by Debra Fiakas CFA
A continuous quest to find companies that can turn sales into profits has turned up an unlikely font of cash. Dyadic International (DYAI: OTC/PK) is a developer of industrial enzymes. Back in the day the company sold enzymes to the rag trade to create those fancy jeans with the stone washed look. More recently Dyadic has worked with Abengoa (ABGB: NASD) and Codexis (CDXS : NASD) in support of their renewable fuel processes.
Dyadic uses the fungus Myceliopthora thermophila in a fungal expression system for gene discovery, expression and the production of enzymes and proteins. Dyadic ferments the fungus, called C1 for short, at commercial scale to speed up time to new product introduction and reduce cost. The company has been successful in getting its innovations protected with a series of U.S. patents – an important shield in the somewhat crowded industrial enzyme playing field. The most recent patent award came in November 2013 for a method to use novel combinations of enzymes to convert lignocellulosic biomass into fermentable sugars.
Yet, let’s get to the cash flow news. In the twelve months ending September 2013 the company claims to have earned $15.7 million in sales from customers, largely to sales of enzymes to animal feed producers. The company declared a net loss in the annual period but claims to have squeezed $5.7 million in operating cash flow out of $15.7 million in total sales.
The thing is, Dyadic’s financial news is unverified. The company issues press releases and submits reports to OTC Markets where its stock price is quoted. However, it files no reports with the Securities and Exchange Commission and does not have its books audited.
Investors have to treat Dyadic as a private company, conducting the sort of intense scrutiny needed to dig into information held close to the vest. Even though the OTC Markets calls for financial reports from quoted companies that are in a style and format reminiscent of SEC reports, it would be ill advised to assume that preparation of reports to OTC Markets are as vigorous. One plus for Dyadic is an audit of its annual report by a recognized regional auditor.
Dyadic and its founder/CEO Mark Emalfarb have a colorful history. It is worthwhile to check out the story as a means to get perspective on Dyadic’s present reporting and trading circumstances. It involves a Hong Kong subsidiary, allegations of accounting improprieties, quite a lot of finger pointing and numerous lawsuits. The dust appears to have settled on most of it and the company has moved on to new product introductions and customer relationships. Still Dyadic has still not resumed filing reports with the SEC and that leaves DYAI quotation on the OTC Pink service.
Approximately 27,000 DYAI shares trade each day. The recent $0.08 spread between the bid and ask prices is surprisingly narrow for an OTC quoted security. It is a company with some blemishes. What is more, a position in DYAI could be one of the more time consuming in your portfolio, given the level of due diligence required to manage the risk.
Yet recent developments suggest there could be more sales and cash flow in Dyadic’s future. Dyadic is to have received a $1.0 million milestone payment from BASF related to research work and licensing in the December 2013 quarter. A long-time relationships with Abengoa is about to enter commercial stage as that company’s cellulosic ethanol plant in Kansas goes into volume production in 2014. Royalty payments should follow. Dyadic is brewing up its second target protein for Sanofi that will ultimately end up in pre-clinical tests. As long as Dyadic management can keep its customer relationships congenial, it prospects are certainly looking up.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
