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Dyadic International (OTCQX:DYAI)

Q2 2014 Earnings Conference Call

August 14, 2014 5:00 PM ET

Executives

Michael Faby - VP, Finance

Mark Emalfarb - President and CEO

Danai Brooks - EVP and COO

Tom Dubinski - CFO

Analysts

Tim Quinlisk - Mayo Capital

Richard Deutsch - Ladenburg Thalmann

Barry Kitt - Pinnaccle Fund

Operator

Welcome to Dyadic International's Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. My name is Matt, and I will be your conference coordinator today.

As a reminder, today's call is being recorded. At this time, I would like to introduce your host for today's call, Michael Faby, Dyadic's Vice President of Finance.

Michael Faby

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

I'm joined today by Dyadic's Chairman, President and Chief Executive Officer, Mark Emalfarb; our Vice President and Chief Operating Officer, Danai Brooks; and our new Chief Financial Officer, Tom Dubinski. On today's call Mark and Danai will cover operating highlights, business development and corporate strategy, and Tom 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 financial 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 factors section in Dyadic's filings with the OTC markets group, including Dyadic's annual report filed on March 31st, 2014, as well as our Form 10 registration statement, which we expect to file later today with the Securities and Exchange Commission. 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 Emalfarb

Thank you, Mark, and I want to thank all of you for joining us on today's call. The past quarter continued to be an extremely exciting time at Dyadic from both a business and technology perspective.

In terms of our licensing and collaboration opportunities, we are currently in various stages of negotiations and discussions with a number of companies. These negotiations and discussions with both existing licensees who are interested in potentially expanding the rights, as well as new licensees, including first and second generation biofuels, animal nutrition, and other applications within the industrial enzyme industry.

From a the technology side of the business, we are achieving very good results from our ongoing research and development activities, and our own development pipeline, and excellent results in the further development of our C1 white strain expression system. Many of our third party and government funded research programs continue to see very promising results as well. In some cases, such as with the BASF project, we are ahead of schedule, and expect to receive milestone payments from this project, earlier than expected.

We believe the genomic revolution is upon us. With the rapidly dropping cost of gene discovery, there appears to be a growing number of gene candidates that need to be turned into products. We believe that one of the biggest bottlenecks in biotechnology today is turning genes into products with high yield at low costs. We believe that is precisely our C1 technology sweet spot, and with the progress we are making with the rapidly improving expression levels with our C1 white strain, commercial interest to C1 is growing.

There is a saying in the biotechnology industry, an expression system is not everything, but everything is nothing but have a good expression system. Dyadic C1 expression system is one of the best for a wide variety of applications.

While we continue to pursue all opportunities, including those in the field of second generation biofuels, bio-based chemicals, biopharmaceuticals, animal health and other industrial enzyme markets, one area we and the first generation biofuel industry at large are particularly interested in, is related to the July 2nd ruling from the EPA that corn kernel fiber qualifies as crop residue, and eligible for RIN credits. We believe this opens up a significant potential opportunity for us, to target our C1 expression system for enzyme development at first generation biofuels, where there is already 15 billion gallons of capacity looking for ways to take advantage of cellulose agreement credits. The ability to point enzymes to this opportunity could have a significant impact, not only to our business, but also to the entire first generation ethanol industry.

Abengoa, one of our C1 licensees announced this past Tuesday during their second quarter conference call, the following; regarding our Hugoton plant, we continue working on the startup of this facility expected to begin producing ethanol during the following weeks. Construction has been completed. We are now in the commissioning phase. Meanwhile, we have already secured -- started the production of our own enzyme, and we will be delivering the first lot to the plant later this week. They also announced that they are continuing to improve the efficiency of the C1 enzymatic cocktail by an additional 30%. We expect to begin receiving royalties on the successful production of Abengoa's proprietary C1 based enzymes and royalties, as they start to produce cellulosic ethanol at Hugoton. Abengoa has reported investing nearly $1 billion in the second generation biofuel technology, and I encourage you to visit their web site to learn more about this exciting technology and this Hugoton facility.

In the second generation biofuel space, we recently signed a memorandum of understanding to enter into a collaboration agreement with CIMV, a leading biofuel pre-treatment technology company, which Danai will cover in more detail later. Additionally, we are in negotiations and in discussions with various parties for interest in conducting research and development at Dyadic Netherlands, and/or obtaining a license for C1 for use in both first and second generation biofuels and bio-based chemicals. We also have, or expect to have project expansions with several of our major partners, including Sanofi, BASF, and our confidential animal feed licensee.

Our enzyme business performance has been strong, with 28% year-over-year growth in product sales and our R&D revenues of 56% year-over-year for the six months ending June 30, 2014. Gross margins for the industrial enzyme products improved 18% year-over-year for that same period of time.

We continue to build our team with top notch talent, that will position Dyadic for future growth. Tom Dubinski, our new Chief Financial Officer brings experience with him from a number of fully reporting SEC companies, which give Dyadic enhanced skill and expertise in the general controls, registrations and SEC filings. He shares our strategic vision for the future, and has worked to develop financial competencies for many high growth organizations in the past. Tom will give you more detail in his background later.

Also during the quarter, we added Mike Tarnok to the Board of Directors. Mike is the current Chairman of the Board and former Interim CEO of Keryx Biopharmaceuticals, a NASDAQ listed biotech company, with a $1.5 billion market capitalization. Prior to Keryx, Mike had a 25-year career at Pfizer in senior finance and operating roles. Over the past 13 months, we have now brought on board a new Chief Operating Officer, a new Chief Financial Officer, a leading pharmaceutical executive for the Board of Directors, a new head of sales in Europe from DuPont; one of the most senior scientists from our licensee Codexis; and 11 additional scientists, which bring our total R&D headcount to 32.

During this expansion, where staff increased by 44% and our scientific and operational capabilities have dramatically improved, our SG&A and R&D budget, excluding the litigation against our former legal counsel, has increased by only 15%.

We are very excited to inform you about Dyadic's progress towards becoming a full SEC reporting company. We expect to file our Form 10 later today with the SEC. We will now go through a common period, before we potentially become a fully reporting company. Although this timeline may be extended, as we receive comments from the SEC.

As a commitment to our shareholders, we have put in an enormous effort and energy to uplift to the OTCQX and finalize our SEC registration over the past year. With this broader profile, we have stepped up our efforts to better inform both retail and institutional investors about the value and potential if Dyadic to an increased presence, investor conferences and institutional road shows. In addition, we are continuing with our rebranding efforts, and should have a completely revised and freshened web site within next few months to assist with these efforts as well.

Finally, with regards to our litigations against our former legal counsel, the court-ordered remediation has now scheduled for November 10th and 11th, and immediately has been identified. We believe that we have an extremely strong case, and are legitimately seeking hundreds of millions of dollars in damages, both from among other things, market cap loss and lost opportunities.

I will now turn over to Danai Brooks, our Chief Operating Officer to discuss the operations and business development.

Danai Brooks

Thank you, Mark. I will focus today on new business opportunities, the recently announced collaboration with CIMV, some of our technology advances, and discuss actions we are taking around our cash position.

From a business development side, we have set very high expectations for the company. We are in negotiations and discussions with a number of additional parties in both first and second generation biofuels, to collaborate or license our technology. Other new opportunities, include among others, the one mentioned earlier by Mark, related to breaking down corn fiber, as well as a variety of other novel enzymes for a number of applications in animal health, baking, brewing bio-based chemicals, biopharmaceuticals and other market. Ongoing negotiations and discussions are with leading companies across the globe, including in the U.S., Western Europe, Brazil, India, China, Japan and Southeast Asia. Any one of these agreements could have a material impact on the current shareholder value.

We are excited about our new collaboration with CIMV in the area of cellulosic biofuels and bio-based chemicals. This relationship grew out of our work together in the EU-funded Biomimetic program, which began in 2011. CIMV's patented approach to separate the three main components of bio [ph] material, allows both production of high quality cellulose and hemi-cellulose, which is especially well suited to our enzymes, and Biolignin, a pure form of lignin, that may be sold commercially as a high value, environmentally friendly alternatives to petroleum-based chemicals, resulting in a much higher return on investment.

Under the five year collaboration, Dyadic and CIMV are working together to develop more efficient fully integrated processes to produce environmentally low impact biofuels and bio-based chemicals. Dyadic anticipates supply enzymes to CIMV's plant, 2015 demonstration plant, as well as licensing our C1 technology for onsite production of enzymes at CIMV's future commercial scale plans.

To complete the value chain from biomass to bioethanol, CIMV is also collaborating with Taurus Energy, a leading developer of yeast technology to turn cellulosic sugar created by our enzymes, into bioethanol for international development, where CIMV is collaborating with Pearson Capital, a leading developer of major infrastructure transportation and energy projects, including highways, bridges, dams and power plants in the emerging markets of China, Africa and Latin America.

The investment in our R&D center in Holland continues to pay off, as we are seeing rapid increases in yields from our production strains, significantly reducing the overall production cost for our future C1-based products. The C1 white strain, which allows us to create pure enzymes and other proteins, is giving its very exciting results on a variety of projects in terms of both strain and process improvement.

As Mark mentioned, revenue for the R&D facility is up 56% year-over-year for the first half of 2014 versus the first half of 2013, and the 32% team is currently supporting 17 projects, up from 20 heads in 10 projects 12 months ago. The facility currently has nine public-private funded programs, four commercial projects with Sanofi, BASF, our confidential animal feed licensee and a second pharmaceutical company, and we have initiated an additional two internal product development projects, for a current total of four; an animal feed enzyme, a food enzyme, our second generation biofuel program, and a product used in the pharmaceutical industry. We are also working on platform improvements for both C1 strain development and fermentation optimization.

On the operation side, as Mark mentioned, the gross margin percentage of our industrial enzyme business has improved dramatically, by 18 percentage points in the first half of 2014 as compared to the first half of 2013. We have been successful in a number of initiatives from improving fermentation yields, improving our raw material sourcing and logistics, and improving certain other manufacturing processes, such as downstream processing of our enzymes. We are very proud of these achievements over the past six months, and hope to continue them into the remainder of 2014.

Despite improved business performance, we have had a cash decrease of $4.6 million over the first six months of the year. Our largest investments were in $1.1 million spent on expert witnesses for our litigation against our former legal counsel, and $1.3 million in increased inventory and other working capital items. We expect to reduce our professional fees associated with the litigation by approximately $0.7 million for the remaining six months of 2014, as compared to the first six months of 2014, and we are actively drawing down inventory and targeting a $1 million reduction from our June 30, 2014 inventory levels.

The reduction in legal fees, inventory and working capital should represent an improvement of $3 million in the remaining six months of 2014 as compared to the first six months. In addition, we expect to receive milestone and royalty payments from Abengoa, and one or more milestone payments from BASF in the remaining half year.

In order to address our capital needs, we are actively exploring several value creating transactions, including but not limited to, licensing our C1 technologies to new collaborators, expanding technical or geographical licensing options for existing licensees, raising additional debt or equity financing if necessary, and extending the maturity dates of our existing convertible subordinated debt, and our shareholder [indiscernible].

Based on the current status of our business operations, announcing any new licensees, proceeds from our litigation or financings, we believe that our existing cash will be adequate to satisfy our needs for at least the next 12 months.

Now let me turn it over to our new CFO Tom Dubinski, who will go through our financial overview. Tom?

Tom Dubinski

Thank you, Danai. I would like to express my excitement of [indiscernible] Dyadic team, the company has a world class technology platform, solid business fundamentals and a top notch management team. Prior to joining Dyadic, I held various financial positions of increasing responsibility in the healthcare and biotechnology industry. I served as a management consultant, where I advised public and private clients on financial strategy and operations. I have also held senior level finance and accounting positions at Walgreens, Novartis, MTS and Abbott Laboratories. My role at Dyadic will leverage my past experience with internal controls, public company reporting and strategic planning.

Before reviewing the second quarter 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 web sites.

From a revenue perspective, net product related revenue for the six months increased 28% to $4.9 million from $3.8 million for the same period a year ago. The relatively high growth rate for the period was driven by an increased sales in nearly all of our market segments, with the food, animal food and nutrition segment contributing 24%, starch and alcohol 65%, and brewing 63%, which are marked as showing the largest increase for the six month period.

License fee revenue for the six months decreased $5 million, as no license fee contracts were signed in the first half of 2014. in Q2 2013, we entered into a license agreement with BASF, which called for a $5 million upfront license fee, and an additional $1 million fee due upon the completion of transfer of certain technologies, which was completed and recognized in Q4 of 2013.

Research and development revenue for the six months increased 56% to $1.1 million compared to $725,000 in 2013. The increase was due to several projects meeting milestone targets and objective suited than originally anticipated. Additionally, a number of projects accounted for on a completed contract basis, met their technological milestones and deliverables.

Total revenue for the six month period decreased $3.6 million, due $6 million compared to $9.6 million for the same period a year ago. This increase in license fee revenue of $5 million previously discussed was offset by increases in the product related revenue of $1.1 million and the research and development revenue of $405,000 for the six month period ended June 30th of 2014.

Gross profit for the six month period decreased $1.9 million compared to $5.7 million for the same period a year ago. The decrease primarily was due to the decrease in license fee revenue of $5 million and a related margin impact at a license transaction realized. Excluding the effects of the decrease in license fee revenues, gross profit for the six months ended June 30th increased from 15% in 2013 to 32% for the six months ended June 30, 2014. The increase was due to a combination of fermentation and recovery yields for our enzyme products, and meeting certain contractual milestones sooner on a number of our research and development projects.

Operating expenses; general and administrative expenses were $3.6 million for the six months ended June 30, 2014 as compared to $2.4 million for the six months ended June 30, 2013, an increase of 51%. The most significant portion of this increase was attributable to continued and ongoing legal and expert work in connection with our lawsuit against our former outside legal counsel.

Sales and marketing expenses for the six month period ended June 30, 2014 rose 39% to $583,000. The increase is due to the addition of a new animal feed salesman in June of 2014, and the additional compensation and travel related costs incurred, in support of new and more aggressive sales initiatives. Additionally, new sales resources were brought in late in the second quarter of 2014.

Research and development for the six month period ended June 30, 2014, was up 15% to $655,000. The increase was originally expected to be higher, as resources were being allocated to internal research projects. However, a number of externally funded research projects acquired additional resources for certain periods of time, which increased our research and development revenue, that limited our ability to maintain dedicated resources purely on internal R&D.

As a result of the above discussion, overall operating expenses for the six month period ended June 30, 2014 increased 42% to $4.9 million compared to $3.4 million in the same period last year.

Net income and loss; net loss for the six months was $3.2 million or $0.10 per basic and diluted share, compared to a net income of $1.9 million or $0.06 per basic and $0.05 per diluted share for the same period a year ago. Exclusive of litigation related legal fees, the net loss for the six months ended June 30, 2014 would have been $2.2 million or $0.06 per basic and fully diluted share, as compared to net income of $2.3 million or $0.07 per basic and fully diluted share for the six months ended June 30, 2013.

Financial position and cash flow analysis; as of June 30, 2014, cash and cash equivalents were $4.3 million compared to $8.9 million at December 31, 2013. During the six months ended June 30, 2014, the company used approximately $4.6 million in cash and cash equivalents, versus generating $3.1 million for the same period in 2013. Two significant uses of cash and cash equivalents for the six months ended June 30, 2014, were to fund the litigation against former outside legal counsel and restock our inventory levels.

As reflected in our condensed consolidated financial statements, we incurred a loss of approximately $3.2 million and a profit of $1.9 million for the six months ended June 30, 2014 and 2013 respectively. Net cash used in operating activities was approximately $4.5 million for the six months ended June 30, 2014, net cash provided by operating activities for the six months ended June 30, 2013, was $3.1 million.

From investing activities, for the six months ended June 30, 2014, our net cash used in investment activities was approximately $164,000 as compared to approximately $132,000 for the six months ended June 30, 2013. This increase of approximately $32,000 was mainly due to increase on our capital expenditures at our research facility in the Netherlands, to support our new product development activity. The expansion of the lab was completed in January of 2014.

From financing activities, for the six months ended June 30, 2014, net cash provided to financing activities was $40,000. This amount was received as a repayment of a stock subscription receivable under our 2013 employee loan program, in connection with their exercise of stock options to purchase 250,000 shares of common stock.

Shareholders' equity and accumulated deficit at June 30th of 2014 and 2013, our history of operating losses has resulted in an accumulated deficit of approximately $81.8 million and a total negative stockholders equity of approximately $245,000 as of June 30, 2014. Total stockholder equity was approximately $2.7 million as of December 31, 2013.

Now I'd like to turn the call back to our operator to take your questions. Matt?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Tim Quinlisk with Mayo Capital.

Tim Quinlisk - Mayo Capital

Hi guys. Thanks for taking my call. Mark, I wanted to maybe explore a little bit further the new designation or the pathway by the EPA with regards to sort of the corn residuals, and what kind of impact that could be on further pushing enzyme use in first generation, particularly in light of the fact, we are already starting to see some press -- from some competitors sort of counting both realized gains in energy savings and yields coming out of first generation ethanol. So if you could sort of help me understand that a little better. And then secondly, how would you approach that market, either on a direct or indirect basis through some of your existing licensees already?

Mark Emalfarb

Well thanks Tim for joining us. We have had discussions with a variety of companies, some as recent as this week, that are aiming exactly at that, as trying to figure out a way to extract the cellulosic part of their traditional corn ethanol business, so they can get those RINs. We would address that opportunity in a way that some of these discussions we are talking about research funding, funding some kind of collaborative effort, license agreements, where they feel that in some way that's even more exciting initially, because there's 15 billion gallons worth of ethanol being produced today, that capital is already being spent, and they are looking ways to extract more value out of it and capture those RINs.

And the EPA ruling allowing, under certain circumstances, to get cellulosic ethanol credits has really stimulated them and excited the industry to try to figure out a way to extract those RINs, as well as improve their yields. And so, we would do that as a direct program and developing our own enzymes, and/or in conjunction with one or more of the ethanol players, and of course, our license with Abengoa allows them to go after first generation ethanol as well, and as I think they made public in the past, that's one of their targets, and they recognize this opportunity for getting cellulosic RINs, that's going to give somewhere between 3% and 10% in yields anyway.

So hopefully [indiscernible].

Tim Quinlisk - Mayo Capital

Mark, would you envision this as significant enough, where you could potentially see, instead of standalone second gen facilities, maybe sort of a hybrid approach or sort of bolt-on to existing first generation facilities to sort of capture and integrate that better or no?

Mark Emalfarb

I think that's certainly feasible, and I think a lot of people are already evaluating it. Some people are already doing that. But I think even more important to that is, some of these people, whether it’s a dry mill or a wet mill, are looking to develop enzyme that fit right into existing process with no CapEx, no extra expense, just getting at the cellulosic material, so they can get those RINs, in addition to the extra yield and get those cellulosic RINs by doing that. So the bolt-on is a great approach, but quite frankly, some of these guys are talking about just directly putting it in their existing process, in a certain place in the their operations, that will allow them to grab cellulosic sugars out in that process, and collect those cellulosic RINs.

Tim Quinlisk - Mayo Capital

Okay. Then just one follow-on; if you look at the landscape, particularly in North America, in terms of the make up of the producer. There is a couple of large players; I am thinking about the ADMs of the world and the Valero that has got six, seven plants, with 100 million gallon capacity. Is that -- are those type of larger players more likely to embrace a model that would build and sort of product on-site, their own enzymes as opposed to buy the enzymes directly from a more established player like Novozymes?

Mark Emalfarb

Well I mean obviously the larger player, the bigger impact it has on their business, the more they can afford to invest in R&D. So I think that those types of companies, I can't really get specific in names, are absolutely interested in garnering those benefits, and we certainly are reaching out and have had discussions with some of those people today. So I think you are probably on target with that, but I really can't go much further.

Tim Quinlisk - Mayo Capital

Okay. And just finally, one clarification on the Form 10 that's filed, you noted that you will file it by the end of the business today, it is a public observer -- so we are going to be able to see that immediately, or do we have to wait until this comment period, do you think expires before that's published?

Mark Emalfarb

I am not 100% sure of that, when we file that. I think that its --

Tim Quinlisk - Mayo Capital

Is that going to be made available to them, or they have to wait till the SEC reviews?

Mark Emalfarb

I think it will be pending SEC review.

Tim Quinlisk - Mayo Capital

Right. And okay, is there a specified period, is it 30, 60, 90 days, or --?

Tom Dubinski

There is a 60-day period that they have to --

Mark Emalfarb

To evaluate it. They might actually complete that review before 60 days, but they have 60 days to review it, provide comments that we can respond to.

Tim Quinlisk - Mayo Capital

That's great. Thank you.

Tom Dubinski

But Tim, it can get dragged out if they ask us for comments, and they can stretch it out. But there is no serious comments back and forth, it could be as soon as within 60 days that we will be a fully reporting SEC company.

Tim Quinlisk - Mayo Capital

Okay, great. I will get back in the queue. Thank you.

Operator

Then we will take a question from Walt Parnell, Private Investor.

Unidentified Analyst

Hey Mark. You know, I was just looking at my sheet. It turns out I have been an investor since October 12, 2009, so I am starting to get a little history here. Look, I find this report fairly alarming. I am alarmed at the rates that you burned through cash in the first half of the year. I am glad to hear, you are doing some things to mitigate that going forward, but you're not so confident in your ability to make that cash last, but you're not considering additional equity or debt offerings, and additional or convertible debt offerings at this stock price, not very attractive to me. In view of the precarious, somewhat precarious cash situation you find yourself in, why did you strike a deal like you did with CIMV, where you didn't extract an upfront license fee, as you usually do?

Mark Emalfarb

Well, I think I can let Danai answer that question if you'd like? Go ahead Danai.

Danai Brooks

So for CIMV, they are a little bit earlier stage than some of the other companies in terms of where they are on the process. They have a pilot facility in France today. They are building that first demonstration facility next year, and they are several years away from commercial production. And so for that company and that situation, it was either late to do a deal few years down the road, or partner with them and lock them up with our technology for this collaboration, and get in a situation where we are in place and our technology just match up, and it will end up being the license fee about a few years down the road. So either not do a deal right away, or announce something that is a former collaboration, where we are working together today.

Mark Emalfarb

And I can elaborate a little bit on that, on the picking on our part. So if you think about, when you do a biopharmaceutical drug, you get Phase 1, Phase 2, Phase 3. By the time you are in the Phase 2, they have already picked their expression host, and if you're not in that process, you get left behind. So the potential opportunity that we see of their technology to be able to make pure cellulose, its easier to digest, and it appears as one of their partners and investors in their company is very strong.

And we know things that we haven't made public, in terms of who they may align themselves with to build a multitude of plants in a variety of different countries. We just hoped that it would be better to get embedded with them now and be part of that process, than to wait and have Novozymes or DSM or somebody else creep in; because if you look at it, you think about it, DSM paid $100 million plus to get involved with POET. Novozymes paid $100 million plus to get involved with M&G. So we are not putting money upfront to get [indiscernible], in this particular case. Obviously in the case of Abengoa, its even better, they actually paid us money to get involved early on and to expand their license.

So we think it’s a good opportunity. We think it’s a good approach. We think the technology has promise, and we didn't want to wait and take that chance to let somebody else come in and steal the opportunity from us.

Unidentified Analyst

All right. Well good luck with your progress, payments and licenses in the next few months, because that cash has been worried [ph].

Mark Emalfarb

Thanks Paul. We are working out. Thank you.

Operator

(Operator Instructions). At this time, we will take a question from Richard Deutsch with Ladenburg Thalmann.

Richard Deutsch - Ladenburg Thalmann

Yes. Thank you for taking my call, and I got to tell you, you finally delivered for the quarter, much so, Walt [indiscernible] your cash burn. It's miniscule versus the opportunity that you have and the approaching clarity that you have and the maturity of some of these contracts with some of these world-leading multibillion market players. So I am not worried about the cash at all, and I certainly don't expect a dilutive situation to come around.

My question though is on a project that I have had a great deal of excitement about, and I'd like you to see if we can illuminate what is happening with your animal feed customer that is expected to file a registration statement? Last I recall is that you indicated, correct me if I am wrong, that they had achieved some productivity gains, and we are withdrawing their expected registration statements, in order to operate their filing to incorporate, a more advanced better production strain. So can you give us a little clarity on what you are doing and when they expect to do it, how important it might be?

Mark Emalfarb

Okay. So I mean in anticipation of these types of questions, I did check in with our lab in Holland, who is working closely with them on their project. And I think what you have expressed is exactly where its at, is that every time you make a change in a strain in the fermentation process, and get improved yields and performance, they have to obviously do chicken studies or pig studies or animal feed studies, to be able to present that data to the regulatory agencies on the new strain and the new process. Once they do that, they are locked in, and so they are -- from my understanding is, on a new and improved strain and process, they are running animal feed studies today, as we speak, and when those are done, hopefully they will feel confident that it will go forward and that will become the product they register. So once they put that stake in the ground, it’s a long term process, its probably the product they are going to sell for five or 10 years, so they wanted to make sure, that I think they had the most competitive best performing product, before they pull the trigger.

So they are in the animal feed studies right now, and a lot of the regulatory work has already been done upfront, in terms of the toxicity, the pathogenicity and other things that needed to be done, and they are just waiting for these additional feed studies, and from that hopefully they will pull forward.

Richard Deutsch - Ladenburg Thalmann

I just want to be clear. So are you confirming that they have actually had a greater deal of success than they originally targeted, and that's the reason for this few month's delay in the actual presentation of the registration statement?

Mark Emalfarb

Yes. But what we are confirming to you is that, they believe that the newer strain in process that we have created with them is higher productivity, better performance than it was six months ago, or a year ago, or two years ago, as they keep improving. And at some point, they just got to stop, launch a product, and I think -- I am hoping at this time, that they make that decision that its productive enough, performance is equal or better than average, but below our cost, and they want to pull forward. So again, they are running the studies and those animal studies are done, they will decide what they are going to do. They may take that product, they may go back to the one that was like three or six months ago, but we are all hopeful that in fact, that one that they have today is better and cheaper.

Richard Deutsch - Ladenburg Thalmann

Okay. And what would be the -- going back to what Walt was talking about, after this product is launched, would you consider that a significant event financially for Dyadic or not?

Mark Emalfarb

Well of course, we consider it a significant event, not so much when it was launched. Of course, it’s a good event. But from a cash flow perspective, they have to get it registered, and they have to transfer the customers from their existing product to the new product.

Richard Deutsch - Ladenburg Thalmann

Okay. So what's the opportunity for Dyadic from this customer's position in the animal feed business?

Mark Emalfarb

Well this is a very large customer that already has a big market share in this type of product. We view this as a very significant opportunity for us, to generate royalties, without any cost of goods. So it drops right to the bottom line, when we collect those royalties.

Richard Deutsch - Ladenburg Thalmann

They don't have an exclusive in this area. Do you have any opportunities, now that these guys are moving forward to open up other development projects with other animal feed producers?

Mark Emalfarb

We are obviously in discussions and negotiations with a variety of those type of people. BASF, by the way, is another animal feed enzyme company, and they are developing their own enzymes for animal feed, and there is a variety of other people that we are in discussions with and in negotiations with to develop new and better products, or in some cases, just brand new products, because they are not even in that business today. Some are in it; some aren't in it. Some need better expression systems than they have on their own. Some have none. So I would say that's a big opportunity for us in a variety of fronts.

Richard Deutsch - Ladenburg Thalmann

Okay. And just to finish, you mentioned BASF is working on animal feed enzymes. Is that utilizing their license with Dyadic, or that's a separate?

Mark Emalfarb

I can't really tell you what they are doing, but obviously, we expect BASF to implement C1 in a variety of different programs, including animal feed.

Richard Deutsch - Ladenburg Thalmann

Okay. Well thank you and congratulations on all your accomplishments and your momentum going forward. I will get back in the queue. Thanks.

Operator

And we will take a follow-up from Tim Quinlisk of Mayo Capital.

Tim Quinlisk - Mayo Capital

Hey Mark, could you give us a quick update on what's going on with Sanofi? I know there was some -- you guys are waiting for some sort of discussions with them about sort of the path going forward, in terms of how that was going to proceed? Any update there, I would appreciate that?

Mark Emalfarb

Yeah so, again, our scientists have been in touch with Sanofi on several occasions. I think we both have agreed on a plan forward. We have been told that they are going to extend the program. We are just waiting for them to send the final agreements to sign that and move forward. But verbally they have committed that they are going forward. Its how big of a budget they are negotiating apparently, with how big a budget they are getting from people within Sanofi that they report to. So we expect it to continue, and we are hoping to do that very soon.

Tim Quinlisk - Mayo Capital

And Mark, would you anticipate that would just be a -- sort of an R&D kind of relationship, or could it potentially be -- at least not now, but maybe down the road, you might consider the non-exclusive like arrangement?

Mark Emalfarb

We obviously -- currently, we have an R&D relationship, where they will fund some of the research to develop this vaccine. We expect, that if we in fact can meet some of the targets, and it progresses continuously, that it will lead to significant payment upfront for them to take the technology in. I mean, if everything was perfect, the R&D program would go well. They'd fund it continuing going forward, some time in the next six months to a year. Hopefully, they would see enough promise, that they then would say, we want to bring it in-house and grow it up ourselves, and validate sort of what all the other licensees have done in the past, validate the productivity, and that we can get the quantity and the quality out of that uric sample that we gave them through our R&D program at that point, if they like what they saw and they validate it, where we get an upfront fee, a fairly significant one; and then when they decided to the second step is to actually take a full license, to bring it in, it would be for that particular vaccine only, and we would get another big payment, then hopefully, they would see the promise of C1 and the advancements of the technology that not only we are making in their program, but we update them as to advancements we make in our own R&D efforts, and they have been quite significant over the last six months in the R&D, on the white strain in particular, both in terms of yield and purity, and that would lead to even a bigger relationship with Sanofi and others.

Tim Quinlisk - Mayo Capital

Okay. And then the second unnamed pharmaceutical company, is it working in the same sort of area that Sanofi is working in, or is it in a different kind of field?

Mark Emalfarb

Its in a different area, we can't disclose it. But it’s a much earlier stage project. It's more exploratory. Its exciting for us [indiscernible] second project in this base, but our focus right now is with the Sanofi project.

Tim Quinlisk - Mayo Capital

Okay. And then just finally, can you give us an update on, if you're seeing any tangible benefits yet, or perhaps too early with regards to the new hires you put into the facility in the Netherlands, as also on the sales side as well?

Mark Emalfarb

I think we are seeing tangible -- or lets say, intangible benefits. Tangible would be, you take the sales, you've got new sales, means they are already bringing in revenue, right? So we see the breadth and scope of experience and knowledge that he is bringing to this industry and these applications, in our particular space, interest he salesmen that's in Europe. He is a starch expert, which is one of our most successful products, as you see from the results, it has been growing. We believe that he is bringing a lot of expertise and context in relationships there. But we haven't seen the tangible numbers, because he just started to bottom out [indiscernible] in terms of tangibility.

And in terms of the scientific brainpower that we have brought in, we are seeing tangible results, and the science is that -- sort of on fire, in terms of where its going and has gone. We are really excited about the yields of productivity and some of the research programs that we are far-far further down the road than we would expect at this point, including, we mentioned, the BASF program. And so, we are seeing some benefit to that already, and quite frankly, we have very good scientists already in house, that are very good at doing the things they do with C1, and bringing in the extra horsepower is paying off. But its still too early to tell of how good, how far, how fast we can move this thing. But I can tell you, the expression levels is moving farther and faster on the white strain than we ever anticipated, and I think, some of our research partners are flabbergasted as well about that.

So our lab is located minutes away from Wageningen University, which is actually the number one life sciences university in continental Europe. So the talent pool that we have to pull from for that lab is enormous. So our ability to scale last year has been very effective, and we believe that we can continue to pull in top talent from that university and nearby, going forward as well.

Tim Quinlisk - Mayo Capital

Okay, great. Thank you.

Operator

This time, we will take a follow-up from Richard Deutsch with Ladenburg Thalmann.

Richard Deutsch - Ladenburg Thalmann

Okay. Well thanks for getting a second shot at you guys here. You've mentioned the white strain having exceptional progress, do you expect any patent filing to come out of that, and a second unrelated question, I was quite impressed with Tom O'Shaughnessy's projects that he was working on a couple of years ago in the pulp and paper industry, and several of the issues that you're dealing with, in terms of taking on distributorships or getting trials done. Can you give us an update on what's proceeding in that arena?

Mark Emalfarb

Yeah. So to deal with the white strain, we are excited about the results we are seeing. I think our research partners, for the most part are excited about the results we are seeing. The promise that its not what they are bringing to us, but kind of bring to their businesses. I think the data that we have generated, and some of the research we have conducted, we have already filed some patents in the white strain, of course, we are resolving more. But more importantly than that, we are going to be able to demonstrate to the world and all the people that are looking to turn DNA into products, that as you come through Dyadic Netherlands and Jupiter Florida to come with their projects, because we have a very-very powerful system that's getting better all the time. And I can tell you that the mass majority of the world, there is no way of turning DNA into products at low cost and high volume, and there is very few people that are available over this kind of platform. And I think that, our platform is already world class, and its just getting better. I think by being able to show data and demonstrate this, its going to lead to even bigger and better opportunities down the road, for our existing customers, as well as new customers who we are in negotiations and discussions with.

Richard Deutsch - Ladenburg Thalmann

Will you put any of those data points on your web site?

Mark Emalfarb

I think we will, and we will have to put them in a way, that hopefully that non-scientific people from the industry understand that the magnitude of the expression levels and the purity that we are getting on the C1 white strain is quite novel and unique.

Richard Deutsch - Ladenburg Thalmann

Okay. And how about Tom O'Shaughnessy's pulp and paper project?

Mark Emalfarb

Well its not Tom O'Shaughnessy's pulp and paper project, its Dyadic's pulp and paper project, and again, that's an industry that's very difficult. We have been working with distributors in that industry to try to get them on board and test and sample our products. We have actually supplied samples to a variety of industry leaders in that space, that actually have customers and salespeople calling on that industry, and they have been evaluating and testing it, and we are waiting for the results, and hopefully, they are buying to take that to the market for us. So that's an ongoing continuing evaluation, but that's something that we are not spending a lot of time on directly, we are doing it trying to get through some of the bigger customers that are in those plants on a daily basis, and we are just waiting for them to say yay or nay, and we are just waiting for those answers, it takes a long time.

Danai Brooks

And we just launched the Fibrezyme G4 product earlier this year, so that now we have a nice product for that sakes or better than what we had in the past. So that will hopefully get our foot in the door for some of these bigger distributors.

Richard Deutsch - Ladenburg Thalmann

All right. Thank you.

Operator

At this time we will take a question from Barry Kitt with Pinnaccle Fund.

Mark Emalfarb

Hello?

Operator

Mr. Kitt, please touch your mute button, we cannot hear you.

Barry Kitt - Pinnaccle Fund

Can you hear me now?

Mark Emalfarb

Yes, we can hear you. Hi Barry.

Barry Kitt - Pinnaccle Fund

Oh I am sorry, I had mute on. I apologize. So anyways, Mark and team, I just wanted to -- I have been involved for almost 11 years, since before you went public and I am the largest holder of the convertible debt securities, and I just wanted to tell everyone, express -- that I have no concern for the company's cash position. There is too many good things going on to worry about that. I want to compliment Mark on building the team he has built, and the opportunities you have in hand, I think, are unprecedented in the company's history and no real questions other than that. Just wanted to express my confidence in the company and the management team and the direction that you're taking.

Mark Emalfarb

Well thank you Barry. We think that the technologies that we have created has the ability to break hundreds, if not thousands of products for people over time. We think that we have [indiscernible] platform that very few people have, I think the barrier to entry is huge, to get involved in this space. And we see a growing number of companies interested in it, I think as Danai pointed out, from South America, Asia, Europe and North America, we have discussions and negotiations ongoing with numerous companies, and I expect that line of company to get bigger, not smaller.

Barry Kitt - Pinnaccle Fund

Thanks Mark, and also thanks for working through the Form 10 issue, and finally getting us listed, so more brokers can talk to their clients about this opportunity.

Mark Emalfarb

Right. And we -- I think as Danai pointed out, we are going to go out and present the opportunity to a wider audience, both in institutional and retail, and try to have people understand the enormous opportunity that we believe we have at our hands, and we factor, unlike most biotech companies -- we have products that are being made today, licensees have made products and quite frankly, up to 500,000 liters from [indiscernible]. Abengoa reported Tuesday, that they actually have successfully produced C1s. They are a variety of our licensed strain, and started shipping that product or will be shortly, to their facility in Hugoton, Kansas. And I think, they may be the largest, let's say sized vessel that have ever been run cellulose at 500,000 liters is three times the size of the largest plants we have had, and quite frankly, 150,000 liters is enormous already.

So this is scalable, its programmable, we can take DNA, we can make it in large volumes cheaply. We just need to find the right genes to put in, and we are talking to the world scientific community, both industry and academics, to try to find those billion dollar molecules. In the meantime, they try to make the ones that are $10 million or $100 million opportunity for ourselves and for others. So exciting times, great opportunities ahead, technology is getting better, quicker, faster and cheaper, and our scientific team is just doing a phenomenal job with the number of people we have in hand.

So I want to thank al our shareholders for the opportunity to keep us going, and to be there for us, and we appreciate your support and your patience. The time that we have grown this business and we have turned this technology into something that's very-very exciting. And we have shown great progress in 2014 so far, towards reaching the objectives that we all hope would create value for shareholders. We think by filing the Form 10, which we expect to do by late today, will help -- not only will we become a fully reporting company down the road, I think its clearer, and the opportunity will be much easier for the public to understand and the investment community to understand the breadth and scope of opportunities that lie ahead.

And we look forward to further progress reports that we can give you in the third quarter, in some time in November. And I want to remind all our shareholders that we really-really appreciate your support, and we are working hard everyday to achieve all the great things we all expect. Thank you.

Operator

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

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Source: Dyadic International's (DYAI) CEO Mark Emalfarb on Q2 2014 Results - Earnings Call Transcript

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