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 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual 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 Annual Report. All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual 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 currently two
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
Thermothelomyces heterothallica (formerly 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 $75.0 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 and drugs, such as virus-like
particles (VLPs), protein antigens, monoclonal antibodies (mAbs), Bi-Specific
antibodies, Fab antibody fragments, Fc-Fusion proteins, as well as other
therapeutic enzymes and proteins. The Company is aiming to develop products such
as innovative vaccines and drugs, biosimilars and/or biobetters.

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.


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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 consideration.
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 method, 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 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
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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.
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's 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 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
and 2019, 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, "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
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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 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 benefits, because it represents a
company's potential future obligation to the taxing authority for a tax position
that was not recognized as a result of applying the provision of ASC 740.
The Company classifies accrued interest and penalties related to its tax
positions as a component of income tax expense. The Company currently is not
subject to U.S. federal, state and local tax examinations by tax authorities for
the years before 2014.The United States Internal Revenue Service (the "IRS")
completed its review of the Company's 2015 tax filing on October 17, 2017, and
no changes were required. See Note 4 to the Consolidated Financial Statements in
Section F-1 for further information on the examination of the Company's 2016 tax
return.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The Company utilized various methods, including income,
cost and market approaches to determine the fair value of its investments in
equity interest, which may fall into Level 3 of the fair value hierarchy because
of the significant unobservable inputs utilized in these valuation approaches.
These inputs can be readily observable, market corroborated, or generally
unobservable inputs. The Company utilizes valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable inputs. Our key
inputs included, but were not limited to, significant management judgments and
estimates, including projections of the timing and amount of the project's cash
flows, determination of a discount rate for the income approach, market
multipliers, probability weighting of potential outcomes of legal and regulatory
proceedings, and weighting of the valuations produced by the income, cost and
market approaches.
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 Year Ended December 31, 2019 Compared to the Year End December 31, 2018 Revenue and Cost of Revenue


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The following table summarizes the Company's revenue and cost of research and development revenue for the years ended December 31, 2019 and 2018:


                                                 Year Ended December 31,
                                                  2019              2018
Revenue                                      $ 1,681,076       $ 1,295,451

Cost of research and development revenue $ 1,459,701 $ 1,027,278





The increases in revenue and cost of research and development revenue for the
year ended December 31, 2019 reflect ten research collaborations compared to six
research collaborations for the year ended December 31, 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 year ended December 31, 2019 increased
to approximately $3,088,000 compared to $2,102,000 for the year ended
December 31, 2018. The increase primarily reflects the costs of additional
internal research projects.
Research and development expenses - related party, for the year ended
December 31, 2019, decreased to approximately $869,000 compared to $1,216,000
for the year ended December 31, 2018. The decrease is primarily due to
completion of a research service agreement with BDI in June 2019.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2019,
increased 22.0% to approximately $5,520,000 compared to $4,523,000 for the year
ended December 31, 2018. The increase principally reflects increases in noncash
share-based compensation expenses of $717,000 related to 2019 stock options
awards and options vested upon the April 2019 uplisting to NASDAQ, business
development and investor relations costs of $186,000, insurance costs of
$138,000, and legal costs and NASDAQ uplisting expenses of $125,000, offset by
reductions in executive compensation costs, including the separation of the
Company's former CFO, of $168,000, which was a one-time expense in 2018.
Foreign Currency Exchange
Foreign currency exchange loss for the year ended December 31, 2019, was
approximately $28,000 compared to $21,000 for the year ended December 31, 2018.
The increase reflects the currency fluctuation of the Euro in comparison to the
U.S. dollar.
Interest Income
Interest income for the year ended December 31, 2019, increased 10.1% to
approximately $985,000 compared to $895,000 for the year ended December 31,
2018. The increase reflects the higher yield on the Company's investment grade
securities, which are classified as held-to-maturity.
Income Taxes
The Company had net operating loss ("NOL") carryforwards available in 2019 that
will begin to expire in 2037. As of December 31, 2019, and 2018, the Company had
NOLs in the amount of approximately $19.7 million and $9.1 million,
respectively.
For the year ended December 31, 2018, the Company's current income tax benefit
of $1.0 million was generated from the corporate Alternative Minimum Tax credit
refund resulting from the Tax Cuts and Jobs Act ("TCJA").
Net Loss
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Net loss for the year ended December 31, 2019 was approximately $8.3 million compared to a net loss of $5.7 million for the year ended December 31, 2018. The change was primarily due to increases in general and administrative expenses of approximately $1.0 million, research and development expenses of approximately $0.6 million, and the prior year income tax benefit from the corporate Alternative Minimum Tax credit refund of approximately $1.0 million.



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. Between
January 2016 and August 2018, the Company repurchased a total of 14,390,254
shares of its common stock from its existing cash on hand, for an aggregate
purchase price of $21,814,530 at a weighted average price of $1.52 per share. As
of December 31, 2019, our investment balance includes $29.7 million short-term
investments with contractual maturities of twelve (12) months of less, including
interest receivable, and $1.5 million long-term investments with contractual
maturities beyond twelve (12) months. In June 2019, the Company's liquidity was
further improved with the receipt of approximately $0.5 million tax refund
resulting from the elimination of corporate Alternative Minimum Tax (AMT) under
the TCJA. An additional $0.5 million AMT tax refund is expected to be received
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 our business development and research expenses,
as well as additional costs as an SEC reporting and NASDAQ listed company. We
believe that our existing cash position and investments in short-term and
long-term investment grade securities will be adequate to meet our operational,
business, and other liquidity requirements for at least the next twelve (12)
months.
At December 31, 2019, cash and cash equivalents were approximately $4.8 million
compared to $2.4 million at December 31, 2018. The carrying value of investment
grade securities, including accrued interest at December 31, 2019 was $31.2
million compared to $39.1 million at December 31, 2018.
Net cash used in operating activities for the year ended December 31, 2019 of
approximately $5.8 million resulted from a net loss of $8.3 million, offset by
share-based compensation expense of $1.2 million, amortization of
held-to-maturity securities of $0.2 million, BDI research and development
activities of $0.3 million and changes in other operating assets and liabilities
of $0.8 million.
Net cash used in operating activities for the year ended December 31, 2018 of
approximately $4.4 million resulted from a net loss of $5.7 million, and changes
in other operating assets and liabilities of $0.8 million, offset by stock based
compensation expense of $0.5 million, amortization of held-to-maturity
securities of $0.7 million, and BDI research and development activities of $0.9
million.
Net cash provided by investing activities for the year ended December 31, 2019
was approximately $7.7 million compared to $3.3 million for the year ended
December 31, 2018. Cash flows from investing activities in 2019 and 2018 was
primarily related to proceeds from maturities, net of purchases of investment
grade debt securities.
Net cash provided in financing activities for the year ended December 31, 2019
was approximately $0.6 million compared to net cash used in financing activities
of $2.3 million for the year ended December 31, 2018. Cash flows provided in
financing activities in 2019 were primarily related to proceeds received from
the exercise of stock options. Cash flows used in in financing activities in
2018 were primarily related to repurchases of our common stock.

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