DYADIC INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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
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Dyadic International, Inc. ("Dyadic", "we", "us", "our", or the "Company") is a
global biotechnology platform company based in Jupiter, Florida with operations
in the United States, a satellite office in the Netherlands and predominantly
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
Danisco USA ("Danisco"), 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). Danisco retained certain rights to
utilize the C1 technology in pharmaceutical applications, including the
development and production of pharmaceutical products, for which it will be
required to make royalty payments to Dyadic upon commercialization. In certain
circumstances, Dyadic may owe a royalty to either Danisco or certain licensors
of Danisco, depending upon whether Dyadic elects to utilize certain patents
either owned by Danisco or licensed in by Danisco.
After the DuPont Transaction, the Company has been focused on the
biopharmaceutical industry, specifically in further improving and applying the
proprietary C1 technology into a safe and efficient gene expression platform to
help speed up the development, lower production costs and improve the
performance of biologic vaccines and drugs 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 involved in multiple funded
research collaborations with animal and human pharmaceutical companies designed
to leverage its C1 technology to help develop products such as innovative
vaccines and drugs, biosimilars and/or biobetters.
Recent Developments
In 2020, the Company continued to expand its relationships with business and
research partners in the biotech and pharmaceutical industry, academic and other
institutions, as well as certain governmental agencies as follows:
•On November 12, the Company entered into a fully funded collaboration with a
top-tier global pharmaceutical company to express two (2) molecules of
commercial interest.
•On November 12, the Company expanded its collaboration with one of the top-ten
global drug manufacturers we are collaborating with, who is funding the research
to evaluate C1's ability to express a new class of proteins in our ongoing
research collaboration.
•In October, Dyadic entered into a non-exclusive technology agreement with
Epygen Biotech of India, who after obtaining required funding, expects to
produce cGMP clinical trial material at their facility and conduct trials in
India, using Dyadic's C1 expressed receptor binding domain (RBD) antigen of the
SARS-CoV-2 Spike Protein. This agreement demonstrates how potential
collaborators globally can develop and manufacture vaccines and drugs on a
regional basis that are affordable, safe and effective.
•On September 17, Dyadic announced a fully funded collaboration with Jiangsu
Hengrui Medicine Co., Ltd. ("Hengrui") to apply Dyadic's C1 technology to the
development of selected Hengrui biologic drugs. This agreement highlights C1's
potential value proposition to address demand for more efficient
biomanufacturing processes of biologic drugs and vaccines.
•On July 15, Dyadic signed a fully funded R&D collaboration with one of the top
five global pharmaceutical companies for human health. Under this agreement,
Dyadic will be expressing two different types of therapeutic compounds.
•In the second quarter, Dyadic entered into two new fully funded collaborations
with two of the leading global animal health companies to demonstrate the C1
technology platform for expression and production of therapeutic proteins for
companion and farm animal diseases. The Company has rapidly expanded into the
animal health market and has signed fully funded agreements with all four
leading animal health companies, as well as a fifth global animal health company
to evaluate C1. The first two projects has been expanded into the second phase
and the Company has received additional funding.
•In March, Dyadic entered into a nonexclusive research license with WuXi
Biologics, one of the leading global Contract Development and Manufacturing
Organizations.
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•In the first quarter, Data presented at the 15th European Conference on Fungal
Genetics ("ECFG15") demonstrated that the Company's C1 strain has been
glyco-engineered to achieve a core human-like G2 glycan level over 76%. Data
also showed excellent progress we made in reducing the extracellular protease
background by 50 times in C1. The elimination of protease activity makes the C1
cell line more efficient at producing stable proteins, leading to simpler
purification requirements.
•In March, Dyadic entered into a feasibility study with the University of Oslo
involving an influenza vaccine.
The Company is currently working on several COVID-19 related vaccine and
antibody opportunities, including but not limited to the following:
•Dyadic, in conjunction with VTT, has successfully engineered several C1 strains
that express the Full Spike protein and the Receptor Binding Domain (RBD)
antigen of the SARS-CoV-2 spike protein. C1 RBD is being expressed in multiple
forms at high levels, which can be used to produce very large quantities of
several potential COVID-19 vaccine candidates at flexible commercial scales, at
low cost. The proprietary C1 expressed RBD antigen is being used in animal
trials by nine different research groups, governmental agencies, and biopharma
companies, including the Israel Institute for Biologic Research (IIBR) and in
collaboration with scientists from Oxford University, Utrecht University,
Erasmus Medical Center and University of Veterinary Medicine Hannover, DE (TiHo)
and others who are testing the C1 expressed RBD vaccine candidate(s) in animal
trials on a stand-alone basis as well as testing the C1 RBD with nanoparticles
and adjuvants. The animal studies are currently scheduled to include challenge
studies with transgenic mice that express the Human Ace-2 and Hamsters as well
as additional mice studies.
•In June, Dyadic was selected by the Frederick National Laboratory to engineer
its patented and proprietary C1 cell lines to produce several COVID-19 vaccine
candidates which will be utilized by the Vaccine Research Center part of the
National Institute of Allergy and Infectious Diseases at the National Institute
of Health. This collaboration is ongoing and C1 has shown to be able to express
one or more of their SARS-CoV-2 vaccine candidates. We expect to send samples to
them later this month for them to analyze and characterize.
•Dyadic provided one of its C1 RBD SARS-CoV-2 vaccine strains, along with
samples of the C1 expressed RBD vaccine candidate, to the IIBR for their use in
developing a potential COVID-19 vaccine. A recently concluded IIBR mice study
showed that the C1 expressed SARS-CoV-2 RBD has the potential to generate
excellent immunogenicity responses with very high titers and neutralizing
antibodies against the Covid-19 virus. The successful mice study has encouraged
them to perform a new challenge study in which transgenic mice expressing the
Human Ace2 will be infected with the SARS-CoV-2 virus. This study is expected to
start soon.
•Interim results from a recent additional mouse study further supports that the
C1 expressed SARS-CoV-2 RBD, in addition to generating excellent immunogenicity
responses with very high titers and neutralizing antibodies against the Covid-19
virus, also has the potential to stimulate the memory cellular immune response
induced in human cells by the SARS-CoV-2 virus.
•Dyadic has expressed a SARS-CoV-2 monoclonal antibody (mAb) in collaboration
with IDBiologics, Inc., who licensed this mAb from the Vanderbilt Vaccine Center
("VVC"). A sample of this potential C1 expressed COVID-19 antibody has been
delivered to the VVC and is currently being compared to the same mAb expressed
from CHO. Initial neutralization results are encouraging and are supported by
prior non-SARS-CoV-2 monoclonal antibody neutralization results reported in one
our ongoing pharmaceutical collaborations.
•Dyadic continues to provide samples of its proprietary C1 expressed RBD
SARS-CoV-2 antigens to additional parties who are evaluating the RBD antigen for
potential use in SARS-CoV-2 vaccine and diagnostic applications.
Impact of COVID-19
The outbreak of the novel coronavirus COVID-19, which was declared a pandemic by
the World Health Organization on March 11, 2020, has led to adverse impacts on
the U.S. and global economies and created uncertainty regarding potential
impacts to the Company's employees, operations, and research projects.
To date, as a direct result of COVID-19, some of our employees are still working
remotely. The extent to which the COVID-19 pandemic will directly or indirectly
impact our business will depend on future developments that are highly
uncertain, including as a result of new information that may emerge concerning
COVID-19 and the actions taken to contain it or treat COVID-19, the economic
impact on local, regional, national and international business partners and
markets, delays or disruptions in our on-going research projects, and
unavailability of the employees of the Company or third-party contract research
organizations with whom we conduct business, due to illness or quarantines, all
of which are highly uncertain and
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cannot be predicted at this time. Management is actively monitoring this
situation and the possible effects on its financial condition, liquidity,
operations, vendors, industry, and workforce. Even after the COVID-19 pandemic
has subsided, the Company may continue to experience adverse impacts to its
business as a result of any economic recession or depression that has occurred
or may occur in the future. Given the daily evolution of the COVID-19 outbreak
and the response to curb its spread, currently we are not able to accurately
estimate the effects of the COVID-19 outbreak to our results of operations,
financial condition, or liquidity.
Open Market Sale Agreement?
On August 13, 2020, we entered into an Open Market Sale Agreement? with
Jefferies LLC, or Jefferies, with respect to an at the market offering program
under which we may offer and sell, from time to time at our sole discretion,
shares of our common stock, par value $0.001 per share, having an aggregate
offering price of up to $50.0 million through Jefferies as our sales agent or
principal.
We have not and are not obligated to sell any shares under the sale agreement.
Subject to the terms and conditions of the sale agreement, Jefferies will use
commercially reasonable efforts, consistent with its normal trading and sales
practices and applicable laws and regulations, to sell shares of our common
stock from time to time based upon our instructions, including any price, time
or size limits or other customary parameters or conditions we specify, subject
to certain limitations. Under the sale agreement, Jefferies may sell shares of
our common stock by any method permitted by law deemed to be an "at the market
offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as
amended.
We will pay Jefferies a commission equal to 3.0% of the gross proceeds from each
sale of shares of our common stock sold through Jefferies under the sale
agreement and will provide Jefferies with customary indemnification and
contribution rights. In addition, we agreed to reimburse certain legal expenses
and fees by Jefferies in connection with the offering up to a maximum of
$50,000, in addition to certain ongoing disbursements of Jefferies' counsel, if
required. The sale agreement will terminate upon the sale of all $50.0 million
of shares under the sale agreement, unless earlier terminated by either party as
permitted therein.
The issuance and sale, if any, of shares of our common stock by us under the
sale agreement will be made pursuant to a registration statement on Form S-3
filed with the SEC on August 13, 2020 and declared effective by the SEC on
August 25, 2020 and the accompanying Prospectus, as supplemented by a Prospectus
Supplement. As of the date of this filing, there have been no sales made under
the Open Market Sale Agreement?, and we have no immediate plans to sell any
securities under this program to fund our near-term business plan.

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
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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
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.

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Provision for Contract Losses
The Company assesses the profitability of our collaboration agreements to
provide research services to our contracted business partners and identifies
those contracts where current operating results or forecasts indicate probable
future losses. If the anticipated contract cost exceeds the anticipated contract
revenue, a provision for the entire estimated loss on the contract is recorded
and then accreted into the statement of operations over the remaining term of
the contract. The provision for contract losses is based on judgment and
estimates, including revenues and costs, where applicable, the consideration of
our business partners' reimbursement, and when such loss is deemed probable to
occur and is reasonable to estimate.

Accrued Research and Development Expenses
In order to properly record services that have been rendered but not yet billed
to the Company, we review open contracts and purchase orders, communicate with
our personnel and we estimate the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or otherwise
notified of the actual cost. The majority of our service providers invoice us
monthly or quarterly in arrears for services performed or when contractual
milestones are met. We make estimates of our accrued expenses as of each balance
sheet date in our consolidated financial statements based on facts and
circumstances known to us at that time. We periodically confirm the accuracy of
our estimates with the service providers and make adjustments if necessary.
Examples of accrued research and development expenses include amounts owed to
contract research organizations, to service providers in connection with
commercialization and development activities.
Stock-Based Compensation
We have granted stock options and restricted stock to employees, directors and
consultants. The fair value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes model
considers volatility in the price of our stock, the risk-free interest rate, the
estimated life of the option, the closing market price of our stock and the
exercise price. For purposes of the calculation, we assumed that no dividends
would be paid during the life of the options and restricted stock and applied a
discount to reflect the lack of marketability due to the holding period
restriction of its shares under Rule 144 prior to the Company April 2019
uplisting to NASDAQ. We also used the weighted-average vesting period and
contractual term of the option as the best estimate of the expected life of a
new option except in the case of our CEO, 5 or 10 years , and in the case of
contractors, 2 or 3 years). The Company performs a review of assumptions used in
the Black-Scholes option-pricing model on an annual basis. During the Company's
annual review of its volatility assumption in 2018, the Company determined that
it would be appropriate to use the Company's historical volatility since 2016,
as the DuPont Transaction resulted in significant changes in the Company's
business and capital structure. The change in assumption was effective January
1, 2018 and only impacts new options granted in 2018 and thereafter.
The estimates utilized in the Black-Scholes calculation involve inherent
uncertainties and the application of management judgment. These estimates are
neither predictive nor indicative of the future performance of our stock. As a
result, if other assumptions had been used, our recorded share-based
compensation expense could have been materially different from that reported. In
addition, because some of the options and restricted stock issued to employees,
consultants and other third-parties vest upon the achievement of certain
milestones, the total ultimate expense of share-based compensation is uncertain.
In connection with board member and employee terminations, the Company may
modify certain terms to outstanding share-based awards. We have recorded charges
related to these modifications based on the estimated fair value of the
share-based options immediately prior to and immediately after the modification
occurs, with any incremental value being charged to expense. We have used the
Black-Scholes pricing model in this valuation process, and this requires
management to use various assumptions and estimates. Future modifications to
share-based compensation transactions may result in significant expenses being
recorded in our consolidated financial statements.
Accounting for Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with ASC Topic 740 ("Topic 740"), "Income Taxes". Under this method,
income tax expense/(benefit) is recognized for: (i) taxes payable or refundable
for the current year and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity's financial
statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is provided to reduce the deferred tax
assets reported if based on
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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 .
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
$1,001,233. As of September 30, 2020, we have received 100% of the AMT refund.
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.

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Results of Operations
Three and Nine Months Ended September 30, 2020 Compared to the Same Periods in
2019
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 and nine
months ended September 30, 2020 and 2019:
                                      Three Months Ended September 30,                 Nine Months Ended September 30,
                                          2020                    2019                    2020                    2019
Revenue                           $         416,361          $   454,507          $       1,256,004          $ 1,247,908
Cost of research and development
revenue                                     266,929              384,803                  1,169,351            1,034,934
Provision for contract losses               112,433                    -                    187,388                    -



For the three months ended September 30, 2020, revenue and cost of research and
development revenue included eight on-going research collaborations compared to
five collaborations for the same period a year ago. The slight decreases
primarily were due to the smaller dollar amount for each project compared to the
same period a year ago. The increase in revenue and cost of research and
development revenue for the nine months ended September 30, 2020 reflected
twelve on-going research collaborations compared to eight collaborations for the
same period a year ago. The increase in provision for contract losses reflected
the activities of one biopharmaceutical collaboration research project.
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 September 30, 2020
increased to approximately $986,000 compared to $841,000 for the same period a
year ago. The increase primarily reflected additional costs of COVID-19 related
projects and other internal research projects.
Research and development expenses for the nine months ended September 30, 2020
increased to approximately $2,858,000 compared to $2,352,000 for the same period
a year ago. The increase primarily reflected additional costs of COVID-19
related projects and other internal research projects.
Research and development expenses - related party, for the three months ended
September 30, 2020, was none compared to approximately $102,000 for the same
period a year ago. The decrease was primarily due to the completion of research
projects conducted at BDI in 2019.
Research and development expenses - related party, for the nine months ended
September 30, 2020, was none compared to approximately $828,000 for the same
period a year ago. The decrease was primarily due to the completion of research
projects conducted at BDI in 2019.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30,
2020, increased 55.6% to approximately $1,643,000 compared to $1,056,000 for the
same period a year ago. The increase principally reflected increase in noncash
share-based compensation expenses of $236,000, legal and SEC registration
expenses of $217,000, accrued incentives of $54,000, insurance premium of
$46,000, and other increases of $34,000.
General and administrative expenses for the nine months ended September 30,
2020, increased 9.6% to approximately $4,772,000 compared to $4,355,000 for the
same period a year ago. The increase principally reflected increase in insurance
premium of $186,000, noncash share-based compensation expenses of $167,000,
legal and SEC registration expenses of $99,000, business development and
investor relations costs of $65,000, and other increases of $66,000, offset by
reductions in executive compensation costs and accrued incentives of $166,000.
Interest Income
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Interest income for the three months ended September 30, 2020 was approximately
$77,000 compared to $245,000 for the same period a year ago. The decrease was
primarily due to a decrease in interest rate and yield on the Company's
investment grade securities, which are classified as held-to-maturity.
Interest income for the nine months ended September 30, 2020 was approximately
$392,000 compared to $778,000 for the same period a year ago. The decrease was
primarily due to a decrease in 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 ended September 30, 2020 was approximately
$2,499,000 compared to $1,698,000 for the same period a year ago.
Net loss for the nine months ended September 30, 2020 was approximately
$7,365,000 compared to $6,569,000 for the same period a year ago.
Liquidity and Capital Resources
Our primary source of cash has been the cash received from the DuPont
Transaction in December 2015, interest income received from investment grade
securities, and funding from our research collaboration agreements. The
Company's liquidity was further improved with the receipt of an approximately
$0.5 million tax refund in June 2019 and an approximately $0.5 million
additional tax refund in July 2020 resulting from the elimination of corporate
Alternative Minimum Tax (AMT) under the TCJA.
Our ability to achieve profitability depends on a number of factors, including
our scientific results and our ability to continue to obtain funded research and
development collaborations from industry and government programs, as well as
sub-license agreements. We may continue to incur substantial operating losses
even if we begin to generate revenues from research and development and
licensing. Our primary future cash needs are expected to be for general
operating activities, including our business development and research expenses,
as well as additional costs as an SEC reporting and NASDAQ listed company. We
may decide to fund all or part of a Phase I clinical trial in order to
demonstrate the safety of the C1 expression platform in humans. There is no
assurance that funding would be available at acceptable terms, if at all.
We rely on our existing cash and cash equivalents, investments in debt
securities, and operating cash flow to provide the working capital needs for our
operations. We believe that our existing cash position and 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. However, in the event our financing needs for the
foreseeable future are not able to be met by our existing cash, cash equivalents
and investments, we would seek to raise funds through public or private equity
offerings, and through other means to meet our financing requirements.
On August 13, 2020, we entered into an Open Market Sale Agreement? with
Jefferies LLC, or Jefferies, with respect to an at the market offering program
under which we may offer and sell, from time to time at our sole discretion,
shares of our common stock at an aggregate offering price of up to $50.0 million
through Jefferies as our sales agent or principal. This program adds to our
financial flexibility to pursue additional opportunities that leverage the broad
application potential of C1. However, as of the date of this filing, there have
been no sales made under the Open Market Sale Agreement?, and we have no
immediate plans to sell any securities under this program to fund our near-term
business plan.
As of September 30, 2020, cash and cash equivalents were approximately $21.9
million compared to $4.8 million as of December 31, 2019. The carrying value of
short-term and long-term investment grade securities, including accrued interest
as of September 30, 2020 was approximately $8.7 million compared to $31.2
million as of December 31, 2019.
Net cash used in operating activities for the nine months ended September 30,
2020 of approximately $5.3 million was principally attributable to a net loss of
approximately $7.4 million, partially offset by share-based compensation
expenses of approximately $1.3 million, changes in tax receivable of
approximately $0.5 million, and amortization of held-to-maturity securities of
approximately $0.3 million.
Net cash used in operating activities for the nine months ended September 30,
2019 of approximately $4.4 million was principally attributable to a net loss of
$6.6 million, partially offset by share-based compensation expense of
approximately $1.0 million, changes in tax receivable of approximately $0.5
million, changes in other operating assets and liabilities of approximately $0.5
million, and amortization of held-to-maturity securities of approximately $0.2
million.
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Net cash provided by investing activities for the nine months ended September
30, 2020 was approximately $22.1 million compared to $6.4 million for the nine
months ended September 30, 2019. Cash flows from investing activities during the
nine months ended September 30, 2020 and 2019 were primarily related to proceeds
from maturities and purchases of investment grade debt securities.
Net cash provided by financing activities for the nine months ended September
30, 2020 was approximately $0.2 million compared to $0.3 million for the nine
months ended September 30, 2019. Cash flows from financing activities during the
nine months ended September 30, 2020 and 2019 were primarily related to proceeds
from exercise of options.

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