U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark one)
{x} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
{_} TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
For the transition period from ________________ to ________________
Commission file number 333-102629
-----------------------------------
Dyadic International, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 45-0486747
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 Intracoastal Pointe Drive, Suite 404 Jupiter Florida 33477
-------------------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(561) 743-8333
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes { x } No { }
As of May 13, 2005, there were 22,241,105 shares of registrant's common stock
outstanding, par value $.001 (including 300,300 shares held in escrow).
Transitional Small Business Disclosure Format (Check One): Yes { }; No {X}
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2005..................... 3
Condensed Consolidated Statements of Operations - Three-months ended
March 31, 2005 and 2004................................................... 4
Condensed Consolidated Statements of Cash Flows - Three-months ended
March 31, 2005 and 2004................................................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation................. 14
Item 3. Controls and Procedures................................................... 21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............... 21
Item 6. Exhibits.................................................................. 22
Signatures.................................................................................. 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Dyadic International, Inc.
Condensed Consolidated Balance Sheet
March 31, 2005
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 17,437,044
Accounts receivable, net of allowance for uncollectible accounts of $462,964 3,069,846
Inventory 6,747,069
Prepaid expenses and other current assets 744,183
------------
Total current assets 27,998,142
------------
Fixed assets, net 715,268
Intangible assets, net 187,271
Goodwill 467,821
Other assets 187,072
------------
Total assets $ 29,555,574
============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,929,441
Accrued expenses 1,405,235
Accrued interest payable to stockholders 62,094
Current portion of notes payable to stockholders 171,986
Deferred revenue 75,000
Income taxes payable 10,046
------------
Total current liabilities
4,653,802
------------
Long-term liabilities:
Notes payable to stockholders, including accrued interest, net
of current portion 3,353,325
Other liabilities 34,455
Minority interest 106,591
------------
Total long-term liabilities 3,494,371
------------
Total liabilities 8,148,173
------------
Stockholders' equity:
Preferred stock, $.0001 par value:
Authorized shares - 5,000,000; none issued and outstanding --
Common stock, $.001 par value,
Authorized shares - 100,000,000; issued and outstanding - 21,940,805 21,941
Additional paid-in capital 48,449,401
Notes receivable from exercise of stock options (462,500)
Accumulated deficit (26,601,441)
------------
Total stockholders' equity 21,407,401
------------
Total liabilities and stockholders' equity $ 29,555,574
============
See accompanying notes.
3
Dyadic International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
2005 2004
------------ ------------
Net sales $ 3,734,360 $ 3,989,875
Cost of goods sold 2,984,756 2,953,538
------------ ------------
Gross profit 749,604 1,036,337
------------ ------------
Expenses:
Research and development 1,718,396 850,383
Selling, general and administrative 1,868,363 976,331
------------ ------------
Total expenses 3,586,759 1,826,714
------------ ------------
Loss from operations (2,837,155) (790,377)
------------ ------------
Other income (expense):
Interest expense (173,402) (101,753)
Investment (loss) income, net (71,259) 1,336
Minority interest (7,424) (20,242)
Foreign currency exchange gains (losses), net 61,262 (54,720)
Other (expense) income, net (68,010) 1,508
------------ ------------
Total other expense (258,833) (173,871)
------------ ------------
Loss before income taxes (3,095,988) (964,248)
Provision for income taxes 12,307 26,256
------------ ------------
Net loss $ (3,108,295) $ (990,504)
============ ============
Net loss applicable to holders of common stock $ (3,108,295) $ (1,198,897)
============ ============
Net loss per common share:
Basic and Diluted $ (0.14) $ (0.10)
============ ============
Weighted average common shares used in calculating net loss per share:
Basic and diluted 21,934,583 12,460,806
============ ============
See accompanying notes.
4
Dyadic International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three-Months Ended March 31,
2005 2004
------------ ------------
Operating activities
Net loss $ (3,108,295) $ (990,504)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of fixed assets 120,954 125,940
Amortization of intangible and other assets 22,533 22,533
Amortization of costs related to modification of notes payable to stockholder 92,785 --
Minority interest 7,424 20,242
Provision for doubtful accounts 7,200 5,000
Stock issued for consulting services 3,740 --
Compensation expense on non-employee stock options 7,680 10,944
Changes in operating assets and liabilities:
Accounts receivable 1,036 371,161
Inventory (105,036) (1,015,485)
Prepaid expenses and other current assets 117,226 (18,515)
Other assets (952) (40,326)
Accounts payable (29,293) 624,842
Accrued expenses (28,657) 181,599
Accrued interest payable to stockholders (45,611) 144,924
Deferred revenue -- (45,756)
Income taxes payable (2,763) 23,690
Other liabilities (1,358) --
------------ ------------
Total adjustments 166,908 410,793
------------ ------------
Net cash used in operating activities (2,941,387) (579,711)
------------ ------------
Investing activities
Purchases of property and equipment (34,455) (36,215)
------------ ------------
Net cash used in investing activities (34,455) (36,215)
------------ ------------
Financing activities
Repayment of notes payable to stockholders -- (109,724)
Repayment of other notes payable -- (2,257)
Payment for issuance costs related to private offering (97,764) --
------------ ------------
Net cash used in financing activities (97,764) (111,981)
------------ ------------
Net decrease in cash and cash equivalents (3,073,606) (727,907)
Cash and cash equivalents at beginning of period 20,510,650 1,649,562
------------ ------------
Cash and cash equivalents at end of period $ 17,437,044 $ 921,655
------------ ------------
Supplemental cash flow information:
Cash paid for interest $ 137,410 $ 49,267
============ ============
Cash paid for income taxes $ 24,093 $ 2,566
============ ============
See accompanying notes.
5
Dyadic International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim information and with the instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments of a normal and recurring nature considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2005 may not necessarily be indicative of the results that may
be expected for the year ending December 31, 2005.
For further information, refer to Dyadic International, Inc.'s (the "Company")
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-KSB for the year ended December 31, 2004.
Merger
The Company was organized under the name CCP Worldwide, Inc., as a Delaware
corporation on September 23, 2002. On October 29, 2004, we completed the merger
of our newly created and wholly owned subsidiary, CCP Acquisition Corp., a
Florida corporation, with and into a Florida corporation formerly known as
Dyadic International, Inc., which was the surviving corporation of the Merger
and became our wholly owned subsidiary. Following the Merger, our new subsidiary
changed its name to Dyadic International (USA), Inc. ("Dyadic-Florida") from
Dyadic International, Inc., and the Company's name was changed to Dyadic
International, Inc. from CCP Worldwide, Inc.
Concurrently, the officers and directors of the Florida corporation formerly
known as Dyadic International, Inc. became the officers and directors of the
merged and reorganized entity. A total of 12,580,895 shares of common stock were
exchanged in the Merger, on a one-for-one basis, including the 300,300 shares
placed in escrow related to a development agreement. The Company's pre-Merger
obligations to contingently issue common shares in accordance with a real estate
acquisition agreement, employee stock options, nonemployee stock options and
warrants and convertible debt instruments were also assumed.
The Company has recorded the Merger as the issuance of stock for the net
monetary assets of CCP Worldwide, Inc. (which were nil), accompanied by a
recapitalization. This accounting is identical to that resulting from a reverse
acquisition, except that no goodwill or other intangible assets were recorded. A
total of 1,653,138 shares of common stock, representing the aggregate number of
shares held by stockholders of CCP Worldwide, Inc. immediately prior to the
Merger, have been retroactively reflected as outstanding for all periods
presented in the accompanying condensed consolidated financial statements.
Additionally, the accompanying condensed consolidated financial statements
retroactively reflect the authorized capital stock of CCP Worldwide, Inc. and
the resultant change from no par to $0.001 par value on the Company's common
stock.
Immediately prior to the Merger, CCP Worldwide, Inc. disposed of its only
operating subsidiary as part of a Split-off Agreement among CCP Worldwide, Inc.,
its wholly owned subsidiary, the Company and a former member of the board of
directors of CCP Worldwide, Inc.
As a result of the Merger and the Split-off Agreement, the only business
operations following the Merger Dyadic International, Inc., formerly CCP
Worldwide, Inc., are the operations of the Company.
6
Historical Results of Operations
The Company has incurred losses from operations during the last several years,
which have resulted in an accumulated deficit of approximately $26.6 million as
of March 31, 2005.
The Company has attributed these operating results, among other things, to
negative trends in the textile enzymes sector, utilization of funds for
acquiring and developing assets, including but not limited to intellectual
property and proprietary technology, expansion of its operations, establishment
of new affiliates, and increased research and development spending. In order to
advance its science and to develop new products, the Company has continued to
incur discretionary research and development expenditures in 2005. The Company
has historically funded losses from operations with proceeds from external
borrowings, borrowings from its stockholders, and sales of preferred and common
equity securities. The Company believes that if needed, it will raise sufficient
capital to continue to fund its operations and satisfy its obligations through
year end 2006.
Recent Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
(FIN 47). The document is an interpretation of FASB Statement 143, Asset
Retirement Obligations, which was issued in June 2001. The FASB issued the
Interpretation to address diverse accounting practices that have developed with
regard to the timing of liability recognition for legal obligations associated
with the retirement of a tangible long-lived asset in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. According to the Interpretation, uncertainty
about the timing and (or) method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005 (December 31, 2005, for calendar year-end
companies). Retrospective application of interim financial information is
permitted, but is not required. Early adoption of this Interpretation is
encouraged. The Company does not anticipate that the adoption of the new
standard will have an effect on the Company's financial position or the results
of its operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces
SFAS 123 and supersedes APB 25. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values, beginning with the first
interim or annual period after December 15, 2005. The Company will adopt SFAS
123R effective January 1, 2006. The grant-date fair value of employee share
options and similar instruments will be estimated using an option-pricing model
adjusted for any unique characteristics of a particular instrument. If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. Two transition alternatives will be allowed for the public
entities: the modified-prospective-transition method or the
modified-retrospective transition method. The Company has not yet determined the
method of adoption nor the effect of adopting SFAS 123R.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs: an Amendment to
ARB No. 43. This statement clarifies the types of costs that should be expensed
rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs, such as abnormal amounts of idle
facility expense, freight, handling costs and wasted material, associated with
operating facilities involved in inventory processing should be expensed or
capitalized. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005. Consequently, the Company will adopt the standard
in 2006. The Company does not anticipate that the adoption of the new standard
will have an effect on the Company's financial position or the results of its
operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements. Actual results could differ
from those estimates.
7
Net Loss Per Share
Basic net loss per share has been computed using the weighted-average number of
shares of common stock outstanding during the period. In arriving at net loss
applicable to common stockholders, accrued preferred stock dividends and
accretion of preferred stock issuance costs are deducted for each period
presented in which such cumulative preferred stock was outstanding.
The following table reflects the calculation of basic and diluted net loss per
share for the periods presented:
Three-Months Ended March 31
----------------------------
2005 2004
------------ ------------
Net loss $ (3,108,295) $ (990,504)
Less: Accrued dividends on preferred stock -- (198,907)
Accretion of preferred stock issuance costs -- (9,486)
------------ ------------
Net loss applicable to holders of common stock for basic
and diluted calculation (3,108,295) (1,198,897)
============ ============
Weighted average common shares used in computing net loss per common
share:
Basic and diluted 21,934,583 12,460,806
============ ============
Net loss per common share:
Basic and diluted $ (0.14) $ (0.10)
============ ============
The following potentially dilutive securities were not included in the
calculation of diluted net loss per share as they were anti-dilutive for the
respective periods presented:
Three-Months Ended March 31
---------------------
2005 2004
--------- ---------
Instruments to purchase common stock:
Stock options outstanding pursuant to the 2001 Equity
Compensation Plan 1,395,389 530,000
Other stock options 65,000 65,000
Warrants outstanding 6,952,776 1,500,000
Common stock issuable pursuant to conversion features:
Redeemable Series A convertible preferred stock -- 2,726,323
Subordinated convertible notes payable 473,835 339,572
--------- ---------
Total shares of common stock considered anti-dilutive 8,413,165 5,160,895
========= =========
A total of 300,300 contingently issuable shares under an agreement to conduct
research and development activities on behalf of the Company pursuant to an
arrangement entered into in connection with a manufacturing contract, are also
excluded. Such shares of common stock are unearned, nonvested, restricted shares
that will be considered outstanding once earned under the agreement.
Additionally, 300,300 shares of common stock potentially issuable under a real
estate purchase contract are not included in the above amounts as they are not
issuable until the purchase contract is closed, which is anticipated to occur in
the second quarter of 2005.
Inventory
Inventory primarily consists of finished goods including industrial enzymes used
in the industrial, chemical and agricultural markets, and is stated at the lower
of cost or market using the average cost method. Finished goods include raw
materials and manufacturing costs, substantially all of which are incurred
pursuant to agreements with independent manufacturers. Provisions have been made
to reduce excess or obsolete inventory to net realizable value.
8
Stock Option Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation (FIN 44), including related amendments and
interpretations, and provides pro forma disclosures of the compensation expense
determined under the fair value provisions of SFAS 123. Under APB 25, since the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.
Pro forma information regarding net loss and net loss per common share as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123 is presented below. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information is as follows:
Three-Months Ended March 31
-------------------------------
2005 2004
------------- -------------
Net loss applicable to holders of common stock, as reported for basic
and diluted calculations $ (3,108,295) $ (1,198,897)
Deduct: Fair value method stock option expense (74,080) (33,870)
------------- -------------
Pro forma net loss applicable to holders of common stock,
basic and diluted calculations $ (3,182,375) $ (1,232,767)
============= =============
Net loss per common share, as reported:
Basic and diluted $ (0.14) $ (0.10)
============= =============
Pro forma net loss per common share:
Basic and diluted $ (0.15) $ (0.10)
============= =============
Weighted average fair value per option granted during the period(1) $ 1.76 $ --
Assumptions:
Average risk free interest rate 3.74% 3.60%
Average volatility factor 50% 50%
Expected dividend yield 0% 0%
Expected life (in years) 5.00 5.00
(1) A Black-Scholes option-pricing model was used to develop the fair values
of the options granted.
Revenue Recognition
The Company recognizes revenues in accordance with Staff Accounting Bulletin
(SAB) No 104, Revenue Recognition in Financial Statements (SAB 104). SAB 104
sets forth four basic criteria that must be met before SEC registrants can
recognize revenue. These criteria are: persuasive evidence of an arrangement
must exist; delivery had to have taken place or services have had to been
9
rendered; the seller's price to the buyer should be fixed or determinable; and
collectibility of the receivable should be reasonably assured. Sales not meeting
any of the aforementioned criteria are deferred. Sales are comprised of gross
revenues less provisions for expected customer returns, if any. Reserves for
estimated returns and inventory credits are established by the Company, if
necessary, concurrently with the recognition of revenue. The amounts of reserves
are established based upon consideration of a variety of factors, including
estimates based on historical returns.
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
Research and Development
Research and development costs related to both present and future products are
charged to operations when incurred. Revenue received for research and
development is recognized as the Company meets its obligations under the related
agreement.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated into United States dollars in accordance with SFAS No. 52, Foreign
Currency Translation. Assets and liabilities of the Company's foreign
subsidiaries are translated at period-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the period. Certain
accounts receivable from customers are collected and certain accounts payable to
vendors are payable in foreign currencies. These amounts are adjusted to reflect
period-end exchange rates. Net translation adjustments and realized exchange
gains and losses are included as a component of foreign currency exchange gains
(losses), net, in the accompanying condensed consolidated statements of
operations.
2. Long-Term Liabilities
Long-term liabilities consist of the following at March 31, 2005:
Notes payable to stockholders:
Loan payable with a rate of 8% as of March 31, 2005 to Mark A.
Emalfarb Trust (Bridge Loan), secured by all assets of the Company,
in the original principal amount of $3,000,000, principal and
accrued interest due January 2007 and conversion price of $3.33.
Accrued interest of $239,941 included in principal balance. Net of
beneficial conversion feature of $201,726. $ 2,223,215
Subordinated convertible note payable to Mark A. Emalfarb Trust
(Emalfarb Trust Note) with a rate of 6%, secured by all assets of
the Company, in the original principal amount of $750,766, dated May
2001, principal and accrued interest due January 1, 2007, or earlier
upon a Qualified Public Offering, a Liquidation Event, a repurchase
by payor or the conversion of all Series A Preferred Stock into
Common Stock. Conversion price of $3.33. Accrued interest of $86,058
included in principal balance.
Net of beneficial conversion feature of $237,447.in principal balance. 599,377
Subordinated convertible note payable to Francisco Trust u/a/d
February 28, 1996 (the Francisco Trust) (Francisco Trust Note) with
a rate of 6%, secured by all assets of the Company, in the original
principal amount of $664,839, dated May 2001, principal and accrued
interest due January 1, 2007, or earlier upon a Qualified Public
Offering, a Liquidation Event, a repurchase by payor or the
conversion of all Series A Preferred Stock into Common Stock.
Conversion price of $3.33. Accrued interest of $76,209 included in
principal balance.
Net of beneficial conversion feature of $210,315. 530,733
--------------
$ 3,353,325
==============
Subordinated notes payable to the minority stockholders of a
subsidiary, interest at a weighted average rate of 6.0% as of March
31, 2005, no fixed repayment terms, classified as current. $ 171,986
==============
10
On May 29, 2003, the Company obtained a $3.0 million revolving note from a group
of shareholders, including the Chief Executive Officer, who contributed
$2,185,000, and a group of other Dyadic-Florida shareholders who contributed
$815,000, bearing interest at 8% per annum, with all unpaid principal and
interest originally due on January 2, 2004, and extended to January 1, 2005 on
February 13, 2004. Approximately $903,000 of the proceeds from the October
Offering were used to pay off the $815,000 of principal and approximately
$88,000 of accrued interest for the portion of the bridge loan contributed by
the group of other Dyadic-Florida shareholders. The loan is collateralized by a
security interest in all of the Company's assets.
The Mark A. Emalfarb Trust was also granted a warrant to purchase up to 1.5
million shares of the Company's common stock at the lesser of $4.50 per share or
the Series A Preferred conversion price, expiring ten years from the date of
grant (the Bridge Loan Warrant). In November 2004, the exercise price of the
Bridge Loan Warrant was reduced to $3.33 and the maturity date was extended to
January 1, 2007 in connection with the Merger. As a result, approximately
$343,000, representing the incremental fair value of the modified warrant as
compared to the fair value of the original warrant immediately before the
modification, will be amortized to interest expense through the new maturity
date. The remaining unamortized portion of $201,726 is reflected as a reduction
of notes payable to stockholders in the accompanying condensed consolidated
balance sheet for the three-month period ended March 31, 2005. Approximately
$29,000 was amortized to interest expense during the three-month period ended
March 31, 2005. Interest expense on the Bridge Loan was approximately $48,000
and $60,000 for the three-month periods ended March 31, 2005 and 2004,
respectively, excluding the amortization of the beneficial conversion feature of
approximately $29,000.
In connection with the Merger, the conversion prices of the subordinated
convertible notes payable to the Mark A. Emalfarb Trust and the Francisco Trust
were fixed at $3.33 and the maturity dates were extended to January 1, 2007. As
a result of the modification of the conversion price, a beneficial conversion
feature totaling approximately $554,000 was recorded in October 2004 and will be
amortized to interest expense through the new maturity date. The remaining
unamortized portion of $447,762 is reflected as a reduction of notes payable to
stockholders in the accompanying condensed consolidated balance sheet as of
March 31, 2005. Approximately $64,000 was amortized to interest expense during
the three-month period ended March 31, 2005.
Interest expense on the subordinated convertible notes payable was approximately
$23,000 and $5,000 for the three-month periods ended March 31, 2005 and 2004,
respectively. The notes payable and accrued interest due on the subordinated
convertible notes payable are convertible in whole or part into shares of the
Company's common stock at any time, at a conversion price equal to fair market
value of the Company's common stock.
Mark A. Emalfarb Trust and Francisco Trust are major stockholders of the Company
and are trusts benefiting the Company's President and Chief Executive Officer,
and his wife and children, respectively.
The subordinated notes payable to the minority stockholders of a subsidiary are
collateralized by the subsidiary's accounts receivable and inventories. Interest
expense on these subordinated notes payable was approximately $2,500 and $2,800
for the three-month periods ended March 31, 2005 and 2004, respectively, and
accrued interest of approximately $62,000 is included in accrued interest
payable to stockholders as of March 31, 2005.
3. Stockholders' Equity
In February 2005, the Company signed an agreement with an investor relations
consulting firm for a one year term. In addition to monthly cash compensation
and expense reimbursement, the Company issued 10,000 shares of common stock for
compensation of services to be rendered, which were valued at $39,000 based on
the fair market value of the Company's common stock on the date of grant. The
common stock has not been registered under the Securities Act and may not be
offered or sold absent registration under the Securities Act or an
11
applicable exemption from such registration requirements. The stock certificate
evidencing such securities bears a restricted legend. The agreement may be
terminated with five days prior notice on May 25, 2005 or August 25, 2005.
Unless the agreement is terminated, the Company will issue an additional 10,000
shares of common stock on each of those dates. The $39,000 of compensation
expense is being amortized over the term of the agreement. Deferred compensation
expense of approximately $35,000 is included in prepaid expenses and other
current assets in the accompanying condensed consolidated financial statements.
4. Commitments and Contingencies
Litigation, Claims and Assessments
In the opinion of management, there are no known pending legal proceedings that
would have a material effect on the Company's financial position, results of
operations or cash flows.
5. Segment Data Information
Operating segments are defined as components of an enterprise engaging in
business activities about which separate financial information is available that
is evaluated regularly by the chief operating decision maker or group in
deciding how to allocate resources and in assessing performance. Utilizing these
criteria, the Company has identified its reportable segments based on the
geographical markets they serve, which is consistent with how the Company
operates and reports internally.
The Company has three reportable segments: U.S. operations, Asian operations and
Netherlands operations. The U.S. reportable segment includes a subsidiary in
Poland that is considered auxiliary and integral to the U.S. operations. The
accounting policies for the segments are the same as those described in the
basis of presentation and summary of significant accounting policies. The
Company accounts for intersegment sales (which are eliminated in consolidation)
as if the sales were to third parties, that is, at current market prices. The
U.S. operating segment is a developer, manufacturer and distributor of enzyme
products, proteins, peptides and other bio-molecules derived from genes, and a
collaborative licensor of enabling proprietary technology for the development
and manufacturing of biological products and use in research and development.
The Asian operating segment is engaged in the manufacturing and distribution of
chemical and enzyme products to the textile and pulp and paper industries. The
Netherlands operating segment is also a developer of enzyme products, proteins,
peptides and other bio-molecules derived from genes and to date has invested
solely in research and development activities.
The following table summarizes the Company's segment and geographical
information:
Three-Months Ended March 31, 2005
----------------------------------------------------------------------------
U.S. Asian Netherlands
Operating Operating Operating
Segment Segment Segment Eliminations Totals
------------ ------------ ------------ ------------ ------------
Net Sales:
External customers $ 2,390,543 $ 1,343,817 $ -- $ -- $ 3,734,360
Intersegment 133,620 -- -- (133,620) --
------------ ------------ ------------ ------------ ------------
Total net sales 2,524,163 1,343,817 -- (133,620) 3,734,360
(Loss) income from operations (2,716,657) 70,376 (224,366) 33,492 (2,837,155)
Investment (loss) income, net (60,823) 131 8 (10,575) (71,259)
Interest expense (a) (132,655) (13,894) (37,428) 10,575 (173,402)
Depreciation and amortization 18,929 8,995 93,030 -- 120,954
Capital expenditures 24,526 9,929 -- -- 34,455
Total assets at March 31, 2005 27,882,307 2,187,087 286,710 (800,530) 29,555,574
12
Three-Months Ended March 31, 2004
----------------------------------------------------------------------------
U.S. Asian Netherlands
Operating Operating Operating
Segment Segment Segment Eliminations Totals
------------ ------------ ------------ ------------ ------------
Net Sales:
External customers $ 2,628,208 $ 1,361,667 $ -- $ -- $ 3,989,875
Intersegment 85,005 -- -- (85,005) --
------------ ------------ ------------ ------------ ------------
Total net sales 2,713,213 1,361,667 -- (85,005) 3,989,875
(Loss) income from operations (761,215) 160,868 (205,988) 15,958 (790,377)
Investment (loss) income, net 13,024 13 7 (11,708) 1,336
Interest expense (a) (66,712) (15,872) (30,877) 11,708 (101,753)
Depreciation and amortization 20,262 12,648 93,030 -- 125,940
Capital expenditures 13,766 22,449 -- -- 36,215
Total assets at March 31, 2004 10,790,796 1,933,327 719,797 (1,237,367) 12,206,553
(a) Interest expense relating to the purchase by the U.S. operating segment of
manufacturing equipment is allocated to the Netherlands operating segment.
13
Item 2. Management's Discussion and Analysis or Plan of Operation
The following should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004.
The term "the Company", "Dyadic", "we", "us" or "our" refers to Dyadic
International, Inc., unless the context otherwise implies.
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, that involve substantial risks and
uncertainties. Forward-looking statements can be identified by the fact that
they do not relate strictly to historical or current facts. They use words such
as "may," "will," "expect," "intend," "anticipate," "believe," "estimate,"
"continue," "project," "plan," "shall," "should," and other similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, making projections of our future results of operations
or our financial condition or state other "forward-looking" information.
Forward-looking statements involve known and unknown risks and uncertainties
that may cause the actual results, performance or achievements of our Company to
be materially different from those that may be expressed or implied by such
statements. Important factors that could cause the actual results, performance
or achievement of the Company to differ materially from the Company's
expectations include (i) assumptions or cautionary factors discussed in
connection with a particular forward-looking statement or elsewhere in this Form
10-QSB, or (ii) cautionary factors set forth in other Company's filings from
time to time with the Securities and Exchange Commission, including our Annual
Report on Form 10-KSB for the year ended December 31, 2004, including the
section titled "Desciprtion of Business - Risk Factors That May Affect Future
Results." All forward-looking statements attributable to the Company are
expressly qualified in their entirety by these and other factors. Except as
required by law or regulation, we do not undertake any obligation to publicly
update forward-looking statements to reflect events or circumstances after the
date on which the statement is made or to reflect the occurrence of
unanticipated events.
General
We are a biotechnology company engaged in the development, manufacture
and sale of enzymes, other proteins, peptides and other bio-molecules derived
from genes, and the collaborative licensing of our enabling proprietary
technologies. We use our proprietary technologies to develop and manufacture
biological products, and intend to collaboratively license them for research,
development and manufacturing of biological products, for two categories of
applications:
o enzymes and other biological products for a variety of industrial
and commercial applications, which we refer to as our Enzyme
Business; and
o human therapeutic proteins for use by pharmaceutical and
biotechnology companies in pre-clinical and clinical drug
development applications and commercialization following drug
approval, which we refer to as our BioSciences Business.
We have developed and use a number of proprietary fungal strains to
produce enzymes and other biomaterials, but the one on which we have principally
focused is a patented system for protein production, or protein expression,
which we call the C1 Expression System. This System is based on our patented
Chrysosporium lucknowense fungus, known as C1, as its host production organism.
A host production organism is an organism which has been genetically altered to
express genes to produce targeted protein products. We discovered the C1
microorganism in the mid-1990's and initially developed it, without the
application of molecular biology, to produce neutral cellulases for our textile
manufacturing customers. By 1998, we began to apply molecular genetics and other
proprietary biotechnology tools to C1 to create a technology, which we refer to
as the C1 Host Technology. The C1 Host Technology, once fully developed, is
expected to be capable of performing:
o two screening functions for:
o the discovery of genes and the proteins they express; and
14
o the identification of improved protein variants resulting from
modifications to their genes; and
o three expression functions for:
o the expression of proteins in commercial volumes for
industrial enzyme applications;
o the expression of human therapeutic proteins in small volumes
for pre-clinical and clinical testing for drug development
applications; and
o the expression of human therapeutic proteins for drugs in
commercial volumes.
We have been, over the last several years, principally focused on the expression
capabilities of the C1 Host Technology. These efforts culminated in our first
commercially successful application - our C1 Expression System.
Using the C1 Expression System, as well as other biological systems,
our Enzyme Business develops and produces commercial quantities of enzymes for
sale to textile, pulp and paper, animal feed, chemical, agricultural, and other
industries. These industries, in turn, use our products to enhance their own
products or to improve production efficiency. We currently sell more than 45
liquid and dry enzyme products to more than 150 industrial customers in 50
countries.
We believe, however, even larger market opportunities exist for our C1
Expression System. For example, we believe our C1 Expression System can be
successfully harnessed to help solve the protein expression problem confronting
the global drug industry - the difficulty, despite enormous historic investment,
of cost-effectively and expeditiously harnessing existing genomic knowledge to
develop new specialized biological products, or therapeutic proteins. For the
past five years, we have been developing our C1 Expression System to serve the
drug industry in the discovery, development and production of human therapeutic
proteins, with our primary focus on enabling pharmaceutical and biotechnology
companies to not only successfully carry on the development of drugs from their
gene discoveries, but also to manufacture those drugs at economically viable
costs. Still in the development stage, we refer to these activities as our
BioSciences Business. These activities have generated no revenues in 2004 or
2005.
We have also been developing the screening potential of our C1 Host
Technology for gene discovery and the identification of protein variants
resulting from modifications to their genes, which we refer to as our C1
Screening System. These efforts have included our purchase of state-of-the-art
robotics equipment and a collaborative partnership with a Netherlands-based
scientific organization, TNO Quality of Life (f/k/a TNO Nutrition and Food
Research Institute), and the establishment of a wholly-owned subsidiary, Dyadic
Nederland BV, to develop a fully-automated high throughput screening system, or
HTS System. We believe that if our BioSciences Business' application of our C1
Expression System and our C1 Screening System can each be perfected, we will be
able to offer a potentially unique end-to-end solution for drug companies: a
single host production organism usable throughout the discovery, pre-clinical
and clinical testing and commercial production phases of drug development that
would greatly increase drug development efficiency, economy and speed to market.
By the same reasoning, we believe that the C1 Host Technology is expected to
benefit the development of industrial or specialty enzyme products by allowing
discovery, improvement, development and large-scale manufacturing in a single
host organism, which should result in shorter inception to commercialization
time and greater probability of success.
Currently, we own three issued U.S. patents, seven issued International
patents and 50 U.S. and International filed and pending patent applications
which we believe provide broad protection for our C1 Expression System, our
underlying C1 Host Technology, our C1 Screening System and their products and
commercial applications.
History of Dyadic
The Company's operating subsidiary, Dyadic International (USA), Inc.
("Dyadic-Florida"), was founded by Chief Executive Officer, Mark A. Emalfarb, in
1979, and was throughout the 1980's a leading supplier of both domestic pumice
stones and pumice stones imported from overseas for use in the stone washing of
denim garments. In the 1990's, we evolved from serving only the denim industry
to the development and manufacture of specialty enzymes and chemicals and, by
1995, were generating revenues of approximately $8,500,000 and annual profits of
approximately $1,300,000. In the mid-1990's, we discovered the C1 microorganism
in connection with our efforts to develop improved industrial enzymes. By 1998,
we began investing significant financial resources in the application of
molecular genetic technology to the development of the C1 Host Technology.
15
In the first half of 2001, we raised capital of approximately
$13,635,000, prior to expenses of approximately $200,000, largely to fund the
development of our C1 Screening System. At that time, we thought we were within
one year of being able to find collaboration partners to help us complete its
development, though we continued to develop our C1 Expression System. However,
between 2001 and 2003, even as our Enzyme Business began to grow rapidly, we
experienced a major shift in market demand for our C1 Screening System. First,
we found that large pharmaceutical companies, frustrated by lack of success with
some of their investments in unproven screening technologies like our C1
Screening System, began requiring unprecedented levels of accumulated scientific
data as a pre-condition to partnering with us. Second, we found that the
interest of these large pharmaceutical companies had moved away from gene
discovery and screening applications, to an interest in the expression of
therapeutic proteins for pre-clinical testing, clinical trials and drug
commercialization.
We adjusted our strategy accordingly, and between May 2003 and March
2004, we began to focus principally on our C1 Expression System, even as we
continued to develop our C1 Screening System and related HTS hardware and
assemble more scientific data to support our claims regarding that System's
potential. During this interval of time, we also continued to grow our Enzyme
Business, as we used our C1 Expression System and other proprietary technologies
to successfully develop several industrial enzymes, while continuing to seek
equity financing.
Between April and July 31, 2004, we raised common equity capital of
approximately $4,735,000, prior to expenses of approximately $118,000, through a
private placement. Between October 1 and November 4, 2004, we raised additional
common equity capital of approximately $25,400,000, prior to estimated expenses
of approximately $2.7 million, in a private placement we conducted companion to
the merger of our wholly owned subsidiary into Dyadic-Florida, in which its
shareholders received shares of our stock representing a majority of our
outstanding shares.
We derive almost all of our revenues from the conduct of our Enzyme
Business, and have thus far generated only nominal revenues from our conduct of
our BioSciences Business. We have incurred losses every year since we began
developing our C1 Host Technology in 1999. Those losses resulted primarily from
expenses associated with research and development activities and general and
administrative expenses. To become profitable, we must continue to grow our
Enzyme Business, and generate income from the conduct of our BioSciences
Business, either directly or through potential future license agreements and
collaborative partnerships with drug companies.
Results of Operations for the Three-Months Ended March 31, 2005 Compared to the
Three-Months Ended March 31, 2004
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's condensed consolidated statements of
operations in comparing the three-months ended March 31, 2005 to the
three-months ended March 31, 2004 (in thousands):
-----------------------------
Three-Months Ended March 31,
-----------------------------
Increase
(In thousands) 2005 2004 (Decrease)
------- ------- -------
Net sales $ 3,734 $ 3,990 $ (256)
Cost of goods sold 2,985 2,954 31
------- ------- -------
Gross profit 749 1,036 (287)
------- ------- -------
Operating expenses:
Research and development 1,718 850 868
Selling, general and administrative 1,868 976 892
------- ------- -------
3,586 1,826 1,760
Loss from operations (2,837) (790) (2,047)
------- ------- -------
Other income (expense):
Interest expense (173) (102) (71)
Investment (loss) income, net (71) 1 (72)
Minority interest (8) (20) 12
Foreign currency exchange gain (loss),
net 61 (55) 116
Other (expense) income, net (68) 2 (70)
------- ------- -------
Total other expense (259) (174) (85)
------- ------- -------
Loss before income taxes (3,096) (964) (2,132)
Provision for income taxes (12) (26) 14
------- ------- -------
Net loss $(3,108) $ (990) $(2,118)
======= ======= =======
16
Net Sales
For the three months ended March 31, 2005, we generated net sales of
approximately $3,734,000, compared to net sales of $3,990,000 for the comparable
period ended March 31, 2004, a decrease of approximately $256,000. This decline
in revenues (despite approximately the same unit volumes) reflects the
continuing concentration of the Company's sales to the textiles market (82%
compared to 78% for the comparable period ended March 31, 2004), and the impact
of competition, particularly in the textiles market, which has created a strong
downward pressure on pricing. Revenues also continue to be adversely affected by
the negative residual effects on the Company's competitive position in its
markets primarily resulting from the Company's inability, between 2003 and most
of 2004, to fund working capital, staffing expansion, product registrations and
product development needs, when the Company chose to instead expand its very
limited resources on extending its C1 Host Technology platform.
To what degree our revenues from the textiles market will continue to
decline in the future will depend not only on that market's dynamics, but also
on the extent to which pricing pressure created by our competitors continues and
on our success in developing new products. We believe our revenues will resume
growth when new products being developed from our C1 Host Technology and other
technologies for new markets (e.g. pulp & paper and animal feed) begin to
achieve penetration and other new products are introduced both to existing and
other new markets. We have made substantial investments both in personnel and
other initiatives since November 2004 to expand our sales, marketing and product
development efforts. However, we intend to exercise discipline over the
application of resources to the textiles market (which is characterized by low
profit margins and intense competition) relative to other higher profit and
larger market opportunities we identify. Nonetheless, the markets for a number
of our new products are generally characterized by longer sales cycles for
reasons relating to various factors, such as required governmental registration
processes (e.g. animal feed enzymes in Europe) and required product trials at
customers' facilities of multi-month durations or longer (e.g. pulp & paper),
and we can therefore offer no guidance as to when these new products will
penetrate those markets.
Cost of Goods Sold
For the three-months ended March 31, 2005, cost of goods sold was
approximately $2,985,000, or 80% of net sales, as compared to approximately
$2,954,000, or 74% of net sales for the three-months ended March 31, 2004. The
increase in cost of goods sold as a percentage of sales is due primarily to the
price decreases and sales mix issues discussed above.
The effect of changes in foreign currency rates and the resultant
effect on the cost of inventory and certain contract manufacturing costs
denominated in Euros can and may significantly impact the ultimate cost incurred
by the Company in the future.
17
Research and Development
For the three-months ended March 31, 2005, research and development
expenses, or R&D, were approximately $1,718,000, or 46% of net sales, as
compared to approximately $850,000, or 21.3% of net sales for the three-months
ended March 31, 2004, representing an increase of approximately $868,000.
Approximately $111,000 of this increase is due to additional patent fees related
to newly granted patents. R&D activity was constrained in 2004 by our lack of
adequate capital resources. With our success in raising additional capital in
2004, we have substantially increased our spending for R&D projects in 2005,
both on the further development of our core technologies, and on new product and
technology development, in an effort to ultimately increase revenues and profit
margins and to also create additional business opportunities. To assist in this
development, we hired a project manager, outside contract labor and scientific
consultants for an additional expense of approximately $131,000. Also, in
February 2005, we initiated a genomic sequencing project with Agencourt
Bioscience to sequence our C1 host organism. The first phase of the C1
sequencing project was completed ahead of schedule, in the second quarter of
2005. With the completion of phase one, we were able to identify several novel
commercially useful genes and, upon completion of the project, we expect to be
able to identify a large variety of novel commercially useful genes that were
previously unavailable to us, which should greatly assist our ability to
accelerate our product development efforts and further improve the efficiencies
of our C1 Host Technology for making proteins and enzymes for diverse markets,
including pharmaceuticals, textiles, pulp and paper, animal feed, and food.
Selling, General and Administrative Expenses
For the three-months ended March 31, 2005, selling, general and
administrative expenses were approximately $1,868,000, or 50% of net sales,
compared to approximately $976,000, or 24.5% of net sales for the three-months
ended March 31, 2004, representing an increase of approximately $892,000. This
increase is attributable to several factors, including an increase in salaries
and wages of approximately $320,000 due the addition of five employees (two in
the finance department and three in sales and marketing, including a Vice
President - Pulp and Paper) and additional contract labor. These additions are a
part of the substantial investments both in personnel and other initiatives we
have made since November 2004 to expand our sales, marketing and product
development efforts, as well as to staff the Company with the personnel
necessary to operate as a public company. Professional fees of approximately
$481,000 related to accounting, legal and other service related expenses, to
assist the Company in its transition to a public company and an increase of
approximately $53,000 for directors and officers insurance premiums are also
factors that contributed to the increase in selling, general and administrative
expenses.
Other Income (Expense)
Interest Expense
For the three-months ended March 31, 2005, interest expense was
approximately $173,000 as compared to approximately $102,000 for the
three-months ended March 31, 2004, representing an increase of approximately
$71,000. This increase was due primarily to the amortization of beneficial
conversion features of approximately $93,000, as described below. Offsetting
this $93,000 increase is a decrease in interest expense of approximately
$27,000, which relates to a $1,225,000 note payable to the Mark A. Emalfarb
Trust that was cancelled in exchange for 367,868 Investment Units in November
2004. The exchange was effected at a price of $3.33 per share, which was the
offering price in the Company's October Offering.
In connection with the Merger and a series of related transactions, the
Bridge Loan maturity date and the Bridge Loan warrants were modified in November
2004 and, as a result, we will recognize an additional $350,000 in interest
expense through the new maturity date, January 1, 2007. Also in November 2004, a
$1,225,000 note payable to the Mark A. Emalfarb Trust was cancelled in exchange
for 367,868 Investment Units and the conversion prices on the convertible notes
due to the Emalfarb Trust and the Francisco Trust were modified to fix the
conversion price at $3.33 per share, which resulted in a beneficial conversion
feature of $554,000 to be amortized to interest expense through the maturity
date of January 1, 2007.
18
Investment Loss, Net
For the three-months ended March 31, 2005, loss from investments was
approximately $71,000. There were no investments held during the three-months
ended March 31, 2004. The net proceeds from the private placement offering
completed in early November 2004, were invested in money market funds as of
December 31, 2004. During the three-months ended March 31, 2005, all remaining
proceeds were placed in short-term investments, which were subsequently sold,
resulting in the net loss of approximately $71,000, and then reinvested in money
market funds as of March 31, 2005.
Foreign Currency Exchange Gains (Losses), Net
For the three-months ended March 31, 2005, the Company incurred net
foreign currency exchange gains of approximately $61,000 as compared to losses
of approximately $55,000 for the three-months ended March 31, 2004. A large
portion of our business is transacted with foreign customers and vendors in
foreign currency denominations. Accordingly, fluctuations in foreign currency
exchange rates, primarily relating to the Euro, can greatly impact the amount of
foreign currency gains (losses) we recognize in future periods relating to these
transactions. We do not, and have no current plans to, engage in foreign
currency exchange hedging transactions.
Liquidity and Capital Resources
Capital Raising Activities
Since inception, the Company has financed operations primarily with
proceeds from the sales of the products from its Enzyme Business, external
borrowings, borrowings from its stockholders and sales of preferred and common
equity securities. In May 2003, the Company received a $3,000,000 loan from a
group of shareholders, including the Chief Executive Officer, who contributed
$2,185,000, and a group of other Dyadic-Florida shareholders who contributed
$815,000. In the first half of 2004, we raised approximately $4,740,000 in
private offerings of our equity securities, of which $1,500,000 was used to
redeem all outstanding shares of our Series A preferred stock.
In November 2004, in accordance with Subscription Agreements and a
Private Offering Memorandum (the "October Offering") dated October 2004, the
Company sold 7,629,204 Investment Units, realizing gross proceeds of
approximately $25,405,000. An Investment Unit consists of one share of the
Company's common stock and one five-year callable warrant to purchase one share
of the Company's common stock at $5.50 per share for every two Investment Units
purchased. Accordingly, 3,814,602 warrants to purchase the Company's common
stock were issued to participants in the October Offering. Concurrently, the
Company issued 711,050 warrants to purchase the Company's common stock at $5.50
per share to participants in the Offering completed in July 2004, as well as
247,730 warrants to purchase the Company's common stock at $5.50 per share and
495,460 warrants to purchase the Company's common stock at $3.33 per share, both
to placement agents in the October Offering.
Ancillary to the Merger and October Offering, in November 2004, an
additional 367,868 Investment Units were sold to Mark A. Emalfarb through the
Mark A. Emalfarb Trust in exchange for the cancellation of the Company's note
payable to the Mark A. Emalfarb Trust with a balance of $1,225,000. The exchange
was effected at a price of $3.33 per share, which was the offering price in the
Company's October Offering.
Concurrent with the Company's completion of the Merger and the equity
issuance transactions described above, a warrant to purchase 1.5 million shares
of the Company's common stock issued in connection with the May 2003 $3.0
million revolving note payable to the Mark A. Emalfarb Trust was modified to
reduce the exercise price from $4.50 to $3.33 per share. Additionally, the
maturity date of this Bridge Loan was extended to January 1, 2007. As a result,
approximately $350,000, representing the incremental fair value of the modified
warrant as compared to the fair value of the original warrant immediately before
the modification will be amortized to interest expense through the new maturity
date. Approximately $903,000 of the proceeds from the October Offering were used
to pay off the $815,000 of principal and approximately $88,000 of accrued
interest for the portion of the bridge loan contributed by the group of other
Dyadic-Florida shareholders.
19
Also concurrent with the Company's completion of the Merger and the
equity transactions described above, the conversion prices with respect to the
October 29, 2004 principal and accrued interest balances on the Emalfarb Trust
Note and the Francisco Trust Note were fixed at $3.33 per share, and the due
dates were extended to January 1, 2007. As a result of the modification of the
conversion price, a beneficial conversion feature totaling approximately
$554,000 will be amortized to interest expense through the new maturity date.
Cash Flow
From Operating Activities
Net cash used in operating activities was approximately $2,941,000 and
$580,000 for the three-months ended March 31, 2005 and 2004, respectively, which
was primarily due to the increase in net loss in 2005 of approximately
$2,118,000.
From Investing Activities
For the three-months ended March 31, 2005, net cash used in investing
activities was approximately $34,000 as compared to approximately $36,000 for
the three-months ended March 31, 2004, which relates to purchases of property
and equipment. There are no immediate plans for large increases in capital
expenditures; however, management is continually assessing such requirements
concurrent with our growth.
From Financing Activities
For the three-months ended March 31, 2005, our net cash used in
financing activities was approximately $98,000, for issuance costs related to
the October 2004 private offering, as compared to approximately $112,000 for the
three-months ended March 31, 2004 for repayment of notes payable to
stockholders.
Financial Condition and Liquidity at March 31, 2005
As of March 31, 2005, stockholders' equity was approximately
$21,407,000, an increase of approximately $20,136,000 over March 31, 2004. The
improvement is due to the equity capital we raised in July 2004 and November
2004 and the redemption of our Series A convertible preferred stock at a
substantial discount from its carrying value. Our 2005 net loss, when combined
with losses incurred through December 31, 2004, resulted in an accumulated
deficit of approximately $26,601,000 at March 31, 2005.
As of March 31, 2005, we had a total of approximately $17,437,000 in
cash and cash equivalents. Our outstanding indebtedness was approximately
$3,525,000 as of March 31, 2005, and consisted of notes payable to certain
stockholders and the Bridge Loan. We are committed to make annual minimum
payments under our operating leases aggregating approximately $297,000 for 2005,
approximately $84,000 for 2006, approximately $43,000 in 2007, approximately
$39,000 in 2008, and approximately $219,000 thereafter. We also are committed to
make annual minimum payments under our Polish contract manufacturing agreement
of $264,000 for the remainder of 2005 and an aggregate of $707,000 through 2008.
We have also entered into various agreements with independent third parties to
conduct R&D activities on our behalf. One such agreement, entered into in July
2004, has committed a third party to provide research and development assistance
valued at approximately $1.25 million. The consideration includes $250,000 in
cash, which was paid upon signing the agreement, and 300,300 shares of our
common stock, to be released from escrow as the shares are earned. The agreement
is with one of our long-standing third party R&D vendors. We also have
employment agreements with several officers and key employees as outlined in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our Annual Report on Form 10-KSB.
Funding of Future Operations
We believe that our operating losses will continue in 2005. In
addition, our future capital requirements will be substantial. We believe that
if we meet our business plan, we will have sufficient capital to fund our
operations and meet our obligations through year end 2006. However, it is
possible that we will seek additional financing within this timeframe. We may
raise additional funds through public or private financings, collaborative
20
relationships or other arrangements. Additional funding, if sought, may not be
available on terms favorable to us. Further, any additional equity financing may
be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Our failure to raise capital when needed may harm our
business and operating results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of the end of the period covered by this Quarterly Report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) Changes in Internal Controls
During the course of its review of our financial statements for the
nine-months ended September 30, 2004, but subsequent to the completion of the
audit of, and the issuance of an unqualified report on, our financial statements
for the year ended December 31, 2003, Ernst & Young LLP, our independent
registered public accounting firm, reported to our Board of Directors and
management that it had identified a significant deficiency it considered to be a
material weakness in our internal controls over financial reporting under
standards established by the Public Company Accounting Oversight Board (which
became applicable to us on October 29, 2004, when the Merger with CCP Worldwide,
Inc. was completed). As a consequence, our consolidated financial statements as
of and for the year ended December 31, 2003 (which had not previously been filed
with the Securities and Exchange Commission), were restated. The reported
material weakness related to the recording of foreign currency denominated
revenue, inventory purchasing and research and development expenditure
transactions during 2003 and through September 30, 2004. In the fourth quarter
of 2004 and the first quarter of 2005, our management and our Board of Directors
took the following steps to remediate this material weakness: trained the
appropriate accounting employees on foreign currency denomination in accordance
with GAAP, improved controls with respect to the recording of foreign currency
transactions, and hired a Chief Financial Officer and Director of Financial
Reporting to deal with accounting issues and to prepare the Company's financial
statements. Except as noted above, there have not been any changes in the
Company's internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting .
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 25, 2005, the Company entered into an Agreement (the
"Agreement") with a third party consultant pursuant to which the Company issued
10,000 shares of Company common stock, valued at $3.90 per share, to such third
party consultant as compensation for investor relations services in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act). The terms of the Agreement were
privately negotiated between the Company and the consultant, the consultant
executed an "investment letter" acknowledging, among other things, that the
securities described in this Item 2 have not been registered under the
Securities Act, and these securities may not be offered or sold absent
registration under the Securities Act or an applicable exemption from such
registration requirements; and (iii) the stock certificate evidencing such
securities bears a restricted legend.
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ITEM 6. EXHIBITS
A) Index to Exhibits
Exhibits Description of Documents
- -------- ------------------------
10.6.1 Employment Agreement dated March 30, 2005 between Ratnesh (Ray) Chandra
and Dyadic International, Inc. (2)
10.6.2 Employment Agreement dated January 31, 2005 between Wayne Moor and
Dyadic International, Inc. (3)
10.6.3 Employment Agreement dated March 30, 2005 between Alexander (Sasha)
Bondar and Dyadic International, Inc. (2)
10.6.4 Employment Agreement dated March 30, 2005 between Kent Sproat and
Dyadic International, Inc. (2)
10.8.3 Indemnification Agreement dated January 11, 2005 between Dyadic
International, Inc. and Richard Berman (1)
10.8.4 Indemnification Agreement dated March 29, 2005 between Dyadic
International, Inc. and Robert Shapiro (2)
10.9.1 Standard form of Director Stock Option Grant Agreement under Dyadic
International, Inc. 2001 Equity Compensation Plan (1)
10.9.2 Second Amendment to Dyadic International, Inc. 2001 Equity Compensation
Plan dated as of January 12, 2005 (1)
10.9.3 Form Employee Option Agreement under the Dyadic International, Inc.
2001 Equity Compensation Plan, as amended (2)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (4)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (4)
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Exhibits Description of Documents
- -------- ------------------------
32.1 Certification of Chief Executive Officer required by 18 U.S.C. Section
1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002) (4)
32.2 Certification of Chief Financial Officer required by 18 U.S.C. Section
1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002) (4)
(1) Incorporated by reference from the Company's Form 8-K, filed January 14,
2005 with the Securities and Exchange Commission.
(2) Incorporated by reference from the Company's Form 8-K, filed April 1, 2005
with the Securities and Exchange Commission.
(3) Incorporated by reference from the Company's Form 8-K, filed February 1,
2005 with the Securities and Exchange Commission.
(4) Filed herewith.
SIGNATURES
In accordance with the requirements of the Exchange Act, Dyadic International,
Inc. caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYADIC INTERNATIONAL, INC.
(Registrant)
Date: May 16, 2005 By /s/ Mark E. Emalfarb
------------------------------------
Mark A. Emalfarb
Chief Executive Officer
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