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Item 7. Management’s Discussion and Analysis

2025-03-26 compared with 2024-03-28 · 61 added, 60 removed, 121 unchanged (50% of the section changed)

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Dyadic International, Inc.

(“Dyadic”, “we”, “us”, “our”, or the “Company”) is a global biotechnology company based in Jupiter, Florida with operations in the United States and a satellite office in the Netherlands, and it utilizes several third-party consultants and research organizations to carry out the Company’s activities.

Over the past two plus 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 SA, BASF SE, Codexis, Inc.

(“Dyadic”, “we”, “us”, “our”, or the “Company”) is a global biotechnology platform company based in Jupiter, Florida with operations in the United States and a satellite office in the Netherlands, and it utilizes several third-party consultants and contract research organizations to carry out the Company’s activities.

Over the past two plus decades, the Company developed a gene expression platform for producing commercial quantities of industrial enzymes and other proteins, and previously licensed this technology to third parties, such as Abengoa Bioenergy SA, BASF SE, Codexis, Inc.

and others, for use in industrial (non-pharmaceutical) applications.

This technology is based on the Thermothelomyces heterothallica (formerly known as Myceliophthora thermophila ) fungus, which the Company named C1.

On December 31, 2015, the Company sold its industrial technology business to Danisco USA (“Danisco”), the industrial biosciences business of DuPont (NYSE:

DD) (the “DuPont Transaction”).

As part of the DuPont Transaction, Dyadic retained co-exclusive rights to the C1-cell protein production platform for use in all human and animal pharmaceutical applications, and currently the Company has the exclusive ability to enter into sub-license agreements (subject to the terms of the license and to certain exceptions) for use in all human and animal pharmaceutical applications.

Danisco retained certain rights to utilize the C1-cell protein production platform 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 building innovative microbial platforms to address the growing demand for global protein bioproduction and unmet clinical needs for effective, affordable, and accessible biopharmaceutical products for human and animal health and for other biologic products for use in non-pharmaceutical applications.

The C1-cell protein production platform is a robust and versatile thermophilic filamentous fungal expression system for the development and production of biologic products including enzymes and other proteins for human and animal health.

Some examples of human and animal vaccines and drugs which have the potential to be produced from C1-cells are protein antigens, ferritin nanoparticles, virus-like particles (“VLPs”), monoclonal antibodies (“mAbs”), Bi/Tri-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 which are designed to leverage its C1-cell protein production platform to develop innovative vaccines and drugs, biosimilars and/or biobetters.

The Company also developed the Dapibus™ thermophilic filamentous fungal based microbial protein production platform to enable the rapid development and large-scale manufacture of low-cost proteins, metabolites, and other biologic products for use in non-pharmaceutical applications, such as food, nutrition, and wellness.

For the past nine years since the Company sold its industrial technology business to Danisco USA (“Danisco”), the industrial biosciences business of DuPont (NYSE:

DD) (the “DuPont Transaction”), the Company has been focused on building innovative microbial protein production platforms to address the growing demand for global protein bioproduction and unmet clinical needs for effective, affordable, and accessible biopharmaceutical products for human and animal health and for other biologic products for use in non-pharmaceutical applications.

As part of the DuPont Transaction, Dyadic retained co-exclusive rights to its proprietary and patented C1 protein production platform (the “C1 platform”) for use in all human and animal pharmaceutical applications, and currently, the Company has the exclusive ability to enter into sub-license agreements (subject to the terms of the license and to certain exceptions) for use in all human and animal pharmaceutical applications.

Danisco retained certain rights to utilize the C1 platform 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.

After the DuPont Transaction, the Company has directed its efforts toward advancing the C1 platform to address the increasing global demand for the development and manufacturing of prophylactic and therapeutic biopharmaceuticals for human and animal health.

The Company’s biopharmaceutical development efforts have been centered on enhancing the capability of the C1 platform to produce stable, properly folded, and functional proteins for pharmaceutical applications, including vaccines and monoclonal antibodies.

In addition to improving the quality and productivity of the C1 platform, the Company has sought to validate its platform for human use through a series of fully funded biopharmaceutical projects, extensive animal studies utilizing C1-produced proteins, and in 2024, the successful completion of a Phase 1 first-in-human study for a vaccine antigen produced using C1, which demonstrated its safety for human applications.

Recognizing the longer development timelines, clinical testing, and regulatory requirements associated with human and animal pharmaceutical products, the Company has refined its core business strategy to expand into recombinant (non-animal derived) alternative proteins for non-pharmaceutical applications in research, nutrition, and industrial markets.

To address these opportunities, the Company has developed and launched the Dapibus™ Protein Production Platform (“Dapibus™”), which supports various applications within the alternative proteins field, namely in Life Sciences, Food & Nutrition, and Bioindustrial applications.

Given the reduced developmental costs, shorter timelines, and fewer regulatory requirements associated with alternative proteins, Dapibus™ has enabled the Company to generate near-term recurring revenue while continuing to build long-term value through C1 for pharmaceutical applications.

The Company anticipates achieving commercialization of certain alternative protein products in 2025 through a combination of existing collaborations and internal manufacturing efforts.

Critical Accounting Estimates

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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.

With respect to licenses deemed to be the predominant item to which the sales-based royalties relate, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

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For purposes of the calculation, we assumed that no dividends would be paid during the life of the options.

We also used the weighted-average vesting period and contractual term of the option as the best estimate of the expected life of a new option, except for the options granted to the CEO (i.e., 5 or 10 years) and certain contractors (i.e., 1 or 3 years).

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.

The expected stock price volatility was calculated based on the Company’s own volatility since the DuPont Transaction.

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Cost of research and development revenue

For the years ended December 31, 2023 and 2022 , the Company’s revenue was generated from sixteen and fourteen collaborations, respectively.

The decrease in revenue and cost of research and development revenue was due to higher individual contract amounts on certain research funding and related work performed during 2022.

The license revenue for the year ended December 31, 2023 was in connection with the Janssen license agreement, and for the year ended December 31, 2022 was in connection with the Phibro/Abic and Janssen license agreements.

For the years ended December 31, 2024 and 2023, the Company’s revenue was generated from 19 and 16 collaborations, respectively.

The decrease in research and development revenue and cost of research and development revenue was due to higher individual contract amounts on certain research funding and related work performed during 2023.

The license revenue for the year ended December 31, 2024 was in connection with the Inzymes and Proliant license agreements, and for the year ended December 31, 2023 was in connection with the Janssen license agreement.

Research and Development Expenses

Research and development costs are expensed as incurred and primarily include salary and benefits of research personnel, third-party contract research organization services and supply costs.

Research and development expenses for the year ended December 31, 2023 decreased to $3.3 million compared to $4.5 million for the year ended December 31, 2022.

The decrease primarily reflected the winding down of activities related to the Company’s Phase 1 clinical trial of DYAI-100 COVID-19 vaccine candidate.

Research and development expenses for the year ended December 31, 2024 decreased to $2,044,000 compared to $3,297,000 for the year ended December 31, 2023.

The decrease was due to the completion of activities related to the Company’s Phase 1 clinical trial of DYAI-100 COVID-19 vaccine candidate.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2023, decreased to $5.8 million compared to $6.4 million for the year ended December 31, 2022.

The decrease principally reflected a decrease in management incentives of $466,000, business development and investor relations costs of $219,000, and legal expenses of $39,000, partially offset by increases insurance premiums of $96,000, and other increases of $24,000.

General and administrative expenses for the year ended December 31, 2024 increase d to $6,135,000 compared to $5,817,000 for the year ended December 31, 2023 .

The increase reflected increases in business development and investor relations expenses of $294,000, share-based compensation expenses of $109,000, professional service expenses of $82,000, and other increases of $84,000, partially offset by decreases in management incentive expenses of $124,000, legal expenses of $65,000 and insurance expenses of $64,000.

Foreign Currency Exchange

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The decrease reflected the currency fluctuation of the Euro in comparison to the U.S.

Interest Income

Interest income for the year ended December 31, 2023, increased to $417,000 compared to $180,000 for the year ended December 31, 2022.

The increase was primarily due to an increase in interest rates and yield on the Company’s investment grade securities, which are classified as held-to-maturity.

For the year ended December 31, 2023, the Company had a gain of approximately $1.0 million from the sale of the Company’s equity interest in Alphazyme, LLC.

For the year ended December 31, 2022, the Company received a settlement payment of $250,000 from the termination of a proposed license and collaboration.

The Company had net operating loss (“NOL”) carryforwards available as of December 31, 2023 and 2022, in the amount of approximate ly $45.9 million and $44.0 million, respectively.

Approximately $42.9 milli on of the net operating loss carryforwards will be carried forward indefinitely and will be available to offset 80% of taxable income.

Loss from Operations

Loss from operations for the year ended December 31, 2024, decreased to $5,901,000 compared to $8,230,000 f or the year ended December 31, 2023.

The decrease in loss from operations was largely due to an increase in licensing revenue of $1,000,000 from Proliant and $890,000 from Inzymes, including success fees in 2024 and the above-discussed decrease in research and development expenses associated with the completion of activities related to the Company’s Phase 1 clinical trial of DYAI-100 COVID-19 vaccine candidate.

Other Income, Net

For the year ended December 31, 2024, the total other income, net, of $92,000 compared to $1,434,000 for the year ended December 31, 2023.

The decrease was largely due to an increase in interest expenses of $428,000 related to the Convertible Notes in 2024 and a gain on the sale of the Company’s equity interest in Alphazyme, LLC of $1,018,000 in 2023.

The Company had net operating loss (“NOL”) carryforwards available as of December 31, 2024 and 2023 , in the amount of approximately $49,903,000 and $45,850,000, respectively.

Approximately $46,965,000 of the NOL carryforwards will be carried forward indefinitely and will be available to offset 80% of taxable income.

The remaining amount of the net operating loss carryforwards will expire at varying dates through 2038.

Net loss for the year ended December 31, 2023 was $6.8 million compared to a net loss of $9.7 million for the year ended December 31, 2022.

The decrease in net loss of $2.9 million was principally due to decreases in research and development expenses of $1.2 million, general and administrative expenses of $605,000, and partially offset by an increase in other income of $768,000.

Net loss for the year ended December 31, 2024 was $ 5,809,000 compared to a net loss of $6,795,000 for the year ended December 31, 2023 .

The decrease in net loss of $986,000 was principally due to an increase in license revenue of $1,537,000 and a decrease in research and development expenses of $1,253,000, partially offset by an increase in general and administrative expenses of $318,000 and a decrease in other income of $1,343,000.

Liquidity and Capital Resources

Our primary source of cash to date has been the cash received from the DuPont Transaction in 2015, interest income received from investment grade securities, revenues from our research collaboration agreements and license agreements, and funds from the exercise of employee stock options.

For the year ended December 31, 2023, the Company received $1.3 million from the sale of its equity interest in Alphazyme, LLC and $600,000 upfront payment for a product development and licensing agreement.

On March 8, 2024, the Company sold and issued an aggregate principal amount of $6.0 million of its 8.0% Senior Secured Convertible Promissory Notes due March 8, 2027 (the “Convertible Notes”) in a private placement in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

The purchasers of the Convertible Notes include immediate family members and family trusts related to Mark Emalfarb, our President and Chief Executive Officer and a member of our Board of Directors, including The Francisco Trust, an existing holder of more than 5% of the Company’s outstanding common stock, (collectively, the “Purchasers”).

The net proceeds from the sale of the Convertible Notes, after deducting offering expenses, are approximately $5,850,000.

In accordance with FASB Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern (“Topic 205-40”), management is required to evaluate whether there are conditions and events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern for at least 12 months from the issuance date of the Company’s condensed interim financial statements.

This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued.

When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern.

The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The Company expects to incur losses and have negative net cash flows from operating activities as it continues developing its microbial protein production platforms and related products, and as it expands its pipelines and engages in further research and development activities for internal products as well as for its third-party collaborators and licensees.

The success of the Company depends on its ability to develop its technologies and products to the point of regulatory approval and subsequent revenue generation or through the sublicensing of the Company’s technologies and products, and its ability to raise capital to finance these developmental efforts.

On March 8, 2024, the Company issued an aggregate principal amount of $6.0 million of its 8.0% Senior Secured Convertible Promissory Notes due March 8, 2027 (the “ Convertible Notes”) in a private placement.

The purchasers of the Convertible Notes included immediate family members and family trusts related to Mark Emalfarb, our President and Chief Executive Officer and a member of our Board of Directors, including The Francisco Trust, an existing holder of more than 5% of the Company’s outstanding common stock, (collectively, the “ Purchasers”).

The net proceeds from the sale of the Convertible Notes, after deducting offering expenses, were $5,824,000.

The Company intends to use the net proceeds from the offering of the Convertible Notes for working capital and general corporate purposes.

The Convertible Notes will be senior, secured obligations of Dyadic and its affiliates, and interest will be payable quarterly in cash on the principal amount equal to 8% per annum.

The Convertible Notes are senior, secured obligations of Dyadic and its affiliates, and interest is payable quarterly in cash on the principal amount equal to 8% per annum.

The Convertible Notes will mature on March 8, 2027 (the “ Maturity Date”), unless earlier converted, repurchased, or redeemed in accordance with the terms of the Convertible Notes.

The Convertible Notes will be convertible into shares of Dyadic’s Class A common stock (the “Common Stock”), at the option of the holders of the Convertible Notes (the “Noteholders”) at any time prior to the Maturity Date.

The conversion price is $1.79 per share of the Common Stock, which is equal to 125% of the trailing 30-day VWAP of the Common Stock ending on the trading day immediately preceding the date of the securities purchase agreement.

The Convertible Notes can be converted into shares of Dyadic’s Class A common stock (the “ Common Stock”), at the option of the holders of the Convertible Notes (the "Noteholders”) at any time prior to the Maturity Date.

This private placement funding is expected to support our near-term revenue growth and accelerate our strategic objective of commercialization opportunities for pharmaceutical and non-pharmaceutical applications.

On October 4, 2024, the Company entered into an amendment (the "Amendment”) to the Convertible Notes.

Pursuant to the Amendment, (i) the conversion price upon which the Convertible Notes will be convertible into shares of the Company’s common stock is $1.40 per share of common stock, and (ii) the Redemption Date (as defined in the Amendment) will fall on any of the 26, 29 and 32-month anniversaries of the origi nal issue date of the Convertible Notes, which are May 8, 2026, August 8, 2026 and November 8, 2026.

The Convertible Notes contain customary covenants, and the Securities Purchase Agreement relating to the Convertible Notes also contains certain affirmative and negative covenants (including, without limitation, restrictions on our ability to incur indebtedness, permit liens, make dividends or certain debt payments or consummate certain affiliate transactions).

The Company was in compliance with its covenants with respect to the Convertible Notes as of December 31, 2024.

As of December 31, 2024, $910,000 of the Convertible Notes were converted into 556,623 shares of Common Stock.

For more information regarding the Convertible Notes, including the covenants related thereto, see Note 5 to the Consolidated Financial Statements.

This private placement funding strengthened our financial position, and it will support our near term revenue growth and accelerate our strategic objective of commercialization opportunities for pharmaceutical and non-pharmaceutical applications.

The Company has received successful top-line results for the Phase 1 clinical trial of DYAI-100, and we do not plan to continue Phase 2/3 clinical trials unless funding is secured.

Our ability to achieve profitability depends on many 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 legal and administrative costs as an SEC reporting and NASDAQ listed company.

Our future cash requirements will depend on many factors, including those factors discussed under Item 1A.

Risk Factors.

As of December 31, 2023, we had an accumulated deficit of $ 80.3 million.

We expect to incur losses and have negative net cash flows from operating activities as we continue developing our microbial platforms and related products, and as we expand our pipeline and engage in further research and development activities for internal products as well as for our third-party collaborators and licensees.

The success of the Company depends on its ability to develop its technologies and products to the point of regulatory approval and subsequent revenue generation or through sublicensing of the Company’s technologies and products, to raise enough capital to finance these developmental efforts.

We expect our existing cash and cash equivalents and cash raised from the Convertible Notes, investments in debt securities, and operating cash flows will be sufficient to meet our operational, business, and other liquidity requirements for at least the next twelve (12) months from the date of issuance of the financial statements contained in this Form 10-K.

However, we have based this estimate on assumptions that may prove to be wrong, and our operating plan may change because of many factors currently unknown.

In the event our financing needs are not able to be met by our existing cash, cash equivalents and investments, we would seek to raise additional capital through strategic financial opportunities that could include, but are not limited to, future public or private equity offerings, collaboration agreements, and/or other means.

In addition, on November 16, 2024, Dyadic entered into an agreement with the Bill & Melinda Gates Foundation (the “Gates Foundation”) relating to a grant in the amount of $3,092,136 awarded from the Gates Foundation for the cell line development of monoclonal antibodies targeting respiratory syncytial virus and malaria utilizing the Company’s C1 platform to provide globally accessible treatment options for underserved populations (the “Gates Foundation Grant”).

The Company expects its existing cash and cash equivalents and cash raised from the Convertible Notes, the Gates Foundation Grant, investments in debt securities, and operating cash flows from its existing and future license agreement(s) will be sufficient to meet its operational, business, and other liquidity requirements for at least the next twelve (12) months from the date of issuance of the financial statements contained in this Annual Report.

However, the Company has based this estimate on assumptions that may prove to be wrong, and its operating plan may change as a result of many factors currently unknown to it.

Any amounts raised may be used for the further development and commercialization of product candidates, and for other working capital purposes.

There is no guarantee that any of these strategic or financing opportunities will be executed or realized on favorable terms, if at all, and some could be dilutive to existing shareholders

At December 31, 2023 , cash and cash equivalents were $ 6.5 million compared to $ 5.8 million at December 31, 2022 .

The carrying value of investment grade securities, including accrued interest at December 31, 2023 was $ 0.8 million compared to $ 6.9 million at December 31, 2022 .

Net cash used in operating activities for the year ended December 31, 2023 of $ 6.7 million resulted from a net loss of $ 6.8 million adjusted for share-based compensation expenses of $ 1.2 million, partially offset by sale of our investment in Alphazyme of $1.0 million, and changes in operating assets and liabilities of $0.1 million.

Net cash used in operating activities for the year ended December 31, 2022 of $8.1 million resulted from a net loss of $9.7 million adjusted for share-based compensation expenses of $1.9 million, offset by changes in operating assets and liabilities of $0.3 million.

Net cash provided by investing activities for the year ended December 31, 2023 was $ 7.5 million compared to net cash used in investing activities of $ 2.4 million for the year ended December 31, 2022 .

Cash flows from investing activities in 2023 were primarily related to proceeds from maturities, net of purchases of investment grade debt securities, and proceeds from the sale of investment in Alphazyme.

Cash flows from investing activities in 2022 were primarily related to proceeds from maturities, net of purchases of investment grade debt securities.

There was no net cash provided by financing activities for the year ended December 31, 2023 compared to $544,000 for the year ended December 31, 2022 .

Cash flows from financing activities in 2022 were primarily related to proceeds received from the exercise of stock options.

At December 31, 2024 , cash and cash equivalents were $6,507,000 compared to $6,515,000 at December 31, 2023 .

The carrying value of investment grade securities, including accrued interest at December 31, 2024 was $2,781,000 compared to $758,000 at December 31, 2023 .

Net cash used in operating activities for the year ended December 31, 2024 of $3,975,000 resulted from a net loss of $5,809,000 adjusted for share-based compensation expenses of $1,126,000 , partially offset by changes in operating assets and liabilities of $755,000.

Net cash used in operating activities for the year ended D ecember 31, 2023 of $6,727,000 resulted from a net loss of $6,795,000 adjusted for share-based compensation expenses of $1,244,000, partially offset by sale of our investment in Alphazyme of $1,018,000, and changes in operating assets and liabilities of $143,000.

Net cash used in investing activities for the year ended December 31, 2024 was $1,876,000 compared to net cash provided by investing activities of $7,450,000 for the year ended December 31, 2023 .

Cash flows from investing activities in 2024 and 2023 were primarily related to proceeds from maturities, net of purchases of investment grade debt securities, and proceeds from the sale of investment in Alphazyme.

Net cash provided by financing activities for the year ended December 31, 2024 was $5,849,000, which was related to net proceeds from issuance of convertible notes, and proceed from exercise of options.

There were no cash flows from financing activities in 2023.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis