Dyadic International's (DYAI) CEO Mark Emalfarb on Q1 2014 Results - Earnings Call Transcript

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 |  About: Dyadic International, Inc. (DYAI)
by: SA Transcripts

Dyadic International (OTCQX:DYAI) Q1 2014 Results Conference Call May 8, 2014 8:00 AM ET

Operator

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to Dyadic International’s First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. My name is Greg, and I will be your conference coordinator today.

As a reminder, please note that this call is being recorded. At this time, I would like to introduce you to your host for today’s call, Michael Faby, Dyadic’s Chief Financial Officer.

Michael Faby

Thank you, Greg. Good afternoon. And thank you for joining today’s conference call to discuss Dyadic’s financial and operating results for the first quarter of 2014, which we’ve reported on the press release issued earlier this afternoon. The press release and Dyadic’s first quarter financial statements have been posted to both the Dyadic and OTC Markets websites.

I’m joined today by Dyadic’s Chairman, President and Chief Executive Officer, Mark Emalfarb and our Vice President and Chief Operating Officer, Danai Brooks. On today’s call Mark and Danai will cover operating highlights, business development and corporate strategy, and I will review our financial results in a bit more detail. We will then give you an opportunity to ask questions. Each caller will be allowed one question and one follow-up question in order to provide all callers an opportunity to participate. If time permits, the operator will allow additional questions from those who have already spoken.

Before we begin, we would like to remind you that certain statements made in this conference call maybe forward-looking statements, which involve risks and uncertainties that could cause Dyadic’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Some of the factors that could cause actual results to be materially different are detailed in the risk factor section in Dyadic’s filings with the OTC markets groups including Dyadic’s annual report filed on March 31st, 2014. Dyadic expressly disclaims any intent or obligation to update or revise any forward-looking statements except as required by law.

I will now turn the call over to our Chairman, President and CEO, Mark Emalfarb.

Mark A. Emalfarb

Thank you, Mike, and I want to thank all of you for joining us on today’s call. Dyadic is better positioned than we have been in a very, very long time. We want to make it clear that a primary goal of ours is to make the company be profitable on the operations of selling products to providing development R&D services. Exclusives of license fee revenue that may come from in time to time. We're off to a strong start in 2014 towards this objective.

And we're putting the right piece in place partnered with or compete against the industry leaders. Our First Quarter performance highlights that investments in our proprietary technology are continuing to pay off on multiple fronts.

Total revenues grew 20% in the First Quarter. This is a result of increased sales in all of our targetted market sectors. Including animal nutrition, starch, alcohol and brewing.

Our gross profit – it nearly doubled. Led by progress made in both the product and R&D side of the business. Enzyme product margins are improving to accommodation of a positive factors including decreased raw material cost and improved productivity gains.

The expansion of our Dutch research center is already starting to bear fruit. If we are experiencing more rapid technology advancement, which are already benefitting ongoing internal and external research projects.

Such as research projects being funded by the ASF. Dyadic's technology licensing model is expected to bring us recurring royalty streams in a broad variety of end markets. The first in such world, which are expected later this year from Abengoa Bioenergy, a C1 licensee.

Abengoa has reported that they expect the sale to get in our plant Hugoton, Kansas, will begin operations this year.

These series of successes have been driven by the strength of our C1 expression system which we're continuing to push to become more versatile and productive. We are one of the very few companies that have a filamented fungal expression technology that is industrial-proven.

It has the capability to turning DNA into commercially useful and economically viable products. It can address a broad variety of end markets.

Compared to other expression systems, our technology's unique and offers certain advantages. A few ones is already being used by ourself and our licensee to develop and manufacture large volumes of enzymes and proteins and is capable of producing purer products.

The opportunity to turn DNA to products across multi-billion dollar markets is almost unlimited. Today, the scientific community is discovering genes that encode for proteins and enzyme at an accelerated pace while the cost of sequencing is plummeting.

New discoveries are being made daily around the world within industry and academy alike. Scientists are working to develop technology that deploys to help better feed, fuel and heal humankind.

Our C1 technology platform is a proven industrial, programmable and scalable technology that can turn many of these gene discoveries into products for us, our partners and our collaborators.

In fact, market opportunities are enormous and growing. Society is moving towards a more sustainable and environmentally friendly global economy which will continue to drive demand for enzymes and other proteins. Industrial, energy, health as well as other applications.

The industrial enzyme business alone is a multi-billion dollar market when we and our licensee to just beginning to develop a host of new products.

Second generation bio-fuels which uses neither food nor fossil fuels as extrate [ph] fuel is beginning to be commercialized this year. And as a process requires a huge amount of enzymes to work.

If our technologies' proven to work in the pharmaceutical space, which is still a big "if", C1 could be a game changer for vaccines, anti-bodies and therapeutic protein. We have seen promising results in our recent research activities related to the vaccine we are working on with them.

We've come far. The addressable market opportunities are enormous. Our C1 technology is one of the best in class when we are licensing and continuing to push it further. C1 is becoming more viable and more applicable in new markets all the time.

We believe that the recently announced strengthening of our management team in Europe will allow for additional technology advancement and will help to accelerate in research and product revenues.

We are committed to augmenting our leadership team worldwide. And we expect to make additional announcements in the coming months.

Let me now turn the call over to our COO, Danai Brooks to discuss the business operations.

Danai E. Brooks

Thank you, Mark, and good afternoon, everyone. I’m going to spend some time updating you on our R&D operations and business development initiatives. Our three strategic objectives for Q1 has been to one: spend on our R&D capabilities, two: strengthen our management team and three improve our product developing offering in pipeline.

We believe that we've been successful in all three aspects of the business. First in R&D, the investment and resources that began last fall in expanding our capabilities are beginning to very tangibly pay-off.

Our latest generation CMAX 5 biofuel enzyme is expected to have 40% lower cost than the previous generation CMAX 4. We were able to improve our strain and manufacturing protocols in part due to having our new fermentation lab and expanded scientific staff.

The internal work performance first enough to steward during the past quarter, we expect to have the project funded for an additional six months. While we were able to express, purify and deliver the vaccine [indiscernible]. There are many technical hurdles that need to be overcome before the product completes the preclinical phase.

We hope to have clarity on a potential revenue event by the end of the year. But this will be during by the science. Our project with BASF has already hit certain milestones, which we were not anticipated to hit until the end of 2014.

Using the widescreen technology that we used to create our new Fibrezyme G4 product, we've been able to far better than expected performance of the project, which is reflected in our financials.

These three projects highlight C1 capabilities in producing highly productive pure enzymes and other proteins that can operate in such a varied environment from an industrial bar refinery breaking down wheat straw to the human body as a vaccine.

As we announced earlier this week, we've hired two new executives to join our European leadership team. Our new VP of Business Development, Dr. Ronen Tchelet joined us from Codexis, a Dyadic licensee.

Ronen is a leading researcher and managed a lab of over 30 scientists that exclusively use C1 as their expression system for over six years. He played a key role in both R&D and drug and business development efforts.

Our new Director of Sales in Europe, Andre Klaassen has spent the past two decades selling enzymes at Dupont and Genencor. He will manage day-to-day European sales operations, support new product development and provide key account management.

Andre and Ronen represent an ideal blend of industry know-how and entrepreneurial spirit that will allow Dyadic to further exploit one of the world's best proteins and expression system.

These two new hires highlight our growing ability to attract top gear talent to Dyadic. Further, we've engaged Boyden [ph], a leading global search firm, to aid us in hiring a new CFO that will embody the same principles of experience, energy and entrepreneurial spirit.

We're currently evaluating a highly-qualified slate of candidates. In addition, we expect to make new hires this year in our R&D center to add biosomatic capabilities and additional hires for sales force in Asia.

Finally, we're also enabled - we're also in the process of interviewing at least one additional Director for the Board of Directors. We're looking to add a business leader with deep pharmaceutical experience to aid us in opening and add that market. Currently we're down to a very short list of candidates and we believe that they're both well-respected and savvy business people who could help guide the company into its next phase.

We find to continue to expand the team with strategic hires in a cyclically responsible manner. For certain cost-cutting initiatives, we were able to balance hiring twelve new employees last year with just a modest increase in SG&A and R&D spend.

On the product sides, we had a successful launch of Fibrezyme G4, our new product for the pulp and paper and textile industry. Our first sales have been in Asia and customers worldwide are currently evaluating the product.

While we don't expect a significant impact to top line revenue in 2014, the product is important to our portfolio as we try to compete in new markets.

Our next products, including a new – all new animal feed enzyme – are still a few years away. Though we've been making meaningful progress with those development projects as well.

In business development, we have made significant strides and discussions with a number of parties, partnered in developing second generation Bonafils[ph] in China, Southeast Asia, India and Brazil.

We hope to be able to announce more specifics around our plans in the coming month. In other business development matters, we continue to have detailed discussions with major chemical, industrial biotechnology, pharmaceutical and energy companies.

However, we could cannot yet provide guidance on whether there will be another major licensing revenue event in 2014.

Now, let me turn over the call to our CFO, Mike Faby to discuss our 2014 Q1 Financial results, Mike?

Michael J. Faby

Thank you Danai. Before reviewing the quarterly financial results, I would like to refer you again to our press release and financial statements which are posted on the Dyadic and OTC Markets websites. I will begin with a review of the income statement. But before I do, I want to talk about how we derived revenues.

We derived revenues in three ways. First we derived revenues from the licensing of our technology to third parties which generally consist of upfront and future payment, as well as licensees from products sold or manufactured by third parties that use our technology.

Second, we derive revenues from the sales of our proprietary products, which include C1 related products. Lastly, to a lesser extent, we derive revenue from research and development projects which are often a precursor to a new place of deal.

Developing a new commercial product, plus additional services and the connection with the technology license.

Total revenue increased 20% for the three months ended March 31st 2014 to $3 million as compared to $2.5 million for the prior year.

Net product related revenue increased over 17% to $2.5 million for the three months ended March 31st 2014 as compared to $2.1 million for the three months ended March 31st 2014 - as compared to $2.1 million for the prior year.

This increase was due to several new customers in certain key markets, including animal feeds, starch and alcohol and brewing that were added in late 2013 as well as increased sales to existing customers.

Research and development revenue for the quarter increased 36% to $526,000 compared to $387,000 for the same period in 2013. The increase was due to the start of certain external research and development projects and the very efficient performance by our team of scientists in executing those projects well within schedule and budget.

The positive performance on these projects, along with our increased margins on enzyme cells resulted in an overall gross profit margin increasing from 21% to 34% quarter over quarter.

We have taken on a number of European Union sponsored projects which normally requires substantial discount from our standard FTE rates. We, therefore, expect to see lower margins in the latter half of the year. These projects generally provide Dyadic rights similar to a license to exploit whatever usable technology that it discovered while working on a particular EU grant project.

There was no license fee revenue recorded in the first quarter. For the three months ended March 31st 2014, cost of goods sold was approximately $2 million or 66% of total revenue as compared to approximately $2 million or 79% of total revenue for the three months ended March 31st 2013.

Gross profit increased from $520,000 last year to $1 million for the first quarter of 2014. We have seen margin improvements in both product-related revenues and research and development revenues. The margin increased its product-related and product-related revenues were due to our continued efforts to reduce our raw material cost and increase productivity due to newly upgraded fermentation and downstream processing equipment.

Additionally, price increases on certain higher volume products contributed to the increase in gross profit. Further, our margin on Research and Development revenues were up significantly as we achieved project milestones on certain projects that allowed us to recognize additional revenues with much higher margins.

Total general administrative expenses for the quarter increased 51% to $1.9 million compared to $1.3 million for the same period in 2013. The increase was due primarily to expert cost associated with ongoing litigation against the company's formal type legal counsel at approximately $675,000 as compared to $185,000 in June 1 of 2013.

Excluding legal fees associated with the lawsuit, general and administrative expenses were up 14% from the prior year. Cost and expenses related to the lawsuit are expected to decrease significantly through the remainder of 2014.

The professional liability lawsuit, it is expected to continue through 2014 but the anticipated trial some time in 2015. Cost and expenses will again increase as we near trial preparation and throughout the trial itself.

Additionally, as the company continues with its plan to once again become an SEC reporting company, we expect increased cost to satisfy additional legal, financial reporting and compliance requirements.

Sales and marketing costs increased $37,000 or 18% quarter over quarter. The majority of the increase was due to additional sales resources brought online with Second Quarter of 2013.

As we reach and then announced we added sales resources starting in June 2014 and expect to continue to expand the team during the remainder of 2014. Research and development expense increased 14% to $330,000. This increase is lower than anticipated as technical resources were deployed on certain third party funded projects during the quarter.

As expected that Research and Development spending will increase to the remainder of the year.

During the First Quarter of 2014, as previously announced we closed our Greensboro, North Carolina facility and sold the assets for a net gain of approximately $12,000. We do not anticipate any further cost associated with this closure.

Net loss for the three month ended March 31st 2014, was $1.6 million or $0.05 per basic and fully diluted share. As compared to a net loss of $1.5 million or $0.05 per basic and fully diluted share for the three month ended March 31st 2013. Exclusive of litigation-related legal fees, the net loss for the three month ended March 31st 2014 would have been $894,000 or $0.03 per basic and fully diluted share as compared to a net loss of $1.3 or $0.04 per basic and fully diluted share for the three month ended March 31st 2013.

Now, let me turn to liquidity and capital resources. At March 31st 2014, cash and cash equivalents totaled $70 million as compared to $8.9 million in December 31st 2013. The decrease was substantially due to increase in legal expenses and inventory on hand to satisfy anticipated sales for 2014.

A divisionally Dyadic launch that's Fibrezyme G4 product in April, which required cash expenditures to ensure product availability in certain strategic geographic regions and lead projected demand.

Total convertible subordinated debt as of March 31st 2014 was $6.8 million. On October 1st 2013, the company extend the maturity dates of this debt to January 1st 2015. The company has a right to prepay all $6.8 million of the debt anytime after March 31st without penalty with 30 days written notice.

The remaining $1.4 million note to a stockholder is non-convertible and is not subject to the pre-payment provision. All debt is classified as short term and in the condensed consolidated balance sheet as of March 31st 2014.

Capital expenditures for the three months ended March 31st 2014 were approximately $84,000 as compared to $88,000 which are the same period last year. As reflected in our financial statements, we incurred a loss of approximately $1.6 million and $1.5 million for the three months ended March 31st 2014 and 2013 respectively.

Net cash used in Operations was approximately $1.8 million as compared to $153,000 provided by Operations for the same period in 2013.

The majority of the cash used in operating activities was related to the loss and the increase in inventory previously mentioned. For the three months ended March 31st 2014, our net cash used in investing activities was approximately $65,000 as compared to approximately $90,000 for the three months ended March 31st 2013.

The increase is mainly due to the completion of our facility as being our Dutch research center in late 2013 and early 2014 in support of our new product development initiatives.

For the three months ended March 31st 2014, there was no net cash provided by financing activities. Approximately $59,000 was raised during the three months ended March 31st 2013. This amount is primarily due to cash received from proceeds from the exercise of the stock options, grants and other equity plans.

Now, I'd like to turn the call back – oh, I'm sorry – finally, to provide a better training platform, and I was we speak to broaden and diversify our shareholder base, we recently completed the uplisting of our common stock from the OTC Pink to the OTCQX marketplace.

QX is the highest tier of the OTC marketplace and provide the highest of visibility and access possible in the OTC market, with stringent financial and disclosure requirements. Our next milestone to apply for the listing of our common stock on a national exchange, to further expand their visibility and provide us access to a broader investor base, as we seek to increase shareholder value.

Prior to a listing, we must complete the registration process with the SEC for our common stock. Before incurring those additional cost and management efforts, we will need to meet the applicable listing standards for an exchange which currently includes a minimum $2 dollar share price and 90 days consecutive trading. And a minimum share of stockholders equity of $4 million. We are hopeful that the continued progress we are making in our business plan and growth initiatives will enable us to begin this process later this year.

Now, I'd like to turn the call back to our Operator to take your questions, Greg?

Question-and-Answer-Session

Operator

(Operator Instructions) And our first question comes from George Prabel [ph], who is a private investor.

Unidentified Speaker

Good afternoon. Question related to revenues – upcoming revenue stream and I hope it ends up being a very good stream here from Abengoa. I'll start up at Hugoton.

Now, we hear that the plant is essentially up to speed now. What will be the approximate revenues which uses a figure of per million gallons of product that they produce, based on the current agreement?

Mark A. Emalfarb

So, it's a – the current agreement – we get a percent royalty which we've – we haven't disclosed how many cents per gallon. But, it's a – I would say it's a – in the single digits or lower single digits. If you do all that...

Unidentified Speaker

So, a nickel or last year's. You're saying something like that?

Mark A. Emalfarb

In that range but...

Unidentified Speaker

Okay.

Mark A. Emalfarb

If you do a [indiscernible] George, we really can't give you that information.

Unidentified Speaker

I see.

Mark A. Emalfarb

Not that we wouldn't like you, we just can't. And we also expect a milestone payment as well when they open up that plant.

Unidentified Speaker

Okay, is there any idea? Is that a six-digit figure? The milestone?

Mark A. Emalfarb

Oh, the milestone? Yes, it's a six-digit or six-digit figure yes.

Unidentified Speaker

Yes, okay. All right, I'll hold on for now, and listen to the rest of the guys here.

Operator

Our next question comes from Terry Sponteim [ph] who's also a private investor.

Unidentified Speaker

Yes, my question was about the litigation. Is there any chance that settles before you go to trial?

Mark A. Emalfarb

There is a chance that it will settle. We – I think in the financial statements we point out that - do they court ordered mediation by September 30th? Don't know if that date will hold or not. But there is a chance that we will settle before trial, yes.

Unidentified Speaker

Got you. Just a follow-on question to your Abengoa plants? Sounds like there's low, slow starting compared to what they were hoping. But that is scheduled to come on line here in the next 60 days or so. Does that sound right?

Mark A. Emalfarb

Oh, it sounds right but I mean, we'd have to ask Abengoa that question. But, you know, they are definitely delayed from what they initially talked about. I think they initially talked about doing it late last year, early this year and, it's probably more likely, in my opinion, maybe Q3. But I don't know that for sure.

Unidentified Speaker

Okay.

Mark A. Emalfarb

You have to remember that this the first of its kind plant. It's 25 million gallons and its invested close to $0.5 billion and it's not easy to turn one of these big guys on. Especially one that's never been built before.

Unidentified Speaker

No, I understand. Is there time for another question or is that it?

Mark A. Emalfarb

We can come back to you because we have more people in line.

Unidentified Speaker

Okay.

Operator

And our next question comes from Tim Quinlisk with Mayo Capital.

Tim Quinlisk – Mayo Investment Advisers

Hey, Mark, just to follow up on the R&D revenue increase that you've experienced in the quarter – to the $0.5 million level. Given the step function increase of the margin, the gross margin level, I mean, presuming that's all very good revenue – very good margin business on the R&D side.

Just a question for you in terms of your capacity to incur or do more kind of R&D research in-house for third – other parties either prospective new clients or existing clients like Sanofi or BASF.

And I think you mentioned on the call today that you had done some work for BASF. I thought, my impression was that they were doing all that work in-house and can you kind of fill us in on what you're doing there.

And then just finally he also mentions Sanofi potentially talking about six months further research. Is that also going to considered to be R&D revenue as well?

Mark A. Emalfarb

Yes, so let me start with you. Remember last or I think early this year, toward the end of last year, we expanded that lab by 40%. And so...

Unidentified Speaker

Yes.

Mark A. Emalfarb

And so we haven't – we have new hires with our new space and then can I talk about the fermentation lab helped us already improve the yield by reducing cost and goods on our CMEG side by 40% already.

So, you know, the recent capacity but, you know, we have obviously the more R&D do we for others, so less R&D we can do for ourselves in our own product development, so that sort of that balance the act of how much revenue do we generate. And typically the margins there are in the 40 % to 50 % range, you know, when we do that. But sometimes, obviously, we exceed certain expectations and we can actually, you know, book those revenues faster and get the job done quicker, different scientists, you know, can actually deliver in a milestone sooner.

So, there is room for more, let's say, product development for third parties. But we have taken a lot of that product development or certainly when we talk about to do our own development of our technology platform to make it more robust, more versatile. And we think we can make so we can start driving it towards pharmaceuticals or other industries as well as just the industrial enzyme business.

So, it's a balancing act of how we apply those resources to our own needs and the needs of the third party researchers. And with the additional higher now – Ronen who comes from the Codexis, his Hungarian lab with a UC1 in the last six years, is back on an Teva, you know, we're hoping we can win in the other people at DNL that more and more demand even from third parties to more and more research and to be, you know, we can be more selective of what we take on and who we are taken on for and balance it on not only for product development but the platform development, because we're making big advances with the new expansion not just on the fermentation yield and productivity and lower costs but on making these C1 technology more versatile in the type of things that then I talked about on breaking that biomass to sugars or bio fuels to human health.

So, yes, we're going to be stretched. We could actually probably use more bodies that we have today to do more things we need to do. And so we have to balance out. So, I'm not quite sure I've answered all those.

And in terms of BSF, I think we were clear that in addition to the $6 million that they gave us last year as a non-exclusive license, in addition to the things they're doing on their own, I mean, they basically told us that, you know, they have more things to do than they can even do their own people. So, they're looking for us to help them if we can continue to hit the milestones and make the advances we are doing like we are on the project we are doing for them to continue to use us to do research and development for them in addition to our own health capabilities. So, I hope I answered all those questions.

Unidentified Speaker

Right. So, more Mark just to follow up on that, if I may, can you talk about the breaths and the depths of relationship with BASF after kind of a year here? I mean, are you finding that particularly given their entry [ph] with some other companies that they have bought it, are you seeing them using the C1 platform more extensively throughout their organization or is it too really a call back?

Mark A. Emalfarb

Well, I think it's not really to tell but it is too early to kind of on a border line. I was there and had a meeting with them when I went to Amsterdam to the Bio Fuel Conference in March and spent a day with a couple of their key senior people that are driving this whole enterprise. And I think they are embedding it into all the different divisions that they have to try to make more and more products for whether at the industrial enzymes or its catalyst or embedding it hopefully into the brand new [ph] acquisition, which they actually made. So I think they see the potential and I think they want to realize it and recognize it as soon as possible. But, you know, you're dealing with a major, major chemical company and one of the largest on earth. And they move like an oil tanker little slowly but when that momentum goes, it goes. And I think they seem to be committed to making C1 platforms that they adapt as their own and pushing it to extremely high levels and using it broadly throughout all their industries they go after.

The one thing I noticed, the additional acquisitions that BSF has made are not computing technologies to our special system but rather complementary technologies. So if for example Branium [ph] has some very large GenBank [ph] and would use our expression system to create products. So their acquisitions don't detract from their ability or desire to use C1. It actually expand universally on what they can use C1 for.

Unidentified Speaker

No, I understand. I was just wondering if you are seeing any evidence of them using the C1 platform to express some of those genes specifically.

Mark A. Emalfarb

Well, I mean, the clearest evidence is the funding research in Netherlands…

Unidentified Speaker

Yes.

Mark A. Emalfarb

To the enzyme for specific field. And we've done an extremely I think great job of producing high levels of that. And I think as then I pointed out, we are hitting certain levels of activities that we didn't expect to hit until ended 2014 and maybe even later.

Unidentified Speaker

Okay. Very good. I'll get back in the queue because I wanted to ask you about Sanofi when you have a chance. Thank you.

Operator

(Operator Instructions) Our next question comes from Richard Deutsch with Ladenburg Thalmann.

Richard Deutsch – Ladenburg Thalmann

Yes. Hi, guys. Thanks for taking my call. In the company's commitment to fully relistingly shares once again on a national exchange, can you give me your best guess right now as to when your Form 10 might be ready to be filed?

Mark A. Emalfarb

Rick, I think we are probably a few months away to finalizing the Form 10 and getting it filed and approved. It's not a quick process. And as you're familiar with the company, it's – you know, and some of the background, it's going to take a little bit longer than, you know, maybe some other processes have taken. But we are working it very hard and we are making a lot of progress. I think we have the right resources working on it. We have Oracare [ph] and [indiscernible] as a law firm. It's a – our SEC council. They're a very good law firm working on this. And we have B. Railey, a very good investment bank helping on us this as well. So, we have the right people and resources working on it. But it's going to take probably a few more months.

Richard Deutsch – Ladenburg Thalmann

Three months? Six months? Just – I know it's an estimate but I think it's critical to the pricing on the stock to see this kind of, you know, re registration of the shares. It's vital to the shareholder interest here.

Mark A. Emalfarb

I think Rick we clearly get that picture and we're diligently working on it. And I think it's more like a two or three month from today until we could get it into shape that we wanted to be in. Because when we do file that Form 10, we want it to be as crisp and as clear as to the opportunity and that it's potential of applying this technology in the industries and the applications that it can go to.

So, you know, we are working diligently now I can tell you. And we are putting resources towards it but there is a lot of other things we are doing at the same time. And we want to get it done as soon as possible but we got to do it right.

Richard Deutsch – Ladenburg Thalmann

OK. That's fair enough. 90 days and we'll get excited again. And then the follow up question that I have is a few years ago, you took another license fee from a confidentially named but large designated large, you know, animal feed producer in the continent. You know, they – according to what we have heard have gone through a long process of developing and testing products. We're, you know, at the point now where we would like to see when you think that company could be ready to file for a permit to start selling product, you know, from the regulators. Can you give us a little bit of your – best guess as to, you know, when this might happen?

Mark A. Emalfarb

Hopefully, we would like it to see it happen this year. And, again, if they're filing not ours, then I think some of the issues that they are having is not the issues of failures, it's the issue of maybe potentially – Richard, that they – when you file these things and you have a certain product that you have created, that's what you go forward with. And so if you come up with an improved version of that in the interim, it delays you in filing the one that you have.

So, I think it's kind of like a text 22. When do you launch and file it? You launched and filed it right because you have something really good or did the wait and file it when they have something a little better, because they are going to live that filing for a long, long time as a product. So, we sort of are not exactly sure of when they are going to stop on improvements, on the performance, on the fermentation process optimization and just let it go and say to __ it's good enough, we could, you know, we got to stop keeping make improvements, we just got to get on with the show. And that's the decision estimate. So it's very difficult for us to tell you that. I would say that they are – I would say that they are very happy with the product and we are discussions with them for other projects as well. And so, everything is happening. Everything is positive. And it's – right now, it's the timing.

Richard Deutsch – Ladenburg Thalmann

So, then hearing what you are saying, they are actually improving the product beyond their expectations and they are waiting to, you know, file what they could have already filed but for wanting to make it even better than they originally thought. Is that fair enough?

Mark A. Emalfarb

Yes, in general terms. I think what happened through the R&D program and the planning that they have given to us at Dyadic Netherlands and that their internal, let's say, research and development efforts and the collaboration, they 're creating something that's a little different than what they started to create the main in fact perform better and that will perform at higher yields and lower cost.

And so I think that's what you are saying and I think we understand. I think we're talking the same language. And that delays when they pull the trigger.

Richard Deutsch – Ladenburg Thalmann

OK. Thank you. I get back to the queue.

Operator

And our next question comes from Walter Schenker with MAZ Partners.

Walter Schenker – MAZ Partners

Hey, Mark. In the quarter, product sales were 17 %, which is nice, but the inventories rose almost twice as much. You're building the inventories against specific new customers and new orders or it just seems like a lot of inventory given the sales level?

Mark A. Emalfarb

Well, it takes us a while to build up inventory and to ship it to – you know, for example, to get over to Hong Kong in a store over in Asia. And we're expecting some significant growth from significant customers and the large customers as well as the existing customers. And if we don't have product, we can't deliver it and we can't meet our revenue goals. So, we got to adjust that later if we have to, and we will, but we are obviously expecting a very nice revenue growth this year.

Walter Schenker – MAZ Partners

Okay. So the growth in inventory is hopefully per se during a revenue ramp you're expecting were up through the year?

Mark A. Emalfarb

Right. That is why we're building it.

Walter Schenker – MAZ Partners

Okay. Thank you.

Operator

And next, we'll take a follow-up question from Tim Quinlisk with Mayo Capital.

Tim Quinlisk – Mayo Capital

Hey, guys. So a question for you on the Sanofi. Mark, you mentioned sort of the another six months of ongoing research on their behalf and supported their efforts to I guess purify this vaccine. Can you be more specific in terms of what you need to do to deliver to them to sort of get to the endpoint? And also on the interim basis, how are you going to be treating that – the work that you do for them? Is that, again, is a research –R&D revenue that you're going to book?

Mark A. Emalfarb

Yes. So, you know, we are in discussions now. They haven't pull the trigger in terms of the next six months of funding. But we feel pretty confident that they will. We've had some really good discussions with them. In fact, the proposed to us pretty much the plan that we want to follow. But, you know, that somebody up above has to sign off.

Tim Quinlisk – Mayo Capital

Okay.

Mark A. Emalfarb

And we're hopeful that will happen soon. In terms of what we have to deliver is, you know, we have all right road map that they have provided us. They sent a research we had done in the past. It shows some interesting results. And we have to construct on C1 strain in a different way, which I really can't get into because obviously of confidentiality but they look promising and they look like they could take some to, you know, what they want to get to.

So, there is a couple of fid routes that they want to pursue. One is a preferred route and one is less preferred. And so I think we're going to pursue both and hopefully both the winners. And one would be a bigger one more than the other one. But we're not sure. Either of the one may win. But we have seen some interesting things and they seem to be excited and they seem to want to go forward. But I can't really give you much more than that. I don't if that helps answer your question or not.

Tim Quinlisk – Mayo Capital

Okay. That's good. Thank you. And then, just one follow on it seems like given the inventory increase that you have put on the books this quarter and a strong revenue growth you had in this first quarter, you seem to be expecting a nice ramp in revenues over the back half of this year. Can you talk a little bit about when the product is going to derived off the C1 platform like the Fibrezyme C4 product? And when does that start to become meaningful? And what does that do prospectively to the margin structure of that business as you go forward? Is it materially better in terms of the gross profit from C1 derived product?

Mark A. Emalfarb

Yes. So let me sort of – if that was your first question. And you see that, you know, our gross margins on the products that we made are dramatically better this year and, you know, we've been able to lower the cost of manufacturing to productivity improvements and lower raw material cost. So, obviously, the goal here is to become profitable sooner than later. And in order to do that, we have to sell more of the existing products we have today because that's what we have to sell right now and sell some of the future products that we just launched, like the C1 products that we just talked about. And, yes, the emphasis is really more on the C1 because it seems that we're able to produce two recombinant DNA significantly higher levels of the products we target in a much lower cost. And so the future really isn't that but the current products we, in fact, are making dramatic improvements in the yields and buying better and cheaper raw materials. Some of that just because raw material costs had come down some of that because we found better sources. But a lot of that has improved fermentation processes.

So, again, that comes from averaged both from a manufacturing side and things going on in the manufacturing plant, from our Dyadic Netherlands plant.

And let me give example on that. That Fibrezyme product that we just launched, you know, when we first came out with it, you know, I think it was like 4,000 units and now it's like – make that times for the gross margin in the product to very good. So the point is it's a new product and a new market and we have to obviously get adaption – adoption in different areas whether it be pulp and paper or a textile. But it shows that the margins can dramatically get significantly higher to the recombinant DNA tools using C1. I think that's what you are looking for.

Tim Quinlisk – Mayo Capital

Yes. Okay, good. Thank you.

Operator

And next, we'll take a follow-up from private investor, George Prebel [ph].

Unidentified Speaker

Yes. And once again, related to the – what appears to be a fairly significant total number of staff to be added both domestically here and internationally, the impact of – and I haven't thinking negative impact our short term at least, how significant is that anticipated to be against the existing revenue based some of the positions being, you know, senior management and obviously more expensive overall to that group – in total group we have in here.

Mark A. Emalfarb

So, I look – and I answered some of that but let me deal with the two new hires in Europe that are, you know, we think are very, very good hires and by the way we think that demonstrates the power and the perception of the industry as it grows and C1 becomes more adapted by more and more people because, you know, a person is worth for 20 years to deposit not just come over to Dyadic.

So, you know, why are they taking that risk? And I think in that press release we talked about that or he had it in his quote that he sees the potential opportunity of our existing products but he is more excited about the potential of what we can make facing C1. But, you know, he is a season sales person that has contacts and relationships in Europe and elsewhere by the way but also from mostly in Europe that we expect him to pay for himself by selling more products, existing products at very nice gross margins. So, w don't expect that to be a big, big burn for long. And in fact, turn it into a profit center.

And in terms of – in the case of Ronen, the gentleman that's coming for used to be with Teva and in Codexis, you know, again, we expect even though yes these are higher paid personnel, but these people, you know, in case of Ronen, he brings in a significant research and development deal so pay for himself, one, he will be able to be built in into the R&D program as an FTE or partial FTE rate and at a 40% to 50% margin and, two, that's get lead into a license or some other structure or partnership or collaboration.

And then I will let – and I talked about, you know, I think he talked about earlier that, you know, we made some class savings and shutting down Greensborough, et cetera, and maybe we can get an can get [indiscernible].

Michael J. Faby

Yes. So, we have seen senior hire assumption in the financial impact yet but in the past year, we bought on 12 people and I think our total SG&A, if you exclude the legal allotted numbers, that 14 % and we took the staff from 39 to 51. So, we've cut a lot of cost. We have cut – we shut down Greensborough. We have but our external legal advisers for other aspects. Considerably, we've cut our IT budget and streamlined several other things.

So, what we are try to do in our planning is, and it hasn't been – one to one offset because we are trying to grow the business but offset is much as possible in growing the business by also cost savings. So we are pretty positive that we're not going to over spend in growing the business. And …

Unidentified Speaker

But no significant borrowing, additional borrowing anticipated associated with these debts and…

Michael J. Faby

No, no.

Unidentified Speaker

Yes. OK.

Michael J. Faby

No, no. I wouldn't expect that. I wouldn't expect that. And like Mark said, the two guys we've run on I think are going to be revenue generators.

Unidentified Speaker

Okay.

Operator

And our next question comes from Tim Quinlisk from Mayo Capital.

Tim Quinlisk – Mayo Capital

Hey, guys. Just one follow-up question from me. You – two things, one, you talked about – can you talk about some of the other potential license opportunities as you go through the balance of the year in terms of maybe some of the end markets you're thinking about? And also for the first time, I've heard you talk about now China, Asia, and it always was a concern that that was an area that you'd always run into some risks of some, you know, potentially some bad – some issues of ceiling band et cetera. You know, I'm talking about license in their per se or could you more specifically talk about the selling product into that region? Thanks.

Michael J. Faby

I think we're talking about both actually. And when we are going in to China and potentially India, we are extremely cautious. So the partnerships that we are looking at, for example, for China, I mean, we are looking at some of the biggest companies in those countries. And I think because dealing with big – such large companies, they are going to be more sophisticated and they are going to be highly motivated to protect their own IP because it's their license or technology and they are invested in ours. So, we are thinking long and hard about whether or not to get into China and to get into India. But I don't – we don't believe the answer is to ignore those as markets or market opportunities for Dyadic. So I think the answer is to – we need to go in – we need to go in smartly and we need to find the right partners. And so the team is working very hard to figure out what are strategies there.

Mark E. Emalfarb

And, you know, we're going to be cautious obviously in terms of where we go and not matter what part of the world we're going to with the technology if we let it loose into a place it's going to be certain assurance, certain guarantees. And, you know, other than –in addition of bio fuels, there are other areas and aspects of our business or some of these, let's say, companies over in Asia are interested in as well on just lines on business and getting involved. So, we're being cautious and we[re going to watch the family jewels so, yes.

Tim Quinlisk – Mayo Capital

Okay. Thank you.

Operator

And next, we'll hear again from Richard Deutsch with Ladenburg Thalmann.

Richard Deutsch – Ladenburg Thalmann

Yes. Thank you. I'm just going to follow up on a couple of things team brought up. But first of all, it seems to be in mystery how a company of your size contracting out production from standard – fungal production systems and in bacterial production systems, can compete with people like Novisyn, DuPont and DSM and still bring in the kind of margins, but how are you doing that? It's quite an accomplishment but it's kind of a mystery in to why you can do that against companies so much larger than you with scale and then you come out with such a nice margin on that? That's my first question.

Mark E. Emalfarb

I mean, I think it bodes well for the manufacturing partners that we work with. It bodes well for the people that we have working here, like Rich Chando [ph] who oversees that operation. It goes well for Dyadic Netherlands and the R&D in the driving of the – in the yield and productivity of C1 and our other technologies.

You can imagine, of course, if we had our own CapEx and our own tanks in the ground that in one way you would be able to improve the margins because you would be, you know, taking away the margins from the contract manufacture. But in the other way, we would taking capital away from the ability to develop a whole bunch of new things and new opportunities.

So, you know, we are doing – and we have being doing this since 1994 by the way, so with third party manufacturing. We used to deal with not now DSM who is more tech before them and we come to at Sunpro [ph] in a 150,000 leader for manager, which are quite large tanks. I think if we know Abengoa has even talked about I think they are going to have ATM produce some of their initial batches of their bio fuel enzymes if they are going to use Hugoton plant.

So, you know, it really comes down that if you can get great productivity out of your organism and the fermentation process it matches with that, that's where the margins are made more than the tanks, I mean, the tanks are still tanks but fixed cost, take it a 100 million units or 10 billion units out of the same tank, so the sums of organism the way it is engineered, it then makes the determination more than a steel thank itself. So I don't know it that answered your question but hopefully it does.

Richard Deutsch – Ladenburg Thalmann

Yes. I think it does. And the only question is the company's licensing strategy, it's a pure __ with the success you have already had BASF is large on names animal feed company constantly, you know, producing even better than they originally thought, you know, which is going to make an even better product when it comes out. Abengoa's success it actually there are claims on their enzyme program are very, very positive telling people like myself how they have advanced the yields and the productivity of the license to enzyme technology that you have gotten.

I am trying to understand your licensing strategy. You have never given an exclusive, which means you are open to more bio fuel, more chemical, you know, more animal feed, you know, you are already selling standard products into food in burling [ph]. The world is so big. What is the strategy in terms of doing more license skills? Can you just talk about that a little bit because I would suspect that you can never ever cover the world with all your opportunities and it might be better off or – and I want to know exactly what you are thinking in terms of best value for shareholders here.

Mark A. Emalfarb

What we constantly think about is making C1 more productive and more versatile and the thing that can makes the different market out locations and how to engineer for pharma, for food, for feed, for bio fuels. So the production system C1 is at the heart of everything we do. And that research center in Holland and the guys that are manipulating that for the good reasons of making it more productive, more robust and more versatile in the things you can do. It's already scalable so we have already proven that we run $150 leader and I'm sure we can run even larger so we don't need to go any bigger in terms of scalability. We just need to continue to make it more versatile and targeted towards with the people that come to us so that we find the one-turn gene in the products.

And as you pointed out, their analyst untapped opportunities as the world is sequencing genes everyday finding new discoveries everyday for something useful to feed, fuel, heal the world, other application benefits.

The goal here is to identify them, them to identify us to figure how we work together who pays for those research and development projects, who pays the registered products, who has got the margin and distribution channels to launch those, some of those we can do on our own, some of those we're doing with the animal nutrition company, some of those are like BSF, Abengoa, Sanofi, so we realize that we have no intentions [ph] of what the engine that we created with C1 is getting better, cheaper, faster and more versatile and it's easy to make a higher levels at lower cost.

And so, with the advent of the people in how many we have, with the new hires and in the case of Ronen for example, we expect to drive the versatility and yielding higher and faster than we have in the past and we put resource so that in doing that and hopefully that we can get the message out and obviously have been – in addition to the Danai like myself and Wim, Ronen will not be going out as part of his responsibility in trying to help us identify new product and opportunities, maybe potentially new markets we have more experience in and try to bring in more and more partners and more and more potential licensees and more and more R&D revenues that lead to licenses, more and more collaborations.

You know, the world is our oyster and we have to, you know, put the sand in the oyster and let the pearl grow and we have a lot of opportunity to do that to growing. And people have to find us. We have to find them. Danai and I are going to this World Bio Congress in Philadelphia next week. And I can assure you that we don't have any time other than partnering one-on-one meetings almost the entire time we're there, so.

Richard Deutsch – Ladenburg Thalmann

OK. Could you update to your presentations to show us on a comparative level your competitive nature with your C1 systems versus, you know, the latest from DuPont and Novisyn so we can actually look at where you stand versus the biggest, the best in the world?

Mark A. Emalfarb

So, I think, Rick, that, you know, obviously we're not inside DuPont and we're not inside Novisyn so we don't know what the cost structure is. We can just get enzymes and test the performance equal, you know, how it works on a certain substrate.

So, you know, we have done …

Richard Deutsch – Ladenburg Thalmann

Right. Versus their most advanced products.

Mark A. Emalfarb

And we've done that …

Richard Deutsch – Ladenburg Thalmann

Yes.

Mark A. Emalfarb

We've done that. We've shown that. We have CMAX 5 coming out. So when we have CMAX 5, we'll probably do comparative to whatever we can get our hands on at the time just like we did with the CMAX 3 and CMAX 4, CMAX 1. So, be patient. It will come when we have the data and we have the competitive products to go ahead to head on. But in terms of their productivity, we don't know what they are doing. Because they're not sharing the information with the public because they are selling enzymes, they are not selling licenses.

Richard Deutsch – Ladenburg Thalmann

Right. OK. But they have put up performance metrics on some of their existing products and I – you know, that's what I was looking for, just the comparison against their claims, you know, versus what your claims are. But I understand.

Thank you. Congratulations on getting a little momentum and a little more inside into your future, you know, expected things going forward. Thanks a lot.

Mark A. Emalfarb

I am showing no further questions this time. And I'll turn things back over to Mr.Emalfarb for closing comments.

Mark A. Emalfarb

We want to thank our shareholders in support with Dyadic for being patient, always spent a time to put the technology and resources in place to grow the business to profitability, which we expect to achieve within the next two or three years. We were showing very good progress so far in 2014 towards achieving this objective. And we are continuing to take further steps to drive product revenues and increased margins as demonstrated by this quarter's results. We look forward to reporting our future progress to you during our second quarter call in early August. I also want to remind you that our annual shareholder meeting will be held in late June where we will further update you on what is happening.

Operator

This concludes our program for today. You may all disconnect.

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