DYADIC INTERNATIONAL, INC. 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 BusinessDyadic International, Inc. ("Dyadic", "we", "us", "our", or the "Company") is a global biotechnology platform company based inJupiter, Florida with operations inthe United States , a satellite office inthe Netherlands and predominantly two research organizations performing services under contract to Dyadic inFinland andSpain . 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 asAbengoa 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. OnDecember 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.
Recent Developments In the first quarter of fiscal 2020, the Company continued to develop relationships with business and research partners in the biopharmaceutical industry and achieved the following:
22
--------------------------------------------------------------------------------
•Data presented at the 15th
•Dyadic entered into a funded collaboration with another top four animal health company to engage in a feasibility study regarding the production of two proteins using our C1 platform. Three of the top four animal health companies are currently funding research programs to evaluate C1. The first two projects with one of these top three have been expanded with additional funding and have entered the second phase of development, and a new work proposal for a third project is under final review.
•Dyadic entered into a nonexclusive research license with WuXi Biologics, one of the leading global Contract Development Manufacturing Organizations.
•Dyadic entered into a new feasibility study with the
•In connection with the COVID-19 pandemic, the Company has the following initiatives:
•The Israel Institute for Biological Research ("IIBR") has expanded its collaboration with the Company to explore the potential of C1 to express gene sequences and targets developed by IIBR into both an rVaccine candidate and monoclonal antibodies ("mAbs") that may potentially help combat the outbreak of the COVID-19 virus.
•Dyadic's C1 gene expression platform is being used to express targets and
vaccination candidates developed by Ufovax, a spin-off vaccine company of
Impact of COVID-19
The recent outbreak of the novel coronavirus COVID-19, which was declared a
pandemic by the
23
--------------------------------------------------------------------------------
many of the same parties. In addition, the Company is pursuing other opportunities where it may be able to apply its C1gene expression platform to help combat the COVID-19 pandemic; however, there is no assurance that any of these opportunities will materialize or that the C1 technology or any product expressed from C1 or any of the various other steps in a vaccine or drug development process will perform, provide benefits, obtain governmental safety and regulatory approvals, be registered or gain market acceptance. In addition, our C1 technology has yet to be used to produce a vaccine, antibody or other biologic product that has entered the clinical trial phase, and we are competing with more experienced companies for grants or funding of this type. As a result, there is no assurance that we will receive these grants or funding resulting from these proposals. We rely on our existing cash and cash equivalents, investments in debt securities, and operating cash flow to provide the working capital needs of our operations. We believe that we have sufficient cash, cash equivalents and investments to fund our operations for at least the next twelve months. However, in the event our financing needs for the foreseeable future are not able to be met by our existing balances of cash, cash equivalents and investments, we would seek to raise funds through public or private equity offerings, and through other means to meet our financing requirements. There is no assurance that funding would be available at acceptable terms, if at all.
Critical Accounting Policies, Estimates, and Judgments
The preparation of these consolidated financial statements in accordance with
GAAP requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and related disclosure of contingent
assets and liabilities at the date of our consolidated financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions or
conditions. Such differences could be material to the consolidated financial
statements.
We define critical accounting policies as those that are reflective of
significant judgments and uncertainties and which may potentially result in
materially different results under different assumptions and conditions. In
applying these critical accounting policies, our management uses its judgment to
determine the appropriate assumptions to be used in making certain estimates.
These estimates are subject to an inherent degree of uncertainty. Our critical
accounting policies include the following:
Revenue Recognition
The Company has no pharmaceutical products approved for sale at this point, and
all of our revenue to date has been research revenue from third party
collaborations and government grants. The Company is expected to generate future
revenue from license agreements and collaborative arrangements, which may
include upfront payments for licenses or options to obtain a license, payment
for research and development services and milestone payments, in the form of
cash or non-cash considerations (e.g., minority equity interest).
Revenue related to research collaborations and agreements: The Company
typically performs research and development services as specified in each
respective agreement on a best efforts basis, and recognizes revenue from
research funding under collaboration agreements in accordance with the 5-step
process outlined in Topic 606: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. We recognize revenue when we satisfy a
performance obligation by transferring control of the service to a customer in
an amount that reflects the consideration that we expect to receive. Since the
performance obligation under our collaboration agreements is generally satisfied
over time, we elected to use the input method under Topic 606 to measure the
progress toward complete satisfaction of a performance obligation.
Under the input methods, revenue will be recognized on the basis of the entity's
efforts or inputs to the satisfaction of a performance obligation (e.g.,
resources consumed, labor hours expended, costs incurred, or time elapsed)
relative to the total expected inputs to the satisfaction of that performance
obligation. The Company believes that the cost-based input method is the best
measure of progress to reflect how the Company transfers its performance
obligation to a customer. In applying the cost-based input method of revenue
recognition, the Company uses actual costs incurred relative to budgeted costs
to fulfill the performance obligation. These costs consist primarily of
full-time equivalent effort and third-party contract costs. Revenue will be
recognized based on actual costs incurred as a percentage of total budgeted
costs as the Company completes its performance obligations.
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
24
--------------------------------------------------------------------------------
to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company's performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods. Revenue related to grants and fundings:The Company may receive grants and fundings from governments, agencies, and other private and not-for-profit organizations.These grants and fundings are intended to be used to partially or fully fund the Company's research collaborations, including opportunities arising in connection with COVID-19 that the Company is pursuing with certain collaborators. However, most, if not all, of such potential grant revenues, if received, is expected to be earmarked for third parties to advance the research required, including preclinical and clinical trials for SARS-CoV-2 vaccines and/or antibodies candidates. Revenue related to sublicensing agreements: If the sublicense to the Company's intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue allocated to the license when technology is transferred to the customer and the customer is able to use and benefit from the license.
Milestone payments: At the inception of each arrangement that includes development, commercialization, and regulatory milestone payments, the Company evaluates whether the achievement of the milestones is considered probable and estimates the amount to be included in the transaction price. If the milestone payment is in exchange for a sublicense and is based on the sublicensee's subsequent sale of product, the Company recognizes milestone payment by applying the accounting guidance for royalties. To date, the Company has not recognized any milestone payment revenue resulting from any of its sublicensing arrangements. Royalties: With respect to licenses deemed to be the predominant item to which sales-based royalties relate, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its sublicensing arrangements. We invoice customers based on our contractual arrangements with each customer, which may not be consistent with the period that revenues are recognized. When there is a timing difference between when we invoice customers and when revenues are recognized, we record either a contract asset (unbilled accounts receivable) or a contract liability (deferred research and development obligations), as appropriate. We are not required to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
The Company adopted a practical expedient to expense sales commissions when incurred because the amortization period would be one year or less.
Accrued Research and Development Expenses In order to properly record services that have been rendered but not yet billed to the Company, we review open contracts and purchase orders, communicate with our personnel and we estimate the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly or quarterly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of accrued research and development expenses include amounts owed to contract research organizations, to service providers in connection with commercialization and development activities. Stock-Based Compensation We have granted stock options and restricted stock to employees, directors and consultants. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model considers volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of our stock and the exercise price. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and restricted stock and applied a discount to reflect the lack of marketability due to the holding period restriction 25
--------------------------------------------------------------------------------
of its shares under Rule 144 prior to the Company
The estimates utilized in the Black-Scholes calculation involve inherent
uncertainties and the application of management judgment. These estimates are
neither predictive nor indicative of the future performance of our stock. As a
result, if other assumptions had been used, our recorded share-based
compensation expense could have been materially different from that reported. In
addition, because some of the options and restricted stock issued to employees,
consultants and other third-parties vest upon the achievement of certain
milestones, the total ultimate expense of share-based compensation is uncertain.
In connection with board member and employee terminations, the Company may
modify certain terms to outstanding share-based awards. We have recorded charges
related to these modifications based on the estimated fair value of the
share-based options immediately prior to and immediately after the modification
occurs, with any incremental value being charged to expense. We have used the
Black-Scholes pricing model in this valuation process, and this requires
management to use various assumptions and estimates. Future modifications to
share-based compensation transactions may result in significant expenses being
recorded in our consolidated financial statements.
Accounting for Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with ASC Topic 740 ("Topic 740"), "Income Taxes". Under this method,
income tax expense/(benefit) is recognized for: (i) taxes payable or refundable
for the current year and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity's financial
statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is provided to reduce the deferred tax
assets reported if based on the weight of the available positive and negative
evidence, it is more likely than not some portion or all the deferred tax assets
will not be realized.
In determining taxable income for the Company's consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process requires the Company to make
certain estimates of our actual current tax exposure and assessment of temporary
differences between the tax and financial statement recognition of revenue and
expense. In evaluating the Company's ability to recover its deferred tax assets,
the Company must consider all available positive and negative evidence including
its past operating results, the existence of cumulative losses in the most
recent years and its forecast of future taxable income. Significant management
judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.
The Company is required to evaluate the provisions of Topic 740 related to the
accounting for uncertainty in income taxes recognized in a company's financial
statements. Topic 740 prescribes a comprehensive model for how a company should
recognize, present, and disclose uncertain positions that the company has taken
or expects to take in its tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. Differences between tax positions taken or expected to be taken in
a tax return and the net benefit recognized and measured pursuant to the
interpretation are referred to as "unrecognized benefits." A liability should be
recognized (or amount of net operating loss carry forward or amount of tax
refundable is reduced) for unrecognized tax benefit because it represents a
company's potential future obligation to the taxing authority for a tax position
that was not recognized because of applying the provision of Topic 740.
The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017 and became
effective January 1, 2018 . The legislation included, among other things, a
reduction of the U.S. federal corporate income tax rate from 35% to 21%, and a
repeal of the corporate alternative minimum tax (the "AMT"). The TCJA repealed
the corporate AMT but permitted unused AMT credit carryforwards to be used to
reduce the regular tax obligation in future years. 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. Subsequently, the Coronavirus Aid, Relief and
Economic Security Act ("CARES Act"), which was signed into law in March 2020 ,
accelerated the full refund of any unused AMT credits from 2021 (as provided for
in the TCJA) to 2018 or 2019, at the taxpayer's election .
26
--------------------------------------------------------------------------------
Accordingly, we reclassified the balance of the AMT credit from the deferred tax
asset to an income tax receivable in 2018. The corresponding balance in the
valuation allowance has been reversed into income tax benefit in the amount of
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 Three Months EndedMarch 31, 2020 Compared to the Same Period in 2019 Revenue and Cost of Revenue The following table summarizes the Company's revenue and cost of research and development revenue for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Revenue$ 315,372 $ 402,527 Cost of research and development revenue$ 278,182 $ 327,903 The decrease in revenue and cost of research and development revenue for the three months endedMarch 31, 2020 reflect five on-going research collaborations compared to six collaborations for the same period a year ago. Research and Development Expenses Research and development costs are expensed as incurred and primarily include salary and benefits of research personnel, third-party contract research organization services and supply costs. Research and development expenses for the three months endedMarch 31, 2020 increased to approximately$755,000 compared to$692,000 for the same period a year ago. The increase primarily reflects the additional costs of accelerated glyco-engineering project conducted at VTT. 27
--------------------------------------------------------------------------------
Research and development expenses - related party, for the three months endedMarch 31, 2020 , was$0 compared to approximately$389,000 for the same period a year ago. The decrease was due to the completion of the Research Service Agreement with BDI inJune 2019 . General and Administrative Expenses General and administrative expenses for the three months endedMarch 31, 2020 , increased 15.8% to approximately$1,653,000 compared to$1,428,000 for the same period a year ago. The increase principally reflects increases in insurance and other outside service costs of$101,000 , noncash share-based compensation expenses of$97,000 , business development and investor relations costs of$70,000 , and other increases of$54,000 offset by reductions in executive compensation costs and accrued incentives of$74,000 and legal expenses of$23,000 . Interest Income Interest income for the three months endedMarch 31, 2020 , decreased 37.1% to approximately$168,000 compared to$267,000 for the same period a year ago. The decrease was primarily due to the lower interest rate and yield on the Company's investment grade securities, which are classified as held-to-maturity. Net Loss Net loss for the three months endedMarch 31, 2020 was approximately$2,214,000 compared to$2,175,000 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
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 anSEC 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. AtMarch 31, 2020 , cash and cash equivalents were approximately$4.7 million compared to$4.8 million atDecember 31, 2019 . The carrying value of short-term and long-term investment grade securities, including accrued interest atMarch 31, 2020 was approximately$29.3 million compared to$31.2 million atDecember 31, 2019 . Net cash used in operating activities for the three months endedMarch 31, 2020 of approximately$2.0 million was principally attributable to a net loss of approximately$2.2 million and changes in operating assets and liabilities of approximately$0.3 million , offset by share-based compensation expenses of approximately$0.4 million and amortization of held-to-maturity securities of approximately$0.1 million . Net cash used in operating activities for the three months endedMarch 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 provided by investing activities for the three months endedMarch 31, 2020 was approximately$1.7 million compared to$3.0 million for the three months endedMarch 31, 2019 . Cash flows from investing activities during the three 28
--------------------------------------------------------------------------------
months ended
© Edgar Online, source
