In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation of all periods presented. The results of the Company’s operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Since concluding the DuPont Transaction, theThe Company has conductedconducts business in one operating segment, which is identified by the Company based on how resources are allocated, and operating decisions are made. Management evaluates performance and allocates resources based on the Company as a whole.

Use of Estimates

The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the applicable period. Estimates inherent in the preparation of these consolidated financial statements include, but are not limited to, estimates related to revenue recognition, accrued expenses, stock-based compensation expense, and income taxes. The Company bases its estimates on historical experience and other market specific or other relevant assumptions it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from these estimates under different assumptions or conditions. Such differences could be material to the consolidated financial statements.

Concentrations and Credit Risk

The Company’s financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investment securities, and accounts receivable. At times, the Company has cash, cash equivalents, and investment securities at financial institutions exceeding the Federal Depository Insurance Company (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) insured limit on domestic currency and the Netherlands’ FDIC counterpart for foreign currency. The Company onlycurrently deals withfour reputable financial institutions and has not experienced any losses in suchthose accounts.

For each of the three months ended September 30, 2022March 31, 2023 and 20212022, the Company's revenue was generated from seven and eight customers. For each customers, respectively. Significant customers are those that account for greater than 10% of the Company's revenues. For the ninethree months ended September 30, 2022March 31, 2023 and 20212022, the Company’sthree and six significant customers accounted for approximately $626,000 or 67.0% and $512,000 or 95.9% of total revenue, was generated from thirteen customers.respectively. As of September 30, 2022March 31, 2023 and December 31, 20212022, the Company’s accounts receivable was from fourseven and eightsix customers, of which,three customers accounted for approximately $588,000 or 78.1% and $291,000 or 88.2% of the total accounts receivable, respectively. The loss of business from one or a combination of the Company’s customers could adversely affect its operations.

The Company conducts operations in the Netherlands through its foreign subsidiary and generates a portion of its revenues from customers that are located outside of the United States. For the three months ended September 30, 2022March 31, 2023 and 20212022, the Company had fourone and fivethree customer(s) outside of the United States (i.e., European and Asian customers) that accounted for approximately $154,288 or 16.5% and $136,000 or 25.5% of the revenue, respectively. 

As of March 31, 2023, the Company had three customers outside of the United States (i.e., European and Asian customers) that accounted for approximately $133,000100,000 or 16.0% and $478,000 or 69.1%13.3% of the revenue, respectively. For theaccounts receivable. As of nine months ended September 30,December 31, 2022and 2021, the Company had foursix and seven customers outside of the United States that accounted for approximately $509,00091,000 or 25.6% and $1,599,000 or 76.5% of the revenue, respectively. 

As of September 30, 2022, the Company had two customers outside of the United States (i.e., European and Asian customers) that accounted for approximately $43,000 or 17.8% of accounts receivable. As of December 31, 2021, the Company had four customers outside of the United States that accounted for approximately $157,000 or 56.4%27.4% of accounts receivable.

The Company uses several contract research organizations (“CROs”) to conduct its research projects. For the three months ended September 30, 2022March 31, 2023 and 20212022, three and twoCROs accounted for approximately $1,352,0001,076,000 or 99.5%95.0% and $1,982,0001,494,000 or 97.2% of total research services we purchased, respectively. For the nine months ended September 30, 2022 and 2021, three CROs accounted for approximately $4,146,000 or 97.4% and $6,621,000 or 96.9%96.7% of total research services we purchased, respectively. As of September 30, 2022March 31, 2023 and December 31, 20212022, three and two CROs accounted for approximately $714,000 $567,000 or 91.9%73.6% and $1,312,000$1,018,000 or 84.8%79.7% of the accounts payable, respectively. The loss of one CRO or a combination of the Company’s CROs could adversely affect its operations.

Cash and Cash Equivalents

We treat highly liquid investments with original maturities of three months or less when purchased as cash equivalents, including money market funds, which are unrestricted for withdrawal or use.

Investment Securities

The Company’s investment policy requires investment securities to be investment grade and held to maturity with the primary objective to maintain a high degree of liquidity while maximizing yield. The Company invests excess cash balances in short-term and long-term investment grade securities. Short-term investment securities mature within twelve (12) months or less, and long-term investment securities mature over twelve (12) months from the applicable reporting date. Management determines the appropriate classification of its investmentseach investment at the time of purchase and reevaluates the classifications at each balance sheet date.

The Company’sCompany classifies its investments in debt securities have been classified and accounted for as held-to-maturity. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost, net of allowance for credit losses if applicable, and adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized over the life of the related held-to-maturity security. When a debt security is purchased at a premium, both the face value of the debt and premium amount are reflected as investing outflow. Other-than-temporary

When evaluating an investment for other-than-temporary impairment, charges, if incurred,the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and whether it is more likely than not the Company will be includedrequired to sell the investment before recovery of the investment’s cost basis. The Company measures expected credit losses on held to maturity debt securities on an individual security basis. The estimate of expected credit losses considers historical credit information from external sources. The impairment of the investment that is related to the credit loss, if any, is expensed in other income (expense).the period in which the event or change occurred. 

The Company classifies its investments in money market funds as available-for-sale securities and presented as cash equivalents on the consolidated balance sheets. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, all of our money market funds were invested in U.S. Government money market funds. The Company’s investments in money market funds, have been classified and accounted for as available-for-sale securities and presented as cash equivalents onwhich the consolidated balance sheets. Therisk of loss is minimal. 

As of March 31, 2023, or December 31, 2022, the Company did not have any investment securities classified as trading as of September 30, 2022, or December 31, 2021.trading.

Accounts Receivable

Accounts receivable consist of billed receivables currently due from customers and unbilled receivables. Unbilled receivables represent the excess of contract revenue (or amounts reimbursable under contracts) over billings to date. Such amounts become billable in accordance with the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project.

OutstandingAccounts receivable are stated net of an allowance for credit losses, if deemed necessary based on the Company’s evaluation of collectability and potential credit losses. Management assesses the collectability of its accounts receivable using the specific identification of account balances are reviewed individually for collectability. Theand considers the credit quality and financial condition of its significant customers, historical information regarding credit losses and the Company’s evaluation of current and expected future economic conditions and changes in our customer collection trends. If necessary, an allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses inis recorded against accounts receivable such that the Company’s existingcarrying value of accounts receivable.receivable reflects the net amount expected to be collected. Accounts receivable balances are written off against the allowance for credit losses when the potential for collectability is considered remote. Substantially all of our accounts receivable were current and include unbilled amounts that will be billed and collected over the next twelve (12) months. There was no allowance for doubtful accountscredit losses as of September 30, 2022March 31, 2023, and December 31, 20212022.

Accounts receivable consist of the following:

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

Accounts Payable

Accounts payable consist of the following:

Accrued Expenses

Accrued expenses consist of the following:

Revenue Recognition

The Company has no pharmaceutical products approved for sale at this point. All of our revenue to date has been research revenue from third-party collaborations and government grants, as well as revenue from sublicensing agreements and collaborative arrangements, which may include upfront payments, options to obtain a license, payment for research and development services, milestone payments and royalties, in the form of cash or non-cash considerations (e.g., minority equity interest).

Revenue related to research collaborations and agreements: The Company typically performs research and development services as specified in each respective agreement on a best efforts basis, and recognizes revenue from research funding under collaboration agreements in accordance with the 5-step process outlined in ASC Topic 606 (“Topic 606”): (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue when we satisfy a performance obligation by transferring control of the service to a customer in an amount that reflects the consideration that we expect to receive. Depending on how the performance obligation under our license and collaboration agreements is satisfied, we elected to recognize the revenue either at a point in time or over time by using 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 based on the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation. The Company believes that the cost-based input method is the best measure of progress to reflect how the Company transfers its performance obligation to a customer. In applying the cost-based input method of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill the performance obligation. These costs consist primarily of full-time equivalent effort and third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations. 

A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods. 

Revenue related to grants: The Company may receive grants from governments, agencies, and other private and not-for-profit organizations. These grants are intended to be used to partially or fully fund the Company’s research collaborations, including opportunities arising in connection with COVID-19 that the Company is pursuing with certain collaborators. However, most, if not all, of such potential grant revenues, if received, is expected to be earmarked for third parties to advance the research required, including preclinical and clinical trials for SARS-CoV-2 vaccines and/or antibodies candidates. 

Revenue related to sublicensing agreements: If the sublicense to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue allocated to the license when technology is transferred to the customer and the customer is able to use and benefit from the license.

Customer options: If the sublicensing agreement includes customer options to purchase additional goods or services, the Company will evaluate if such options are considered material rights to be deemed as separate performance obligations at the inception of each arrangement. 

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 thesales-based royalties relate, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its sublicensing arrangements. 

We invoice customers based on our contractual arrangements with each customer, which may not be consistent with the period that revenues are recognized. When there is a timing difference between when we invoice customers and when revenues are recognized, we record either a contract asset (unbilled accounts receivable) or a contract liability (deferred research and development obligations), as appropriate. If upfront fees or considerations related to sublicensing agreement are received prior to the technology transfer, the Company will record the amount received as deferred revenue from licensing agreement. 

We are not required to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. 

The Company adopted a practical expedient to expense sales commissions when incurred because the amortization period would be one year or less.

Research and Development Costs

Research and development (“R&D”) costs are expensed as incurred. R&D costs are for the Company’s internally funded pharmaceutical programs and other governmental and commercial projects.

Research and development costs consist of personnel-related costs, facilities, research-related overhead, services from independent contract research organizations, and other external costs. Research and development costs, including related party, during the three and ninemonths ended September 30, 2022March 31, 2023 and 20212022 were as follows:

Foreign Currency Transaction Gain or Loss

The Company and its foreign subsidiary use the U.S. dollar as its functional currency, and initially measure the foreign currency denominated assets and liabilities at the transaction date. Monetary assets and liabilities are then re-measured at exchange rates in effect at the end of each period, and property and non-monetary assets and liabilities are convertedcarried at historical rates.

Fair Value Measurements

The Company applies fair value accounting for certain financial instruments that are recognized or disclosed at fair value in the financial statements. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

The Company’s financial instruments included cash and cash equivalents, investment in debt securities, accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred research and development obligations and deposits. The carrying amount of these financial instruments, except for investment in debt securities, approximates fair value due to the short-term maturities of these instruments. The Company’s short-term and long-term investments in debt securities are recorded at amortized cost, and their estimated fair value amounts are provided by the third-party broker service for disclosure purposes.

Non-Marketable Investments

The Company also holds investments in non-marketable equity securities of privately held companies, which usually do not have a readily determinable fair value. Our policy is to measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer such observable price changes may include instances where the investee issues equity securities to new investors, thus creating a new indicator of fair value, as an example. On a quarterly basis, we perform a qualitative assessment considering impairment indicators to evaluate whether these investments are impaired and also monitor for any observable price changes. If indicators of impairment exist, we will prepare a quantitative assessment of the fair value of our equity investments, which may include using both the market and income approaches which require judgment and the use of estimates, including discount rates, investee revenues and costs, and available comparable market data of private and public companies, among others. Valuations of such privately held companies are inherently complex and uncertain due to the lack of liquid market for the company’s securities. In addition, such investments are inherently risky in that such companies are typically at an early stage of development, may have no or limited revenues, may not be or may never become profitable, may not be able to secure additional funding or their technologies, services or products may not be successfully developed or introduced into the market.

Income Taxes

For the ninethree months ended September 30, 2022March 31, 2023, there werewas no provision for income taxes or unrecognized tax benefits recorded. As of September 30, 2022March 31, 2023 and December 31, 20212022, deferred tax assets were approximately $15.7$16.9 million and $13.0$15.5 million, respectively. Due to the Company’s history of operating losses and the uncertainty regarding our ability to generate taxable income in the future, the Company has established a 100% valuation allowance against deferred tax assets as of September 30, 2022March 31, 2023 and December 31, 20212022.

Other Income

The other income recognized duringFor the ninethree months ended September 30, March 31, 2023, other income of approximately $989,000 was related to the sale of the equity interest in Alphazyme, LLC. For the three months ended March 31, 2022, other income of $250,000 was related to a settlement payment we received from the termination of term sheet of a proposed license and collaboration.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other revenue, expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income (loss) under GAAP. The Company does not have any significant transactions that are required to be reported in other comprehensive income (loss), and therefore, does not separately present a statement of comprehensive income (loss) in its consolidated financial statements.

Stock-Based Compensation

We recognize all share-based payments to employees, consultants, and our board of directors (“Board of Directors”Directors (the “Board”), as non-cash compensation expense, in research and development expenses or general and administrative expenses in the consolidated statement of operations based on the grant date fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are recorded as they occur.

For performance-based awards, the Company recognizes related stock-based compensation expenses based upon its determination of the potential likelihood of achievement of the specified performance conditions at each reporting date.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common stock shares outstanding during the reporting period. Diluted net loss per share adjusts the weighted average number of common stock shares outstanding for the potential dilution that could occur if common stock equivalents, such as stock options were exercised and converted into common stock, calculated by applying the treasury stock method.

For the three months ended March 31, 2023, a total of 5,581,991 shares of potentially dilutive securities, including 163,044 shares of unvested restrict stock units and options to purchase 5,418,947 shares of common stock, were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive. For the ninethree months ended September 30,March 31, 2022, and 2021, the effect of the potential exercise of options to purchase 5,281,097 and 4,824,2155,425,040 shares of common stock respectively, werewas excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive.

Recently Adopted Accounting Pronouncements 

In June 2016, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued Accounting Standards Update (“ASU”(the “ASU”) 2016-13, Financial Instruments - —Credit Losses (Topic(Topic 326): Measurement of Credit Losses on Financial Instruments,. which modifiesreplaces the measurement ofincurred loss model with a forward-looking expected credit lossesloss (“CECL”) model and requires consideration of certain financial instruments.a broader range of reasonable and supportable information to estimate expected credit losses. ASU 2016-13 will be effective for the Company beginning in the first quarter of 2023. The Company does not expectapplies to financial assets, measured at amortized cost, including held-to-maturity debt securities and accounts receivable. ASU 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to members’ equity in the period of adoption. The Company adopted ASU 2016-13 and related amendments as of January 1, 2023, and the adoption of the new standard did not have a material impact on ourthe Company’s consolidated financial positions, results of operations, and cash flows.

In December 2019, the FASB issued ASU No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments of this update simplify the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The Company adopted ASU 2019-12 on January 1, 2021, and adoption of ASU 2019-12 did not have any material impact on our consolidated financial positions, results of operations, cash flows and related disclosures.statements.

Other pronouncements issued by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant to our consolidated financial statements.

Note 2:    Cash, Cash Equivalents, and Investments

The Company’s investments in debt securities are classified as held-to-maturity and are recorded at amortized cost, net of allowance for credit losses, and its investments in money market funds are classified as available-for-sale securities and presented as cash equivalents.equivalents on the consolidated balance sheets. The following table shows the Company’s cash, available-for-sale securities, and investment securities by major security type as of September 30, 2022March 31, 2023, and December 31, 20212022:

_________________

Notes:

(1) Definition of the three-level fair value hierarchy:

(2) All of our money market funds were invested in U.S. Government money market funds.

(3) Short-term investment securities will mature within 12 months or less, from the applicable reporting date.

(34) For the three months ended September 30, 2022March 31, 2023 and 2021,2022, the Company received discounts of $15,233 and paid discounts premiums of $5,072 and $0$20,850 to purchase held-to-maturity investment securities, respectively. For the nine monthsyear ended September 30,December 31, 2022and 2021, the Company paid premiumsreceived discounts of$24,198 and $283,940 $6,280 to purchase held-to-maturity investment securities, respectively. For the year ended December 31, 2021 the Company paid premium of $283,940 to purchase held-to-maturity investment securities.

(5) The Company considers the declines in market value of its investment portfolio to be temporary in nature. The Company’s investment policy requires investment securities to be investment grade and held to maturity with the primary objective to maintain a high degree of liquidity while maximizing yield. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of September 30,March 31, 2023 and December 31, 2022,, the Company doesdid not consider any of its investments to be other-than-temporarily impaired.impaired and no allowance for credit losses was recorded. 

Note 3:    Research and Collaboration Agreements, Sublicense Agreements, and Investments in Privately Held Companies

A Global Food IngredientCompany

On May 10, 2022, the Company entered into a Joint Development Agreement (the “JDA”) with a Global Food Ingredient Company (“GFIC”) to develop and manufacture a number ofseveral animal free ingredient products using the Company’s biotechnologies.

Under the terms of the JDA, Dyadic is to develop its proprietary production cell lines for the manufacture of animal free ingredient product candidates. The research collaboration will be fully funded by the GFIC in an amount approximating $4.1 million over two years. Dyadic will receive certain defined “Success Fees”“success fees” (the “Success Fees”), upon researching certain productivity and activity levels and milestones at different stages of the collaboration. Dyadic will also receive a “Commercialization Fee” (the “Commercialization Fee”) of low eight figures upon commercialization, and a royalty payment of low single digits based on commercial sales. 

The JDA can be terminated in its entirety oralong with any sublicense granted, in each case with or without cause by either party, within 90 business days after receipt of written termination notice.

Accounting Treatment 

The Company considered the guidance in ASC 808, Collaborative Arrangements (ASC 808) and determined the JDA is not applicable to such guidance. The Company concluded that GFIC represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the JDA. 

The Company identified the following promises under the JDA: (1) to provide agreed-upon research and development services with GFIC’s proteins; (2) to nominate a project manager and two additional steering committee members to meet at least quarterly to review the project’s status; (3) to grant a R&D license in consideration of GFIC’s payment of Service Fees and its other project obligations; and (4) to grant a commercial license in consideration of and subject to GFIC’s payment of the commercialization fee and royalties. 

The Company concluded that, while participation on the joint steering committee was capable of being distinct from other promises, such participation is considered to be part of the research and development services and does not constitute the transfer of a good or service within the context of the JDA. Additionally, the Company concluded that the promise to grant a commercial license is a contingent promise based upon the success of the research project which is outside the control of both the Company and the GFIC, and therefore, it should be accounted for in the same way as a customer option. The Company further concluded that the contingent promise to grant a commercial license is not considered a material right and does not give rise to a separate performance obligation. 

Based on management’s assessment, the Company concluded the agreed-upon research and development services and the R&D license under the R&D plan should be combined and accounted for as one single performance obligation in consideration of the service fees. Accordingly, the Company records the service fees as research and development revenue using the cost-based input method in accordance with the Company’s policy (see Note 1). 

Under the JDA, the Company is also eligible to receive Success Fees upon certain milestones, a Commercialization Fee upon commercialization, and future sales-based royalty payments. The Success Fees are considered constrained variable considerations and excluded from the transaction price at inception. The Company will re-evaluate the Success Fees and estimate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The Company will not recognize revenue related to the Commercialization Fee and sales-based royalty until the associated event occurs.

For the three and nine months ended September 30, 2022March 31, 2023, the Company recorded research and development revenues of approximately $339,000$339,000 and $452,000, respectively,Success Fees of approximately $65,500 in connection with the JDA.JDA.

Phibro/Abic

On February 10, 2022, the Company entered into an exclusive sub-license agreement with Abic Biological Laboratories Ltd. (“Abic”), an affiliate of Phibro Animal Health Corporation (“Phibro”) to provide services for a targeted disease (the “Phibro/Abic Agreement”). The Phibro/Abic Agreement was an addendum to the initially non-exclusive sub-license agreement the Company signed with Phibro on July 1, 2020. According to the Phibro/Abic Agreement, the Company received an exclusivity payment of $100,000 in April 2022. In July 2022, the Company expanded the license agreement to include an additional research project to develop another animal vaccine for livestock. 

Phibro/Abic may terminate the Phibro/Abic Agreement in its entirety, or any sublicense granted, in each case with or without cause at any time upon 90 daysdays’ prior written notice to Dyadic.

Accounting Treatment

The Company considered the guidance in ASC 808, Collaborative Arrangements (ASC 808) and determined the Phibro Agreement is not applicable to such guidance. The Company concluded that Phibro/Abic represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Phibro/Abic Agreement. 

The Company identified the following obligations under the Phibro/Abic Agreement: (1) an exclusive right to utilize the C1-cell protein production platform for certain disease; (2) our obligation to provide agreed-upon research and development services; (3) research report to be provided to Phibro/Abic based on the requirements of the agreement.

Based on management’s assessment, the Company concluded two performance obligations should be accounted for separately: (1) the agreed-upon research and development services, and (2) the right to exclusively access and use C1-cell protein production platform for certain disease.

Accordingly, the Company records the R&D services as research and development revenue using the cost-based input method in accordance with the Company’s policy (see Note 1). 

Under the Phibro/Abic Agreement, the Company has received an exclusivity payment in April 2022 and is eligible to receive an exclusivity payment of $100,000, certain milestone payment upon regulatory approval, and future sales-based royalty payments. The milestone payment is considered constrained variable consideration and excluded from the transaction price at inception. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The Company will not recognize revenue related to sales-based royalty until the associated event occurs. As of March 31, 2023, there were no events or circumstances that would change the transaction price and no milestone or royalty payments have been recognized. 

For the three and nine months ended September 30, 2022, the Company recorded $0 and $100,000, respectively, from the exclusivity payment as license revenue. For the three and nine months ended September 30, 2022, the Company recorded research and development revenues of approximately $32,000 and $86,000, respectively, in connection with the Phibro/Abic Agreement.

Janssen

On December 16, 2021, the Company entered into a Research, License, and Collaboration Agreement (the “Janssen Agreement”) for the manufacture of therapeutic protein candidates using its C1-cell protein production platform with Janssen Biotech, Inc., one of the Janssen Pharmaceutical Companies of Johnson & Johnson (“Janssen”). Pursuant to the terms of the Janssen Agreement: (i) Janssen will pay Dyadic an upfront payment of $500,000 for a non-exclusive license to utilize the C1-cell protein production platform to develop C1 production cell lines for the manufacturing of Janssen’s therapeutic protein candidates against several biologic targets, (ii) Janssen will provide R&D funding up to €1.6 million to develop and assess C1 production cell lines for its product candidates, (iii) Janssen will have an option to pay a mid-seven figure payment for an exclusive license from Dyadic to use the C1-cell protein production platform for the manufacturing of therapeutic proteins directed to one specific target, and upon exercise, Janssen would have the right to add additional non-exclusive targets to the collaboration and Dyadic would complete the technology transfer of the C1-cell protein production platform, fully enabling Janssen to internally develop C1 cell lines against licensed targets, and upon successful completion of the technology transfer, Dyadic is eligible to receive a milestone payment in the low seven figures, (iv) for each product candidate, Dyadic could receive development and regulatory milestones in the mid-seven figures, and (v) Dyadic could receive aggregate commercial milestone payments in the low nine figures per product, subject to a limit on the number of such products, with the amount depending on the cumulative amount of active pharmaceutical ingredient produced by Janssen for each product manufactured with Dyadic’s C1-cell protein production platform. 

Janssen may terminate the Janssen Agreement in its entirety, or on a country-by-country or other jurisdiction-by-other jurisdiction basis, for any or no reason, upon 90 days’ prior written notice to Dyadic.

Accounting Treatment

The Company considered ASC 808, Collaborative Arrangements (ASC 808) and determined the Janssen Agreement is not applicable to such guidance. The Company concluded that Janssen represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Janssen Agreement. 

The Company identified the following promises under the Janssen Agreement: (1) a right to access the C1-cell protein production platform; (2) our obligation to provide agreed upon research and development services under the R&D Funding; (3) participation in the joint steering committee; (4) the reservation of targets; (5) the grant of option to obtain a research license of intellectual property and know-how rights of its C1-cell protein production platform to produce target proteins; (6) our obligation to complete tech transfer activities upon the exercise of a research license; and (7) the options to obtain a commercial license and an exclusive license on specific targets. 

The Company concluded that the research and development services under the R&D Funding represents a separate unit of account, because it is a prerequisite to the license agreement and a third-party contract research organization will be used to conduct the research. The Company also concluded that, while participation on the joint steering committee was capable of being distinct, participation is part of the research and development services and does not constitute the transfer of a good or service to Janssen within the context of the contract. 

Other promises including the reservation of targets and tech transfer are not capable of being distinct from the licenses within the context of the contract and should therefore not be treated as a separate performance obligation. Additionally, at contract inception, the Company evaluated Janssen’s options for a research license, commercial license and to exercise exclusive rights on certain targets in order to determine whether these options to purchase additional license rights at their standalone selling prices provide a material right (i.e., an optional good or service offered for free or at a discount) to the customer. The Company concluded that these options in the Janssen Agreement are not material rights and do not give rise to a separate performance obligation. Instead, these options are deemed as marketing offers, and additional option fee payments are recognized or being recognized as revenue when Janssen exercises the option. The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes. 

Based on management’s assessment, the Company concluded two performance obligations should be accounted for separately: (1) the agreed-upon research and development services, and (2) the right to access C1-cell protein production platform under the research plan. Accordingly, the Company records the €1.6 million of R&D Funding as research and development revenue using the cost-based input method in accordance with the Company’s policy (see Note 1). 

As noted above, the Company received a non-refundable upfront payment of $0.5 million to reserve the initial protein targets until Janssen decides to exercise an option to license in the future, which represents a right to access the C1-cell protein production platform prior to using it. The Company recognizes the upfront payment of $0.5 million over the target reservation period, during which Janssen can obtain a research and/or commercial license and/or an exclusive license on specific targets or recognize in full when the contract is terminated. 

The Company also excluded option exercise fees and future milestone payments that the Company was eligible to receive under the Janssen Agreement, from the initial transaction price. The Company will not recognize revenue related to option exercise payments and future milestone payments until the associated event occurs, or relevant thresholds are met. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

As of September 30, 2022March 31, 2023, the upfront payment was recorded in deferred license revenue, current and non-current portion in the amount of approximately $176,000 and $221,000132,000, respectively. For the three and ninemonths ended September 30, March 31, 2023 and 2022, the Company recognized approximately $44,000 and $103,000$15,000 of the upfront payment as license revenue, respectively. For the three and nine months ended September 30, March 31, 2023 and 2022, the Company recorded research and development revenues of $172,000approximately $189,000 and $418,000,$15,000, respectively, in connection with the Janssen Agreement.

IDBiologics, Inc. 

On July 8, 2020, the Company entered into a Common Stock Purchase Agreement (the “IDBiologics Agreement”) with IDBiologics, Inc (“IDBiologics”). IDBiologics is a private biotechnology company focused on the development of human monoclonal antibodies for the treatment and prevention of serious infectious diseases. The Company was founded in 2017 and seeded by Vanderbilt University Medical Center in response to the repeated threats of epidemics around the world including Ebola in West Africa and Zika in the Americas. IDBiologics is developing a portfolio of monoclonal antibodies against SARS-CoV-2, influenza and Zika viruses.

Pursuant to the term of the IDBiologics Agreement, on July 8, 2021,Dyadic received 129,661 shares of IDBiologics’ common stock, which represent 0.37% of IDBiologics’ outstanding equity, in exchange of a feasibility study performed by Dyadic. Dyadic provided services including the use of Dyadic’s C1-cell technology to express a SARS-CoV-2 monoclonal antibody which IDBiologics licensed from the Vanderbilt Vaccine Center. The Company determined not to record the basis for its equity interest in IDBiologics because the fair value amount of the service provided is considered immaterial. 

The Company evaluated the nature of its equity interest in IDBiologics and determined that IDBiologics is a Variable Interest Entity (“VIE”) due to the capital structure of the entity. However, the Company is not the primary beneficiary of IDBiologics as Dyadic does not have the power to control or direct the activities of IDBiologics that most significantly impact the VIE. As a result, the Company does not consolidate its investment in IDBiologics.

On April 25, 2021, the Company entered into a project agreement (the “Project Agreement”) to provide additional research services to IDBiologics. For thethree and nine months ended September 30, March 31, 2023 and 2022, the Company recognized approximately $0 and $109,000, respectively, of research and development revenue related to IDBiologics. 

 As of September 30, 2022, the Company does not consider its investment in IDBiologics to be impaired, as there was no event or transaction that would change the value of this investment.

Alphazyme

On May 5, 2019, the Company entered into a sub-license agreement (the “Alphazyme Sub-License Agreement”) with Alphazyme, LLC (“Alphazyme”). Under the terms of the Alphazyme Sub-License Agreement, the Company has granted to Alphazyme, subject to the terms of the license agreement entered into between the Company and Danisco US, Inc. on December 31, 2015, a sub-license to certain patent rights and know-how related to Dyadic’s proprietary C1-cell protein production platform for the purpose of commercializing certain pharmaceutical products that are used as reagents to catalyze a chemical reaction to detect, measure, or be used as a process intermediate to produce a nucleic acid as a therapeutic or diagnostic agent.

On June 24, 2020, the Company entered into an Amended and Restated Non-Exclusive Sub-License Agreement (the “Amended Sub-License Agreement”) with Alphazyme to amend and restate the Alphazyme Sub-License Agreement. Pursuant to the Amended Sub-License Agreement and in consideration of Dyadic’s transfer of its C1-cell protein production platform, Alphazyme issued 2.50%2.5% of the Class A shares of Alphazyme to Dyadic, and Dyadic became a party to the Alphazyme Limited Liability Company Agreement pursuant to which the Company will agree to certain customary rights, covenants and obligations. In addition, and subject to achieving certain milestones, Alphazyme is obligated to pay a potential milestone payment and royalties on net sales, if any, which incorporate Dyadic’s proprietary C1-cell protein production platform. 

On December 1, 2020, an Amended and Restated Limited Liability Company Agreement with Alphazyme (the “Amended Alphazyme LLC Agreement”) was entered into. Under the Amended Alphazyme LLC Agreement, Alphazyme obtained additional capital contribution from a third-party and Dyadic’s ownership was diluted to 1.99%. As a result, the Company recorded a gain of $284,709 as its basis of investment in Alphazyme.

The Company evaluated the nature of its equity interest investment in Alphazyme and determined that Alphazyme is a VIE due to the capital structure of the entity. However, the Company is not the primary beneficiary of Alphazyme as Dyadic does not have the power to control or direct the activities of Alphazyme that most significantly impact the VIE. As a result, the Company does not consolidate its investment in Alphazyme. The Company reports its investment in Alphazyme under the cost method of accounting, given that it does not have the ability to exercise significant influence or control over Alphazyme. 

 As of September 30, 2022, the Company does not consider its investment in Alphazyme to be impaired, as there was no event or transaction that would change the value of this investment.

BDI

On June 30, 2017,January 18, 2023, the Company entered into a strategic Research Services Agreement (the “RSA”) with Biotechnology Developments for Industry in Pharmaceuticals, S.L.U. (“BDI Pharma”), and with VLP The Vaccines Company, S.L.U. (“VLPbio”), both of which are subsidiaries of Biotechnology Developments for Industry, S.L., a Spanish biotechnology company (“BDI Holdings” and together with BDI Pharma and VLPbio, “BDI”).

The Company paid EUR €1.0 million (the “RSA Initial Payment”) in cash to engage BDI to develop designated C1 based product candidates and further improve the C1 manufacturing process, in consideration of which Dyadic also received a 16.1% equity interest in BDI Holdings and a 3.3% equity interest in VLPbio. Under the RSA, BDI is obligated to spend a minimum amount of EUR €936,000 over two years for the research and development project. 

The Company concluded that BDI is not a VIE, because BDI has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest. Additionally, Dyadic is not the primary beneficiary of BDI as Dyadic does not have the power to control or direct the activities of BDI or its operations. As a result, the Company does not consolidate its investments in BDI, and the financial results of BDI are not included in the Company’s consolidated financial results. 

The Company performed a valuation analysis of the components of the transaction and concluded that the fair value of BDI equity interest was considered immaterial, the RSA Initial Payment of approximately USD $1.1 million (EUR €1.0 million) was accounted for as a prepaid research and development collaboration payment on our consolidated balance sheet, and the collaboration payment under the RSA paid by Dyadic were expensed as the related research services were performed by BDI.

On July 26, 2021, the Company entered (i) a Sale andSecurities Purchase of Shares Agreement, under which the Company agreed to sell its 16.1% equity interest in BDI Holdings, and (ii) aAlphazyme, LLC (the “Alphazyme Sale and Purchase of Shares Agreement under which the Company agreed to sell its 3.3% equity interest in VLPBio (together the “BDI Sale”Agreement”). In connection with the closing of the BDI Sale, the Company received approximately $1.6 million, net of transaction and legal expenses in August 2021. The gain generated from the BDI Sale was recorded in other income.

In connection with the BDI Sale, the Company also entered into an amendmenthas the potential to receive additional payments based on the future sales of Alphazyme’s existing products, pursuant to the Service FrameworkAlphazyme Sale Agreement. The Amended Sublicense Agreement (the “Amended SFA”) with BDI Pharma.between Dyadic and Alphazyme, which was previously entered on June 24, 2020, remains in effect. Under the Amended SFA, the Company maintains the right to engage in research and development projects at BDI Pharma until June 30, 2025, with the non-compete term extending to June 30, 2030, without any other material terms and conditions changed.

For the three and nine months ended September 30, 2022, there was no research and development expense related to BDI.

Novovet and Luina Bio

On April 26, 2019, the Company entered into a sub-license agreement (the “Luina Bio Sub-License Agreement”) with Luina Bio Pty Ltd. (“Luina Bio”) and Novovet Pty Ltd (“Novovet”). Under the terms of the Luina BioAlphazyme Sub-License Agreement, Dyadic is entitled to potential milestone and royalty payments upon the Company granted to Novovet, subject to the termscommercialization of the license agreement entered into between the Company and Danisco US, Inc. on December 31, 2015, a worldwide sub-license to certain patent rights and know-how related toAlphazyme products using Dyadic’s proprietary C1-cell protein production platform for the exclusive and sole purposeplatform. As of commercializing certain targeted antigen and biological products for the prevention and treatment of various ailments for companion animalsMarch 31, 2023, no milestones or royalty payments have been recognized.

In consideration of January 2023, the license granted pursuant to the Luina Bio Sub-License Agreement, DyadicCompany received a 20% equity interestcash payment of approximately $1.27 million and recognized a gain of approximately $989,000 in Novovet (“Novovet Up-Front Consideration”) in accordanceother income associated with the terms of Novovet’s Shareholder Agreement (“Shareholders Agreement”) and will receive a percentage of royalties on future net sales and non-sales revenue, if any, which incorporates Dyadic’s proprietary C1-cell protein production platform.sale.

The Company evaluated the nature of its equity interest investment in Novovet and determined that Novovet is a VIE, because Novovet does not have sufficient equity to finance its activities without additional financial support from third party investors or lenders. However, the Company is not the primary beneficiary of Novovet as Dyadic does not have the power to control or direct the activities of Novovet that most significantly impact the VIE. As a result, the Company will not consolidate its investment in Novovet, but account for under the equity method investment, given that it has the ability to exercise significant influence, but not control, over Novovet. 

To date Novovet has not raised the capital required to move this opportunity forward, and therefore, the Company has not transferred its C1-cell protein production platform to Novovet. Therefore, the Novovet Up-Front Consideration received under the Luina Bio Sub-License Agreement, in the form of a 20% equity interest in Novovet, does not yet meet the revenue recognition criteria under ASC 606.

On February 15, 2022, the Company sent a letter to Luina Bio Pty Ltd and Novovet Pty Ltd, indicating its intention to terminate the Luina Bio Sub-License Agreement.

On June 29, 2022, the Company sent a letter to Luina Bio Pty Ltd and Novovet Pty Ltd, to transfer our shares of Novovet Pty Ltd back to Novovet pursuant to the Shareholders Agreement.

Note 4:    Commitments and Contingencies

Legal Proceedings

We are not currently involved in any litigation that we believe could have a materially adverse effect in our financial condition or results of operations. From time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers immaterial, individually and in the aggregate. The Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The requirement for these provisions is reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable and costly. Protracted litigation and/or an unfavorable resolution of one or more of proceedings, claims or investigations against the Company could have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations.

Note 5:    Share-Based Compensation

Description of Equity Plans

The 2021 Equity Incentive Award Plan (the “2021 Plan”) was adopted by the Company's Board of Directors on April 9, 2021 and approved by the Company’s Annual Meeting of Shareholders (the “Annual Meeting”) on June 11, 2021. The 2021 Plan serves as a successor to the Company’s 2011 Equity Incentive Plan (the “2011 Plan”). Since the effective dateadoption of the 2021 Plan, all equity awards were made from the 2021 Plan and no additional awards will be granted under the 2011 Plan. The 2021 Plan provides for the issuance of a variety of share-based compensation awards, including stock options, restricted stock awards, restricted stock unit awards, performance awards, dividend equivalents awards, deferred stock awards, stock payment awards and stock appreciation rights. As of April 16, 2021, the 2021 Plan increased the number of shares available for the grant of stock options, restricted stock awards and other awards by 3,000,000 in addition to the number of shares remaining available for the grant of new awards under the 2011 Plan as of April 16, 2021.2011.

As of September 30, 2022March 31, 2023, the Company had 5,281,0975,418,947 stock options outstanding and an additional 3,522,561163,044 unvested restricted stock units in addition to 2,873,706 shares of common stock available for grant under the 2021 Plan. As of December 31, 20212022, there were 4,774,2155,031,097 stock options outstanding and an additional 4,263,386in addition to 3,672,561 shares of common stock available for grant under the 2021 Plan.

Stock Options 

Options are granted to purchase common stock at prices that are equal to the fair value of the common stock on the date the option is granted. Vesting is determined by the Board of Directors at the time of grant. The term of any stock option awards under the Company’s 2011 Plan and 2021 Plan is ten years, except for certain options granted to the contractors which are either one or three years. 

The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the award as if the award was, in substance, multiple awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the following. 

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury rates with securities approximating the expected lives of options at the date of grant.

Expected dividend yield. The expected dividend yield is zero, as the Company has never paid dividends to common shareholders and does not currently anticipate paying any in the foreseeable future.

Expected stock price volatility. The expected stock price volatility was calculated based on the Company’s own volatility since the DuPont Transaction. The Company reviews its volatility assumption on an annual basis and has used the Company’s historical volatilities since 2016, as the DuPont Transaction resulted in significant changes in the Company’s business and capital structure. 

Expected life of option. The expected life of option was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The Company uses the weighted average vesting period and contractual term of the option as the best estimate of the expected life of a new option, except for the options granted to the CEO (i.e., 5 or 10 years) and certain contractors (i.e., 1 or 3 years). 

The assumptions used in the Black-Scholes option pricing model for stock options granted during the ninethree months ended September 30, 2022March 31, 2023 are as follows:

The following table summarizes the stock option activities during the ninethree months ended September 30, 2022March 31, 2023:

_________________

Notes:

(1) Represents the following stock options granted:

(2) Represents the following stock options expired: 

Restricted Stock Units

Restricted stock units (the “RSUs”) are granted subject to certain restrictions. Vesting conditions are determined at the discretion of the Board of Directors. The fair market value of RSUs is generally determined based on the closing market price of the stock on the grant date.

On January 3, 2023, the Company granted 247,961 RSUs fully vested, to executives and key personnel in lieu of cash bonus earned for the year ended 2022. The Company also granted 163,044 RSUs, vesting upon one year anniversary of the grant, to the Board of Directors as a result of reduction in director cash compensation for 2023. The grant of these RSUs was approved by the Compensation Committee of the Board of Directors in November 2022. The weighted average fair value for the RSUs is $1.38.

Compensation Expenses

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

For performance-based awards, the Company recognizes related stock-based compensation expenses based upon its determination of the potential likelihood of achievement of the specified performance conditions at each reporting date.

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