DYADIC INTERNATIONAL INC - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2019

o	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 ý No o

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 ý No o

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 o				Accelerated filer o
Non-accelerated filer ý				Smaller reporting company ý
				Emerging growth company o

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. o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 8, 2019, the registrant had 26,763,486 shares of common stock outstanding.



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	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25

PART II OTHER INFORMATION		25
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

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 key customers and collaborators; (8) the pharmaceutical and biotech industry, governmental regulatory and other agencies' willingness to adopt, utilize and approve the use of the C1 gene expression platform; (9) speculative nature and illiquidity of equity securities received as consideration from sub-licenses and (10) other factors discussed in Dyadic's publicly available filings, including information set forth under the caption “Risk Factors” in this Quarterly Report and in our Form 10-K filed with the Securities Exchange Commission (“SEC”) on March 27, 2019. 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 Quarterly Report and under the caption “Risk Factors” and elsewhere on our Form 10-K filed with the SEC on March 27, 2019 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, 2019			December 31, 2018
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	3,975,761		$	2,386,314
Short-term investment securities	35,778,093			38,816,441
Interest receivable	290,259			294,240
Accounts receivable	425,951			318,744
Income tax receivable	500,617			506,866
Prepaid research and development	170,334			253,446
Prepaid expenses and other current assets	166,944			172,001
Total current assets	41,307,959			42,748,052

Non-current assets:
Long-term income tax receivable	500,616			500,616
Other assets	50,951			52,139
Total assets	$	41,859,526		$	43,300,807

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	948,058		$	309,060
Accrued expenses	302,970			399,576
Deferred research and development obligations	23,024			141,002
Total current liabilities	1,274,052			849,638

Commitments and contingencies (See 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 - 38,966,988, outstanding shares - 26,713,486	38,967			38,967
Additional paid-in capital	94,694,793			94,385,230
Treasury stock, shares held at cost - 12,253,502	(18,929,915		)	(18,929,915		)
Accumulated deficit	(35,218,371		)	(33,043,113		)
Total stockholders’ equity	40,585,474			42,451,169
Total liabilities and stockholders’ equity	$	41,859,526		$	43,300,807

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,
	2019			2018
Revenues:
Research and development revenue	$	402,527		$	184,330

Costs and expenses:
Costs of research and development revenue	327,903			146,809
Research and development	692,370			576,884
Research and development - related party	389,473			392,549
General and administrative	1,428,067			1,292,997
Foreign currency exchange loss, net	6,034			4,840
Total costs and expenses	2,843,847			2,414,079

Loss from operations	(2,441,320		)	(2,229,749		)

Interest income	266,962			186,457

Loss before income taxes	(2,174,358		)	(2,043,292		)

Provision for income taxes	900			—

Net loss	$	(2,175,258	)	$	(2,043,292	)

Basic and diluted net loss per common share	$	(0.08	)	$	(0.07	)

Basic and diluted weighted-average common shares outstanding	26,713,486			28,159,244

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, 2018	38,966,988	$	38,967	(12,253,502	)	$	(18,929,915	)	$	94,385,230	$	(33,043,113	)	$	42,451,169

Stock-based compensation	—	—		—		—			309,563		—			309,563

Net loss	—	—		—		—			—		(2,175,258		)	(2,175,258		)

Balance at March 31, 2019	38,966,988	$	38,967	(12,253,502	)	$	(18,929,915	)	$	94,694,793	$	(35,218,371	)	$	40,585,474

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,
	2019			2018
Cash flows from operating activities
Net loss	$	(2,175,258	)	$	(2,043,292	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	309,563			269,596
Amortization of held-to-maturity securities, net	32,201			284,730
Foreign currency exchange loss, net	5,148			4,840
Changes in operating assets and liabilities:
Interest receivable	3,981			21,044
Accounts receivable	(106,781		)	171,841
Income tax receivable	6,249			—
Prepaid research and development	83,112			360,711
Prepaid expenses and other current assets	5,049			55,209
Accounts payable	641,799			(57,039		)
Accrued expenses	(96,606		)	207,572
Deferred research and development obligation	(117,978		)	166,024
Income taxes payable	—			(102,000		)
Net cash used in operating activities	(1,409,521		)	(660,764		)

Cash flows from investing activities
Purchases of held-to-maturity investment securities	(13,190,855		)	(17,761,999		)
Proceeds from maturities of investment securities	16,197,000			17,639,000
Net cash provided by (used in) investing activities	3,006,145			(122,999		)

Cash flows from financing activities
Repurchases of common stock	—			(374,820		)
Net cash used in financing activities	—			(374,820		)
Effect of exchange rate changes on cash	(7,177		)	3,547
Net increase (decrease) in cash, cash equivalents and restricted cash	1,589,447			(1,155,036		)
Cash, cash equivalents and restricted cash at beginning of period	2,386,314			5,786,348
Cash, cash equivalents and restricted cash at end of period	$	3,975,761		$	4,631,312

Supplemental cash flow information
Cash refund received from income tax	$	6,249		$	102,000

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”, 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 research organizations performing services under contract to Dyadic in Finland and Spain. Over the past two 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 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 DuPont Danisco (“DuPont”), the industrial biosciences business of DuPont (NYSE: DD) for $75 million (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). DuPont 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 DuPont or certain licensors of DuPont, depending upon whether Dyadic elects to utilize certain patents either owned by DuPont or licensed in by DuPont.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying audited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intra-entity transactions and balances have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).

The accompanying unaudited interim consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in quarterly consolidated financial statements have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments and the elimination of intra-entity accounts) 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. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 27, 2019.

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

The Company’s financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, and investment securities. 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, 2019 and 2018, the Company's revenue was generated from six and two customers, respectively. As of March 31, 2019 and 2018, the Company’s account receivables were from four and one 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. As of and for the three months ended March 31, 2019, the Company only had one customer outside of the United States (i.e. European customer) that accounted for approximately 69.7% or $281,000 of total revenue and 32.8% or $140,000 of the accounts receivable. As of and for the three months ended March 31, 2018, all of the Company’s revenue and accounts receivable were from United States customers.

Cash, Cash Equivalents and Restricted Cash

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. 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 sheet. As of March 31, 2019 and 2018, 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, 2019 and 2018.

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 months. There was no allowance for doubtful accounts as of March 31, 2019 and December 31, 2018.

Accounts receivable consist of the following:



	March 31, 2019		December 31, 2018
	(Unaudited)		(Audited)
Billed receivable	$	267,207	$	193,065
Unbilled receivable	158,744		125,679
	$	425,951	$	318,744

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:



	March 31, 2019		December 31, 2018
	(Unaudited)		(Audited)
Prepaid expenses - various	$	119,962	$	91,725
Prepaid insurance	46,982		77,249
Prepaid taxes	—		3,027
	$	166,944	$	172,001

Accounts Payable

Accounts payable consist of the following:



	March 31, 2019		December 31, 2018
	(Unaudited)		(Audited)
Research and development expenses	$	744,606	$	240,064
Legal expenses	80,740		—
Other	122,712		68,996
	$	948,058	$	309,060

Accrued Expenses

Accrued expenses consist of the following:



	March 31, 2019		December 31, 2018
	(Unaudited)		(Audited)
Employee wages and benefits	$	166,168	$	268,287
Research and development expenses	60,251		49,666
Other	76,551		81,623
	$	302,970	$	399,576

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 may 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.

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.

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.

The Company adopted the following practical expedients and exemptions: We generally expense sales commissions when incurred because the amortization period would be one year or less. We do not 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.

Research and Development Costs

Research and development (“R&D”) costs are expensed as incurred. R&D costs are related to 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, 2019 and 2018 were as follows:



	Three Months Ended March 31,
	2019		2018
	(Unaudited)		(Unaudited)
Outside contracted services	$	585,487	$	469,557
Contracted services - related party	389,473		392,549
Personnel related costs	94,762		94,991
Facilities, overhead and other	12,121		12,336
	$	1,081,843	$	969,433

Foreign Currency Transaction Gain or Loss

The Company’s foreign subsidiary uses the U.S. dollar as its functional currency, and it initially measures 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.

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 a change to the corporate alternative minimum tax ("AMT").

We were required to remeasure all our U.S. deferred tax assets as of December 22, 2017 and recorded a decrease to deferred tax assets of $0.4 million and increase in valuation allowance of the same amount, all of which reflects the estimated impact associated with the re-measurement of our U.S. deferred tax asset at the lower U.S. federal corporate income tax rate. 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, 2018.

The TCJA eliminated the corporate AMT and permits existing AMT credit carryforwards to be used to reduce the regular tax obligation in 2018, 2019, and 2020. Any AMT credit carryforwards that do not reduce regular taxes are eligible for a 50% refund in 2018 through 2020, and a 100% refund in 2021. Accordingly, we reclassified the balance of the AMT credit from the deferred tax asset to an income tax receivable. The corresponding balance in the valuation allowance has been reversed into income tax benefit in the amount of $1,001,233. We expect to receive 50% of the refundable balance for tax years 2018 through 2020, and 100% of the remaining refundable balance in 2021.

For the three months ended March 31, 2019, the Company recorded a provision for income taxes of $900 . There were no unrecognized tax benefits as of March 31, 2019 and December 31, 2018.

Deferred tax assets as of March 31, 2019 and December 31, 2018 were approximately $5.0 million and $4.6 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, 2019 and December 31, 2018.

Stock-Based Compensation

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 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 shares outstanding during the reporting period. Diluted net loss per share adjusts the weighted average number of common shares outstanding for the potential dilution that could occur if common stock equivalents, such as stock options, warrants, restricted stock and convertible debt, were exercised or converted into common stock, calculated by applying the treasury stock method.

For the three months ended March 31, 2019 and 2018, the effect of the potential exercise of options to purchase 4,541,890 and 3,441,890 shares of common stock, respectively, were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive.

Recent Accounting Pronouncements Not Adopted as of March 31, 2019

In June 2016, the FASB issued 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 2020. The Company is currently evaluating the impact, if any, of this newly issued guidance.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which modifies the disclosure requirements on fair value measurements. The effective date for the standard is fiscal years beginning after December 15, 2019, which for the Company is January 1, 2020. Early adoption is permitted. The new disclosure requirements for changes in unrealized gains and losses in other comprehensive income for recurring Level 3 measurements, the range and weighted average of significant unobservable inputs and the amended requirements for the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments

should be applied retrospectively. The Company does not expect ASU 2018-13 to have a material impact on our consolidated financial statements.

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.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Companies are required to recognize and measure leases using a modified retrospective approach at either the beginning of the earliest comparative period presented or the beginning of the reporting period in which the entity first applies the new standard. ASU 2016-02 was effective for the Company beginning in the first quarter of 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company adopted the standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for any stranded tax effects resulting from the Tax Cuts and Jobs Act that was enacted on December 22, 2017. The new guidance will be effective for the Company beginning in the first quarter of 2019. The Company adopted the standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-based Payment Accounting. The standard expands the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, simplifying the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company adopted the standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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 short-term and long-term investment securities by major security type as of December 31, 2019 and 2018:



	March 31, 2019
				Gross		Gross
	Level			Unrealized		Unrealized
	⁽¹⁾	Fair Value		Holding Gains		Holding Losses			Adjusted Cost
Cash and Cash Equivalents
Cash		$	675,229	$	—	$	—		$	675,229
Money Market Funds	1	3,300,532							3,300,532
Subtotal		3,975,761		—		—			3,975,761
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽⁴⁾	2	35,770,171		—		(7,922		)	35,778,093
Long-Term Investment Securities ⁽³⁾
Corporate Bonds ⁽⁴⁾	2	—		—		—			—
Total		$	39,745,932	$	—	$	(7,922	)	$	39,753,854



	December 31, 2018
				Gross		Gross
	Level			Unrealized		Unrealized
	⁽¹⁾	Fair Value		Holding Gains		Holding Losses			Adjusted Cost
Cash and Cash Equivalents
Cash		$	1,048,272	$	—	$	—		$	1,048,272
Money Market Funds	1	1,338,042							1,338,042
Subtotal		2,386,314		—		—			2,386,314
Short-Term Investment Securities ⁽²⁾
Corporate Bonds ⁽⁴⁾	2	38,731,120		—		(85,321		)	38,816,441
Long-Term Investment Securities ⁽³⁾
Corporate Bonds ⁽⁴⁾	2	—		—		—			—
Total		$	41,117,434	$	—	$	(85,321	)	$	41,202,755

_________________

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) Long-term investment securities will mature between 12 and 18 months, from the applicable reporting date.

(4) The premium paid to purchase held-to-maturity investment securities was $80,855 and $286,999 for the three months ended March 31, 2019 and 2018, respectively. The premium paid to purchase held-to-maturity investment securities was $378,681 for the year ended December 31, 2018.

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, 2019, the Company does not consider any of its investments to be other-than-temporarily impaired.

Note 3: Research and Collaboration Agreements

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 companies 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 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 million 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 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 million 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. Specifically, 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 initial payment of approximately USD $1.1 million (EUR €1 million) was accounted for as a prepaid research and development collaboration payment on our consolidated balance sheet, and both the collaboration payment and the remaining USD $1 million commitment to be paid by Dyadic under the SFA will be expensed as the related research services are performed by BDI. As of March 31, 2019, there were four collaboration projects completed and one in progress under the SFA and we have no commitment outstanding under the SFA.

As of March 31, 2019 and December 31, 2018, the prepaid research and development collaboration related to BDI recorded on our consolidated balance sheet were approximately $0.2 million and $0.3 million, respectively. For the three months ended March 31, 2019 and 2018, research and development expenses related to BDI were recorded as research and development - related party in our consolidated statements of operations in the amount of approximately $0.4 million and $0.4 million, respectively.

Note 4: Commitments and Contingencies

Leases

Jupiter, Florida Headquarters

The Company’s corporate headquarters are located in Jupiter, Florida. The Company occupies approximately 4,900 square feet with a monthly rental rate and common area maintenance charges of approximately $9,450. The lease expires on June 30, 2019, and thereafter, the Company will reconsider the square footage of the leased space to align with the staffing requirements of the future operations of the Company.

The Netherlands Office

The Company maintains a small satellite office in Wageningen, The Netherlands. In 2018, the Company occupied approximately 258 square feet with annual rentals and common area maintenance charges of approximately $4,700. The lease expired on January 31, 2019, and thereafter, the Company entered into a new lease with the same lessor (the “New Lease”). The New Lease has a one-year term and includes a flexible office space with annual rentals of approximately $4,000.

Employment Agreements

In connection with Ping Rawson’s appointment as the Company’s Chief Accounting Officer in March 2018, the Company’s Board of Directors approved compensation for Ms. Rawson as follows: Ms. Rawson will be entitled to an annual base salary of $210,000 and she is eligible for a discretionary annual performance bonus up to 100,000 stock options priced at the grant date. In addition, the Company granted Ms. Rawson a sign-on award of 50,000 stock options that will vest annually in equal installments over four years, and a conditional award of 50,000 stock options that vested upon the Company’s becoming an SEC reporting entity. Ms. Rawson will be eligible for twelve months of severance benefits, if her services are no longer required due to a change of control or any reason other than for cause.

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 future 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 have been 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.

As of March 31, 2019, the Company had 4,541,890 stock options outstanding and an additional 1,647,211 shares of common stock available for grant under the 2011 Plan. As of December 31, 2018, there were 3,552,890 stock options outstanding and 1,136,211 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 shares 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 no more than ten years except for options granted to the CEO (five years) and certain contractors (two 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 since the DuPont Transaction. The Company reviews its volatility assumption on an annual basis and determined to use the Company’s historical volatilities since 2016, as the DuPont Transaction had 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 determined to use 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 option granted to the CEO (5 years) and certain contractor (2 years).

Discount for lack of marketability. The Company applies a discount to reflect the lack of marketability due to the holding period restriction of its shares under Rule 144.

The assumptions used in the Black-Scholes option pricing model for stock options granted for the three months ended March 31, 2019 are as follows:



Risk-Free interest rate	2.46% - 2.50%
Expected dividend yield	0	%
Expected stock price volatility	28.590	%
Expected life of options	2 - 6.25 Years
Discount for lack of marketability	8.480	%

The following table summarizes the stock option activity for the three months ended March 31, 2019:



	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018	3,552,890	$1.57	5.06	$1,149,461
Granted⁽¹⁾	989,000	1.89
Exercised	—	—
Expired	—	—
Canceled	—	—
Outstanding at March 31, 2019	4,541,890	$1.64	5.53	$7,320,547

Exercisable at March 31, 2019	2,936,759	$1.59	4.55	$4,860,859

_________________

Notes:

(1) Represents the following stock options granted:

•

Annual share-based compensation awards on January 2, 2019, including: (a) 600,000 stock options with an exercise price of $1.87 granted to executives and key personnel, vesting upon grant, or one year anniversary, or vest annually in equal installments over four years, (b) 300,000 stock options with an exercise price of $1.87 granted to Board of Directors, vesting 25% upon grant and the remaining 75% will vest annually in equal installments over four years, and (c) 24,000 stock options with an exercise price of $1.87 granted to employees, vesting annually in equal installments over four years.


•	One-time award on January 2, 2019 of 50,000 stock options with an exercise price of $1.87 to a contractor, vesting upon one year anniversary.


•	One-time award on March 7, 2019 of 15,000 stock options with an exercise price of $3.00 to a contractor, vesting upon one year anniversary.

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,
	2019		2018
	(Unaudited)		(Unaudited)
General and administrative	$	233,214	$	249,242
Research and development	76,349		20,354
Total	$	309,563	$	269,596

Note 6: Shareholders’ Equity

Stock Repurchase Programs

On February 16, 2016, the Board of Directors authorized a one-year stock repurchase program, under which the Company was authorized to repurchase up to $15,000,000 of its outstanding common stock (the “2016 Stock Repurchase Program”). The 2016 Stock Repurchase Program ended on February 15, 2017.

On August 16, 2017, the Board of Directors authorized a new one-year stock repurchase program, under which the Company may repurchase up to $5,000,000 of its outstanding common stock (the “2017 Stock Repurchase Program”). On August 6, 2018, the Board of Directors authorized an extension of this stock repurchase program through August 15, 2019.

Under the 2017 Stock Repurchase Program, the Company is authorized to repurchase shares in open-market purchases in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares, and the timing of such repurchases, is dependent upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by the Company’s management. The repurchase program may be extended, suspended or discontinued at any time. The Company expects to finance the program from its existing cash resources. All repurchased shares are held in treasury.

The following table summarizes the Company’s stock repurchase activities:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Amount		Total Number of Treasury Shares Purchased as Part of Publicly Announced Plan	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
Privately Negotiated Transactions:
January 12, 2016 - Abengoa repurchased and retired shares	2,136,752	$	1.35	$	2,884,615	—	N/A
January 11, 2017 - Pinnacle Family Office Investments L.P. repurchased shares	2,363,590	1.54		3,639,929		2,363,590	N/A
							$	15,000,000
2016 Stock Repurchase Program ⁽¹⁾:
January through February 2017	7,863,980	1.58		12,448,283		7,863,980	$	2,551,717

2017 Stock Repurchase Program:							$	5,000,000
September through December 2017	381,607	1.41		537,661		381,607	$	4,462,339
January through August 2018	1,644,325	1.40		2,304,042		1,644,325	$	2,158,297
Total open market and privately negotiated purchases	14,390,254	$	1.52	$	21,814,530	12,253,502

_________________

Notes:

(1) The 2016 Stock Repurchase Program ended on February 15, 2017.

Treasury Stock

As of March 31, 2019 and December 31, 2018, 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.

Note 7: Subsequent Events

For purpose of disclosure in the consolidated financial statements, the Company has evaluated subsequent events through May 9, 2019, the date the consolidated financial statements were available to be issued. Except as discussed below, 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.

Sub-License with Luina Bio Pty Ltd. and Novovet Pty Ltd.

On April 26, 2019, the Company entered into a sub-license agreement (the “Luina Bio Sub-License Agreement”). 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 20% equity in Novovet (“Novovet Up-Front Consideration”) in accordance with the Shareholders Agreement described below, and a percentage of royalties on net sales and non-sales revenue which incorporates Dyadic's proprietary C1 gene expression platform. The Luina Bio Sub-License Agreement will terminate on a country-by-country basis in accordance with the terms set forth in the Sub-License Agreement.

As a result of receipt of the Novovet Up-Front Consideration, Dyadic became a party to the Novovet Shareholders Agreement on April 26, 2019 (the “Shareholders Agreement”) pursuant to which the Company has agreed to certain rights, covenants and obligations. The Shareholders Agreement provides that, for as long as the Company has a respective proportion of Novovet equal to or more than 20%, it may designate one individual to serve on the board of directors. The Dyadic appointee is Mark Emalfarb, Dyadic’s CEO. Pursuant to the Shareholders Agreement, the Company agreed, subject to certain exceptions, not to sell, transfer, assign, convey or otherwise dispose of its interests in Novovet. In addition, the Company is entitled to or subject to, as applicable, anti-dilution rights, tag along rights and drag along rights, each as described in the Shareholders Agreement. The equity portion of this arrangement will be accounted for using the equity method of accounting.

Sub-License with 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.

In consideration of the license granted pursuant to the Alphazyme Sub-License Agreement, Dyadic will receive a 7.5% ownership interest in Alphazyme (“Alphazyme Up-Front Consideration”) upon the successful transfer of C1 technology, additional milestone payments and a percentage of royalties on net sales which incorporate Dyadic's proprietary C1 gene expression platform. The Alphazyme Sub-License Agreement has an initial exclusivity period of 18 months (“Exclusivity Period”) beginning on the date the technology transfer has been completed. Following the Exclusivity Period, the sub-license will be nonexclusive. At any time prior to the expiration of the Exclusivity Period, Alphazyme has the option to extend the Exclusivity Period for an additional twelve (12) months in return for an additional 2.5% ownership interest in Alphazyme.

Upon receipt of the Alphazyme Up-Front Consideration, Dyadic will become a party to the Alphazyme Limited Liability Company Agreement (the “LLC Agreement”) pursuant to which the Company will agree to certain customary rights, covenants and obligations. The equity portion of this arrangement will be accounted for using the equity method of accounting.

Research and Commercialization Collaboration with Serum

On May 7, 2019, the Company entered into a research and commercialization collaboration with Serum Institute of India Pvt., Ltd (“Serum”). Under the terms of this collaboration, Serum anticipates applying Dyadic’s C1 technology to express up to twelve (12) antibodies and vaccines and will undertake commercially best efforts to fully develop and commercialize the proteins expressed from Dyadic’s C1 technology. Dyadic has agreed to grant Serum the option to obtain an exclusive commercial sub-

license for each of the twelve (12) proteins in return for certain research funding, milestone payments and royalties for 15 years from the date of the first commercial sale.



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

On December 31, 2015, the Company sold its industrial technology business to DuPont Danisco (“DuPont”), the industrial biosciences business of DuPont (NYSE: DD) for $75.0 million (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 certain exceptions). DuPont 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 DuPont or certain licensors of DuPont, depending upon whether Dyadic elects to utilize certain patents either owned by DuPont or licensed in by DuPont.

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 at flexible commercial scales. We believe that the C1 technology could be beneficial in the development and manufacturing of human and animal vaccines (such as virus-like particles (VLPs) and antigens), monoclonal antibodies (mAbs), Bi-Specific antibodies, Fab antibody fragments, Fc-Fusion proteins, and other therapeutic enzymes and proteins. The Company is aiming to develop such products as innovative vaccines and drugs, biosimilars and/or biobetters. Additionally, in early 2018, we began to conduct certain funded research activities to further understand if, or how the C1 technology may be applied for use in developing and manufacturing certain metabolites. The initial data from this metabolite project, where the Phase I data milestone was achieved, demonstrated that C1 has the potential to be engineered to produce certain metabolites.

Recent Developments

The Company continues to develop relationships with business and research partners in the biopharmaceutical industry. In the first quarter of 2019, the Company entered into new proof of concept research collaborations with two top 25 biopharmaceutical companies to express different types of biologic vaccines and drugs of interest for human and animal health application. In addition, the Company initiated two new internal research projects, including engineering C1 to explore the potential of C1 to express adeno-associated viral (AAV) vectors which are widely used in gene therapy and are in high demand and short supply.

Sub-License with Luina Bio Pty Ltd. and Novovet Pty Ltd.

Sub-License with Alphazyme

Research and Commercialization Collaboration with Serum

Critical Accounting Policies, Estimates, and Judgments

The preparation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles (“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 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.

The Company adopted the following practical expedients and exemptions: We generally expense sales commissions when

incurred because the amortization period would be one year or less. We do not 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.

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. 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 for our CEO which is 5 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 volatilities since 2016, as the DuPont Transaction resulted in significant changes in the Company’s business and capital structure. The change in assumption is effective January 1, 2018 and only impacts new options granted in 2018.

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, “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 ASC 740 related to the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 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 ASC 740. The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017 and is effective January 1, 2018. The new legislation includes, among other things a reduction of the U.S. Federal corporate income tax rate from 35% to 21%, and a change to alternative minimum taxes. The TCJA eliminated the corporate Alternative Minimum Tax (AMT) and permits existing AMT credit carryforwards to be used to reduce the regular tax obligation in 2018, 2019, and 2020. Any AMT credit carryforwards that do not reduce regular taxes are eligible for a 50% refund in 2018 through 2020, and a 100% refund in 2021.

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, 2019 Compared to the Same Period in 2018

Revenue, Cost of Revenue, and Provision for Contract Losses

The following table summarizes the Company’s revenue, cost of research and development revenue and provision for contract losses for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,
	2019		2018
	(Unaudited)		(Unaudited)
Revenue	$	402,527	$	184,330
Cost of research and development revenue	$	327,903	$	146,809

The increase in revenue and cost of research and development revenue reflect six on-going research collaborations in 2019 compared to two collaborations in 2018.

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, 2019 increased to approximately $692,000 compared to $577,000 for the same period a year ago. The increase primarily reflects the costs of additional internal research activities with third-party contract research organizations.

Research and development expenses - related party, for the three months ended March 31, 2019, was approximately $389,000 compared to $393,000 for the same period a year ago. This reflects the research and development costs related to the Company’s R&D Agreements with BDI, which started in July 2017.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2019, increased 10.4% to approximately $1,428,000 compared to $1,293,000 for the same period a year ago. The increase primarily reflects increases in share-based compensation expenses related to stock options granted in 2019 of $73,000, SEC registration and uplisting related costs of $70,000, business development and investor relations costs of $45,000, legal costs of $28,000, offset by reductions in compensation costs of $67,000 and other decreases of $14,000.

Interest Income

Interest income for the three months ended March 31, 2019, increased 43.5% to approximately $267,000 compared to $186,000 for the same period a year ago. The increase in interest income reflects higher yield on the Company’s investment grade securities, which are classified as held-to-maturity.

Net Loss

Net loss for the three months ended March 31, 2019 was approximately $2,175,000 compared to $2,043,000 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. In 2017, the Company’s liquidity was further improved with the receipt of a litigation settlement of approximately $4.4 million, net of legal fees and other payments, and the release of escrowed funds from the DuPont Transaction of approximately $7.4 million. The Company completed its 2016 Stock Repurchase Program in February 2017. On August 16, 2017, the Board of Directors authorized the 2017 Stock Repurchase Program, under which the Company may repurchase up to $5 million of its outstanding common stock. On August 6, 2018, the Board of Directors authorized an extension of the 2017 Stock Repurchase Program through August 15, 2019. The Company financed the 2017 Stock Repurchase Program from its existing cash on hand. As of March 31, 2019, the Company has repurchased a total of 14,390,254 shares of its common stock at a weighted average price of $1.52 for an aggregate purchase price of $21,814,530. The Company also expects to receive the tax refund from the AMT credit carryover of approximately $1 million through 2021.

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 additional costs and expenses as an SEC reporting and NASDAQ listed company, and our business development and research and development expenses. We believe that our existing cash position and investments in investment grade securities will be adequate to meet our operational, business, and other liquidity requirements for the next twelve months.

At March 31, 2019, cash and cash equivalents were approximately $4.0 million compared to $2.4 million at December 31, 2018. The carrying value of investment grade securities, including accrued interest at March 31, 2019 was approximately $36.1 million compared to $39.1 million at December 31, 2018.

Net cash used in operating activities for the three months ended March 31, 2019 of approximately $1.4 million was principally attributable to a net loss of $2.2 million, partially offset by share-based compensation expense of $0.3 million and changes in other operating assets and liabilities of $0.4 million.

Net cash used in operating activities for the three months ended March 31, 2018 of approximately $0.7 million was principally attributable to a net loss of $2.0 million, partially offset by changes in operating assets and liabilities of approximately $0.8 million, share-based compensations expense of approximately $0.3 million and amortization of held-to-maturity securities of approximately $0.3 million.

Net cash provided by investing activities for the three months ended March 31, 2019 was approximately $3.0 million compared to net cash used in investing activities of $0.1 million for the three months ended March 31, 2018. Cash flows from

investing activities in 2019 and 2018 were primarily related to proceeds from maturities and purchases of investment grade debt securities.

Net cash used in financing activities for the three months ended March 31, 2019 was zero compared to $0.4 million for the three months ended March 31, 2018. Cash flows used in financing activities in 2018 were primarily related to repurchases of common stock.



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 Accounting 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 Accounting 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 identified in connection with the evaluation required by Rule 13a-15(d) and 15d- 15(d) of the Exchange Act that occurred during the three months ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

However, 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

The equity securities we receive as consideration for sub-licenses are highly speculative and generally illiquid.

We routinely acquire equity securities in sub-licensees in exchange for the granting of a sub-license to our C1 platform. Many of these sub-licensees have no financial or operating history and the equity securities received are highly speculative and involve a high degree of risk of loss. In addition, the equity securities we receive are typically subject to restrictions on transfer and resale or otherwise have no established trading market. The illiquidity of these equity securities may adversely affect our ability to dispose of such securities at times when it may be otherwise advantageous for us to liquidate such securities. In addition, if we were forced to immediately liquidate some or all of such securities, the proceeds of such liquidation could be significantly less than the current fair value of such securities.

There have otherwise been no changes to our risk factors from those disclosed in our Form 10-K filed on March 27, 2019.



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

Nasdaq Uplisting

Effective April 17, 2019, the common stock began trading on the NASDAQ Stock Market LLC’s NASDAQ Capital Market, under the symbol “DYAI”. Prior to the Company’s uplisting to the NASDAQ, the Company’s common stock had been traded on the OTCQX market.



Item 6.	Exhibits

Exhibits

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



		Incorporated by Reference
Exhibit No.	Description of Exhibit	Form	Original No.	Date Filed	Filed Herewith
10.1	Sub-License Agreement among Dyadic International (USA), Inc., Luina Bio Pty Ltd. and Novovet Pty Ltd, dated April 26, 2019. Specific items in this exhibit have been redacted, as marked by three asterisks [***]	8-K	10.1	May 2, 2019
10.2	Shareholders Agreement among Dyadic International (USA), Inc., JCL Biologics Pty Ltd and Novovet Pty Ltd, dated April 26, 2019. Specific items in this exhibit have been redacted, as marked by three asterisks [***]	8-K	10.2	May 2, 2019
10.3	Non-Exclusive Sublicense Agreement among Dyadic International, Inc., Alphazyme, LLC, dated May 5, 2019. Specific items in this exhibit have been redacted, as marked by three asterisks [***]	8-K	10.1	May 8, 2019
10.4	Research and Commercialization Collaboration Agreement with Serum Institute of India Pvt,. Ltd., dated May 7, 2019. Specific items in this exhibit have been redacted, as marked by three asterisks [***].	8-K	10.1	May 8, 2019
31.1	Certification of Chief Executive Officer of Dyadic Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				x
31.2	Certification of Chief Accounting Officer of Dyadic Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				x
32.1	Certification of Chief Executive Officer of Dyadic Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				x
32.2	Certification of Chief Accounting Officer of Dyadic Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				x





Exhibit No.		Description
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 9, 2019	By:	/s/ Mark A. Emalfarb
		Mark A. Emalfarb
		President and Chief Executive Officer
		(Principal Executive Officer)

May 9, 2019	By:	/s/ Ping W. Rawson
		Ping W. Rawson
		Chief Accounting Officer
		(Principal Financial Officer and Principal Accounting Officer)