currency exchange loss (gain), net		28,272			10,867
Changes in operating assets and liabilities:
Interest receivable		(44,954	)		102,565
Accounts receivable		(131,800	)		35,258
Prepaid expenses and other current assets		64,297			(10,529	)
Accounts payable		480,455			(292,361	)
Accrued expenses		(212,088	)		(326,000	)
Deferred research and development obligation		719,232			163,799
Net cash used in operating activities		(1,906,513	)		(1,996,345	)

Cash flows from investing activities
Purchases of held-to-maturity investment securities		(11,283,940	)		(11,652,385	)
Proceeds from maturities of investment securities		5,500,000			13,350,000
Net cash (used in) provided by investing activities		(5,783,940	)		1,697,615

Cash flows from financing activities
Proceeds from exercise of options		115,800			175,000
Net cash provided by financing activities		115,800			175,000
Effect of exchange rate changes on cash		(6,834	)		(2,983	)
Net decrease in cash and cash equivalents		(7,581,487	)		(126,713	)
Cash and cash equivalents at beginning of period		20,637,045			4,823,544
Cash and cash equivalents at end of period	$	13,055,558		$	4,696,831

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 in 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.

To date, 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.

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 the three months ended March 31, 2021 and 2020, the Company’s revenue was generated from eight and five customers, respectively. As of March 31, 2021 and December 31, 2020, the Company’s accounts receivable was from seven 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 March 31, 2021, the Company had six customers outside of the United States (i.e. European and Asian customers) that accounted for approximately 76.7% or $353,000 of the revenue. For the three months ended March 31, 2020, the Company had three customers outside of the United States that accounted for approximately 58.0% or $183,000 of the revenue. As of the three months ended March 31, 2021, the Company had four customers outside of the United States (i.e. European and Asian customers) that accounted for approximately 46.0% or $174,000 of accounts receivable. As of December 31, 2020, the Company had seven customers outside of the United States that accounted for approximately 41.6% or $123,000 of accounts receivable.

The Company uses several contract research organizations (“CROs”) to conduct its research projects. As of and for the three months ended March 31, 2021, three CROs accounted for approximately $2,017,000 or 98.1% of total research services we purchased and $1,324,000 or 89.8% of the accounts payable. For the three months ended March 31, 2020, one CRO accounted for approximately $855,000, or 100% of total research services we purchased. 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 March 31, 2021 and December 31, 2020, all of 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 March 31, 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 March 31, 2021 and December 31, 2020.

Accounts receivable consist of the following:

	*March 31, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Billed receivable	$	293,323	$	130,532
Unbilled receivable		91,640		163,667
	$	384,963	$	294,199

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	*March 31, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Prepaid insurance	$	94,841	$	204,988
Prepaid expenses - various		120,534		72,403
Prepaid taxes		814		3,164
	$	216,189	$	280,555

Accounts Payable

Accounts payable consist of the following:

	*March 31, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Research and development expenses	$	1,337,755	$	904,572
Legal expenses		93,071		24,496
Other		42,987		84,031
	$	1,473,813	$	1,013,099

Accrued Expenses

Accrued expenses consist of the following:

	*March 31, 2021*		*December 31, 2020*
	(Unaudited)		(Audited)
Employee wages and benefits	$	175,210	$	447,881
Research and development expenses		42,006		28,508
Other		60,452		13,367
	$	277,668	$	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 months ended March 31, 2021 and 2020 were as follows:

	*Three Months Ended March 31,*
	*2021*		*2020*
	(Unaudited)		(Unaudited)
Outside contracted services	$	1,659,194	$	613,790
Personnel related costs		148,162		123,638
Facilities, overhead and other		742		18,025
	$	1,808,098	$	755,453

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

The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017 and became effective January 1, 2018. The TCJA contains several key provisions, including a reduction in the U.S. federal corporate income tax rate from 35% to 21% and repeal of the corporate alternative minimum tax (“AMT”). The TCJA’s reduction in the U.S. statutory tax rate had no additional impact on the consolidated financial statement for the year ended December 31, 2020.

For the three months ended March 31, 2021, there were no provision for income taxes and unrecognized tax benefits recorded. As of March 31, 2021 and December 31, 2020, deferred tax assets were approximately $10.2 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 March 31, 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 months ended March 31, 2021 and 2020, the effect of the potential exercise of options to purchase 5,324,215 and 4,663,390 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 intraperiod 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 Equivalent, 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 March 31, 2021, and December 31, 2020:

	*March 31, 2021 (Unaudited)*
				*Gross*		*Gross*
	*Level*			*Unrealized*		*Unrealized*
	*(1)*	*Fair Value*		*Holding Gains*		*Holding Losses*			*Adjusted Cost*
Cash and Cash Equivalents
Cash		$	1,217,419	$	—	$	—		$	1,217,419
Money Market Funds	1		11,838,139		—		—			11,838,139
Subtotal			13,055,558		—		—			13,055,558
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽³⁾	2		14,161,252		1,658		(17,847	)		14,177,441
Total		$	27,216,810	$	1,658	$	(17,847	)	$	27,232,999

	*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) The premium paid to purchase held-to-maturity investment securities was $283,940 and $196,385 for the three months ended March 31, 2021 and 2020, respectively. The premium 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 March 31, 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”) with Biotechnology Developments for Industry in Pharmaceuticals, S.L.U. (“BDI Pharma”), and a Service Framework Agreement (the “SFA”, and together with the RSA, the “R&D Agreements”), with VLP The Vaccines Company, S.L.U. (“VLPbio”), both of which are subsidiaries of Biotechnology Developments for Industry, S.L., a Spanish biotechnology company (“BDI Holdings” and together with BDI Pharma and VLPbio, “BDI”).

The R&D Agreements provide a framework under which the parties will engage in a research and development collaboration encompassing several different projects over approximately a two-year period, with a focus on advancing Dyadic’s proprietary C1 technology in the development of next generation biological vaccines and drugs. Dyadic expects to leverage the BDI team’s previous C1 gene expression and industrial fermentation scale-up and commercialization experience with yeast and filamentous fungi processes to further advance Dyadic’s proprietary C1 technology with the potential to commercialize certain biopharmaceutical product(s). All of the data and any products developed from the funded research projects will be owned by Dyadic.

Upon closing of the BDI transaction, 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. BDI is obligated to spend a minimum amount of EUR €936,000 over two years in the conduct of the research and development project under the RSA. If the research and development activities produce a product that is selected for additional development and commercialization, then Dyadic expects to 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. In addition, 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 since the closing of the BDI transaction.

The Company has 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 has completed its services under the RSA and the entire amount of the RSA Initial Payment was expensed. Dyadic had fulfilled its SFA commitment and completed all research projects under the SFA in 2019.

On February 18, 2021, the Company entered into a separate service agreement with BDI to perform a research project unrelated to the R&D Agreements. For the three months ended March 31, 2021, approximately $15,000 recorded in the cost of research and development revenue was associated with this new service agreement.

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, once 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”) was entered into. 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 as a result of a third-party additional capital contribution obtained by Alphazyme. As of March31, 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.

Under the term of the IDBiologics Agreement, Dyadic agreed to receive 129,611 shares of IDBiologics’ common stock, which represent 0.37% of IDBiologics’ outstanding equity, in exchange for the services to be provided by Dyadic. Such services include the use of Dyadic’s C1 technology to express a SARS-CoV-2 monoclonal antibody which IDBiologics licensed from the Vanderbilt Vaccine Center. The shares of common stock of IDBiologics vested 50% upon the signing of the IDBiologics Agreement, 25% will vest upon the completion of Step 3 of a feasibility study required by the IDBiologics Agreement, and 25% will vest at the end of the project.

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. Upon receipt its shares, Dyadic will account for the equity interest in IDBiologics under the cost method. No revenue from the IDBiologics Agreement was recorded during the three months ended March 31, 2021, because the amount of consideration received was immaterial.

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”) to be held on June 11, 2021, shareholders will be asked to approve the Company’s 2021 Equity Incentive Award Plan (the “2021 Plan”), which was adopted, subject to shareholder approval, by the Board of Directors on April 9, 2021. We are seeking stockholder approval of the 2021 Plan to increase 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. If this proposal is approved by our shareholders, the 2021 Plan will become effective as of the date of the Annual Meeting and as of such date, no additional awards will be granted under the 2011 Plan. If our shareholders do not approve this proposal, the 2021 Plan will not become effective and the 2011 Plan will continue to be effective in accordance with its terms, until its expiration date.

As of March 31, 2021, the Company had 5,324,215 stock options outstanding and an additional 1,388,386 shares of common stock available for grant under the 2011 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 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 3years).

The assumptions used in the Black-Scholes option pricing model for stock options granted during the three months ended March 31, 2021 are as follows:

Risk-Free interest rate			0.13%-0.55%
Expected dividend yield			—%
Expected stock price volatility			54.52%-56.07%
Expected life of options (in years)			2.00-6.25

The following table summarizes the stock option activities during the three months ended March 31, 2021:

						*Weighted-Average*
				*Weighted-Average*		*Remaining Contractual*		*Aggregate Intrinsic*
	*Shares*			*Exercise Price*		*Term (Years)*		*Value*
Outstanding at December 31, 2020		4,638,390		$	2.44		5.64	$	13,701,610
Granted (1)		745,825			5.25
Exercised (2)		(60,000	)		1.93
Expired		—			—
Canceled		—			—
Outstanding at March 31, 2021		5,324,215		$	2.84		6.03	$	14,209,431

Exercisable at March 31, 2021		4,016,141		$	2.28		5.09	$	12,927,908

_________________

Notes:

(1) Represents the following stock options granted:

	•	Annual share-based compensation awards on January 4, 2021, including: (a) 417,500 stock options with an exercise price of $5.16 per share granted to executives and key personnel, upon one year anniversary, or vesting annually in equal installments over four years, (b) 227,500 stock options with an exercise price of $5.16 per share granted to members of the Board of Directors, vesting upon one year anniversary, (c) 23,325 stock options with an exercise price of $5.16 per share granted to employees, vesting annually in equal installments over four years and (d) 5,000 stock options with an exercise price of $5.16 per share granted to a consultant, vesting upon one year anniversary.
	•	One-time award on January 8, 2021, 35,000 stock options with an exercise price of $5.50 per share granted to a new member of the Board of Directors, vesting in one year from the grant date.
	•	One-time award on January 21, 2021, 7,500 stock options with an exercise price of $5.65 per share granted to a consultant, vesting in one year from the grant date.
	•	One-time award on March 22, 2021, 30,000 stock options with an exercise price of $6.87 per share granted to a consultant, vesting in one year from the grant date.

(2) Represents the following stock options exercised:

•

A total of 60,000 stock options exercised with a weighted average exercise price of $1.93.

Compensation Expenses

We recognize all share-based payments to employees and our Board of Directors, as non-cash compensation expense, in research and development expenses or general and administrative expenses in the consolidated statement of operations, and these charges had no impact on the Company’s reported cash flows. Stock-based compensation expense is calculated on the grant date fair values of such awards, and recognized each period 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.

Total non-cash stock option compensation expense was allocated among the following expense categories:

	*Three Months Ended March 31,*
	*2021*		*2020*
General and administrative	$	377,052	$	380,251
Research and development		44,019		46,688
Total	$	421,071	$	426,939

Note 6: Shareholders’ Equity

Issuances of Common Stock

For the three months ended March 31, 2021, there were 60,000 shares of the Company’s common stock issued as a result of the exercise of stock options with a weighted average issue price of $1.93 per share. For the three months ended March 31, 2020, there were 100,000 shares of the Company’s common stock issued as a result of the exercise of stock options with a weighted average issue price of $1.78 per share.

Changes in Stockholders Equity

			*Three Months Ended March 31, 2021 (Unaudited)*
	*Common Stock*		*Treasury Stock*			*Additional Paid-In Capital*		*Accumulated Deficit*			*Total*
January 1, 2021	$	39,748	$	(18,929,915	)	$	98,013,079	$	(50,676,351	)	$	28,446,561
Stock-based compensation		—		—			421,071		—			421,071
Stock issued		60		—			115,740		—			115,800
Net loss		—		—			—		(3,294,949	)		(3,294,949	)
March 31, 2021	$	39,808	$	(18,929,915	)	$	98,549,890	$	(53,971,300	)	$	25,688,483

			*Three Months Ended March 31, 2020 (Unaudited)*
	*Common Stock*		*Treasury Stock*			*Additional Paid-In Capital*		*Accumulated Deficit*			*Total*
January 1, 2020	$	39,613	$	(18,929,915	)	$	96,105,851	$	(41,351,078	)	$	35,864,471
Stock-based compensation		—		—			426,939		—			426,939
Stock issued		100		—			174,900		—			175,000
Net loss		—		—			—		(2,214,139	)		(2,214,139	)
March 31, 2020	$	39,713	$	(18,929,915	)	$	96,707,690	$	(43,565,217	)	$	34,252,271

Treasury Stock

As of March 31, 2021, and December 31, 2020, there were 12,253,502 shares of common stock held in treasury, at a cost of approximately $18.9 million, representing the purchase price on the date the shares were surrendered to the Company.

Open Market Sale Agreement℠

On August 13, 2020, we entered into an Open Market Sale Agreement℠ with Jefferies LLC, or Jefferies, with respect to an at the market offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, par value $0.001 per share, having an aggregate offering price of up to $50.0 million through Jefferies as our sales agent or principal.

We have not and are not obligated to sell any shares under the sale agreement. Subject to the terms and conditions of the sale agreement, Jefferies will use commercially reasonable efforts, consistent with its normal trading and sales practices and applicable laws and regulations, to sell shares of our common stock from time to time based upon our instructions, including any price, time or size limits or other customary parameters or conditions we specify, subject to certain limitations. Under the sale agreement, Jefferies may sell shares of our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

We will pay Jefferies a commission equal to 3.0% of the gross proceeds from each sale of shares of our common stock sold through Jefferies under the sale agreement and will provide Jefferies with customary indemnification and contribution rights. In addition, we agreed to reimburse certain legal expenses and fees by Jefferies in connection with the offering up to a maximum of $50,000, in addition to certain ongoing disbursements of Jefferies’ counsel, if required. The sale agreement will terminate upon the sale of all $50.0 million of shares under the sale agreement, unless earlier terminated by either party as permitted therein.

The issuance and sale, if any, of shares of our common stock by us under the sale agreement will be made pursuant to a registration statement on Form S-3 filed with the SEC on August 13, 2020 and declared effective by the SEC on August 25, 2020 and the accompanying Prospectus, as supplemented by a Prospectus Supplement. As of the date of this filing, there have been no sales made under the Open Market Sale Agreement℠.

Note 7: Subsequent Events

Management continues to actively monitor the COVID-19 pandemic and its development, and the possible effects on the Company’s financial condition, liquidity, operations, vendors, industry, and workforce.

For purpose of disclosure in the consolidated financial statements, the Company has evaluated subsequent events through May 13, 2021, the date the consolidated financial statements were available to be issued. Management is not aware of any material events that have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in the accompanying financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements appearing in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, assumptions and uncertainties. Important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis include, but not limited to those set forth in “Item 1A. Risk Factors” in this Quarterly Report. All forward-looking statements included in this Quarterly Report are based on information available to us as of the time we file this Quarterly Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.

Overview

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 under contract to Dyadic 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 in by Danisco.

The Company and its C1 technology played an important role in the €20 million Zoonosis Anticipation Preparedness Initiative (“ZAPI”) program, which was a five-year research and development program sponsored by the European Union. ZAPI brought together experts in human and animal health to create new platforms and technologies that will facilitate a fast, coordinated, and practical response to new pandemic threats as soon as they emerge. The Company’s C1 gene expression and recombinant protein production platform was selected by ZAPI as a production host of antigens for the Schmallenberg virus (“SBV”) and Rift Valley Fever virus (“RVFV”). The C1 expressed SBV antigen was produced at approximately 300 times greater yield than the SBV antigen expressed from insect (baculovirus) cells and was more stable. Additionally, the C1 SBV antigen was shown to be safe and effective to provide full protection to cattle, sheep, and mice. Based on these results, ZAPI has provided the Company with additional funding, in 2021, to produce both the SBV and RVFV antigens in order to perform expanded animal trials with the C1 expressed antigens which is expected to generate additional safety and efficacy data. In the first quarter of 2021, ZAPI expanded its program with Dyadic by providing additional funding to C1 research and development efforts as well as to conduct additional animal studies using the SBV and RVFV antigens produced from C1. Several positive outcomes have already originated from the ZAPI results, including several fully funded animal health projects and a number of COVID-19 vaccine collaborations, including Dyadic’s proprietary receptor-binding domain (“RBD”) antigen of the SARS-CoV-2 spike protein, used in the production of the Company’s proprietary COVID-19 DYAI-100 vaccine candidate. The C1 expressed SARS-CoV-2 RBD antigen has been developed and tested in various collaborations, including with three of the top infectious disease and coronavirus scientists who worked with Dyadic and C1 in the ZAPI consortium, the Israel Institute for Biological Research (“IIBR”), Medytox, Inc., and others. These activities have positioned the Company to determine its current path forward for an anticipated first-in-human Phase 1 clinical program of DYAI-100 which is anticipated to start in the second half of 2021. The main goal of the DYAI-100 Phase 1 clinical trial is to demonstrate that a protein produced from the Company’s proprietary and patented C1-cells can be safely used in humans which we anticipate will help to accelerate the C1 technology platform’s adoption, use and commercialization and also to serve as a proof of concept for the development of next generation multivariant COVID-19 vaccine candidates.

Based on a growing amount of safety, efficacy and productivity data from research and development programs within ZAPI, the IIBR and several internal and externally funded programs, we and a growing number of scientists globally believe that the C1 cell protein production platform can be used to speed the development, lower production costs, and improve the performance of biologic vaccines, drugs and other biological products which can be efficiently manufactured at flexible commercial scales more affordably. Based on these internally and externally funded C1-cell engineering programs, the number and types of potential vaccines, drugs and biologic products which may be developed and commercialized, continues to grow. Some examples of human and animal vaccines and drugs which have the potential to be produced from C1-cells are protein antigens, virus-like particles (“VLPs”), monoclonal antibodies (“mAbs”), Bi/Tri-specific antibodies, Fab antibody fragments, Fc-Fusion proteins, as well as other therapeutic enzymes and proteins. The Company is involved in multiple funded research collaborations with animal and human pharmaceutical companies which are designed to leverage its C1 technology to develop innovative vaccines and drugs, biosimilars and/or biobetters.

Recent Developments

In 2021, the Company continues to advance its internal research projects and expand its relationships with business and research partners in the biotech and pharmaceutical industry, academic and other institutions, as well as certain government agencies, as follows:

COVID-19 Initiatives:

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Advancing the Company’s proprietary COVID-19 vaccine candidate (C1 produced SARS-CoV-2-S-RBD antigen), DYAI-100, towards a first-in-human Phase 1 clinical trial:

DYAI-100 is supported by a strategic collaboration with, among other parties, the IIBR and leading infectious disease scientists from Erasmus Medical Centre, University Utrecht, TiHo Hannover (scientists who were involved in the ZAPI program) to develop a temperature stable, safe and effective COVID-19 vaccine candidate that can be rapidly manufactured, in large quantities, at low cost, using standard microbial fermenters that are readily available globally.

In March 2021, the Company engaged CR2O, a contract research organization, to manage and support further preclinical and clinical development of DYAI-100. The animal GLP toxicology study began at the end of April 2021, the cGMP production of the C1 expressed SARS-CoV-2 RBD drug product has begun, and a first-in-human Phase 1 clinical trial is expected to begin by year-end.

There are a number of benefits the Company expects to come from the DYAI-100 Phase 1 clinical trial, including demonstrating that certain C1 produced proteins can be produced under cGMP conditions and are safe and tolerated in humans, which will be required by regulatory agencies such as the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA). Additionally, this will also serve as a proof of concept study for potential C1 manufactured next-generation monovalent and multivalent COVID-19 variant vaccine candidates that can be developed and manufactured rapidly, in large quantities, and more affordably.

●

In parallel with advancing the DYAI-100 vaccine candidate towards a Phase 1 clinical trial, the Company has already started to engineer several C1 cell lines to produce several SARS-CoV-2 variant antigens, and has successfully expressed the South African, Brazilian, and UK variant antigens at high productivity and stability. The Company and its collaborators are working to produce RBD antigen and full spike proteins for additional COVID-19 variants.

●

In March 2021, the Company expanded a vaccine development partnership with South Korea’s Medytox Inc. to co-develop C1 enabled COVID-19 variant vaccines and/or boosters (e.g., tetravalent or quadrivalent COVID-19 vaccine candidates) to immunize people against two or more of the current and future COVID-19 variants in Korea and Southeast Asia.

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In April 2021, the Company signed a separate fully funded research collaboration with CR2O to develop a COVID-19 antibody.

Human Health (Non-COVID) Collaborations:

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In February 2021, the Company initiated a fully funded collaboration with TurtleTree Scientific to develop several recombinant protein growth factors, which have the potential to play a critical role in tissue development and healing, including regenerative therapies.

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In March 2021, the Company signed a research collaboration with a new research partner to develop an antigen.

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In April 2021, the Company expanded its collaboration with IDBiologics and started a new fully funded collaboration to develop a second antibody.

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Collaborating with Jiangsu Hengrui Medicine and two top pharmaceutical companies for proof of concept studies designed to improve the production of biologic drugs, including bispecific antibodies, of therapeutic interest. Interim results have demonstrated these biologic drugs were expressed from C1 and there are ongoing discussions for advancing some of these projects towards potential clinical development.

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Continued progress in several ongoing collaborations to develop potential therapeutic candidates of commercial potential, including expressing two new bispecific antibodies and advancing two other antibodies which are entering the second stages for applications in oncology and autoimmune disease.

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Conducting a feasibility study with the University of Oslo for a potential influenza vaccine. Interim results demonstrated that C1 can express hemagglutinin at a high level, and most importantly, that C1 hemagglutinin induced a high level response of neutralizing antibodies in a mice study.

Animal Health Collaborations:

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In collaboration with a top global animal health company, initial studies have demonstrated production of two different antigens for a potential vaccine for an acute respiratory disease of birds. Interim results demonstrated that the antigens were effective at generating high antibody titers. An animal challenge study designed to evaluate protection against the acute respiratory disease is expected to start in June 2021.

●

ZAPI held its Final Stakeholders Virtual Web Meeting on February 4-5, 2021, where positive results were reported from animal studies in mice, sheep, and cattle which evaluated the safety, efficacy, and protection of the C1 produced SBV antigen. The C1 platform was selected by ZAPI to produce recombinant antigens after demonstrating far greater antigen productivity from C1-cells than insect (baculovirus) cells, the next leading expression platform, for both SBV and RVFV. As previously disclosed, in the first quarter of 2021, ZAPI has provided the Company with additional funding to produce larger quantities of both the SBV and RVFV antigens to demonstrate commercial-scale viability of C1 produced SBV and RVFV antigens, and to further optimize the use of C1 to produce recombinant protein subunit nanoparticle vaccines. Preliminary results have been very encouraging and continues to further support C1’s potential for use in developing nanoparticle vaccines in larger quantities at lower cost. Several positive outcomes have already originated from the ZAPI results, including several fully funded animal health projects and several SARS-CoV-2 vaccine collaborations, including Dyadic’s RBD antigen of the SARS-CoV-2 spike protein.

Corporate Highlights:

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The Company extended two non-exclusive research license agreements, including WuXi Biologics and an affiliate of a top pharma company, to continue their C1 research projects in a CDMO and manufacturing environment at their own facilities.

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Hosted KOL Fireside Chat: “The Potential of the Transformative Dyadic C1 Protein Technology in Helping Meet Global Health Challenges”, which is available on the Investors section of the Company’s website, which is available on the Investors section of the Company’s website.

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To date, the Company participated in several scientific conferences, including the recently held World Vaccine Conference, Protein Engineering and Cell Therapy Conference (PEGS) and the ZAPI Final Stakeholders Virtual Conference. ZAPI Stakeholders Final Conference speaker slides and webinar replay are now available on the IABS website via the following link: https://zapi-stakeholders-final-conference.iabs.org/conference-information.php?parag=slides

Impact of COVID-19

To date, 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 SARS-CoV-2 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.

Open Market Sale Agreement℠

We have not and are not obligated to sell any shares under the sale agreement. Subject to the terms and conditions of the sale agreement, Jefferies will use commercially reasonable efforts, consistent with its normal trading and sales practices and applicable laws and regulations, to sell shares of our common stock from time to time based upon our instructions, including any price, time or size limits or other customary parameters or conditions we specify, subject to certain limitations. Under the sale agreement, Jefferies may sell shares of our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

The issuance and sale, if any, of shares of our common stock by us under the sale agreement will be made pursuant to a registration statement on Form S-3 filed with the SEC on August 13, 2020 and declared effective by the SEC on August 25, 2020 and the accompanying Prospectus, as supplemented by a Prospectus Supplement. As of the date of this filing, there have been no sales made under the Open Market Sale Agreement℠.

Critical Accounting Policies, Estimates, and Judgments

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.

We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include the following:

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 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.

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.

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 sales-based royalties relate, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, 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.

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.

Accrued Research and Development Expenses

In order to properly record services that have been rendered but not yet billed to the Company, we review open contracts and purchase orders, communicate with our personnel and we estimate the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly or quarterly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of accrued research and development expenses include amounts owed to contract research organizations, to service providers in connection with commercialization and development activities.

Stock-Based Compensation

We have granted stock options and restricted stock to employees, directors and consultants. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model considers volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of our stock and the exercise price. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and restricted stock and applied a discount to reflect the lack of marketability due to the holding period restriction of its shares under Rule 144 prior to the Company April 2019 uplisting to NASDAQ. We also used the weighted-average vesting period and contractual term of the option as the best estimate of the expected life of a new option except in the case of our CEO, 5 or 10 years, and in the case of contractors, 2 or 3 years). The Company performs a review of assumptions used in the Black-Scholes option-pricing model on an annual basis. During the Company’s annual review of its volatility assumption in 2018, the Company determined that it would be appropriate to use the Company’s historical volatility since 2016, as the DuPont Transaction resulted in significant changes in the Company’s business and capital structure. The change in assumption was effective January 1, 2018 and only impacts new options granted in 2018 and thereafter.

The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. These estimates are neither predictive nor indicative of the future performance of our stock. As a result, if other assumptions had been used, our recorded share-based compensation expense could have been materially different from that reported. In addition, because some of the options and restricted stock issued to employees, consultants and other third-parties vest upon the achievement of certain milestones, the total ultimate expense of share-based compensation is uncertain.

In connection with board member and employee terminations, the Company may modify certain terms to outstanding share-based awards. We have recorded charges related to these modifications based on the estimated fair value of the share-based options immediately prior to and immediately after the modification occurs, with any incremental value being charged to expense. We have used the Black-Scholes pricing model in this valuation process, and this requires management to use various assumptions and estimates. Future modifications to share-based compensation transactions may result in significant expenses being recorded in our consolidated financial statements.

Accounting for Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740 (“Topic 740”), “Income Taxes”. Under this method, income tax expense/(benefit) is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

In determining taxable income for the Company’s consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires the Company to make certain estimates of our actual current tax exposure and assessment of temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, the Company must consider all available positive and negative evidence including its past operating results, the existence of cumulative losses in the most recent years and its forecast of future taxable income. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

The Company is required to evaluate the provisions of Topic 740 related to the accounting for uncertainty in income taxes recognized in a company’s financial statements. Topic 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability should be recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents a company’s potential future obligation to the taxing authority for a tax position that was not recognized because of applying the provision of Topic 740.

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.

The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for information about recent accounting pronouncements.

Results of Operations

Three Months Ended March 31, 2021 Compared to the Same Periods in 2020

Revenue and Cost of Research and Development Revenue

The following table summarizes the Company’s revenue and cost of research and development revenue for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021		2020
Revenue	$	460,520	$	315,372
Cost of research and development revenue		390,762		278,182

The increase in revenue and cost of research and development revenue for the three months ended March 31, 2021, reflected the increased number of on-going research collaborations to eight compared to five collaborations for the same period a year ago.

Research and Development Expenses

Research and development costs are expensed as incurred and primarily include salary and benefits of research personnel, third-party contract research organization services and supply costs.

Research and development expenses for the three months ended March 31, 2021 increased to approximately $1,808,000 compared to $755,000 for the same period a year ago. The increase primarily reflected Phase 1 clinical trial cost of DYAI-100, our COVID-19 vaccine in the amount of $882,000 and an additional cost of $159,000 related to our other internal research projects.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2021, decreased 6.0% to approximately $1,554,000 compared to $1,653,000 for the same period a year ago. The decrease principally reflected reductions in travel and rent expenses of $65,000, insurance and other outside services of $47,000, other decrease of $30,000, offset by increase in legal expenses of $43,000.

Interest Income

Interest income for the three months ended March 31, 2021 was approximately $26,000 compared to $168,000 for the same period a year ago. The decrease was primarily due to the lower balance of hold-to-maturity securities and less reinvestment as a result of the decrease in interest rate.

Net Loss

Net loss for the three months ended March 31, 2021 was approximately $3,295,000 compared to $2,214,000 for the same period a year ago.

Liquidity and Capital Resources

Our primary source of cash has been the cash received from the DuPont Transaction in December 2015, interest income received from investment grade securities, and funding from our research collaboration agreements. The Company’s liquidity was further improved with the receipt of an approximately $0.5 million tax refund in June 2019 and an approximately $0.5 million additional tax refund in July 2020 resulting from the elimination of corporate Alternative Minimum Tax (AMT) under the TCJA.

Our ability to achieve profitability depends on a number of factors, including our scientific results and our ability to continue to obtain funded research and development collaborations from industry and government programs, as well as sub-license agreements. We may continue to incur substantial operating losses even if we begin to generate revenues from research and development and licensing. Our primary future cash needs are expected to be for general operating activities, including our business development and research expenses, as well as additional costs as an SEC reporting and NASDAQ listed company.

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 or part 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.

On August 13, 2020, we entered into an Open Market Sale Agreement℠ with Jefferies LLC, or Jefferies, with respect to an at the market offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock at an aggregate offering price of up to $50.0 million through Jefferies as our sales agent or principal. This program adds to our financial flexibility to pursue additional opportunities that leverage the broad application potential of C1. However, as of the date of this filing, there have been no sales made under the Open Market Sale Agreement℠.

As of March 31, 2021, cash and cash equivalents were approximately $13.1 million compared to $20.6 million as of December 31, 2020. The carrying value of investment grade securities, including accrued interest as of March 31, 2021 was approximately $14.3 million compared to $8.6 million as of December 31, 2020.

Net cash used in operating activities for the three months ended March 31, 2021 of approximately $1.9 million was principally attributable to a net loss of approximately $3.3 million, partially offset by changes in operating assets and liabilities of approximately $0.9 million, share-based compensation expenses of approximately $0.4 million, and amortization of held-to-maturity securities of approximately $0.1 million.

Net cash used in operating activities for the three months ended March 31, 2020 of approximately $2.0 million was principally attributable to a net loss of approximately $2.2 million and changes in other operating assets and liabilities of approximately $0.3 million, offset by share-based compensation expense of approximately $0.4 million, and amortization of held-to-maturity securities of approximately $0.1 million.

Net cash used in investing activities for the three months ended March 31, 2021 was approximately $5.8 million compared to a net cash provided by investing activity of $1.7 million for the three months ended March 31, 2020. Cash flows from investing activities during the three months ended March 31, 2021 and 2020 were primarily related to proceeds from maturities and purchases of investment grade debt securities.

Net cash provided by financing activities for the three months ended March 31, 2020 was approximately $116,000 compared to $175,000 for the three months ended March 31, 2020. Cash flows from financing activities during the three months ended March 31, 2021 and 2020 were primarily related to proceeds from exercise of options.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 4.

Controls and procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

Inherent Limitation on Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II

Item 1.

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, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

Item 1A.

Risk Factors

There have been no changes to our risk factors from those disclosed in our Form 10-K for the 2020 fiscal year filed on March 30, 2021.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Following Exhibits are filed as part of this report pursuant to Item 601 of Regulation S-K:

			Incorporated by Reference
Exhibit No.	Description of Exhibit	Form	Original No.	Date Filed	Filed Herewith
1.1	Open Market Sale Agreement by and between the Company and Jeffries LLC, dated August 13, 2020	S-3	1.2	August 13, 2020
10.1	Dyadic International, Inc. 2021 Equity Inventive Award Plan	DEF14A	10.1	April 27, 2021
31.1	Certification of Principal Executive Officer of Dyadic Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				x
31.2	Certification of Principal Financial Officer of Dyadic Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				x
32.1	Certification of Principal Executive Officer of Dyadic Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				x
32.2	Certification of Principal Financial Officer of Dyadic Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				x

Exhibit No.	Description
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	DYADIC INTERNATIONAL, INC.

May 13, 2021	By:	/s/ Mark A. Emalfarb
		Mark A. Emalfarb
		President and Chief Executive Officer
		(Principal Executive Officer)


May 13, 2021	By:	/s/ Ping W. Rawson
		Ping W. Rawson
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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