10-12G 1 form1012g.htm DYADIC INTERNATIONAL, INC 10-12G 8-14-2014
As Filed with the Securities and Exchange Commission on August 14, 2014

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

DYADIC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
45-0486747
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

140 Intracoastal Pointe Drive, Suite 404
Jupiter, Florida 33477
(Address of principal executive offices) (Zip Code)

(561) 743-8333
(Registrant’s telephone number, including area code)

Copies to:

Karen Dempsey, Esq.
Andrew Thorpe, Esq.
Orrick, Herrington & Sutcliffe LLP
405 Howard Street
San Francisco, CA 94105
(415) 773-5700

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share
(Title of class)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  o
Accelerated Filer  o
Non-Accelerated Filer  o
Smaller Reporting Company  x
 
 
(Do not check if a  smaller reporting company)
 
 


DYADIC INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
PART I
2
 
 
 
Item 1.
2
Item 1A.
26
Item 2.
46
Item 3.
65
Item 4.
66
Item 5.
68
Item 6.
72
Item 7.
79
Item 8.
81
Item 9.
84
Item 10.
85
Item 11.
86
Item 12.
88
Item 13.
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Item 14.
89
Item 15.
90

INFORMATION REQUIRED IN REGISTRATION STATEMENT
 
EXPLANATORY NOTE

You should rely only on the information contained in this General Form for Registration of Securities on Form 10 (the “Registration Statement”) or to which we have referred you.  We have not authorized anyone to provide you with information that is different.  You should assume that the information contained in this document is accurate as of the date of this Registration Statement only.

On the date of effectiveness of this Registration Statement we will become subject to the requirements of Regulation 13(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and will be required to file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of the Exchange Act. Our periodic and current report will be available on the website, www.dyadic.com, free of charge, as soon as reasonable practicable after such materials are filed with, or furnished to the U.S. Securities and Exchange Commission (the “SEC”).

As used in this Registration Statement, unless the context otherwise requires the terms “we,” “us,” “our,” “Dyadic” and the “Company” refer to Dyadic International, Inc., a Delaware corporation, and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information (other than historical facts) set forth in this Registration Statement contains forward-looking statements within the meaning of the Federal Securities Laws, which involve a number of risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements.  Forward-looking statements generally can be identified by use of the words “expect,” “should,” “intend,” “anticipate,” “will,” “project,” “may,” “might,” potential” or “continue” and other similar terms or variations of them or similar terminology.  Such forward-looking statements are included under Item 1.  “Business” and Item 2.  “Financial Information - Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  Dyadic cautions readers that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking information. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. Forward-looking statements involve a number of risks, uncertainties or other factors beyond Dyadic’s control.  These factors include, but are not limited to, our ability to implement our strategic initiatives, our ability to execute and achieve our research and development objectives,  our ability to obtain new license agreements, our dependence on our licensees for research and development funding, milestones and royalties for the products and/or processes that utilize licensed rights, our ability to maintain uninterrupted access to toll manufacturing at the quantities needed and at a competitive cost structure, our ability to hire and maintain, as well as our reliance on qualified employees and professionals, economic, political and market conditions and price fluctuations, government and industry regulation, U.S. and global competition, upgrade financial staffing, implement and monitor internal controls, and comply with financial reporting requirements, and other factors.  We caution you that the foregoing list of important factors is not exclusive. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the events described under the caption “Risk Factors” and elsewhere in this Registration Statement could have a material adverse effect on our business, results of operations and financial condition.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Registration Statement to conform these statements to actual results or to changes in our expectations.
PART I

Item 1. Business

Overview

The biotechnology bottleneck

The genomic revolution has seen billions of dollars invested in technology to discover new genes, the building blocks that carry out instructions encoded in DNA. With the advent and maturation of high-throughput robotic sequencing technology, gene sequencing costs have been spiraling downward from $100 million to sequence a single genome in the early 2000s to approximately $1,000 today according to the U.S. National Human Genome Research Institute. Facilitated by the recent affordability of gene discovery, new genes along with their functions are being identified at a greatly accelerated pace. These genes have the potential for commercial applications in multi-billion dollar opportunities across diverse end markets:

· Biofuels and bio-based chemicals – including bioethanol, biodiesel, renewable plastics and polymers as replacements for petroleum-based products and a variety of bio-based chemicals such as acrylic acid, succinic acid, butanediol, phthalate, solvents, and nutritious oils (e.g., omega 3)

· Biopharmaceuticals  including therapeutic proteins, vaccines, monoclonal antibodies, biogenerics and other biologics used in the treatment of many diseases

· Industrial – including enzymes that stonewash blue jeans; enable pulp & paper mills to operate more cleanly and efficiently; improve food production; create more nutritious animal feed; and aid in making beer, wine and fruit juice
 
Modern biotechnology has enabled the discovery of numerous next-generation enzymes and other proteins that are more effective, cost efficient and environmentally sustainable. The current bottleneck in commercializing these novel genes lies in the inability to develop and manufacture them economically at industrial scale.

Our solution

Dyadic has developed, optimized and successfully commercialized an industrially proven expression system that turns genes into a broad range of valuable products. At the heart of Dyadic's technology are specially engineered strains of the filamentous fungi Myceliophthora thermophila, which we brand as "C1.” The C1 Expression System overcomes many of the inadequacies of existing technologies used for gene discovery, product development and commercialization. Our patented and proprietary C1 Expression System is one of the few commercially available solutions able to take genes and develop highly scalable industrial processes to produce enzymes and other protein products. This fully programmable system is robust, flexible, and safe and has produced products in some of the largest fermenters used in the industry.

Experts in academia and industry regard Dyadic’s C1 technology to be among the foremost expression systems in the world. It is well-recognized that the development of an expression system like C1 is an expensive and risky proposition that requires many years to overcome numerous scientific challenges. Thus, there is a high barrier of entry for competitors in this highly specialized technology sector.

Enzymes for biofuels and bio-based chemicals

Our C1-based enzyme technology is a critical element in the conversion of fibers from plant material (“biomass”) into second-generation cellulosic ethanol and a host of other high value bio-based fuels and chemicals such as butanol, polyurethane, acrylic acid, succinic acid, 1,4-butanediol, biopolymers, and phthalate. We believe that three key factors have enabled Dyadic to become a leader in this nascent industry:

· Highly effective CMAX product line: Robust and tolerant to higher temperatures and pH, C1-based enzymes are particularly adept at converting various types of biomass into the fermentable sugars used to produce biofuels and bio-based chemicals
· Agile, cost efficient research and development platform: Our C1 Expression System has a  genome rich in plant-degrading enzymes, enabling researchers to analyze and select enzymes best suited for their targeted applications quickly and effectively

· On-site manufacturing business model: By allowing our customers to produce enzymes under license on-site at biofuel refineries, versus centralized production of enzymes, we are able to pass along anticipated savings of 30-50% of operating costs to the customer
 
We believe the demand for plant-degrading enzymes will increase substantially, especially as the cellulosic ethanol industry gains traction as the first commercial-scale facilities set to come online in 2014.  McKinsey & Co., a management consultancy, projects worldwide cellulosic ethanol demand to be 20 billion gallons per year by 2020, which if realized we estimate would create an additional $5 billion market for lingocellulosic enzymes. While we expect that McKinsey’s target may be delayed beyond 2020, there remains a belief among many that the industry will grow rapidly. We provide our C1 technology to Abengoa Bioenergy (“Abengoa”) and Compagnie Industrielle de la Matière Végétale (“CIMV”), both pioneers and leaders in the emerging cellulosic ethanol industry.

· Abengoa: Anticipated to begin operations at its 25 million gallon advanced biofuels plant in Hugoton, Kansas in the third quarter of 2014, Abengoa has reported that they will be using enzymes manufactured under its C1 Expression System license as they start up their Hugoton plant. We expect this facility to generate royalties for Dyadic by the end of 2014

· CIMV: We recently entered into a collaboration with CIMV, a leader in developing innovative technologies to process biomass, to create an efficient, fully integrated system to produce environmentally low impact biofuels and bio-based chemicals. Dyadic anticipates supplying enzymes to CIMV’s planned 2015 demonstration plant and licensing its C1 technology for on-site production of enzymes at CIMV’s future commercial scale plants
 
A new way to make biopharmaceuticals

In 2012, biologics accounted for approximately 18% of total global spending on drugs and to reach an overall market revenue of over $169 billion by 2012, and expected to grow to over $220 billion by 2020 according to IMS Health, a leading healthcare market research company. Within the next five years, seven of the top ten global medicines by revenue will be a biologic. However, biotechnology companies today are facing significant challenges in finding suitable systems to produce certain biologic drugs. Novel expression systems may offer significant advantages over the most commonly used production hosts (mammalian cells, bacteria, and yeast) such as lower manufacturing costs, more human-like or better controlled glycosylation of proteins, proper protein folding, and higher purity.

Expression systems based on filamentous fungi, like C1, may provide particular advantages over mammalian cell lines, such as faster cell line development, thereby reducing the initial drug development period. Further, fungal expression systems tend to offer a combination of high yields and shorter growth periods, promising significantly lower production costs. Downstream processing (“DSP”) is streamlined as well, since proteins are typically secreted and the product is easier to isolate and purify. Despite these advantages, filamentous fungal systems are not prevalent today as expression systems for biologics, as the genetic tools for engineering filamentous fungal hosts have historically not been developed to meet the needs of the pharmaceutical industry. We believe that the C1 system has the potential to overcome these challenges and dramatically reduce the cost and time to market for biologics. Given the progress we have already achieved, it is apparent that engineering the C1 Expression System for biologics represents a very lucrative, but risky opportunity that Dyadic has only just begun to pursue.

Our growing industrial enzyme business

Within Dyadic, we have successfully leveraged our technologies to develop a growing industrial enzymes business, with sales of $10 million to more than 35 countries in 2013. We believe that enzymes have particular advantages as biocatalysts and will increasingly replace existing chemicals and other technologies that are potentially more harmful to the environment or human body. According to Freedonia, a leading market research group, industrial enzymes represented a $5.1 billion market worldwide in 2012 and are expected to grow to $7 billion by 2017. Our current business selling proprietary enzyme products for the animal feed, pulp and paper, textiles, and food and beverage end-markets is well-positioned for expansion, and we expect substantial growth.  We are expanding our new product development pipeline of proprietary enzymes to compete against the limited number of competitors in the field that also have advanced technologies to commercialize large volumes of low cost industrial enzymes.
Scientific expertise and a pioneering management team
 
The rich history of Dyadic represents a microcosm of how modern biotechnology is revolutionizing science, medicine, agriculture, and engineering to improve how we feed, fuel, and heal the world. For Dyadic, the journey can be described as going from "jeans to genes”: pioneering the use of pumice stones to stonewash blue jeans in the early 1980s, shifting along with the industry to enzymes at the end of the decade, then beginning a new journey with the discovery of a filamentous fungal strain suitable for producing enzymes in the early 1990s. For the next two decades, Dyadic has built the knowledge, expertise, molecular tools, and technology needed to create and commercialize one of the world’s premiere gene expression systems. During development we identified two separate mutations: the first changed the morphology of our organism, resulting in high productivity and better growth conditions; and the second created our C1 White StrainTM, which allows for the production of purer enzymes. We believe our research and development ("R&D") laboratory, located in the Netherlands near the prestigious Wageningen University, is world class and we have some of the leading scientists and scientific advisors in the field. Dyadic today is still led by its pioneering founder, and its management team has a unique mix of established industry veterans and dynamic youth.

Partnered with leaders in industry and academia

Dyadic has a number of prominent, global commercial partners and licensees of our technology that are leveraging the C1 Expression System across industries, markets, and continents. These partners and licensees are leaders in their respective markets and include Abengoa and CIMV in biofuels, BASF and a confidential animal feed partner in industrial enzymes, and Sanofi Pasteur (“Sanofi”) in vaccines. We are involved in nine innovative private-public programs funded by the European Union and the Dutch government in application areas ranging from cosmetics, algae-based products, bioplastics, baking, and paper waste and starch processing. These research partnerships provide many benefits including revenue to offset R&D costs, business development opportunities, and access to industry knowledge in related fields. Dyadic also enjoys strong, productive, and effective relationships with biotechnology research groups at prestigious institutions around the world, including the Scripps Research Institute, Wageningen University (The Netherlands), Moscow State University, The Netherlands Organization for Applied Scientific Research (TNO), and Bio-Technical Resources (BTR).

What Are Enzymes?

Enzymes are large biological molecules produced by all living cells. They are proteins that act as natural catalysts and are essential for the regulation of tens of thousands of biochemical functions performed by cells and organisms. Whenever one substance needs to be transformed into another, nature uses enzymes to initiate and accelerate the process and to make it more efficient. Everything from the conversion of sunlight and carbon dioxide to oxygen and energy by plants to the digestion and absorption of food requires enzymes.

Diverse with many applications

Microorganisms found in nature, mainly fungi and bacteria, produce thousands of different enzymes, including many commonly used in industrial processes. The key challenges for industry are to identify the ideal enzyme for a specific need, create an expression host that can produce that enzyme at high levels and high purity, and optimize the microorganism used to manufacture the enzyme for robust, reliable growth in a controlled, large-scale industrial fermentation system. Dyadic has achieved this with its C1 fungal expression system.

Nature has finely tuned enzymes to make them ideally suited to performing a particular function, and one function only. These unique proteins are highly specialized not only in what they do, but also under what conditions they will carry out their task. The combination of so many different types of enzymes available in nature and the availability of modern high throughput screening techniques to sort through gene libraries rapidly and efficiently creates an almost unlimited number of opportunities to discover and develop enzymes with desired properties across industries and multiple billion dollar markets. The C1 system may then be used to develop and produce these enzymes at high yields and low costs in commercial scale processes.

One of the earliest commercial applications of enzymes was in the food and beverage industry, where enzymes have long been used successfully in baking and brewing applications and in starch processing to ensure more consistent and safer production of high quality end-products. Another early application of enzymes was in the textiles industry, where amylases, proteases, cellulases, and other enzymes have been developed for use in the washing and finishing of various textiles. Currently, the markets for industrial enzymes encompass a large and diverse range of products, including animal feed, food (e.g., baking, dairy) and beverage (e.g., brewing, fruit juice, and wine production), textiles, pulp and paper, detergents and personal care products, biofuels and grain (starch) processing, and biopharmaceuticals.
An environmentally friendly alternative
 
An enzyme works much like a key opens a lock: when it finds the correct substrate, the molecule that fits within its active catalytic site, a specific biochemical reaction takes place. An important advantage of the specificity of enzymes is the absence of unexpected, unwanted side reactions that could disrupt industrial processes and generate undesired by-products. Therefore, enzymes can safely be added to many industrial processes to enable or speed up reactions or improve product yields. An enzyme that transforms starch into glucose, for example, will catalyze only that specific reaction, and no other material or process will be altered or affected. Further, as natural molecules, enzymes are completely biodegradable. When the biochemical reaction for which an enzyme is needed has finished, the enzyme can be disposed of in the process waste water. It will harmlessly degrade into its amino acid components, which may be reused to form a new protein. Industrial use of enzymes is truly a “green” alternative to many chemical processes used today.

What is a Protein Expression System?

“The expression system is not everything, but everything is nothing without a good expression system”

The DNA sequence of a gene encodes the information needed to make a protein. By transferring this gene into a host microorganism, a mini factory is created that produces the encoded proteins (an "expression host"). Every living cell is essentially an expression system, capable of producing hundreds of enzymes and other proteins. The gene for a desired protein may normally be present in an expression host (a homologous gene), or it can be inserted using molecular engineering (a heterologous gene). For the purposes of this document, we refer to an expression system as a microorganism or host cell line with the necessary molecular tools to enable recombinant engineering for the development and production of targeted enzymes and other proteins. Dyadic's C1 Expression System is built around its patented and proprietary filamentous fungal expression host Myceliophthora thermophila.

Finding the right gene that encodes for a specific enzyme of interest is a key challenge for Dyadic and the broader biotechnology industry. The process of using an expression system to develop a product requires several distinct phases that begin with gene discovery and end with the optimization and manufacturing of a protein product. This process, from beginning to end, typically takes between six months to two years, and sometimes even longer. While each phase presents technical challenges, Dyadic has developed the molecular tools and advanced technologies needed to meet these challenges and fine-tune each aspect of this process.

· Gene Library Creation: At the heart of an expression system is the collection of genes and gene sequences available to be over-expressed by the microorganism. A gene library consists of genes with potential industrial utility that may be native to the expression host or have been collected from a variety of sources, including other organisms or environmental samples. Gene collections can number in the thousands or even millions. In addition to libraries of full-length genes are collections of DNA sequences that are being identified, synthesized, and catalogued at an accelerated rate. These gene fragments may serve a variety of functions, including acting as promoters to regulate gene expression, or producing cofactors that enhance enzyme activity. These genes and DNA sequence libraries provide a virtually untapped pool of new product opportunities waiting to be expressed. Dyadic has created its own proprietary gene library based on C1’s rich genome, as well as genes from other organisms.
 
· Gene Discovery: Using advanced automation and robotic processing technology, the biotechnology industry can screen at a rapid rate for target enzymes or other proteins expressed by genes in their libraries during the gene discovery phase. Once an enzyme or protein with the desired activity and functional characteristics is identified, you can easily isolate the gene responsible for that activity.
 
· Gene Expression: The goal of gene expression is to construct a microorganism capable of producing the protein encoded for by the gene selected during gene discovery. Transfer of the gene of interest into the host microorganism, if successful, typically results in levels of protein production too low for commercial use. Based on extensive experience and expertise, our scientists can apply a wide range of molecular biology techniques to increase expression in the best producing strains. Dyadic’s C1 Expression System includes several C1-based expression hosts and an extensive toolkit that has the potential to enable high levels of expression of genes present in nature.
 
· Product Optimization: Once our scientists have achieved high levels of gene expression in a variety of production strains in the laboratory, they then work to improve production processes and make them even more productive. During fermentation process optimization, we adjust the culture media, nutrients, and environmental conditions to optimize growth of the production strain in large-scale bioreactors.
· Manufacturing: Dyadic's C1 Expression System avoids the challenges involved in switching from a laboratory organism to a commercial production strain. The "one-stop shop" capabilities of C1-based expression hosts are highly prized. The ability to use a single organism in the lab and the factory significantly increases the probability of success for producing a commercially viable product from a gene library in a shorter time frame.
 
Our C1 Expression System

"The search for novel and/or improved industrial enzymes and enzyme production systems is intensifying as market demand increases. One such new system was developed based on a recently discovered fungal isolate, C1... The filamentous fungus C1 was developed into a mature technology and protein-production platform. C1's inherent richness of genes encoding industrially relevant enzymes and its high-producing characteristics have been a proven starting point for the development of different C1 strains producing enzymes and enzyme mixtures." - Industrial Biotechnology, June 2011

Figure 1 – The C1 Expression System turns DNA into products
 

The filamentous fungus Myceliophthora thermophila was isolated by Dyadic scientists in the early 1990s and christened C1. Classical ultraviolet light-induced experiments led to a mutation with beneficial morphological changes in the fungus, resulting in a high-yielding strain that exhibits a low viscosity profile when growing at high density. What began as experiments to identify and produce cellulase enzymes used for stonewashing blue jeans has led to the creation of a world class technology platform for producing all types of enzymes and proteins across several diverse multi-billion dollar markets. Significant milestones in the evolution of C1 have included the following:

· 1992: Discovery of the wild-type C1 strain
 
· 1995-96: Identification of the high cellulase (“HC”) C1 strain derived from mutagenesis experiments resulting in a morphological change in the fungus and over-expression of cellulase enzymes; especially advantageous initially for stonewashing denim and later modified to be used in converting cellulose and other lignocellulosic polymers to sugars for applications in the biofuels industry
 
· 2003: Dyadic established an R&D facility in The Netherlands (“Dyadic Netherlands” or “DNL”)
 
· 2005: Sequenced the C1 genome, enabling new gene discovery and facilitating targeted genetic modification
· 2005-08: Further developed the low cellulase C1 strain (the “White StrainTM”) using mutagenesis and gene knock-out and knock-in technology to shut down fungal production of  the background enzymes and to minimize synthesis of proteases (enzymes that degrade proteins), while increasing enzyme and other protein productivity; allowing for genetic reprogramming of C1 and over-expression and secretion of highly pure enzymes of interest cost effectively and at commercial scale
 
· 2006: Abengoa invests in Dyadic with funds targeted for R&D of C1-based enzymes for second-generation biofuels and bio-based chemicals
 
· 2008: Licensed the C1 technology platform for use in biofuels and bio-based chemicals on a non-exclusive basis to Codexis in partnership with Shell
 
· 2009: Licensed the C1 technology platform for use in second-generation biofuels and bio-based chemicals on a non-exclusive basis to Abengoa
 
· 2011: Began collaborations to develop a vaccine with Sanofi and entered into a license agreement to develop an animal feed enzyme with a confidential leading animal nutrition company
 
· 2012: Expanded Abengoa’s non-exclusive rights for use in second-generation biofuels and bio-based chemicals, and first generation ethanol; began EU-funded Bio-Mimetic program with partners including Proctor & Gamble and CIMV
 
· 2013: Licensed the C1 technology for use in certain markets on a non-exclusive basis to BASF and expanded our Dutch research center
 
· 2014: Further breakthroughs with our White Strain in expressing heterologous genes at even higher levels; established new partnership with CIMV to develop second-generation biofuels; began second funded biopharmaceutical project to develop a therapeutic protein an animal health application
 
We are continually working to refine, enhance, and expand our patented and proprietary C1 technology. Together with our licensees, we continue to invest substantial dollars and resources toward improving the platform through further strain engineering and fermentation process optimization.

Advantages for turning genes into products

Selection of an expression system to create a product from a gene is a critical decision in a new product development process. Our C1 technology is a robust and versatile platform system that aids in de-risking and improves the productivity of the entire process, from genes to commercial products. Strengths of the C1 Expression System include:

· Comprehensive molecular toolkit: Dyadic invested substantial time and resources early to develop a state-of-the art genetic toolkit for optimizing C1-based recombinant protein development and production. We can design C1 microorganisms that produce purer enzymes from our White Strain or versatile enzyme combinations from our high cellulase strain lineage. The toolkit encompasses a wide range of C1 host strains and gene promoters, techniques to knock out genes or increase gene copy number, and methods to enhance the secretion of enzymes and other protein products.
 
· Easy to grow and highly scalable: Thanks to its unique morphology, C1 has very favorable fermentation properties; oxygen transfer and nutrient supply are not hampered by high viscosity, allowing for high yields at low production costs. Our C1 organism has been in commercial use since 1996 and has a long history of scale-up from lab fermenters to commercial-scale vessels. These attributes make C1 a "one-stop shop" for use in the lab and in commercial production, reducing product development time and the cost to deliver targeted products.
 
· Versatile, commercially relevant genetic make-up: Since native, homologous genes are typically expressed at higher levels than are heterologous genes that derive from another organism, it is beneficial to start with an expression system that has a genome rich in the types of proteins targeted for industrial applications. In addition, homologous genes are likely to receive more lenient treatment with regard to regulations targeting genetically modified organisms (“GMOs”) in certain countries. The C1 genome has more than 200 potentially industrially relevant genes, including nine times more polysaccharide monooxygenase enzyme-coding genes, nearly 3-fold more oxidoreductases, four times more cellulose binding domains, and more than 1.5-fold more cellulases than Trichoderma, the major competitive filamentous fungal expression system being used to develop and manufacture enzymes for use in the production of second-generation biofuels and bio-based chemicals.
· High yields: Yields of protein from C1 are high, above 100 grams of protein per liter of fermentation broth when using the C1 high cellulase strains for biofuel applications.  Using the White Strain, we have achieved up to 70 grams of protein per liter, of which up to 70-80% of the protein produced is the target protein. Recently, we have been able to achieve these results with both homologous and the more difficult heterologous genes. These results are quite unique in the biotech industry.
 
· Robust proteins: Selection of an expression system can affect the attributes of the enzyme or protein produced. Enzymes and other proteins expressed from C1 are robust and exhibit activity at broad temperature and pH ranges, making them suitable for use in a broad range of applications.
 
· Safe: C1 has a proven safety profile and has qualified for Generally Regarded as Safe (“GRAS”) status from the U.S. Food and Drug Administration (“FDA”). GRAS Notification letters are broadly recognized in the food and consumer products industries as the safety standard. Thorough testing showed the strain to be non-infectious and to produce no known toxins or mycotoxins.
 
· Intellectual property: Unlike other commonly used fungal expression systems such as Aspergillus and Trichoderma, C1 technology enjoys greater freedom to operate for Dyadic and its licensees.  Historically, there has been significant litigation between firms using Aspergillus and Trichoderma, where freedom to operate is less clear.  In addition, all of Dyadic’s C1 licensees to date have a covenant not to sue against other users of C1.
 
The White Strain

We, our collaborators and licensees have had multiple technological breakthroughs recently in the ongoing development and optimization of the C1 Expression System. In particular, the development of the White Strain potentially offers us, our licensees and collaborators significant technological and commercial advantages, and we have focused on accelerating the development and commercial exploitation of this strain. The ability to produce purer enzymes and other proteins at high productivity has opened the door for the production of next-generation C1-based products in many industries including pharmaceutical, food, and animal nutrition and health. Many of our key third-party projects begun within the last three years use the White Strain as the primary development host.  During the period between 2011 and 2014, we have increased the productivity of the White Strain approximately 12-fold.
Figure 2 – Generation-over-generation productivity improvements of the C1 White Strain
 
Fibrezyme®G4, a high performance cellulase enzyme launched by Dyadic, is an example of a product produced using the C1 White Strain. Fibrezyme®G4 enhances paper and textile quality: it softens denim and creates a stonewashed effect for the textile industry; it also restores fiber strength and increases inter-fiber bonding in paper-making applications. Fibrezyme®G4 was created by combining three genes with desired activities. Most of the products based on our new C1 White Strain technology are still in development and will not be ready for regulatory approval and commercial launch until 2017 or beyond.

Our Business Model

Dyadic's business model builds on three well-established sources of revenue and growth potential: proprietary enzyme sales, licensing and royalties, and third-party R&D. This strategy allows us to leverage our technology across a broad range of industries and application areas:

· Proprietary enzyme sales – Dyadic manufactures enzymes using its proprietary and patented C1 and Trichoderma industrial strains and sells those enzymes in a variety of industrial markets, including animal feed, food and beverage, pulp and paper, and textiles. We have been producing and selling our own proprietary enzymes since 1994, and our global market now spans 35 countries to over 100 customers worldwide.
 
Our business plan focuses on expanding our distribution network, continued cost reductions, supply chain optimization efforts, and pursuing new opportunities for registration of our existing products. We will continue to build our sales and marketing leadership team with targeted additions in Europe, Asia, and the Americas. We are currently laying the groundwork for planned new product launches and related growth and expansion to accompany the anticipated White Strain-based product pipeline that will emerge in 2017 and beyond.

· Licensing and royalty revenues – We license our C1 Expression System with leading companies worldwide, including BASF, Abengoa, Codexis and others. To date, these licenses have allowed us to realize more than $20 million in upfront revenues, in addition to the potential for future milestones, royalties, and in some cases possible payments for expansion of rights from our licensees. Our strategy to date has been to enter into non-exclusive licenses with leading companies that will
use our technology in large markets. The non-exclusive nature of our licenses gives us total flexibility to enter into any kind of future collaboration, partnership or license with other parties.
 
Our on-site licensing model in the biofuels area is more specific, in that we expect to receive an upfront license to use our production strain to make enzymes at our licensee’s facility. For each new facility opened and strain transferred, we anticipate receiving a milestone payment. We anticipate a royalty, either per gallon of biofuel produced or, in the case of bio-based chemicals, per ton of biomass processed. Given our strong track record for improving the cost performance of our CMAX enzymes, we also plan to potentially follow-on the licenses with some of these partners by introducing new, upgraded strains over time and potentially share in the cost savings achieved.

· Research and development revenues – Strategic R&D collaborations with industry leading partners are a potentially valuable source of revenues, and historically have been shown to lead to the signing of significant license agreements. Through these R&D partnerships and establishing a close and productive working relationship with major corporations we are able to demonstrate the value that the C1 Expression System can bring to their processes and product development goals.
 
Our competitive strengths

Dyadic has several key competitive advantages that we will continue to leverage as we expand the commercialization of our technology platform into a global industrial enzymes business:

· C1 Expression System: Our C1 Expression System is an industry leading filamentous fungal platform for enzyme and other protein development and production, and one of only three types of industrially proven filamentous fungi being used for the commercial production of enzymes to meet the needs of second-generation biofuels and bio-based chemicals markets. The C1 Expression System is proven at commercial scale, programmable to produce both purer enzymes and enzyme mixtures tailored for specific applications, and capable of performing as a research or commercial production system; thereby potentially reducing both product development timelines and risk.
 
· Freedom to operate within the framework of a strong patent portfolio: Having established a strong patent portfolio gives us wide freedom to operate using our C1 Expression System. This freedom to operate is rather unique with expression systems, as historically many of our competitors have faced challenges and litigation related to their use of systems based on Trichoderma, Aspergillus, and others.
 
· Partnerships with leading companies: In each of our end markets, Dyadic enjoys strong partnerships with top-tier global companies: BASF and our confidential animal feed licensee in the industrial enzyme industry; Sanofi, a world leader in vaccines; and Abengoa and CIMV, pioneers in the development and commercialization of first generation as well as advanced biofuels. Our ability to build and maintain strong relationships with strategic partners and licensees has clear short-term and long-term benefits: increasing the probability of receiving future royalties; helping advance our technology and supporting our leadership position in the field; and providing credibility in negotiations and future dealings with other third parties.
 
· Global industrial enzymes business: Our burgeoning industrial enzymes business is expected to provide a strong foundation for continued growth in revenues, profits, and market share. As we, our collaborators and licensees, develop new enzymes using the C1 platform, we have in place a well-established sales network to distribute our products in nearly all end-markets and major geographic regions.
 
· State-of-the-art R&D capabilities: Our Dutch research team has a proven track record of developing industry leading products in a cost-effective manner and has been working with C1 for more than a decade. We have also partnered with some of the world's leading research institutions, including The Scripps Research Institute, Moscow State University, Wageningen Universiteit, TNO, Bio-Technical Resources, and BE-Basic Foundation.
 
· Experienced management team: With founder and industry pioneer Mark Emalfarb at the helm, our management team has the scientific, business, and strategic experience and expertise needed to manage a successful and growing company. We have recently strengthened our team with the hiring of a new Chief Operating Officer, Chief Financial Officer, Board Member with substantial pharmaceutical experience, Head of European sales, and several leading scientists.  Many of our
scientists are leaders in their respective fields, and we have developed sophisticated capabilities to develop new products and improve our C1 platform.
 
Our Markets

We are leveraging the C1 Expression System to develop and manufacture enzymes and other proteins for a variety of end-markets. Currently we are mainly focusing our resources and efforts on three primary categories: (i) biofuels and bio-based chemicals; (ii) industrial enzymes including the animal feed, food and beverage, pulp and paper, and textiles end-markets; and (iii) biopharmaceuticals including vaccines, antibodies and other therapeutic proteins. We have a substantially different strategy with each end-market. For biofuels, one of the strategies that we have employed is to license our technology for on-site production of our enzymes. In the pharmaceutical world, we are focused on developing biologics through the preclinical phase. In the industrial enzyme markets, we have a hybrid model of both licensing and direct sales, depending on the specific product category. Through ongoing efforts to advance and broaden our evolving C1 technology platform, Dyadic is also focused on expanding our product offerings and partnerships into new markets.

Figure 3 – Dyadic’s strategy overview by end market
 

Biofuels and bio-based chemicals

As the demand for energy, commodities, and materials derived from natural resources reach unprecedented levels, governments and consumers are seeking sustainable solutions and renewable resources to satisfy their needs and minimize the impact on the environment. Biofuels currently represent one of the most viable and consumer-friendly solutions available. First-generation fuels based on corn, rather than second-generation non-edible plant biomass, are already widely used in automobiles, trucks, and airplanes in the form of bioethanol, biodiesel, and biojet fuel. Since the infrastructure, retail outlets and consumer awareness, acceptance and support for renewable fuels has already been established with first-generation biofuels.

We believe that second-generation biofuels over time have the potential to be cheaper to produce than first-generation ethanol. Since non-edible plant biomass is much cheaper to grow per ton than corn, and there continues to be rapid reductions in cost of enzymes, production processes, and facility construction, second-generation biofuels are projected to become cost competitive. There are also innovative technologies such as those being commercialized by Abengoa and
under development by companies such CIMV. Technology being developed by CIMV is expected to create pure lignin as a byproduct of the biofuel process, which could be sold as a raw material for the production of renewable plastic and may materially change the economics of second-generation biofuel production. In addition, using non-edible plant matter eliminates the “feed vs. fuel” dilemma of using corn or other edible crops for the production of ethanol.
 
In 2014, we are seeing the first commercial scale advanced biofuels plants coming online. Three are based in the United States, built by DuPont, POET/DSM, and our licensee Abengoa for an aggregate 80 million gallon per year capacity. We expect the next wave of second-generation biofuel plants to be built in Brazil, China, and elsewhere in Asia. The leading management consultancy McKinsey & Company expects the nascent cellulosic ethanol market to grow rapidly, projecting a global market of about 20 billion gallons per year by 2020. Based on these projections, we estimate the biofuels enzymes market to potentially be greater than $5 billion within the next decade.

In addition to biofuels, our enzymes can also be used in similar production processes that utilize fermentable sugars to create high-value bio-based chemicals efficiently at industrial scale. A growing number of technologies being developed and commercialized are expected to depend on access to sizeable volumes of affordable fermentable sugars created by applying C1 enzymes to plant biomass. Interest in bio-based chemicals is increasing and many technology companies have shifted their strategy from biofuels to produce bio-based chemicals, which address a wide and expanding range of multi-billion dollar markets such as polyurethane, acrylic acid, succinic acid, butanediol, biopolymers, phthalate, solvents, and nutritious oils (e.g., omega 3).

Dyadic's primary product for the biofuels and bio-based products market is AlternaFuel® CMAX™, a cocktail of enzymes that is now in its fifth generation, with CMAX5 expected to be introduced in late 2014. Produced by a single engineered C1 host organism, the CMAX liquid cellulase preparation includes a variety of carbohydrase enzymes capable of degrading various lignocellulosic biomass substrates, such as corn stover,wheat straw and sugar cane bagasse, all in one fermentation production run Among our numerous competitive advantages in the biofuels and bio-based products markets, we emphasize the following:

· Robust enzymes: Dyadic currently has a wide variety of well-characterized, engineered fungal C1 strains and enzymes, including CMAX, within our portfolio that enable the efficient conversion of multiple forms of non-food plant biomass into fermentable sugars.
 
· Customization: We also have the capability and flexibility to develop highly customized enzyme solutions for diverse biomass feedstocks that are pretreated in different ways. C1 itself is feedstock agnostic and readily grows on a variety of biomass including agricultural residues and energy crops. Rather than focusing on the development of one product for every user and every application, we are committed to working with our commercial partners to create tailored solutions for their specific needs.
 
· On-site licensing model: Dyadic has pioneered a business model that offers licensees the option to produce enzymes on-site at a biorefinery. We believe that 30-50% of the cost of delivered biofuel enzymes derives from downstream processing, stabilization, shipping, handling, and warehousing. On-site production avoids these costs. We are committed to ensuring our customers long-term cost control of their enzyme products and providing them with a more secure supply chain and reduced inventory requirements. In the on-site model, we anticipate to receive an upfront licensing fee, milestones and a royalty per gallon of ethanol produced using our C1 enzyme technology.
 
· Lower development costs: C1's rich genetic make-up and reliability of scale-up from the lab to commercial production gives Dyadic and our licensees a potential competitive advantage by lowering overall product development costs and improving time to market. Our Dutch research team has a proven track record of developing leading products in a cost effective manner. Our scientists have been able to achieve significant improvements in the glucose conversion rates of our CMAX biofuel enzymes over the past 5 years, thereby lowering the doses needed and allowing  us to realize an 80% cost reduction (Figure 4).
Figure 4 - Cost reduction of Dyadic CMAX-series enzymes over the past 5 years
 
We believe the performance expected from our CMAX enzymes which are in development is anticipated to be a critical factor for our customers' ability to produce biofuels and bio-based chemicals at costs over time that can be potentially competitive to first generation sugars and from oil.. Given the potential size of the market, and the leading status of our technology, we plan to continue to invest a sizable amount of our R&D budget in the CMAX biofuel and bio-based chemical program.

Industrial enzymes

Global demand for industrial enzymes totaled over $5 billion in 2013, with established markets in North America and Western Europe and high growth in the emerging markets of Asia, Latin America, Eastern Europe, and Africa. Developed regions with more mature markets are demonstrating relatively rapid uptake of new enzyme technologies to address environmental issues, increase productivity, reduce costs, and improve product value. Developing regions offer attractive long-term market growth opportunities. We divide our industrial enzyme markets into four primary segments: animal feed; food and beverage; pulp and paper; and textiles, as outlined below.

Animal Feed

With the continuous increase in the world's population, a critical target for enzyme additives is more efficient and environmentally friendly production and use of animal feed. Enzymes used as feed additives can unlock more of the nutrient value present in feed products and improve the digestibility and quality of animal feed. The result is more productive poultry, swine, and other livestock, more efficient farming operations, and less environmental waste and pollution.  Enzymes used in animal feed fall into two product families: phytases to degrade phytate, and enzymes to break down non-starch polysaccharides (“NSP”).

Phytase enzymes degrade the phytate found in plant-based ingredients, releasing phosphorus that would otherwise be unavailable. Indigestible phytate in animal feed accounts for 50-75% of the grain phosphorus. The use of phytase also facilitates the release of calcium and other nutrients.  Extensive testing shows that use of phytase can save up to $7 or more per feed ton by resolving phytate anti-nutrient effects that create lost performance. In addition to the economic benefit, phytase enzymes may be marketed as a “green” feed additive as they reduce the amount of polluting waste from feed. However, while a large market, we believe that phytase enzyme margins are less attractive than the NSP enzyme market, on which we have focused on to date.
Xylanase cocktails such as Dyadic’s Xylanase 2XP are tailored to break down NSPs into more digestible components. Numerous reports have documented the negative effects of NSP on nutrient digestibility and absorption in poultry, and application testing data strongly support the use of enzymes in animal feed. Liberating NSP xylans reduces the viscosity of the feed in the intestinal track in chickens and pigs, which allows for better uptake of nutrients and better accessibility of starch by the animal’s own enzymes. A 2014 research study by Texas A&M using Dyadic enzymes showed that enzyme supplementation in chicken feed allowed for a 5% reduction in required calorie intake, resulting in a substantial improvement in food conversion efficiency (“FCE”). Based on this study, our analysis shows that for less than 1 cent per animal, enzyme supplementation can potentially reduce total diet costs by as much as 17 to 26 cents. Egg-laying chickens also benefit from NSP enzyme supplementation of feed, which are shown to upgrade the nutritional value of small grains, making it possible to use increased amounts of sunflower, small grains, and grain byproducts as sources of protein and energy, removing the upper limit of their inclusion in animal feed. Based on current data, even with these reduced-cost diets, overall egg size is improved.

The estimated revenue from the global feed enzyme market was approximately $1.0 billion in 2013, of which approximately 55% are NSP enzymes and 45% phytases. Markets and Markets, a research group, expects the animal feed enzyme market to reach $1.2 billion by 2018. High growth has been driven both by advancements in enzyme technology and a rapidly increasing cost of commercially manufactured compound feed, which represents up to 70% of the total production cost per animal. Asia has had a particularly high growth in feed for poultry and swine, and we expect that market to continue to expand.

Our lead animal feed enzyme, Xylanase 2XP, the company’s largest product in overall sales, is a xylanase-based enzyme cocktail that also contains betaglucanase, cellulase and other beneficial enzymes that work in concert to optimize the available energy and protein of feed for chickens and swine. Registration of these products is ongoing in various countries worldwide and through a number of collaborations. Our key markets for the product are in Europe, the U.S., China and other parts of Asia.

In addition to our current product offerings, we are developing new, innovative products for animal feed applications. One example is a thermostable xylanase enzyme mixture native to C1 that retains a significant amount of its activity during the hign temperature pelletizing process. Additionally, we plan to develop more efficient enzymes designed for use in animal feed products for specific diets in which effective enzymes are currently not commercially available or existing solutions are not cost efficient. These new products using the C1 White Strain will not be introduced for several years due to product development and registration timelines, but could have a very positive long-term impact on our animal feed enzyme business.

Food and Beverage

Demand for enzymes in the food and beverage market was approximately $2 billion worldwide in 2013. In the food and beverage industries, manufacturers face increasing pressure to lower costs and reduce processing times while improving the overall quality of product processes and addressing ethical and health-related concerns. Key drivers in this sector will continue to be rising raw material prices, an emphasis on the nutritional benefits of foods and beverages, and emerging market growth. Enzymes offer significant benefits over traditional alternatives for meeting industry needs, and we believe they will play an increasingly important role across multiple end-markets. In the food and beverage end market, we focus on customers in the brewing, baking and starch & alcohol segments.

Brewing

Our enzymes can enhance brewing products and processes, helping to increase our customers' productivity and profitability. They can reduce the cost and improve the efficiency of brewing by contributing to greater flexibility in raw materials, reducing viscosity, and enabling more effective mashing, filtration, and other processes. We believe that our products have the potential to capture an increasing share of the estimated $200 million global market for brewing enzymes.

It is well recognized in the brewing industry that the presence of NSPs, mainly beta glucans and xylans in cereal grains, can cause processing problems. Water-soluble NSPs increase the viscosity of the solution and block the filters used in production, thereby decreasing process efficiency. The addition of beta glucanase and xylanase enzymes to degrade these NSPs reduces the viscosity of the solution, resulting in cleaner filters and faster, more efficient production processes. Our BrewZyme product contains carbohydrases that improve the efficiency and productivity of filtering and lautering wort and enhance the conversion of poor quality barley to produce acceptable malts.

Amylase enzymes also have an important role in brewing applications. During brewing with high quality malt, endogenous enzymes (those already present in the process broth) degrade the starch of the malt into glucose, which is later fermented to ethanol. However, the use of lower quality malt results in incomplete starch degradation and ultimately less ethanol production. The addition of amylase enzymes to these types of malts improves starch degradation.
Baking

In the baking market, enzymes can improve product quality, extend product shelf-life, and help drive market growth by contributing to new product innovation. The total global enzymes market for baked goods is projected by Market and Markets, a research organization, to increase from $430 million in 2013 to nearly $700 million in 2019.

We believe the applications and importance of enzymes will increase in this market as consumers demand more natural, nutritionally superior products that are free of chemical additives, stay fresher longer, and offer added health benefits. Consider, for example, the continuing trend toward increased consumption of whole wheat breads due to their health-promoting effects. Enzymes can play an important role in improving the quality of both whole wheat and white breads. They can help degrade the fibers in whole grain breads, enhancing the elasticity of the dough and resulting in larger, less dense loaves.  Enzymes such as amylases and xylanases are used in baking to change the structure of the starch and to improve dough qualities such as workability, stability, and uniformity of rising, and to extend the shelf-life of the product.  Baking enzymes can also enhance and stabilize the crumb structure and the volume, texture, and appearance of breads, cakes, pastries, and other baked goods.  Another advantage of enzymes is their ability to reduce the amount of acrylamide -- a carcinogenic compound -- that can form during baking when the amino acid asparagine reacts with sugars such as glucose or fructose at high temperatures.

In addition to amylases and xylanases, we are performing innovative research in conjunction with the Healthbread and Bakenzyme programs to uncover opportunities for the development of new enzymes to improve dough-making and dough quality, such as feruloyl esterases and oxidative enzymes. These enzymes can replace chemical oxidizing agents in dough and breads as processing aids to improve dough properties, increase production volume, extend freshness, and enhance end-product structure and appearance.

Starch and Alcohol

The starch industry is one of the longest-standing markets for enzymes within the food and beverage end-market, dating back to the use of glucoamylase in starch processing in the early 1960s. Market and Markets estimates that the current $1.5 billion alcohol and starch enzyme market will grow annually by 7.9% from 2013 to over $2.2 billion by 2018. Enzymes enable the breakdown of starch into a wide variety of syrups and modified starches without the use of harsh chemicals.

In recent years, it has become increasingly popular to use xylanase or hemicellulase to facilitate conversion of wheat starch into fermentable sugars using industrial-scale liquefaction and saccharification processes. The use of enzymes to lower viscosity during the initial stages of starch conversion, during which long-chain glucose molecules are broken down, makes it possible to decrease overall processing times. Starch manufacturers benefit from additional cost savings, higher quality yield, and reliable production volumes from variable substrates. Our CeluStar XL product has demonstrated unique capabilities to reduce viscosity at very low enzyme doses. Based on the performance of CeluStar XL in application testing, we are now investing to expand our efforts in this end-market.

Pulp and Paper

Traditional manufacturing methods used in the pulp and paper industry depend on large amounts of water, energy, and chemicals for pulp bleaching. The use of enzymes such as xylanases and hemicellulases to break down wood polymers and make it easier to solubilize and remove the lignin component offers a cost-effective, environmentally friendly alternative to conventional chemical methods. Market research estimates the North American enzyme market for pulp and paper is well positioned for growth, and we believe the global market will grow substantially as the adoption rate at mills increases. Driving demand for pulp and paper enzymes will be rising paper raw material prices, interest in reducing the use of harsh chemicals and other methods with negative environmental implications, and growth in emerging markets. In particular, mills in China have a policy-driven interest in reducing their environmental impact. We are actively advancing our products and corporate capabilities to leverage this substantial market opportunity.

Over the past decade, we have demonstrated continued progress in successfully integrating our enzymatic treatments into the production processes of pulp and paper mills. Fibrezyme G4®, our flagship product for this application, has capabilities in bio-refining, bleach boosting, deinking, and waste water treatment. Our Fibrezyme products have demonstrated the ability to improve the efficiency of multiple different components of the pulp and paper manufacturing process, and in particular bleaching, refining, and drying of both virgin and recycled pulp. The drying process is an important target for enzymatic treatment as faster, more efficient drying can translate to reduced energy consumption and increased production rates. Our products also contribute to decreased dependence on virgin pulp by improving numerous steps involved in processing recycled pulp. In addition, our treatments can enhance several important features of pulp and paper products, including strength, brightness, and cleanliness.
Textiles

Dyadic helped pioneer the stonewashing process for denim first selling pumice stones followed by selling cellulase enzymes in the 1980s, and has enjoyed a long history of technology leadership in the textiles industry launching our first generation C1 neutral textile cellulase enzyme in 1996. Today, stonewashing of jeans still depend on cellulases, and the processing of many other textiles relies on a variety of enzymes that can alter fiber structure to soften leather, for example, or make fabrics stronger and more durable.  While the market for enzymes in the textile market remains sizable, we believe most products in this segment are characterized by lower margins.
 
We continue to help our customers gain a competitive advantage by offering quality enzyme products that faciliate more efficient and effective processing of a variety of textiles, decrease dependence on conventional chemicals and reduce consumption of natural resources which lead to lower overall production costs. Fibrezyme® G4, our newly launched next-generation C1 textile enzyme product opeates under wide pH and temperature ranges, allowing for integration into a variety of potential textile manufacturing processes and other high-end niche markets within the textile industry.

Other Industrial Enzyme Markets

R&D leading to advanced biotechnological tools for gene discovery and protein engineering provides a wide variety of highly effective enzymes that have replaced and enhanced traditional chemical processes. These enzymes can now operate at a wider range of temperatures, pH levels, and manufacturing conditions, making them suitable in numerous industrial and consumer applications, including the detergents and nutraceuticals end-markets:

· Detergents: For more than 30 years, enzymes have been used in detergents and household care items to degrade proteins that cause stains, such as grass or wine stains. Currently, enzymes are used in cleaning products to enhance cleaning ability, preventing color fading, and optimize performance at lower temperatures to improve energy efficiency. Biological enzymes products have a smaller environmental footprint than the oil-based and other non-renewable chemicals they are replacing, allowing manufacturers to offer consumers an alternative high performance product that is also more sustainable. The global demand for enzymes in the cleaning products market was approximately $750 million in 2012.
 
· Nutraceuticals: Though still in its formative years, we are confident the nutraceuticals end-market will grow into a billion-dollar industry as consumers increasingly turn to nutraceuticals to prevent illness, manage chronic conditions, and achieve optimum health and wellness. We believe our integrated C1 technology platform will play a major role in delivering functionally superior, cost-effective new ingredients to manufacturers of dietary and herbal supplements and processed foods such as cereals, soups, and beverages.
 
Biopharmaceuticals

Perhaps nowhere is the need for novel expression systems greater than in the biopharmaceuticals industry, where recombinant protein therapeutics, monoclonal antibodies, biogenerics (biosimilars), and vaccines have long developmental timelines, high development costs, and face challenging safety and regulatory issues. The global market for protein therapeutics was valued at more than $169 billion in 2012 and is projected to grow to in excess of $220 billion by 2018. At present more than 165 recombinant protein drugs are approved for human use and another 500 protein drug candidates are in preclinical and clinical development. All of these biologics are made by transferring a target gene into an expression system and growing the host cells in industrial-scale bioreactors to produce commercial quantities of the recombinant proteins.

The demand is increasing for novel expression systems to overcome the shortcomings of the common production hosts used today (mammalian, bacterial, and yeast). The potential benefits of a new expression system include significantly lower manufacturing costs, better control of protein glycosylation and protein folding, and higher purity. The most commonly used expression system at present is Chinese Hamster Ovary (“CHO”) cells. Efforts to increase CHO cell productivity and prolong the life span of cells in culture have led to volumetric productivity greater than 5 grams per liter under conditions of controlled nutrient feeding. This is a fraction of the potential production capability of Dyadic’s C1 White Strain. In addition to productivity, C1 offers many other potential advantages:

· Versatile genetic tools that enable efficient gene transfer with relatively short strain selection timelines
· Effective in the expression of high value proteins derived from indigenous and heterologous genetic sources
 
· Ability to secrete the expressed protein from host cells into the culture media, which significantly reduces the downstream processing costs
 
· Analysis of proteins expressed by C1 shows less over-glycosylation compared to yeast which we believe has a structure potentially more amenable to humanization of the glycosylation pattern of mammalian proteins
 
· Proven in commercial-scale production since 1996
 
· The C1 White Strain can produce a single heterologous protein at a level of up to 50 grams per liter with high purity
 
· Direct, linear scale-up from lab to commercial scale fermentation processes, potentially saving years of preclinical development time
 
· Much lower cost raw materials used in manufacturing than those typically seen with CHO cells
 
However, CHO and other systems are well established and proven to be reliable. Further, about 70% of the recombinant biopharmaceuticals currently on the market or in development are glycosylated proteins and require the addition of various sugars to the expressed proteins, giving them their highly specific glycosylation patterns that confer unique properties and functionality. While C1’s glycosylation capabilities have been found to be more similar to human glycosylation than traditional yeast expression hosts, significant research will be required to access that segment of the market.

As our partnership with Sanofi has demonstrated, using a novel expression system like C1 gives a drug developer another “shot on goal” to find an organism that will accept a foreign gene of interest. Sanofi was not able to sufficiently express the DNA needed to produce its vaccine with the readily available expression systems used for biologics. We believe that pharmaceutical companies will find C1, among the novel, cutting-edge expression systems now available, to be one of the most attractive because of its long track record in industrial applications, its robust growth and fermentation characteristics, and its ability to be readily programmed and easily scaled.

Generic Biopharmaceuticals

Another area of intense growth and an important strategic target for new expression systems is in the production of generic biopharmaceuticals, also known as biosimilars or biogenerics. For innovators developing novel biopharmaceuticals, unique expression systems provide protection against later competition from follow-on/biosimilar products. This is particularly relevant for products that are proprietary (involve trade secrets), have exclusive licensing, and have unique molecular properties (e.g., glycosylation patterns) that are hard to replicate using other systems. This appears to be an important factor in recent acquisitions and exclusive licensing of novel expression systems and related technology by many large pharmaceutical companies. For example, Merck acquired GlycoFi, which was developing a yeast expression system that can replicate human-like protein glycosylation, for $400 million. Numerous companies are pursuing biosimilar versions of blockbuster drugs that will go off patent within the next few years, including some of the leading monoclonal antibody-based therapeutics.

Follow-on biogeneric and biosimilar developers are also searching for superior expression systems to optimize the cost effectiveness of their manufacturing processes. These companies operate in a highly competitive environment. Biogeneric manufacturers have to compete against experienced and well-established innovators with world-class manufacturing facilities, well-developed revenue streams, and market dominance. Contrary to the expectations of many, biogenerics may not cost less than innovator products to manufacture, and innovators may be willing and able to undercut the price of follow-on protein drugs to maintain their market share.  Most innovators will already have a replacement product or portfolio of products for the same indication available by the time biogenerics would enter the picture, so they would have little to lose by competing against new entrants on the basis of price.

The prevailing opinion is that many follow-on proteins will likely be manufactured using novel expression systems and we are already seeing this with biogenerics. However, the regulatory environment for biogenerics continues to be somewhat uncertain, and it remains unclear how readily these products will receive approval for marketing. The manufacturing process still largely controls and defines biotech products (i.e., the process equals the product paradigm). Therefore, the use of a substantially different manufacturing process introduces the risk that regulators could consider a follow-on protein to be inherently dissimilar to the innovator product, leading them not to allow the comparative and abbreviated testing needed for approval.
Active Pharmaceutical Ingredients

A smaller, yet increasingly important sector of the market is the use of industrial enzymes as biocatalysts in the manufacturing of Active Pharmaceutical Ingredients (APIs). The overall API market was estimated at about $30 billion in 2011, and the number of small molecule APIs that rely on biocatalysis to drive their chemical synthesis reactions is rising rapidly. We are actively exploring opportunities in the API space.

Primary Strategic Partnerships and Licensees

BASF

On May 6, 2013, Dyadic entered into a non-exclusive worldwide research, development, and license agreement with BASF SE (BASF). Under the terms of the agreement, BASF will be able to apply Dyadic's C1 Expression System to the development, production, distribution, and sales of industrial enzymes in certain markets for a variety of applications. The agreement also includes certain funding by BASF to support R&D at Dyadic's research center in The Netherlands, a non-refundable upfront license fee of $6 million dollars paid by BASF, and various potential research milestone fees and royalties to be paid to Dyadic on product commercialization.

BASF has the freedom to develop, manufacture, and sell new products using C1 and to explore new business opportunities in a variety of markets, including animal nutrition. A major R&D project currently underway between Dyadic and BASF has been very successful to date, and we expect continued success with this and other future joint projects. We are confident and expect that this interactive partnership will drive continued collaboration and will have a long-lasting, beneficial impact on the industrial enzymes businesses of BASF and Dyadic.

Abengoa Bioenergy

Abengoa is the European market leader in corn-based ethanol production and the seventh largest corn-based ethanol producer in North America. On November 8, 2006, Abengoa acquired 2.14 million shares of Dyadic stock for $10 million to fund R&D for the development of enzymes used to degrade biomass for second-generation biofuel applications.

On February 18, 2009, Dyadic and Abengoa entered into a non-exclusive license agreement (the Abengoa License Agreement), which became effective on May 12, 2009. The agreement gave Abengoa access to certain patent rights and know-how owned by Dyadic related to use of the C1 Expression System for large-scale production of enzymes for use in manufacturing biofuels (including cellulosic ethanol and butanol), energy, and/or chemicals. The Abengoa License Agreement provides for facility fees and royalties to be paid to Dyadic on the commercialization of biofuels and other products that utilize our materials and technologies.

On April 23, 2012, the Abengoa License Agreement was amended and restated to provide Abengoa with additional rights, including worldwide rights to use Dyadic's C1 Expression System in the licensed fields. In addition, the amended agreement clarifies Abengoa's rights to sell enzymes produced using C1 technology to third parties for use in both first- and second- generation biorefining processes for the production of fuels, chemicals, and or/power. Abengoa paid Dyadic an additional $5.5 million non-refundable upfront license fee in exchange for the expanded rights. Dyadic will also receive additional payments, such as royalties, on the commercialization of biofuels and other products that utilize our C1 materials and technologies licensed to Abengoa.

Dyadic's license agreement with biofuels pioneer Abengoa puts our C1 technology at the heart of one of the first commercial scale next-generation cellulosic ethanol facilities in the United States, which is scheduled to come online in the third quarter of 2014. Abengoa has built a biomass-to-ethanol biorefinery in Hugoton, Kansas with a capability of producing 25 million gallons per year of bioethanol for use primarily as transportation fuel and for electricity generation to power an on-site cogeneration plant. According to Abengoa, the Hugoton biorefinery will process nearly 350,000 tons of biomass annually; converting cellulosic feedstock from agricultural waste into renewable liquid fuel using Abengoa's proprietary technology and enzymes developed and manufactured using Dyadic's C1 system. Abengoa has reported that it has invested over $400 million in the design and construction of the Hugoton plant and nearly $1 billion over the past decade in the development of its cellulosic sugar platform, which includes their investment in further advancements made to the C1 technology licensed from Dyadic.

CIMV

In July 2014, Dyadic entered into a memorandum of understanding agreement to commercialize second-generation biofuels and bio-based chemical technology with CIMV.
CIMV’s patented approach for separating lignin from plant material prior to enzymatic processing creates Biolignin™, a pure form of lignin that may be sold commercially as an environmentally friendly alternative to petroleum-derived chemicals. The technology has garnered industry acclaim in winning the Pierre Potier Prize for Innovation in Chemistry and Frost & Sullivan's 2013 French Visionary Innovation Award. CIMV is a portfolio company of Pierson Capital, a leading developer of major infrastructure, transportation and energy programs in the emerging markets of Asia, Africa, and Latin America.

Under the memorandum of understanding, Dyadic and CIMV will work together to develop more efficient, fully integrated processes to produce environmentally low impact biofuels and bio-based chemicals.  Dyadic anticipates supplying enzymes to CIMV’s planned 2015 demonstration plant, and licensing its C1 technology for on-site production of enzymes at CIMV’s future commercial scale plants.

Sanofi Pasteur

Our two current collaborations in the pharmaceuticals industry are with Sanofi to develop a human vaccine and with a major animal health company to develop a therapeutic protein. We are also exploring a variety of new healthcare applications based on the results of several initial tests and market analysis studies.

Our ongoing project with Sanofi in the area of vaccines began in 2011 and continues to be the cornerstone of our entry into the biopharmaceuticals industry. The goal of our partnership is to develop a procedure for transforming C1 to produce high yields of proteins for use in vaccine production. We have successfully demonstrated that C1 is able to produce two different types of vaccine components. This material has been tested, and initial findings indicated that further R&D and testing is necessary before Sanofi would decide to in-license the C1 Expression System for vaccine production.  In July 2014, Sanofi verbally agreed to fund additional R&D work on the project with Dyadic and we are waiting for the written extension agreement to be finalized and executed.

Other partnerships

In 2011 we entered into a license and R&D agreement with a leader in the animal feed enzymes industry. We can report that during the past three years we have been developing together with this licensee a next-generation enzyme product for sale into the animal nutrition industry. This product is expected to replace, to a great extent their current product, which they are a market leader in its segment, within the next two to four years, after registration is complete. We are hopeful that the successful outcome of this project will lead to additional joint R&D agreements and other opportunities to collaborate.

Codexis, a licensee of C1 for biofuels applications has, at least temporarily, ceased its biofuels program. During the period 2009-2012, according to Biofuel Digest, Shell invested $300 million in the program and successfully developed a very high quality enzyme product (CodexymeTM) for the commercial production of second-generation biofuels.

We have three additional collaborations: another animal feed company, a leading maker of dairy products and a pharmaceutical company. The animal feed and dairy product projects have been ongoing since 2011. Neither of these collaborations is active at this time, and no funding is currently being received from either party. However, we are evaluating if and how to continue each of these research projects. While some results show promise, others present certain challenges, and further research is required before these specific commercial products can be developed. The pharmaceutical project to develop a therapeutic protein for animal health began in 2014.

Competition

We are leveraging our C1 Expression System and our non-GMO Trichoderma technology across multiple industries and numerous end-markets. To each we bring unique advantages and opportunities, and in each we face distinct competitive dynamics.

Industrial enzymes

Three major suppliers dominate the global industrial enzymes market: Novozymes, DuPont, and DSM. Novozymes is the market leader, with approximately 48% market share in 2013. DuPont, through its acquisition of Genencor (via Danisco), became the second largest producer, with about 20% of the market. In third place is DSM, with a market share of 12%. Comprising the remaining 20% of the market share are companies such as BASF, AB Enzymes, Chr. Hansen, Adisseo, Alltech, and Dyadic. While a few of the major players have access to their own proprietary expression system, others do not or their expression systems are not meeting their anticipated needs and therefore we believe C1 offers those parties, and others who may be interested in entering this market an opportunity to work together with us to develop next generation enzyme products. Dyadic’s wide freedom to operate, non-exclusive license agreements and the potential for further licensing our C1 technology make us an attractive potential partner.
Biofuels and Bio-based Chemicals

We believe that our CMAX enzymes are one of the leading product offerings in the biofuels market, and our licensing agreement with Abengoa and collaboration with CIMV, both industry leaders, positions our C1 Expression System as a key component of the emerging commercial scale next-generation biofuels production processes. Hydrolysis of cellulosic biomass, driven by enzymatic catalysis, is a critical step in the production processes for biofuels or bio-based chemicals. Enzymatic hydrolysis can account for more than a third of the total operating costs of a biorefinery. Currently there are three leading enzymatic hydrolysis platforms: (i) C1, in use by Dyadic and its licensees; (ii) Trichoderma, in use by Novozymes, BP, DuPont, and Clariant/Süd Chemie; and (iii) DSM's technology. Independent test results repeatedly demonstrate that C1-based enzymes have similar or better performance, depending on the protein loading levels, feedstock, pH, and temperature used in these experiments, than the market leading Trichoderma-based enzymes from Novozymes and DuPont.

Figure 5 – C1 is one of three leading enzyme platforms for second generation biofuels


Biopharmaceuticals

Our C1 Expression System has the potential to become a viable alternative to the current leading expression systems used in the biopharmaceuticals industry to produce vaccines, monoclonal antibodies, and other therapeutic proteins. C1 has several inherent benefits and competitive advantages compared to the industry standard expression systems for biologies such as CHO cells, Pichia, and E. coli, as detailed below:

· Mammalian cells: Currently the preferred hosts for most complex protein therapeutics due mainly to their high compatibility with human glycosylation. They comprise 55% of the market, dominated by CHO cells. Disadvantages include the relatively long time for cell line development, unstable gene expression, and low protein yields.
 
· Bacterial: Representing 40% of the market, bacteria such as E. coli produce toxic and pyrogenic cell wall components that may make them unsuitable for the production of pharmaceutical or food components. However, they are currently the easiest, cheapest, and quickest method for recombinant protein expression and are often used in laboratory settings.
 
· Yeast: In contrast to bacteria, yeast does not produce potentially toxic and pyrogenic cell wall components. Further, the genetic tools for yeast development are advanced and enable continued engineering of new strains that may become more suitable than CHO cell lines. These benefits have allowed yeast to increase their market share to approximately 15%.
We believe that our C1 expression system has potential advantages against all three leading systems, as outlined below.
 
Figure 6 – Competitive advantages of the C1 Expression System compared to the leading pharmaceutical expression systems
 
 
Competitor's Weaknesses
C1's Corresponding Strengths
 
CHO cells
(Chinese hamster ovary)
 
·   Takes a year or more to optimize fermentation process
·   Protein expression levels diminish over time
·  Contamination with mammalian viruses or mycoplasma a concern
·   Linear scale-up
·   High throughput screening (“HTS”) using C1 potentially could speed up drug discovery and development
·   C1 is non-mammalian so no viral inactivation or validation is needed
 
Pichia1
(yeast)
 
 
·   Glycosylation can induce immunogenic response
·   Limited expression of eukaryotic proteins
·   Secretion levels of proteins from yeast cells can be lower than from fungal cells
·   High viscosity
·   Capable of intron processing (to remove unexpressed gene regions)
·   Able to express wide range of eukaryotic proteins
·   Near to human glycosylation anticipated after further glycoengineering
·   High expression levels
 
E. coli
(bacteria)
 
 
·   No intron splicing
·   No glycosylation
·   Cannot express antibodies
·   Target enzymes or other proteins may be insoluble (inclusion bodies) and are not secreted
·   Capable of intron splicing
·   Human-like glycosylation anticipated after further glycoengineering
·   Potentially able to commercially express monoclonal antibodies
·   All targets are secreted
 
Intellectual Property

Our current patent portfolio includes 15 U.S. patents and 41 foreign patents for claims that cover the Dyadic C1 technology platform, and a total of 32 U.S. and foreign filed and pending patent applications. We believe this breadth and depth of established and pending patent coverage provides broad protection for Dyadic’s technology, products, and commercial applications. We also rely heavily on trade secrets to protect our technologies. We review our intellectual property portfolio on an ongoing basis, and we file claims on new innovations and allow certain intellectual property rights to expire at our discretion.

Our primary family of patents protects the commercial development and use of various C1 organisms, the C1 Expression System, certain C1 molecular tools such as promoters, as well as specific C1 genes and C1 enzymes among other IP. These patents comprise a comprehensive intellectual property portfolio that protects our C1 Expression System and the products derived from it. We believe this portfolio gives us wide freedom to operate with our C1 technology and requires that companies seeking to use our C1 organisms and molecular tools as a commercial expression system take a license to the C1 technology from Dyadic or in some cases a sub-license from our licensees.

We also have a family of patents that among other applications protect our use of enzymes and enzyme combinations in the biofuels and bio-based chemicals end-markets. These patents protect the compositions and methods of developing and producing novel enzymes and enzyme combinations that efficiently convert various sources of plant biomass (e.g., corn stover, wheat straw, and bagasse) to the fermentable sugars used in the production of advanced biofuels and bio-based chemicals.  These claims cover the production of enzymes using Dyadic's C1 Expression System, as well as in some circumstances a wide variety of additional production methods that rely on the use of bacteria, yeast, algae, other fungi, and plants.

In addition, we have a series of valuable patents that protect our ability to use C1 and certain other filamentous fungi for high throughput screening (“HTS”) of gene libraries. HTS is an important, broadly applied process in industrial biotechnology and the pharmaceuticals industry to identify and optimize new and improved enzymes and other protein products. Sorting through large gene libraries can be a very tedious and time and resource consuming process. Methods described in our patents may allow us and our licensees the potential to use advanced automation and robotics to screen gene libraries more rapidly and effectively, shortening development timelines and accelerating scale-up to commercial production. While we originally designed these HTS processes for use with our proprietary C1 Expression System, we believe they have the potential for broad application within the industry and may offer Dyadic an additional opportunity to license our filamentous fungal HTS technology.
Research and Development Capabilities and Collaborations
 
Internal Research and Development Capabilities

As of June 30, 2014, Dyadic had 32 employees dedicated to R&D.  We expect to spend 10-15% of our non-licensing revenue on internal R&D-related activities to develop our own product and make improvements to the C1 Expression System. We anticipate that our R&D expenditures will further increase as we explore and embark upon new R&D to further improve our technologies and focus on certain applications for which we believe we may be able to apply our C1 and other technologies.

Most of our R&D activities take place at Dyadic's primary research facility in Wageningen, The Netherlands. A major expansion of the research facility was completed during 2013-2014, which allowed us to close our small laboratory in North Carolina. The expansion included a significant increase in floor space, installation of a wide range of state-of-the-art research equipment including a new fermentation lab, and a 40% increase in our scientific staff.

R&D Collaborations

Wageningen University

DNL is located near Wageningen University, a leading research institution consistently ranked as the #1 life sciences university in Continental Europe by Times Higher Education (THE). Dyadic benefits from our proximity to and close working relationship with the University in many ways: access to key technical support; a ready supply of well-trained scientists and interns; aid in attracting government-funded projects; and a variety of less tangible benefits from our ongoing interactions.

The Scripps Research Institute (Scripps Florida)

Scripps is one of the world's largest and most reputable biomedical research organizations. Dr. Richard Lerner, former president of Scripps previously served as the chairman of Dyadic's Scientific Advisory Board.  The Institute performed the first automated annotation of the C1 genome, allowing identification of key metabolic functions that influence gene expression and facilitating the use of advanced molecular engineering and genetic technologies. It re-annotated the genome in 2009-2010, providing us with new information about C1 genetics that enabled us to improve the C1 technology platform, increase yields, pursue new product candidates, and explore new markets and applications.

Moscow State University

In our longest-running research partnership we work primarily with experts in industrial enzymology at the University's Division of Chemical Enzymology, as well as with microbiology experts at the Russian Academy of Sciences. This collaboration dates back to 1992, when we initiated the joint development of Dyadic's first enzyme product, an acid cellulase produced from Trichoderma, which we commercialized two years later. At that time we also commissioned the Moscow State University to begin the search for a new expression system for the development and production of enzymes. A search through thousands of microorganisms led to their discovery of the C1 wild-type strain.

The Netherlands Organization (TNO)

TNO Quality of Life is a Dutch government-sponsored contract research organization and one of the institutes comprising TNO for Applied Scientific Research. We have worked with TNO since 1998 on a variety of development programs. Their scientists are widely recognized as leaders in the fields of fungal genetics and molecular biology, and we benefit from their continued guidance on state-of-the-art techniques for regulating gene expression, performing gene knock-outs, and improving gene discovery. We enjoy a very close relationship with TNO and, from 2002-2007, our R&D lab was located within the TNO facility, until we outgrew the shared space and established our own stand-alone research center in Wageningen.

Bio-Technical Resources (BTR)

Wisconsin-based BTR, a division of Arkion Life Sciences, is a contract research organization with expertise in areas of strain and process development for fermentation of microbial products. Dyadic, and some of our licensees, have worked with BTR since 1995 on a variety of development programs, including the production of several commercial enzyme products and processes using C1.

Public-private Research Partnerships

Dyadic benefits in many ways from our involvement in nine public-private research partnerships funded by the European Union and other governments, including from revenue to offset R&D costs, potential business development opportunities with partners, ways to accelerate progression of the C1 technology platform, and access to industry knowledge in related fields.
OPTIBIOCAT

OPTIBIOCAT is an EU-funded project developing biocatalytic enzymes to replace the chemicals currently used to produce antioxidants for the cosmetics industry, thereby providing a "greener" more enviromentally friendly and potentially more cost-effective solution. We are using both our proprietary C1 enzyme library and our patented C1 Expression System to produce the targeted enzymes. In addition, the project will implement strain improvement and fermentation optimization strategies to reduce production costs and allow for industrial scale production. Our C1 platform will be a key enabling technology in this large consortium-based effort that began in December 2013 and is scheduled for completion by December 2017.

Bakenzyme

The Bakenzyme project seeks to develop more pure and widely applicable enzyme products for the baking industry to improve dough and bread structures. Most currently available enzyme products have unwanted side activities that can negative affect bread quality. Our C1 technology can produce new, dedicated, and relatively pure enzyme products that will improve dough and bread quality and enhance its nutritional value by increasing the bioavailability of health-promoting nutrients naturally present in flour.  The program began in January 2014 and is scheduled to last through July 2016.

Healthbread

The EU-funded Healthbread project supports a collaboration with several large baking companies to develop enzymes that improve the bioavailability of nutrients in breads. Specifically, the goal is to develop dry processing (milling) technologies to produce wheat fractions, thereby improving the bioaccessibility of bioactive compounds in these wheat fractions during wet processing (fermentation) using enzymes and microbes.  The aim of this two-year project ending in October 2014 is to produce breads and other baked goods with improved nutritional and product qualities, including greater bioavailability of fiber, vitamins, minerals, and other micronutrients. Our role in the project has been to screen a variety of C1 enzymes on whole grain flour and wheat bran to evaluate their activity and, in particular their ability to increase levels of ferulic acid. We are in the process of expressing and analyzing target enzymes in the C1 White Strain.

Miracles and AlgaeParc programs

We are involved in two algae-focused projects: the EU-funded Miracles program and the Dutch-funded Algae Parc Biorefinery, both of which began in November 2013 and are scheduled for completion in November 2017. A great deal of R&D investment is being focused on microalgae as a promising renewable feedstock for manufacturing commodity and specialty products for a variety of food and non-food end-markets. In the food and cosmetics industries demand is growing rapidly for using algae to produce high value compounds such as lipids and proteins, and new, more effective, lower cost methods are needed to release these compounds from the algae biomass, which has been an ongoing challenge. Enzymes, which can weaken algae cell walls, may offer a low-cost solution to existing techniques that involve pressing algae, resulting in lower energy input and higher yields for lipid extraction. We are involved in the development and production of dedicated enzymes to enable and/or improve extraction of high value compounds from algae.

Bio-Mimetic
 
Bio-Mimetic is an EU-funded project to develop enzymes for the production of high value compounds from lignin. Our partners include Procter & Gamble and France-based CIMV, a pioneer in the development of lignin biorefineries. We believe that lignin can be converted efficiently and cost-effectively into high value, sustainable commercial products such as adhesives, detergents, and cosmetics. Lignin is a complex polymer of aromatic alcohols that is present in large amounts in plant cell walls. At present, its main use is as an energy source through burning. Enzymatic degradation of lignin produces small aromatic molecules that can then be used to make chemicals, such as adhesives that mimic many of the same efficient attachment mechanisms found in nature (e.g., the attachment processes used by marine organisms). This project began in July 2012 and is schedule to continue through June 2015

Chit4Value

We are pursuing this 48-month long Dutch-funded project in partnership with Wageningen University. The goal is to convert chitin, one of the world's largest organic waste streams, into valuable compounds. Chitin is present in the cell walls of fungi, for example, and is a component of the exoskeletons of insects, spiders, crabs, lobsters, and shrimp (with shrimp shells being an especially large waste stream that is rich in chitin). This project is evaluating C1 chitinase enzymes for their effectiveness in degrading chitin to monomers that can be used as starting materials for commercial polyamide production. The project is scheduled to complete in 2017.
DISCOX

DISCOX is a Dutch-funded project in partnership with AVEBE, a leading starch producer, to develop enzymes that oxidize starch for non-food applications. Oxidative enzymes play a major role in the natural degradation of wood and other plant debris, and this project aims to produce new oxidative enzymes and evaluate their commercial potential for converting starch into useful materials. The project began in April 2013 and is scheduled to last for 48 months.

Parenco

This Dutch-funded project in partnership with Parenco, a paper mill, and the HAN University, focuses on the conversion of paper waste streams into valuable products, with the ultimate goal being the creation of a consortium that will develop a demonstration biorefinery at the site of the Parenco plant. The aim for this facility is optimal utilization of alternative lignocellulosic raw materials and residues from the region, and conversion into fiber raw materials for the production of paper, polymers, and chemicals. This 16-month project began in July 2013.

Regulatory Environment

We develop products derived from both GMO and non-GMOs that are subject to regulation by federal, state, local, and foreign governmental agencies. Some of our existing products required U.S. FDA approval, and we will need FDA approval for most if not all of our future products in the U.S. In addition, European countries have regulations regarding the development, production, and marketing of products from GMOs, and these are generally more restrictive than present U.S. regulations. The European Union is attempting to replace country-by-country regulatory procedures with a consistent EU regulatory standard, though some country-by-country regulatory oversight will likely remain. Some other regions of the world accept either a U.S. or European clearance together with a filing of associated data and information for their review of a new biologically derived enzyme product. However, other jurisdictions do not accept U.S. or EU clearance and have their own specific rules with which we must comply. Our licensees are also subject to the rules of the U.S., EU, and other countries. We currently have no products pending regulatory review with the FDA or a similar regulatory body in the EU or elsewhere.

In the U.S., our biofuels business is the beneficiary of the Federal Renewable Fuel Standard (RFS), a program established and administered by the Environmental Protection Agency (EPA). With the RFS, the EPA set renewable fuels volume mandates for automotive fuels in the U.S. While the program is not a direct subsidy, the guaranteed market created by the RFS is expected to stimulate growth of the biofuels industry and to raise prices above where they would have been in the absence of the mandate. The RFS has been modified since its establishment under the U.S. Energy Policy Act of 2005, and it is currently under evaluation again. Further changes to the RFS may negatively affect our biofuels business and our licensees in the U.S. biofuels industry, such as Abengoa.

For further discussion on our regulatory environment, see "Risk Factors that May Affect Future Results – Regulations may limit or impair our ability to sell genetically engineered products in the future."

Customers

Our customers for our industrial enzymes are primarily distributors, enzyme formulators, and other value-added resellers. Of Dyadic's approximately 100 customers, our top 10 industrial enzyme customers represented 66%, 69%, and 71% of our sales in the years ending December 31, 2011, 2012, and 2013, respectively.  For the six months ended June 30, 2013 and 2014, the top 10 industrial enzyme customers represented 71% and 66%, respectively. Europe, our largest market, represented 57% of industrial enzyme sales in the first six months of 2014, while the Americas represented 31% and Asia represented 12%.  In general, we have seen the strongest growth in Europe, where we have gained recent registrations with key customers. While these customers each buy from several enzyme suppliers, we believe that the time and resources our customers have spent evaluating and registering our products are driving strong growth in our key existing accounts.

Our main technology licensees have been Abengoa, BASF, Codexis, and the animal nutrition company described above, and we have received significant licensing payments from each over the past several years as well as in some cases additional R&D funding. We expect that Abengoa, BASF, CIMV, the animal nutrition licensee and our other current partners will provide us with recurring royalties and/or R&D revenues in the future.

Funded third-party R&D represented 20%, 23%, and 12% of total revenue, excluding license fee revenue, in the years ending December 31, 2011, 2012, and 2013, respectively, and 19% in the six months ending June 30, 2014. Our government-funded private-public research projects accounted for 32%, 15% and 21% of funded R&D in the years ending December 31, 2011, 2012, and 2013, respectively, and 34% in the six months ending June 30, 2014. We expect government-funded projects to continue to play a
meaningful role in our business on an ongoing basis. In addition to generating revenue, these public-private projects promote innovation and function as a catalyst for growth with potential new products, platform improvement and relationships with industry leaders.
 
Manufacturing

Our commercial scale production processes generally involve conventional types of fermentation equipment and raw materials for use with both our C1 engineered strains and the non-GMO Trichoderma strains we rely on to produce large volumes of industrial enzymes. We continue to develop and optimize these processes in collaboration with our manufacturing partners and licensees. Dyadic does not own enzyme manufacturing facilities; instead we utilize a third party contract manufacturer in North America to produce our products. We have worked continuously with this contract manufacturer to produce commercial enzymes since 2008 and our relationship is governed by a several key points:

· Dyadic owns the technology associated with the production strains and enzymes produced
· Our toll manufacturer produces enzymes for Dyadic using its fermentation tanks and downstream processing equipment according to our process protocols and specifications
· The toll manufacturer operates its plant under Current Good Manufacturing Practices (cGMPs), producing our enzyme products for use as food processing aids and as supplements to animal feed
· The manufacturing facility maintains Kosher and Halal certification, important for the animal feed and food enzyme markets
· The toll manufacturer maintains ISO 9001:2000 status for its Quality Management Systems as they relate to enzyme production and distribution

In addition to controlling the manufacturing process, our applications lab in Jupiter, Florida also provides quality controls and assurances to comply with regulatory and statutory requirements when necessary. Our agreement has not required a minimum purchase or quantity and can be cancelled at the discretion of either party with proper notice. We believe that our current production capacity is adequate for both our present needs and our anticipated requirements for the next several years.

We continuously monitor the production and manufacturing capabilities of our partner. In addition, we have identified several potential alternative manufacturing sites that could be engaged should we have the need for additional production capacity, or if we were to encounter a supply disruption with our toll manufacturer.

Sales and Marketing

Our business-to-business model of selling primarily to distributors and formulators allows us to maintain a relatively small sales team. We have a Vice President of Sales and Marketing located in our Jupiter, FL, headquarters. In addition, six salespeople work remotely in Hong Kong, The Netherlands, Germany, Brazil, North Carolina, and Minnesota. Our experienced sales team works closely with practice leaders with industry expertise in each of our end-markets, including animal feed (U.S.), food and beverage (Europe) and textiles (Asia). We are planning to expand our sales team from five to eight team members in 2014/2015.

Legal Proceedings

We are currently engaged in litigation as plaintiff with three former professional service providers and three individuals from these service providers. In 2009, we filed suit against our professional service providers in connection with events related to alleged improprieties at our former Asian subsidiaries, which we abandoned in May 2007. Jenkins & Gilchrist, P.C., one of the defendants, settled with us for $525,000 on August 8, 2012. Claims against the remaining defendants are still pending. The court ordered mediation, which was originally scheduled for September 30, 2014, has now been scheduled for November 10th and 11th, 2014.  The court has not yet set a trial date for 2015. If the case is not settled, we anticipate it will go to trial in 2015. Please see the section Item 8 – Legal Proceedings” for additional details.

Employees

As of June 30, 2014, we had 52 employees, 32 of whom were primarily engaged in R&D activities. Our workforce includes 30 employees with a Ph.D. or other graduate degree. None of our employees are represented by a labor union, and we consider our employee relations to be good.
Facilities
 
We lease approximately 18,000 square feet of space between one facility in Wageningen, The Netherlands (9,375 sq. ft.) and two facilities in Jupiter, Florida (8,372 sq. ft.). Our primary R&D facility is purposefully located in proximity to the University of Wageningen, a preeminent research institution, which provides us with access to market expertise and a rich talent pool. We recently completed a significant expansion of this facility (4,090 sq. ft.; lease ending December 31, 2018) to add floor space, personnel, and new equipment. We anticipate expanding our Netherlands R&D Facility by an additional 4,434 square feet in approximately November 2014.
 
We lease office space (4,872 sq. ft; lease ending December 31, 2015) that serves as our corporate headquarters in Jupiter, FL. The laboratory in Florida (3,500 sq. ft.; month-to-month lease) is a quality assurance facility situated approximately 2.5 miles from our corporate headquarters. This location gives Dyadic access to the nearby Scripps Florida institute and the Max Planck Florida Institute.

Corporate information

Founded in 1979 by Mark A. Emalfarb, Dyadic has focused on development of the C1 Expression System since 1992, refining and optimizing the C1 system to create an industry leading gene expression and protein production system.

Currently, Dyadic is a global biotechnology company with operation in the United States and The Netherlands. Dyadic was incorporated in Delaware in September 2002. Our principal corporate offices are located at 140 Intracoastal Pointe Drive, Suite 404, Jupiter, FL 33477; telephone number (561) 743-8333; website www.dyadic.com

Reports filed with the OTC Markets Group are available free of charge through the "Investor Info" section of the Dyadic website. Following the effective date of this registration statement, we also intend to make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with, or furnishing it to the Securities and Exchange Commission (SEC). Once filed with the SEC, such documents may be read and/or copied at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC at www.sec.gov

We also make available free of charge through the "Investor Info - Corporate Governance" section of our website the charters of each of the committees of our Board of Directors, and codes of conducts and ethics of our directors, officers, and employees. Such materials are also available in print upon the written request of any stockholder to Dyadic International, 140 Intracoastal Pointe Drive, Suite 404, Jupiter, FL 33477, Attention: Investor Relations.
 
Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following material risks, together with the other matters described in this Registration Statement and in our financial statements and the related notes thereto in evaluating our current business and future performance.  We cannot assure you that any of the events discussed in the risk factors below will not occur.  If we are not able to successfully address any of the following risks or difficulties, we could experience significant changes in our business, operations and financial performance.  In such circumstances, the trading price of our common stock could decline, and in some cases, such declines could be significant and you could lose part or all of your investment.  In addition to the risks described below, other unforeseeable risks and uncertainties or factors that we currently believe are immaterial may also adversely affect our operating results, and there may be other risks that may arise in the future.  Certain statements contained in this Registration Statement (including certain statements used in the discussion of our risk factors) constitute forward-looking statements.  Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing on page 1 of this Registration Statement for important limitations and guidelines regarding reliance on forward-looking statements.

Risks Related to Our Businesses

We should be viewed as an early-stage company as we have recently experienced significant changes to our business, which may make it difficult to evaluate our current business and predict our future performance.

The reliance of all of our businesses upon the expansion of, and further improvements to, and application of our and our licensees’ C1 Expression System capabilities, the ability to commercialize products and processes coming from our and our licensees’ research and development programs, our and our licensee’s reliance on contract manufacturing partners, and the developmental nature of our biopharmaceutical, biofuel and bio-based chemicals businesses, requires that Dyadic be characterized as an early-stage company. Our conduct of the biopharmaceutical business and our commercialization of our biofuel and bio-based chemicals business, in particular, are subject to the risks customarily facing the operations of any early-stage
company.  These risks are related to our ability to successfully develop our new technologies, products and processes, assemble adequate production and R&D capabilities, comply with regulatory requirements, construct effective channels of distribution and manage growth.  Additionally, we are subject to competition from much larger competitors who have greater resources than us. Also, the market for cellulosic sugars, biofuels and biobased chemicals is a market that is not yet established and is only beginning to emerge and there is a risk that it will not succeed and not grow at the rates projected whether delayed or at all.
 
As a result of the developmental nature of our business and any changes to our business focus that we may make as we move forward, our operating history in past periods may not provide a reliable basis to evaluate our current business or predict our future performance. Any assessments of our current business and predictions regarding our future success or viability may not be as accurate as they could be if we had a longer operating history in our current lines of business, the developing and risky nature of some of our businesses, such as biofuels and pharmaceuticals, or if we had not experienced significant changes to our business. We have encountered and will continue to encounter risks and difficulties frequently experienced by young companies in expanding and upgrading our accounting and financial reporting and internal controls infrastructure, our marketing, sales and R&D capabilities, and the rapidly evolving industries in which we operate today and in the future. If we or our licensees do not adequately address these risks successfully, our business will be harmed.

Our licensees may cease to pursue their research and commercialization efforts, such as that announced by Codexis related to its biofuel business. Abengoa, one of our licensees, has delayed the commercialization of its Hugoton, Kansas cellulosic ethanol facility. Further delays, and/or the inability to demonstrate commercial viability of their cellulosic ethanol capabilities will negatively impact our business and our financial results.  The delay or inability of our other licensees to commercialize products and processes will also negatively impact our business and our financial results.

We have a history of net losses, and we may not maintain profitability.

We have an accumulated deficit of approximately $81.8 million at June 30, 2014. To date, we have derived revenue and royalties from the licensing of our C1 Expression System to third parties, the operation of our industrial enzyme business and the collection of R&D fees from third parties.  Our ability to attain profitability will depend on the rate of growth and margin improvements of our industrial enzyme business, our ability to generate new licensing arrangements, our ability to generate R&D funding,  the receipt of future potential milestone, royalty and other payments from our licensees, and our level of expenses among other potential unforeseen circumstances.

We do not currently derive material revenue from the operation of our biopharmaceutical business. Revenue related to the pharmaceutical industry is uncertain as current and future collaborations will depend on our ability to continue to refine and optimize the C1 Expression System to address the needs of the pharmaceutical and biotech industries.  Future revenue from collaborations is uncertain and will depend upon our ability to maintain our current collaborations, enter into new collaborations and to meet R&D and commercialization objectives under new and existing agreements.

Similarly, commercialization of our cellulosic sugar enzyme products for the biofuel and bio-based chemicals markets will be highly contingent on our ability to find new licensees, partnerships and collaborators, and their ability to commercialize new technologies, reduce overall biofuel and bio-based chemical production costs and build new facilities. In particular, we are reliant on the success of our licensee, Abengoa, which expects to begin operations of its first cellulosic ethanol manufacturing facility in the second half of 2014, and our collaborator CIMV, which expects to build a demonstration facility in 2015. Payment of a license fee with CIMV will occur prior to on-site production at a commercial scale facility, which we expect will occur no earlier than 2016 or 2017. For our biofuel and bio-based chemical business in the U.S., we, our collaborators and licensees, are reliant upon the continuation of the RFS program administered by the EPA, which has encouraged the production and use of biofuels in recent years. While the RFS program is not a direct subsidy, the guaranteed market created by the RFS is expected to stimulate growth of the biofuels industry. Any revisions to, or reductions of, the RFS could negatively impact our biofuels business and that of our licensees.
 
Also, the market for cellulosic sugars, biofuels and biobased chemicals is a market that is not yet established and is only beginning to emerge. There is a risk that it will not succeed and not grow at the rates projected, whether delayed or at all.

In addition, while we anticipate expanding our industrial enzyme business in existing and new markets, our level of growth and profitability will be directly impacted by how successfully we develop and launch new products, competitor offerings and overall market conditions.
The R&D efforts needed to enhance our core technologies utilized in all three of our key business areas will require significant funding and increased staffing; therefore, we expect an increase in our near-term operating and research expenses.  Consequently, we will require significant additional revenue to achieve profitability. We cannot provide assurance that we will maintain revenues at current levels or grow revenues or maintain or improve our profit margins. If we fail to maintain or increase revenues and profit margins, the market price of our common stock will likely decrease. Further competition may force us to reduce our profit margins which may affect our ability to generate cash flow.
We may need substantial additional capital in the future to fund our business.

Our future capital requirements may be substantial, particularly as we continue to develop the C1 Expression System and our other proprietary technologies and products to commercialize industrial enzymes, biopharmaceutical products, enzymes for the biofuel and bio-based chemicals market.  Further, we must continue to develop the C1 Expression System to expand its production capabilities through continued strain development, fermentation optimization and work on our high-throughput screening process.  We believe that, with the receipt of expected milestone payments, timely collection of our accounts receivables, further reductions in our inventory, entering into an additional license or sale of existing assets, and the potential settlement of one or more of the defendants in our professional liability lawsuit, we will have sufficient cash available on hand to fund our operations and meet our obligations for at least the next year. Our need for additional capital will depend on many factors, including (i) the financial success of our industrial enzyme business, (ii) the receipt of milestones, royalties and other payments from our licensees, and in particular in the short term Abengoa as it begins to commercialize and produce Cellulosic Ethanol, (iii) our ability to obtain payments from biopharmaceutical business customers through collaborative agreements, (iv) the results of our R&D efforts with BASF and other parties and the receipt of additional research funding, milestones, and other payments, (v) the extent to which we can obtain additional collaborative partnerships for commercialization of our enzymes in the biofuel and bio-based chemicals market, (vi) the extent to which we can obtain additional collaborative partnerships and/or licensees for the development and production of enzymes and other proteins for a variety of other industries, (vii) the progress and scope of our collaborative and independent R&D projects, (viii) the effect of any acquisitions of other businesses that we may make in the future, (ix) the filing, prosecution and enforcement of patent claims (x) the length and outcome of the ongoing litigation against our former legal counsel, and (xi) the ability to refinance and extend our convertible debt and shareholder loan.

If our capital resources are insufficient to meet our capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the development and commercialization of products, if any, resulting from our technologies. If acquisition of additional funds is not possible or if we engage in future equity financings, dilution to our existing stockholders may result. If we raise debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, sell certain assets of the company which will limit future opportunities, or grant licenses on terms that are not favorable to us. Without sufficient funding or revenue, we may have to curtail, cease, or dispose of, one or more of our operations and we would be forced to reduce our employee headcount.

We may not be able to extend our existing debt.

All $8.2 million of our outstanding debt is currently due on January 1, 2015.  According to the terms and conditions of the debt agreements, $6.8 million of the total debt can be converted into Dyadic common stock at preset prices or may be prepaid by Dyadic any time after March 31, 2014, without penalty, with 30 days notice.  The remaining $1.4 million of debt does not have this conversion feature and is not subject to this call provision. If we are unable to repay this debt and/or rollover the debt, if necessary, our business would be adversely impacted.

If we fail to maintain or successfully manage our existing, or enter into new, strategic collaborations, we may not be able to develop and commercialize many of our products and achieve or sustain profitability.

Our ability to enter into, maintain and manage collaborations in our target markets is fundamental to the success of our business. We currently have collaborations in both R&D and supply and/or distribution agreements with various strategic partners. We currently rely on our partners, in part, for manufacturing and sales or marketing services, application and regulatory knowhow, and we intend to continue to do so for the foreseeable future. In addition, we intend to enter into additional strategic collaborations to develop, produce, market and sell other products we develop. However, we may not be successful in entering into collaborative arrangements with third parties for the development, production, sale and marketing of our new and existing products. Any failure to enter into collaborative arrangements on favorable terms could delay or hinder our ability to develop and commercialize our products and could increase our costs of development and commercialization. We may have to give exclusive rights in certain fields, in order to attain additional funding, which could restrict our ability to further license our C1 technology and other technologies in certain fields to other parties.

Reductions in collaborators’ R&D budgets may affect the sales of our businesses.

Fluctuations in the R&D budgets of our customers, licensees and research partners could have a significant impact on the demand for our products.  R&D budgets fluctuate due to changes in available resources, consolidation in the pharmaceutical, energy and other industries, spending priorities and institutional budgetary policies.  We also periodically receive research funding from government agencies.  These governmental agencies experience fluctuations in their R&D budgets, which may negatively impact our
ability to receive funding from such agencies.  Our businesses could be seriously damaged by significant decreases in life sciences and/or renewable fuels, animal feed and food R&D expenditures by government agencies and existing and potential partners.
 
Conflicts with our collaborators and/or licensees could harm our business.

An important part of our strategy includes involvement in proprietary research programs.  We may pursue opportunities in fields that could conflict with those of our collaborators and licensees.  Moreover, disagreements with our collaborators or licensees could develop over rights to our intellectual property, over further licensing of our technologies to other parties in certain fields, or for other reasons.  Any conflict with our collaborators or licensees could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators or licensees, which could reduce our sales. We were previously in a dispute with one of our licensees, Codexis, Inc. (“Codexis”), regarding a license agreement entered into by and between the Company and Codexis, dated as of November 14, 2008 (the “Codexis License Agreement”). On July 30, 2013, Dyadic notified Codexis of Codexis’ apparent breach of the Codexis License Agreement through at least its marketing of the “CodeXyme” enzyme product to third parties for use in biofuels other than Shell Oil.  Dyadic believes the use and marketing of CodeXyme by and to third parties other that Shell in biofuels is a violation of the Codexis License Agreement.  Codexis has assured us that, amongst other things, it has ceased any marketing or sale of enzymes for use in the synthesis of cellulosic fuels and, more generally, that it was stopping work on its advanced biofuels program.  Based on these representations by Codexis, Dyadic agreed to withdraw its July 30, 2013 Notice of Breach on March 10, 2014.  Dyadic’s withdrawal was made without prejudice to any of its rights under the Codexis License Agreement. The parties are continuing to have discussions relating to potential collaboration opportunities in the space.

Some of our collaborators, including our distributors which reformulate our products, or licensees could also become competitors in the future.  Our collaborators and/or licensees could develop competing products, preclude us from entering into collaborations or license agreements with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of products.  Any of these developments could harm our product development efforts.

If issues arise with our collaborators and/or licensees, we will need to either commercialize products resulting from our proprietary programs directly or through licensing to other companies.  We may lose revenue or incur losses. Similarly, we may lose revenue or incur losses if we are unable to license our technology to new licensees on commercially reasonable terms, or are unable to develop the capability to market and sell these products on our own.

Public views on ethical and social issues may limit use of our technologies and reduce our sales.

Our success will depend in part upon our ability to develop products discovered, developed and manufactured through the C1 Expression System. Governmental authorities could, for social, ethical or other purposes, limit the use of genetic processes or prohibit the practice of using a modified C1 organism.  Concerns about the C1 Expression System, particularly the use of genes from nature for commercial purposes, and resulting products, could adversely affect their market acceptance.

The commercial success of our and our licensees’ potential products will depend in part on public acceptance of the use of genetically engineered products including enzymes, drugs and other protein products produced in this manner. Claims, whether true or not, that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes.  Our and our licensees’ genetically engineered products may not gain public acceptance in the industrial, pharmaceutical or bioenergy industries. Negative public reaction to GMOs and products could result in greater government regulation of genetic research and resulting products, including stricter labeling laws or other regulations, and could cause a decrease in the demand for our products. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns or other requirements relating to genetic engineering, some or all of our products and processes may not be accepted. Any of the risks discussed below could result in expenses, delays, or other impediments to our and our licensees’ programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. Our and our licensees’ ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:

• public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and processes, which could influence public acceptance of our and our licensees’ technologies, products and processes;
 
• public attitudes about organic products;
 
• public attitudes regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights with respect to our genetic material and discourage collaborative partners or licensees from supporting, developing, or commercializing our products, processes and technologies; and
• government reaction to negative publicity or other influences concerning GMOs, which could result in greater government regulation of genetic research and derivative products, including labeling requirements.

The subject of GMOs and products derived from them has received negative publicity, which has aroused public debate in the United States and other countries. This adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically altered products.

We must continually offer new products and technologies.

The industrial enzymes and biotechnology industries are characterized by rapid technological change, and the area of gene research is a rapidly evolving field.  Our future success will depend on our ability to maintain a competitive position with respect to technological advances.  Rapid technological development by others could cause our products and technologies to become obsolete.

Any products we or our collaborators or licensees develop through our C1 Expression System will compete in highly competitive markets.  Many of the organizations competing with us in the markets for such products have more capital resources, larger R&D and marketing staff, facilities and capabilities, and greater experience in the regulatory approval, manufacturing and commercialization of products.  Accordingly, our competitors may be able to develop technologies and products more rapidly.  If a competitor develops superior technology or more cost-effective alternatives to our and our collaborators’ or licensees’ products or processes, our business, operating results and financial condition could be seriously harmed.

Customers may prefer existing or future technologies over the C1 Expression System.  Well-known and highly competitive biotechnology companies offer comparable technologies for the same products and services as our industrial enzyme, biopharmaceutical, biofuel and bio-based chemicals businesses.  These companies may develop technologies that are superior alternatives to ours or our collaborators and licensees.  We anticipate that we, our collaborators and licensees will continue to encounter increased competition as new companies enter these markets and as development of biological products evolves.
 
Customers may expect the continued need for improving the C1 Technology platform itself, and for its use in various applications including industrial enzeyme, biopharmaceutical, biofuel and bio-based chemical markets, and the need for continued capital for continued development and advancement of our research and development efforts and technologies.

We could fail to manage our growth, which would impair our business.

Our business plan provides that we anticipate growing at a rapid rate. Our long term success depends on our ability to efficiently and effectively implement, among other things:

· Ability to maintain, and gain additional strategic partners and technology licensees;
· Recruit and hire the required employees necessary to maintain and grow our business and to advance our technologies;
· Technical success of our and our licensees’ or collaborators’ research and product development programs;
· Operational and financial control systems;
 
· Recruiting and training programs;
· Access to additional manufacturing capacity;
· Access to additional growth capital;
· Recruit and maintain board members and scientific advisory board members; and
 
· Scientific risks and uncertainties that may arise during our R&D programs.

Our ability to offer products and services successfully and to implement our business plan in a rapidly evolving global market requires effective planning, reporting and management processes.  We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, implement new and broader internal controls, improve and upgrade our R&D capabilities and employees, expand our internal R&D spending, in addition to expanding and training our global workforce.  We will also need to continue to manufacture our products efficiently and to control or adjust expenses related to R&D, marketing, sales and other administrative activities in response to changes in sales. If we are not successful in efficiently developing new products, and in the manufacturing of our products or managing such expenses, there could be an adverse impact on our operations, financial performance and the continued viability of our business.

We are dependent on several key customers and any decrease in sales to these customers could harm our operating results.

We have significant customer concentration. Although we have over 100 industrial enzyme customers, 38% of our industrial enzymes product sales came from our top three customers in the year ended December 31, 2013, and 34% for the six months ended June 30, 2014. Our R&D revenue comes from a relatively small number of customers, with 61% of revenue coming from the top three
in the year ended December 31, 2013 and 81% in the six months ending June 30, 2014. BASF was our only licensing customer in the year ended December 31, 2013 and we have had no licensing revenue in the six months ended June 30, 2014.
 
While BASF may generate milestone, royalty and research revenue in the future, we expect that upfront license fee to be non-recurring. As of December 31, 2013, there were two customers that accounted for approximately 13% and 12%, respectively, of total accounts receivable. As of June 30, 2014, there were two customers that accounted for approximately 15% and 8%, respectively, of total accounts receivable. Losing a few of these top customers could significantly harm our business, as gaining new customers often has a long sales cycle.

We rely on our collaborators and other third parties to deliver timely and accurate information in order to accurately report our financial results in the time frame and manner required by law.

We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely basis. We rely on such third parties to provide us with complete and accurate information regarding revenues, expenses and payments owed to or by us on a timely basis. For example, our licensees are required to provide us with certain information; the failure for us to obtain such information may affect the accurate or timely reporting of such information.  We will need to establish the proper controls related to obtaining and reporting information from our licensees related to when milestones are earned, if any, when royalties are earned, if any, as well as other types of potential revenues such as facility fees. If the information that we receive is not accurate, our consolidated financial statements may be materially incorrect and may require restatement. Although we may have contractual rights to receive information, such provisions may not ensure that we receive information that is accurate or timely. As a result, we may have difficulty completing accurate and timely financial disclosures, which could have an adverse effect on our business.

Risks Specific to Our Industrial Enzyme Business

Our market share growth depends on costly new product introductions and market acceptance.

The future success of our industrial enzyme business will depend greatly on our ability to continuously develop, register, and introduce new and better performing products in a timely manner that address the evolving requirements of our target markets and customers. There is no assurance that these new products will perform better, save our customers money over existing products of ours or our competitors, or provide them with other benefits, or be registered or gain market acceptance. We are relying on our C1 Expression System and our other proprietary technologies to expand the product line of our industrial enzyme business and improve our gross margins on those products. If we fail to develop new and better performing products, continue to make fermentation yield improvements on our existing production processes (or productivity gains) or gain registration, and market acceptance of new product introductions, we could fail to recoup an adequate return on our R&D investment and lose market share to our competitors, which may be difficult or impossible to regain. Any inability, for technological, regulatory, or other reasons, to successfully develop and launch new products, could reduce our rate of growth or otherwise negatively impact our business.

The dynamic nature of our target markets and the unpredictable nature of the development process may affect our ability to meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of our products include:

· Availability, quality, performance and price of competitive products;
· Functionality and cost of new and existing products;
· Timing of product introduction, performance and pricing compared to our competitors;
· Scientists’ and customers’ opinions of our products’ utility and our ability to effectively incorporate their feedback into future products;
· Status as a GMO in food and animal feed and other markets;
· We are competing against much larger companies; and
· Timing, costs and receipt of regulatory approvals.

The expenses or losses associated with unsuccessful product development activities or lack of market acceptance of our new products could seriously harm our business, financial condition and results of operations.

Our dependence on a sole contract manufacturer could harm our business.

Our manufacturing capabilities, and any current or future arrangements with third parties for these activities, may not be adequate for the successful commercialization of our industrial enzyme products. Our industrial enzyme business currently relies on
one contract manufacturer for all of its manufacturing. If we require additional manufacturing capacity and are unable to obtain it in sufficient quantity or in a timely manner, we may not be able to increase our sales, or may be required to make substantial capital investments to build additional production capacity.
 
We are dependent upon the performance and production capacity of our third-party manufacturing partner.  We do not have a long term supply contract in place with our contract manufacturer and instead submit orders on a purchase order basis. However, our contract manufacturer has been producing a number of our products since September 2008.  In the absence of a supply agreement, our contract manufacturer will be under no obligation to manufacture our products and could elect to discontinue their manufacture at any time or raise their tolling rates such that our margins would be negatively impacted. If we require additional manufacturing capacity and are unable to obtain it in sufficient quantity, we may not be able to increase our sales, or we may be required to make substantial capital investments to build that capacity or to contract with other manufacturers on terms that may be less favorable than the terms we currently have with our supplier. If we choose to build our own manufacturing facility, it could take several years or longer before our facility is able to produce commercial volumes of our products. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense of other potentially more profitable opportunities. In addition, if we contract with other manufacturers, we may experience delays of several months in qualifying them, which could harm our relationships with our collaborators or customers and could negatively affect our revenues or operating results.

Our industrial enzyme business faces risks due to interruptions or changes that affect the ability of our sole contract manufacturer to meet our anticipated future growth, its manufacturing responsibilities, the occurrence of which could adversely impact the availability, launch and/or sales of our products in the future. In such an event that manufacturing is interrupted, we would have to locate additional capacity with another contract manufacturing facility or operate our own enzyme manufacturing plant in a short period of time. Our alternative sources of supply, which may be unavailable on commercially acceptable terms, may cause delays in our ability to deliver products to our customers, increase our costs and decrease our profit margins.

In addition, our toll manufacturer is limited in the types of GMOs it can use, which may limit our ability to launch new products or have our existing products manufactured at their facility. The toll manufacturer is subject to different rules relating to the manufacture of GMOs and also has its own internal policies which may prevent it from acting as our supplier in the future. Therefore, we may need to locate another supplier to produce some of our products.

Our toll manufacturer is located in Mexico City, Mexico. The facility is subject to political unrest, earthquakes, fires and other acts of nature that may exist in that region of the world.

To mitigate these concerns, we have undergone an evaluation of additional contract manufacturers over the past year, and have determined a number of alternatives exist in a variety of locations. These alternate contract manufacturers may require capital investment and time to qualify production of our products and substantial disruption to our business could still result from any delays or disruptions to our toll manufacturer.
 
If such an event took place, that we had to build our own or assist in the retrofitting of an enzyme manufacturing facility, we would need to raise additional capital through equity or debt. This would restrict our ability to fund product development and technology and application research.

Regulations may limit or impair our and our collaborators’ and licensees’ ability to sell genetically engineered products in the future.

We, our collaborators and licensees develop enzyme products using both non-genetically engineered microorganisms (non-GMO), as well as those that have undergone some degree of genetic modification.  Products derived from GMOs may in some instances be subject to bans or additional regulation by federal, state, local and foreign government agencies. These agencies administering existing or future applicable regulation or legislation may not allow us or our collaborators and licensees to produce and market our products derived from GMOs in a timely manner or under technically or commercially feasible conditions.

In addition, regulatory action or private litigation relating to GMO products could result in expenses, delays or other impediments to our product development programs or the commercialization of resulting products.  The FDA currently applies the same regulatory standards to products made through genetic engineering as those applied to products developed through traditional methodologies.  Depending on a product’s application and regardless of its GMO status, it may be subject to lengthy FDA reviews and unfavorable FDA determinations due to safety concerns or changes in the FDA’s current regulatory policy. The EPA regulates biologically-derived enzyme-related chemical substances not within the FDA’s jurisdiction. An unfavorable EPA ruling could delay commercialization or require modification of the production process or product in question, resulting in higher manufacturing costs, thereby making the product uneconomical. The EU also has regulations regarding the development, production and, marketing of products from GMOs, which are generally more restrictive than present U.S. regulations.  For example, among other requirements, EU animal feed registration requires in-vivo efficacy testing, as well as toxicological testing of all enzyme products, including products from non-GMO microorganisms.

Further, we our collaborators and licensees are subject to regulations in the other countries in which we operate outside of the U.S. and EU, which may have different rules and regulations depending on the jurisdiction. Different countries have different rules
regarding which products qualify as GMO and which are non-GMO. If any of these countries expand the definition of GMO and increase the regulatory burden on GMO products, our business could be harmed.
 
Other changes in regulatory requirements, laws and policies, or evolving interpretations of existing regulatory requirements, laws and policies, may result in increased compliance costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.

Our results of operations may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our contemplated facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Furthermore, as we operate our business, we may become liable for the investigation and cleanup of environmental contamination at each of the properties that we lease or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for investigation, cleanup, or other costs.

In addition, new laws, new interpretations of existing laws, increased government enforcement of environmental laws, or other developments could require us or our contract manufacturers to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ethanol production facilities relating to our biofuels business. Present and future environmental laws and regulations and interpretations thereof, more vigorous enforcement of policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect our results of operations and financial position. Additionally, any such developments may have a negative impact on our contract manufacturers, which could harm our business.

Risks Related to Our Biopharmaceutical Business

We may fail to commercialize the Dyadic Expression System for the expression of therapeutic proteins, antibodies and vaccines.

Although our industrial enzyme and biofuel and bio-based chemical businesses have developed and sold products utilizing our C1 Expression System, our C1-based technologies applied in the biopharmaceutical market have not yet completed commercialization of therapeutic proteins, antibodies and vaccines.  Currently, our most advanced project, with Sanofi, needs further research and development in order to continue forward. Sanofi has verbally stated that they will fund additional reaearch and based on those result re-evaluate whether to continue funding additional research and development of this program. There is no guaranty that Sanofi will finalize a written extension, despite their assurance that they will do so, or that they will continue further funding beyond this limited research extension. If our biopharmaceutical business fails to do this, we may be forced to terminate our biopharmaceutical business operations. Even if we or our collaborators successfully develop a commercial product using our C1 Expression System, we may not generate significant licensing, royalty or milestone revenue and achieve profitability in our business.  Additionally, even if the C1 Expression System fulfills its role in the development or production of a pharmaceutical product, the ultimate product may be delayed or never approved by the FDA or other governmental regulatory bodies.

To date, drug companies have developed and commercialized only a small number of gene-based products in comparison to the total number of drug molecules available in the marketplace.  Our biopharmaceutical business must be evaluated as having the same risks as those inherent to early-stage biotechnology companies because the application of our C1 Expression System for the expression of pre-clinical and clinical quantities of therapeutic proteins, antibodies and vaccines is still in development.  Furthermore, we may not be able to expand the capabilities of our technology to produce commercial volumes of therapeutic proteins, antibodies and vaccines at reasonable costs or that have the necessary qualities and other properties required in the pharmaceutical industry.

Successful development of the Dyadic C1 Expression System for these purposes will require significant research, development and capital investment, including testing, to prove its efficacy and cost-effectiveness.  In general, our experience has been that each step in the process has taken longer and costs more to accomplish than originally projected and we anticipate that this is likely to remain the case with respect to the continuing development efforts of our biopharmaceutical business.
Commercialization of our products, including the C1 Expression System for therapeutic proteins, antibodies and vaccines depends on collaborations.

Since we do not currently possess the experience, knowledge or financial resources necessary to develop and commercialize potential drug products that may result from the use of the C1 Expression System, or to complete the potential approval processes required for these products, we must enter into strategic partnerships to develop and commercialize drug products.  If we are not able to find collaborators in the future, the biopharmaceutical business may not be able to develop the C1 Expression System for therapeutic protein products, antibodies and vaccines.  Further, our business model relies on a revenue stream derived from collaboration projects with our customers to express therapeutic proteins, antibodies and vaccines prior to pre-clinical trials.  A large portion of our anticipated return on investment depends on those therapeutic proteins, antibodies and vaccines progressing through drug development and into commercially successful drugs.  Apart from risks relating to whether our biopharmaceutical business can capture such customers, or capture them on satisfactory terms, we will also have no control over post-collaboration project drug development and commercialization.  Additionally, as we have in the past, we expect to expend a greater portion of our resources on further developing the C1 Platform Technology for potential use in producing therapeutic protein products, antibodies and vaccines

We have limited or no control over the resources that any collaborator or licensee may devote to our programs.

Any of our current or future collaborators or licensees may not perform, breach or terminate their agreements with us or otherwise fail to conduct their required activities successfully and in a timely manner.  Potential therapeutic products developed by us or with our domestic and global partners are subject to a lengthy and uncertain regulatory process.  In the United States, the FDA must approve any therapeutic product before it can be marketed.  Prior to filing a new drug application or biologic license application with the FDA, our collaborators must also subject the product candidate to extensive testing, including animal and human clinical trials. This process can take many years and require substantial expenditures.  Our collaborators or licensees may elect not to develop products arising out of our collaborative or license arrangements or may choose not to devote sufficient resources to the development, manufacture, market or sale of these products.  Further, if conflicts could arise between Dyadic and our customers, or among them and third parties, it could discourage or impede the activities of our biopharmaceutical business.  If any of these events occur, we or our collaborators or licensees may not develop our technologies or commercialize our products.

While we anticipate that many of our collaborators or licensees will have experience submitting an application to the FDA or other applicable regulatory authorities, we have no such experience. Neither we nor any collaborator or licensee has yet submitted an application with the FDA or any other regulatory authority for any product candidate generated through the use of our C1 Expression System as it relates to the development and manufacture of pharmaceutical products.  The FDA may not have substantial experience with technology similar to ours, which could result in delays or regulatory action against us. We, our collaborators and licensees, may not be able to able to obtain regulatory approval for our products, which would harm our business.

Our C1 Expression System has been tested for use in the manufacturing of an enzyme in the production of wine, beer and fruit juices, and is generally regarded as safe, and has generated promising safety and toxicity data for that enzyme.  A risk nonetheless exists that the C1 Expression System will produce therapeutic products and enzymes that have safety and toxicity issues associated with them.  Our C1 Expression System may be subject to lengthy regulatory reviews and unfavorable regulatory determinations if it raises safety questions which cannot be satisfactorily answered or if results from studies do not meet regulatory requirements. An unfavorable regulatory ruling could be difficult to resolve and could delay or possibly prevent a product from being commercialized, which would harm our business.  Additionally, future products produced by us or our licensees or collaborators using our C1 Expression System may not be approved by the FDA or other regulatory agencies in the U.S. or worldwide.  There is no assurance that safety and toxicity issues will not arise in current or future product development and manufacturing programs due to fermentation or genetic changes in the C1 strain and fermentation process.

If these therapeutic protein products, antibodies or vaccines are not approved by regulators, we or our customers or collaborators and licensees will not be able to commercialize them, and we may not receive milestone and royalty payments which are based upon the successful advancement of these products through the drug development and approval process.  Even after investing significant time and expense, any regulatory approval may also impose limitations on the uses for which we can market a product, and any marketed product and its manufacturer are subject to continual review.  Discovery of previously unknown problems with a product or manufacturer may result in new restrictions on the product, manufacturer and manufacturing facility, including withdrawal of the product from the market.  In certain countries, regulatory agencies also set or approve prices, which may decrease our margins or harm our business.
Risks Related to Our Biofuel and Bio-Based Chemicals Products

We or our collaborators and licensees may fail to develop commercially viable enzymes to convert lignocellulose into fermentable sugars.

Our biofuel and bio-based chemicals businesses must be evaluated as having the same risks as those inherent in early-stage biotechnology companies.  Our enzymes for converting lignocellulose into fermentable sugars, or cellulosic ethanol, are in late stage development to achieve required cost-efficiencies; however, we may fail in developing more cost-efficient enzymes.  Further, we may be able to develop commercially viable enzymes for only some alternative types of biomass, which may or may not be those with the greatest market potential.  Successful development of the C1 Expression System to discover, develop and produce commercially viable enzymes for the cellulosic ethanol market will require significant development and investment, including testing, to prove its efficacy and cost-effectiveness.  In general, our experience has been that the cost and length of this process is unpredictable and we anticipate that this is likely to remain the case with respect to the development efforts of our biofuel and bio-based chemicals businesses.

Demand for Cellulosic Ethanol may not increase as expected, which would harm our business.

If the expected increase in cellulosic ethanol demand does not occur or is delayed even further, the demand for our enzymes would be diminished or delayed.  As of 2013, the first commercial cellulosic ethanol plants began limited operation, and there is an additional amount of capacity currently being added, including three new commercial-scale bio-refineries are expected to come online in 2014 from Abengoa, a Dyadic licensee, DuPont and POET.  Future demand could be impaired due to a number of factors, including the success of these commercial plants and others, regulatory developments and reduced U.S. gasoline consumption.  Reduced gasoline consumption could occur as a result of increased gasoline or oil prices, causing businesses and consumers to limit driving or acquire vehicles with more favorable gasoline mileage. Conversely, future demand for cellulosic ethanol may be negatively affected by falling gasoline prices caused by the current decline natural crude oil as well as the decline in the price of natural gas.  Widespread adoption of electric vehicles may also offer long-term demand of biofuels.

The market price of ethanol is volatile and subject to significant fluctuations, which may cause our profitability from the production of cellulosic ethanol to fluctuate significantly.

The market price of ethanol is dependent upon many factors, including the price of food crops such as corn, wheat and sugar cane, as well as gasoline, which is in turn dependent upon the price of petroleum.  Petroleum prices are highly volatile and difficult to forecast due to frequent changes in global politics and the world economy.  The distribution of petroleum throughout the world is affected by incidents in unstable political environments, such as Iraq, Iran, Kuwait, Saudi Arabia, Nigeria, Venezuela, and the former U.S.S.R.  The industrialized world substantially depends upon oil from these areas, and any disruption or other reduction in oil supply can cause significant fluctuations in the prices of oil and gasoline.  We cannot predict the future price of oil or gasoline and the market may establish unprofitable prices for the sale of ethanol due to significant fluctuations in market prices.  If the prices of gasoline and petroleum decline, we believe that the demand for and price of ethanol may be adversely affected, causing our profitability to fluctuate significantly.

The U.S. Ethanol Industry is highly dependent upon a myriad of federal and state legislation and regulations and any changes in such legislation or regulation could materially and adversely affect the demand for the services and products in the biofuel and bio-based chemicals markets.

We believe there is increased momentum within the U.S. Congress to enact legislation to revise the RFS. It is possible that some form of reform legislation, potentially including a lowering of the yearly mandates for corn ethanol and/or cellulosic fuels, may pass into law. Any revisions of the RFS may negatively affect the economics of our biofuel and bio-based chemicals businesses in the U.S.

Alternative technologies may not require microbial produced enzymes.

Research is being conducted under the auspices of major seed producers, the U.S. federal government and the National Corn Growers Association, to develop methods of biofuel and bio-based chemical production that does not use enzymes to convert lignocellulose into fermentable sugars.  Additionally, there are other emerging non-enzymatic technologies being developed for the production of Cellulosic Ethanol. If they are successful, these new methods may supplant or greatly reduce the need for enzymes in the biofuel and bio-based chemical end market, which would harm our business.
 
The price of alternative feedstocks such as corn, wheat and sugar cane have come down dramatically and this makes first generation biofuel and biobased chemicals made from food based sugars more competitive than they were in the past and there is no guaranty that such commodities will return to the price levels that will make second generation cellulosic sugar competitive with first generation sugars from such crops, without subsidies.
 
Further advancements in agronomy have led to and are expected to lead to better yields and even lower cost of first generation sugar from corn, wheat,  sugar cane or other energy crops may limit demand for 2nd generation biofuels.
 
Also, the market for cellulosic sugars, biofuels and biobased chemicals is a market that is not yet established and is only beginning to emerge. There is a risk that it will not succeed and not grow at the rates projected, whether delayed or at all.
Other Business Risks That We Face

Changes in global economic and financial markets may have a negative effect on our business.

Our business is subject to a variety of market forces including, but not limited to, domestic and international economic, political and social conditions. Many of these forces are uncertain and beyond our control. Any change in market conditions that negatively impacts our operations or the demand of our current or prospective customers could adversely affect our business operations.

In addition, any such changes in the global financial markets may make it difficult to accurately forecast operating results. In the past, these factors have had, and may continue to have, a negative effect on our business, results of operations, financial condition and liquidity. In the event of a downturn in global economic activity, current or potential customers may go out of business, may be unable to fund purchases or determine to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins, and increase customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet consumer demand or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations and difficulties if we overstrained our resources. The timing and nature of a sustained recovery in the credit and financial markets remains uncertain, and there can be no assurance that market conditions will significantly improve in the near future or that our results will not continue to be materially and adversely affected.

If we lose key personnel, including key management or board personnel, or are unable to attract and retain additional personnel, it could delay our product development programs, harm our R&D efforts, and we may be unable to pursue collaborations or develop our own products.

Our planned activities will require ongoing recruiting and retention of additional expertise in specific industries and areas applicable to the products being developed through our technologies.   These activities will not only require the development of additional expertise by existing management personnel, but also the addition of new management, sales, marketing, regulatory, and scientific personnel.  The inability to acquire or develop this expertise or the loss of principal members of our management, sales, and scientific staff could impair the growth, if any, of our business. Although we believe we will be successful in attracting and retaining qualified management and scientific personnel, competition for experienced personnel from numerous companies, academic institutions and other research facilities may limit our ability to do so on acceptable terms.  Failure to attract and retain qualified personnel would inhibit our ability to pursue collaborations and develop our products or core technologies.

Personnel changes may disrupt our operations.  Hiring and training new personnel will entail costs and may divert our resources and attention from revenue-generating efforts.  In addition, we periodically engage consultants to assist us in our business and operations, these consultants operate as independent contractors, and we, therefore, do not have as much control over their activities as we do over the activities of our employees.  Our consultants may be affiliated with or employed by other parties, and some may have consulting or other advisory arrangements with other entities that may conflict or compete with their obligations to us.

Our lawsuit against our former professional service providers may not be successful and we may be required to pay substantial legal fees if we do not prevail.

We are currently engaged in litigation with three former professional service providers. In 2009, we sued our former professional service providers in connection with the events relating to alleged improprieties at our former Asian subsidiaries, which we abandoned in May 2007. While Jenkens & Gilchrist, P.C., one of the defendants, has already settled, claims against the remaining defendants remain pending. Jenkens & Gilchrist, P.C. settled with us for $525,000 on August 8, 2012. While we believe we will prevail against the remaining defendants, we may fail to succeed in our lawsuit and be required to pay the legal fees for opposing counsel, which may be substantial. In addition, we may not reach a settlement agreement or may reject settlement offers that we deem unsatisfactory. The lawsuit is a substantial distraction for our management which takes up significant amounts of their time and resources, and additionally may discourage investors from investing in our stock. If we are not successful in prosecuting the lawsuit against our former professional service providers, our business may be harmed. The court ordered mediation, which was originally scheduled for September 30, 2014, has now been scheduled for November 10th and 11th, 2014. The court has not yet set a trial date for 2015. Court ordered mediation and a trial date, may be further delayed.

Inability to protect our intellectual property could harm our ability to compete.

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries.  If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage.  The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered
significant problems in protecting their proprietary rights in these foreign countries.  These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights.
 
Our current patent portfolio consists of 13 U.S. patents, 41 foreign patents, including claims that cover the C1 Expression System and 32 U.S. and foreign filed and pending patent applications which we believe provide broad protection for Dyadic, including its products and commercial applications.  However, the patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions.  We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets.  We intend to apply for patents covering both our technologies and our products, as we deem appropriate.  However, existing and future patent applications may be challenged and are not guaranteed to result in the issuing of patents.  Even if a patent is obtained, any existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products.  Others, including our collaborators, may independently develop similar or alternative technologies or design around our patented technologies.  In addition, our collaborators or other third parties may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. If any third party is able to gain intellectual property protections for technology similar to our own, they may be successful in blocking us and our licensees from commercializing our products.

Not all of our proprietary technology is eligible for patent protection and a significant portion of our various proprietary technologies rely upon trade secret protection.  We have taken security measures to protect our proprietary information including confidentiality agreements with employees, collaborators and consultants.  Nevertheless, these measures may not provide adequate protection for our trade secrets or other proprietary information as employees, collaborators or consultants may still disclose our proprietary information. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.

The enforceability of patents involves numerous technical issues and, therefore, the extent of enforceability cannot be guaranteed. Issued patents and patents issuing from pending applications may be challenged, invalidated or circumvented. Moreover, the United States Leahy-Smith America Invents Act, enacted in September 2011, brought significant changes to the U.S. patent system, which include a change to a “first to file” system from a “first to invent” system and changes to the procedures for challenging issued patents and disputing patent applications during the examination process, among other things. The effects of these changes on our patent portfolio and business have yet to be determined, as the final substantive provisions of the America Invents Act took effect on March 16, 2013. The United States Patent and Trademark Office (the “USPTO”), only recently finalized the rules relating to these changes and the courts have yet to address the new provisions. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights. Additional uncertainty may result from legal precedent handed down by the United States Court of Appeals for the Federal Circuit and United States Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other companies’ patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that we were the first to invent the inventions covered by our pending patent applications, we were the first to file patent applications for these inventions or the patents we have obtained.

In addition, Dyadic continues to review our existing patent portfolio.  Based on our analysis of annuity fees against potential commercial opportunities and patent enforceability, we have abandoned certain patents in some countries.  There is a risk that we are abandoning potentially valuable patents.

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and resources and could prevent us from commercializing our technologies or impact our stock price.

Our commercial success depends in part on neither infringing patents and proprietary rights of third parties, nor breaching any licenses that we have entered into with regard to our technologies and products.  Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments and other intellectual property that we may wish to utilize with C1 Expression System or products and systems that are similar to those developed with its use.  If these patent applications result in issued patents and we wish to use the claimed technology, we may need to obtain a license from the appropriate third party.

Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents and other intellectual property rights. Parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell products, and could result in the award of substantial damages against us.  If a claim of infringement against us is successful, we may be required to pay damages and obtain one or more
licenses from third parties.  In the event that we are unable to obtain these licenses at a reasonable cost, we could encounter delays in product commercialization while we attempt to develop alternative methods or products.  Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products.
 
We do not fully monitor the public disclosures of other companies operating in our industry regarding their technological development efforts.  If we did evaluate the public disclosures of these companies in connection with their technological development efforts and determined that they violated our intellectual property or other rights, we would anticipate taking appropriate action, which could include litigation.  The outcome of any action we take to protect our rights may not be resolved in our favor or may not be resolved for a lengthy period of time resulting in substantial costs and diversion of management and technical personnel.

In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technologies, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover, third parties could practice our inventions in territories where we do not have patent protection. Such third parties may then try to import into the United States or other territories products, or information leading to potentially competing products, made using our inventions in countries where we do not have patent protection for those inventions. If competitors are able to use our technologies, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could harm our business.

In the normal course of our business we generate patentable technologies that we believe will be of value to us.   In this case, we carry out detailed patent review and if appropriate, submit a patent application.  Once this application is accepted, Dyadic is then required to pay a “maintenance” fee in each jurisdiction in which that patent was filed.  From time-to-time, during our patent portfolio reviews, we will decide to abandon one, or maybe several patents that we do not see as having commercial viability or value to Dyadic now or in the future.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to synthetic biology. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

We may be forced to sue third parties for patent infringement or to enforce our agreements with our licensees and collaborators.

Any litigation or proceedings that we were to initiate against a third party to enforce a patent claiming one of our technologies could result in significant legal fees and other expenses, diversion of management’s time, and disruption in our business. In addition, the outcome of any such patent, contract or related litigation is unpredictable. There is a chance that the defendant could counterclaim alleging that our patent is invalid and/or unenforceable. In the event that a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would be unable to exclude others from practicing the inventions claimed therein. Even if our patent rights are found to be valid and enforceable, patent claims that survive litigation could result in loss of patent scope. Loss of patent protection or changes in patent terms could harm our ability to compete and have an adverse impact on our business, financial condition and results of operations. In addition, in the event of any disputes with our collaborators or licensees, we may be required to take legal action to enforce our agreements. We recently withdrew a notice of breach we provided to our licensee Codexis regarding a dispute over the Codexis License Agreement. If we are unable to protect our rights under our licensing, collaboration or other agreements, our business may be harmed.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential
and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
 
We may be sued for product liability.

We may be held liable if any product we develop, or any product which is made with the use or incorporation of, any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. These claims could be brought by various parties, including other companies who purchase products from our collaborators or by the end users of the products.

While we maintain product liability insurance, it may not fully cover all of our potential liabilities and our liability could in some cases exceed our total assets, which would have a material adverse effect on our business, results of operations, financial condition and cash flows, or cause us to go out of business. Further, insurance coverage is expensive and may be difficult to obtain, and may not be available to us or to our collaborators in the future on acceptable terms, or at all.  Inability to obtain sufficient insurance coverage at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us, or our collaborators.

International unrest or foreign currency fluctuations could adversely affect our results.

For the year ended December 31, 2013 and 2012, international sales accounted for approximately 85% and 89% of our net sales, respectively. Our key international markets are the European Union, the former Soviet Union, Peoples Republic of China, including Hong Kong, and India. Our international sales are made through international distributors and their wholly owned subsidiaries, and direct to end-user plants with payments to us, in many cases, denominated in currencies other than U.S. dollars. In the conduct of our business, in certain instances, we are required to pay our obligations in currencies other than U.S. dollars. Accordingly, we are exposed to changes in currency exchange rates with respect to our international sales and payment obligations. We incurred a currency gain of $83,000 and a gain of $28,000, for the year ended December 31, 2013 and 2012, respectively.

Fluctuations in currency exchange rates have in the past and may in the future negatively affect our ability to price competitively against products denominated in local currencies.  Also, changes in foreign currency exchange rates may have an adverse effect on our financial position and results of operations as expressed in U.S. dollars.  Our management monitors foreign currency exposures and may, in the ordinary course of business, enter into foreign currency forward contracts or options contracts related to specific foreign currency transactions or anticipated cash flows.  We do not hedge, and have no current plans to hedge in the future, the translation of financial statements of consolidated subsidiaries whose local books and records are maintained in foreign currency.

In addition, the imposition of duties or other trade barriers, trade embargoes, acts of terrorism, wars and other events outside our control may adversely affect international commerce and impinge on our ability to manufacture, transport or sell our products in international markets.

Significant fluctuations in commodity availability and price could have a negative effect on demand for our enzyme products.

Our product lines may be directly or indirectly dependent upon the pricing of commodities and, therefore, may be subject to changes in availability and price of commodities such as oil, soybean meal, corn, corn stover, wheat, wheat straw, barley, sucrose, bagasse and ethanol in our biofuel processing product line, and poultry and animal health in our nutrition product line. Competitive conditions, government regulations, natural disasters and other events could limit the production of our customers’ products that use our enzymes. In addition, concerns about international crises, such as the spread of severe acute respiratory syndrome (“SARS”), avian influenza, or bird flu, and West Nile viruses, have impacted our business in the past and may have an adverse effect on the world economy. These concerns could adversely affect our sales, profitability and business operations, or the operations of our collaborators, our contract manufacturer and our suppliers. As a result, the price and availability of the raw materials used, or the end products which our enzymes are used to produce, may fluctuate substantially, and could significantly impact both the demand for, and average sales price of, our enzymes. Such fluctuations may result in reduced volumes of our enzymes being used, or may result in our enzymes not being used at all. We have experienced fluctuations in the pricing and availability of raw materials used in the fermentation process; such fluctuations may negatively impact our business. Any of these factors may materially and adversely affect our business, financial conditions and results of operations.
 
The price of alternative feedstock such as corn, wheat and sugar cane have come down dramatically and this makes first generation biofuel and biobased chemical made from food based sugars more competitive  than they were in the past and there is no guaranty that such commodities will return to the price levels that will make second generation cellulosic sugars competitive with first generation sugar from such crops, without subsides.
 
Further advancements in agronomy have led to and are expected to lead to better yields and even lower cost of first generation sugar from corn, wheat,  sugar cane or other energy crops may limit demand for 2nd generation biofuels.
In 2009, we entered into a cease and desist order with the SEC relating to, among other things, our internal controls. If we fail to improve or maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to satisfy our reporting obligations and impair our ability to prevent or detect fraud.

On June 4, 2009, we entered into a cease and desist order with the SEC relating to our alleged ineffective internal controls at our Asian subsidiaries, which we abandoned in 2007. In April 2007, we became aware of alleged improprieties at our Asian subsidiaries. In connection with these events, we entered into a cease and desist order with the SEC. Since entering into the cease and desist order, the Company has worked to remediate and improve its internal controls and has a new Chief Financial Officer and auditor in place. For example, the Company has centralized financial reporting, the Company’s audit committee meets quarterly and an independent financial expert consults with our audit committee to the review the Company’s financial statements. The process of implementing our internal controls and complying with required procedures is expensive and time consuming, and requires significant attention from management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.

In addition, any testing conducted by us, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Inferior internal controls or further regulatory action could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock and could materially and adversely affect our business.

Our ability to use our net operating loss carryforwards (“NOLs”) to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs, to offset future taxable income. If the Internal Revenue Service challenges our analysis that our existing NOLs are not subject to limitations arising from previous ownership changes, our ability to utilize NOLs could be limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs reflected in our financial statements, even if we attain profitability.

Risks Related to Our Common Stock

The price of our shares of common stock is likely to be volatile, and you could lose all or part of your investment.

The trading price of our common stock has been, and is likely to continue to be, volatile. Since January 1, 2012 through June 30, 2014, the price of our common stock has fluctuated from a high of $2.25 per share to a low of $0.77 per share.  The trading prices of biotechnology and renewable energy company stocks in general tend to experience extreme price fluctuations.  The valuations of many biotechnology and renewable energy companies without consistent product sales and earnings are extraordinarily high based on conventional valuation standards such as price-to-earnings and price-to-sales ratios. These trading prices and valuations may not be sustained.  Any negative change in the public’s perception of the prospects of biotechnology and renewable energy companies could depress our stock price regardless of our results of operations.  Other broad market and industry factors such as market fluctuations, as well as general political and economic conditions such as war, recession or changes in interest and currency rates may also decrease the trading price of our common stock.  Other factors that may result in fluctuations in our stock price include, but are not limited to, the following:

· Announcements of new technological innovations or new products by us or our competitors;
· Changes in financial estimates by securities analysts;
· Conditions or trends in the biotechnology industry;
· Changes in the market valuations of other biotechnology companies;
· Limitations on the markets into which we can leverage our C1 Expression System;
· Actual or anticipated changes in our growth rate relative to our competitors;
· Developments in domestic and international governmental policy or regulations;
· Announcements by us or our competitors of significant acquisitions, divestures, strategic partnerships, license agreements, joint ventures or capital commitments;
· The position of our cash, cash equivalents and marketable securities;
· Any changes in the terms and conditions of our debt, or the non-renewal of our debt;
· Developments in patent or other proprietary rights held by us or by others;
· Negative effects related to the stock or business performance of our licensees, or the abandonment of projects using our technology by our licensees;
· Scientific risks inherent to emerging technologies such as our C1 Expression System;
· Set-backs, and/or failures, and or delays in our or our licensees’ R&D and commercialization programs;
· Delays or failure to receive regulatory approvals by us and/or our licensees;
· Loss or expiration of our intellectual property rights;
· Lawsuits initiated by or against us;
· Period-to-period fluctuations in our operating results;
· Future royalties from product sales, if any, by our strategic partners;
· Sales of our common stock or other securities in the open market;
· Stock buy-back programs;
· Stock splits; and
· Setbacks, and/or failures, delays or negative result in our lawsuit we filed against our former professional service providers.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities.  In 2007, a stockholder filed a securities class action suit against us, which we settled on July 27, 2010. If a stockholder files a securities class action suit against us, as previously occurred in 2007, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to responding to litigation.

The market price of our common stock has in the past been, and is likely to continue to be, subject to significant fluctuations. In addition to events related to our operating performance, the stock markets in general have experienced substantial volatility related to general economic conditions and may continue to experience volatility for some time. These broad market fluctuations may also adversely affect the trading price of our common stock.

Our quarterly and annual operating results may be volatile.

Our quarterly and annual operating results have fluctuated in the past and are likely to do so in the future.  These fluctuations could cause our stock price to vary significantly or decline.  Some of the factors that could impact our operating results include:

· Expiration of research contracts with collaborators and/or licensees, which may not be renewed or replaced;
· Setbacks or failures in our and our collaborators and licensees research, development and commercialization efforts;
· The success rate of our discovery, and development efforts leading to milestones and royalties;
· The timing and willingness of collaborators and licensees to commercialize their products which would result in royalties;
· General and industry specific economic conditions, which may affect our collaborators’ and licensees’ R&D expenditures;
 
· The adoption and acceptance of our industrial enzymes and other products by customers of our industrial enzyme business;
· The adoption and acceptance of the Dyadic C1 Expression System by bioenergy, biotechnology and pharmaceutical companies;
· The introduction by our competitors of new industrial enzyme products or lower prices of existing products to our industrial enzyme business’s customers;
·
The addition or loss of one or more of the collaborative partners or licensees we are working with to commercialize our products in the biofuel and bio-based chemicals markets, biopharmaceutical, as well as for our food and animal health and nutrition businesses;
· The introduction by our competitors of new expression technologies competitive with our C1 Expression System and new screening technologies competitive with our HTS technology;
· The ability to enter into new licenses and generate revenue from such licenses;
· Scientific risk associated with emerging technologies such as our C1 Expression System;
· Disruption in our manufacturing capacity or failure to bring on the additional manufacturing capacity required to meet our projected growth;
· Uncertainty regarding the timing of upfront license fees for new C1 Expression System license agreements or expanded license agreements;
· Delays or failure to receive milestones and royalties and other payments; and
· The expenses incurred as a result of our lawsuit we filed against our former professional service providers which have and are anticipated to fluctuate greatly quarter to quarter.

A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if sales decline or do not grow as anticipated due to the expiration of research contracts or government research grants, we fail to obtain new contracts, or other factors, we may not be able to correspondingly reduce our operating expenses.  Failure to achieve anticipated levels of sales could, therefore, significantly harm our operating results for a particular fiscal period. However, in 2014 we will continue to incur professional service fees related to the expert witnesses and court reporter in our lawsuit against our former professional service providers. If this case is not settled at the court ordered mediation, which is now set for November 10th  and 11th  2014 , we would expect significant professional service fees related to expert witnesses testimony, court reporter and other expenses to continue during 2015.

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not necessarily a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors causing our stock price to possibly decline.

We do not expect to pay cash dividends in the future.

We have never paid cash dividends on our stock and do not anticipate paying cash dividends on our stock in the foreseeable future. The payment of dividends on our shares, if ever, will depend on our earnings, financial condition and other business and economic factors deemed relevant for consideration by our board of directors.  If we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent that our stock price appreciates, and if the price of our stock does not appreciate, then there will be no return on investment.

Our anti-takeover defense provisions may deter potential acquirers and depress our stock price.

Certain provisions of our certificate of incorporation, bylaws and Delaware law, as well as certain agreements we have with our executives, could be used by our incumbent management to make it substantially more difficult for a third party to acquire control of us. These provisions include the following:

· We may issue preferred stock with rights senior to those of our common stock;
· We have a classified board of directors;
· Action by written consent by stockholders is not permitted;
· Our board of directors has the exclusive right to fill vacancies and set the number of directors
· Cumulative voting by our stockholders is not allowed; and
· We require advance notice for nomination of directors by our stockholders and for stockholder proposals.

These provisions may discourage certain types of transactions involving an actual or potential change in control. These provisions may also limit our stockholders’ ability to approve transactions that they may deem to be in their best interests and discourage transactions in which our stockholders might otherwise receive a premium for their shares over the current market price.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

Our officers, directors and principal stockholders together control approximately 52% of our outstanding common stock as of December 31, 2013. Our founder and chief executive officer, Mark Emalfarb, through the Mark A. Emalfarb Trust under agreement dated October 1, 1987, as amended (the “MAE Trust”) of which he is the trustee and beneficiary, owns approximately 20.1% of our outstanding common stock as of December 31, 2013. Further, the Francisco Trust U/A/D February 28, 1996 (the “Francisco Trust”), whose beneficiaries are the former spouse and descendants of Mark A. Emalfarb, owns approximately 11.8% of our outstanding common stock as of December 31, 2013.  We have historically been controlled, managed and principally funded by Mark A. Emalfarb, our Chief Executive Officer, and affiliates of Mr. Emalfarb. Collectively, Mr. Emalfarb and stockholders affiliated with Mr. Emalfarb control approximately 31.9% of our common stock. Pursuant to a divorce decree dated March 18, 2014, 3,427,688 shares of Dyadic common stock, and 207,904 stock options previously held by the Mark A Emalfarb Trust were transferred to Lisa K. Emalfarb in April 2014.

Mr. Emalfarb is able to control or significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of Mr. Emalfarb may not
always coincide with the interests of other shareholders, and he may take actions that advance his personal interests and are contrary to the desires of our other shareholders.
 
If our existing officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.  In addition, this concentration of ownership may delay or prevent a change in control and might affect the market price of our shares, even when a change may be in the best interests of all stockholders.  Certain of our principal stockholders may elect to increase their holdings of our common stock, which may have the impact of delaying or preventing a change of control. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and, accordingly, they could cause us to enter into transactions or agreements, which we would not otherwise consider.

We are indebted to our largest stockholders.

As of December 31, 2013, we owed the MAE Trust indebtedness of approximately $1.4 million under a secured note payable and $1.0 million under certain convertible subordinated debt.  All of our assets are mortgaged or pledged to secure the notes payable owed to the MAE Trust.  Pursuant to a divorce decree dated March 18, 2014, the $1.4 million note was transferred to Lisa K. Emalfarb on April 1, 2014.  All of our assets are also pledged for convertible subordinated debt of $6.8 million, as of December 30, 2013, owed by the Company to certain debt holders.  The Pinnacle Family Trust holds $3.8 million of the convertible subordinated debt. Approximately $1.9 million of the 2010 Notes and the 2011 Notes are held by four related interests, which include members of management and the board of directors, as well as another related party.   If we were unable to generate sufficient cash flow or otherwise obtain funds necessary to pay this indebtedness when due, we would be in default, and these debt holders would have the right to foreclose on the liens and security interests that secure the debt.  Further, this indebtedness is transferable to third parties. In addition, we may decide to refinance our related party indebtedness through secured borrowings from banks or other commercial lenders.  Any transferee or new lender that is not a related party may not have the same attitude about any failure on our part to meet our binding repayment obligations as the existing related party note holders.  The maturity date of this debt has been extended each year to 2013, 2014, and most recently to 2015, but there is no guaranty that we will be able to extend the maturity date of this debt in the future.  Debt in the amount of $6.8 million is callable by the Company any time after March 31, 2014 without penalty with 30 days’ notice.

If securities or industry analysts do not commence the publication of research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock in a negative manner, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Future sales of shares of our common stock may negatively affect our stock price.

The sale of additional shares of our common stock, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

As of December 31, 2013, there were 34,028,245 shares of our common stock outstanding. Approximately 52% of these shares are beneficially owned or controlled by our executive officers, directors and principal stockholders.  Shares held by our affiliates and certain of our directors, officers and employees are “restricted securities” as defined by Rule 144 (“Rule 144”) of the Securities Act of 1933, as amended (the “Securities Act”) and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144.

Our common stock has a relatively small public float. As a result, sales of substantial amounts of shares of our common stock, or even the potential for such sales, may materially and adversely affect prevailing market prices for our common stock. In addition, any adverse effect on the market price of our common stock could make it difficult for us to raise additional capital through sales of equity securities. Further, our licensee Abengoa is a significant holder of shares of our common stock. Abengoa owns 2,136,852 shares of our common stock. Abengoa purchased such shares on October 26, 2006. Because Abengoa has held such shares for over one year, they may engage in future sales under Rule 144, which could negatively affect our stock price.
Pursuant to a divorce decree dated March 18, 2014, Lisa K. Emalfarb, the former spouse of Mark A. Emalfarb, received 3,427,688 shares of common stock and 207,904 stock options, which were  transferred in April 2014 from common stock held by the MAE Trust, as well as, certain options to purchase additional shares earned by Mr. Emalfarb prior to November 30, 2012. Shares of our common stock held by Ms. Emalfarb may be considered “restricted securities” as defined under Rule 144 and may only be sold pursuant to an effective registration statement or an exemption from registration, if available. Rule 144 provides that a person who is not an affiliate and has held restricted securities for a prescribed period of at least six months if purchased from a reporting issuer or 12 months if purchased from a non-reporting Company, may, under certain conditions, sell all or any of his or her shares without volume limitation, in brokerage transactions. However, Ms. Emalfarb may be able to “tack” her holding period pursuant to Rule 144 and therefore sell her shares immediately and not subject to any holding period pursuant to Rule 144. Ms. Emalfarb may be deemed to be an “affiliate,” in which case she may not sell shares in excess of 1% of the Company’s outstanding common stock each three months. Additionally, for non-reporting issuers, if Ms. Emalfarb is deemed to be an “affiliate,” certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements, must be publicly available for her to sell her shares under Rule 144. As a result of revisions to Rule 144 which became effective on February 15, 2008, there is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least 90 consecutive days) after the restricted securities have been held by the owner for the aforementioned prescribed period of time. A sale by Ms. Emalfarb under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to registration of shares of common stock, may have a depressive effect upon the price of our common stock.

We incurred significant costs as a result of our uplisting on the OTCQX U.S. Premier marketplace, and those costs will increase proportionately higher if, as and when we become a fully reporting company and our management will be required to devote substantial time to compliance requirements.

As a company quoted on the OTCQX U.S. Premier marketplace, we incur significant legal, accounting and other expenses that we did not incur previously. In addition, the OTCQX Alternative Reporting Standards impose various requirements on companies that require our management and other personnel to devote a substantial amount of time to compliance initiatives. These costs will further increase if, as and when we become a fully reporting company under the Exchange Act.

We may in the future seek to list our common stock on the NASDAQ Stock Market or another stock exchange. However, we do not currently meet the listing standards for listing on any national securities exchange. During the period that our common stock is quoted on the OTCQX U.S. Premier or any other over-the-counter system, an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock than would be the case if and when we list on the NASDAQ Stock Market or another stock exchange.

In addition, if we fail to meet the criteria set forth in certain SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

We may not be able to meet the initial listing standards of any stock exchange, correctly predict the timing of such listing or, if listed, maintain such a listing.

We will incur significant costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as related rules implemented by the SEC, impose various requirements on public companies that require our management and other personnel to devote a substantial amount of time to compliance initiatives.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management evaluate effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues. Moreover, if we are not able to maintain compliance with the requirements of Section 404, our stock price could decline, and we could face sanctions or investigations, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.
 
If the SEC does not declare this Registration Statement effective or otherwise delays the effectiveness of this Registration Statement, the Company may be negatively affected and stockholders may not be able to sell shares in the amounts or at the times they might otherwise to.
 
Although the Company has undertaken the steps it believes are necessary to permit the SEC to declare this Registration Statement effective, it is possible that the SEC may, by application of its policies or procedures, delay the effectiveness of the Registration Statement or make it impractical for the Company to respond to the SEC in a manner that permits it to declare the Registration Statement effective. If the Registration Statement is not declared effective, the Company may be negatively affected and stockholders will need to rely on exemptions from the registration requirements of the Securities Act, such as Rule 144. Such exemptions typically limit the amount of shares that can be sold, require that shares be sold in certain types of transactions, require certain holding periods and limit the number of times that shares can be sold.
Item 2. Financial Information
 
Selected Financial Information

The following table provides selected historical consolidated financial data as of and for the periods shown. The data as of and for the fiscal years ended December 31, 2012 and  2013 have been derived from our audited consolidated financial statements for those dates and periods. The data as of and for the six months ended June 30, 2014 and 2013 have been derived from the condensed consolidated financial statements for those periods and dates.   The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes provided in Item 13 of this Form 10 registration statement.  Our historical results are not necessarily indicative of the results that may be expected in the future.

Selected Financial Data for the six Months ended as of June 30, 2014 and 2013:

 
 
June 30,
 
 
 
2014
   
2013
 
Total Revenues from Operatings
 
$
6,046,715
   
$
9,562,606
 
Gross Profit
 
$
1,909,411
   
$
5,664,604
 
Income (Loss) from Operations
 
$
(2,945,317
)
 
$
2,236,709
 
Net Income (Loss)
 
$
(3,247,851
)
 
$
1,862,084
 
Cash Share data:
               
Shares – Basic
   
34,036,295
     
32,135,525
 
Shares – Diluted
   
34,036,295
     
34,175,467
 
EPS – Basic
 
$
(0.10
)
 
$
0.06
 
EPS – Diluted
 
$
(0.10
)
 
$
0.05
 
 
               
Assets
               
Current Assets
 
$
9,994,262
   
$
14,452,927
 
Property, Plant and Equipment, Net
 
$
557,009
   
$
397,766
 
Intangible Assets, Net
 
$
581,896
   
$
535,386
 
Other Assets
 
$
35,222
   
$
148,153
 
Total Assets
 
$
11,168,389
   
$
15,534,232
 
 
               
Liabilities
               
Current Liabilities
 
$
3,169,958
   
$
2,886,186
 
Short-term Debt
 
$
8,242,941
   
$
8,242,941
 
Long-term Debt
 
$
-
   
$
-
 
Total Liabilities
 
$
11,412,899
   
$
11,129,127
 
 
               
Stockholders Equity
 
$
(244,510
)
 
$
4,405,105
 

Selected Financial Data for the year ended, as of December 31, 2013 and 2012:

 
 
December
 
 
 
2013
   
2012
 
Total Revenues from Operatings
 
$
17,134,741
   
$
15,601,720
 
Gross Profit
 
$
8,030,784
   
$
7,985,498
 
Income (Loss) from Operations
 
$
556,502
   
$
1,588,342
 
Net Income (Loss)
 
$
(428,050
)
 
$
1,349,497
 
Cash Provided by Operations
 
$
5,095,854
   
$
365,172
 
 
               
Cash Share data:
               
Shares – Basic
   
32,797,253
     
31,608,841
 
Shares – Diluted
   
32,797,253
     
34,225,590
 
EPS – Basic
 
$
(0.01
)
   
0.04
 
EPS – Diluted
 
$
(0.01
)
   
0.04
 
 
               
Assets
               
Current Assets
 
$
13,852,496
   
$
11,945,791
 
Property, Plant and Equipment, Net
 
$
504,781
   
$
393,860
 
Intangible Assets, Net
 
$
566,867
   
$
525,224
 
Other Assets
 
$
16,173
   
$
16,173
 
Total Assets
 
$
14,940,317
   
$
12,881,048
 
 
               
Liabilities
               
Current Liabilities
 
$
4,129,157
   
$
2,668,965
 
Short-term Debt
 
$
-
   
$
1,424,941
 
Long-term Debt
 
$
8,242,941
   
$
7,000,000
 
Total Liabilities
 
$
11,412,899
   
$
11,093,906
 
 
               
Stockholders Equity
 
$
2,568,219
   
$
1,787,142
 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this registration statement.  The discussion may contain forward-looking statements based on current expectations that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this registration statement.

Overview

Dyadic International, Inc. is a global biotechnology company based in Jupiter, Florida, with our research center in Wageningen, The Netherlands.  We use our patented and proprietary technologies to conduct research, development and commercial activities for the discovery, development, manufacture and sale of enzymes and other proteins for the bioenergy, bio-based chemical, biopharmaceutical and industrial enzyme industries. Dyadic utilizes, among other proprietary technologies, the C1 Expression System, an integrated technology platform based on its patented and proprietary C1 microorganism. The C1 Expression System enables the development and large scale manufacture of low cost enzymes and other proteins for diverse market opportunities. The technology can also be used to screen for the discovery of novel genes.

Strategy

We expect to generate revenues by leveraging our C1 Expression System and other technologies by: (i) conducting R&D projects to develop C1-based products for third parties; (ii) entering into collaborations, license agreements, joint ventures or other business arrangements to collect technology access fees, milestone payments, royalties, profit sharing and other fees; (iii) selling enzyme products, produced using Trichoderma and our C1 Expression System, to both current markets and future markets to customers, through distributors or for customer-collaborators; and/or (iv) obtaining grants from the United States government, foreign governments or other agencies. Our technologies have the potential for commercial applications in multi-billion dollar opportunities across diverse end markets, and we currently are focused on:

Biofuels and bio-based chemicals (including bioethanol, biodiesel, renewable plastics and polymers as replacements for petroleum-based products, and a variety of bio-based chemicals such as acrylic acid, succinic acid, butanediol, phthalate, solvents, and nutritious oils such as Omega 3) – Our advanced C1 enzyme technology is a critical element in the conversion of natural fibers (biomass) into fermentable sugars, which are subsequently fermented into ethanol our other bio-based products. Our current product offering, the CMAX product line, along with the C1-based enzymes developed by our licensees Abengoa and Codexis, are being recognized for their excellent performance characteristics at converting natural fibers (biomass) such as corn stover, and wheat straw into fermentable sugars and through our continued research efforts we expect to continue developing even better performing CMAX enzymes at lower manufacturing costs. As we are focused on a licensing and collaboration model in this nascent industry, with the first commercial scale facility using our technology coming online this year, we do not currently have significant direct sales of CMAX product. However, we have demonstrated our strong market position with our licensee Abengoa and our collaborator CIMV:

· Abengoa, our licensee, is anticipated to begin operations at its 25 million gallon advanced biofuels plant in Hugoton, Kansas in the third quarter of 2014. We expect this facility to generate a milestone and royalties for Dyadic by the end of 2014
· CIMV, a recent collaborator of ours, is a leader in developing innovative technologies to process biomass, to create an efficient, fully integrated system to produce environmentally low impact biofuels and bio-based chemicals. Dyadic anticipates supplying enzymes to CIMV’s planned 2015 demonstration plant and licensing its C1 technology for on-site production of enzymes at CIMV’s future commercial scale plants

Biopharmaceuticals (including therapeutic proteins, vaccines, monoclonal antibodies, biogenerics and other biologics used in the treatment of many diseases) – We believe that the biopharmaceutical industry is in need of novel expression systems like our C1 Expression System to address the challenges in the market today in developing and producing biologics. Using novel expression systems such as C1, drug developers have another “shot on goal” to find an organism that will be able to sufficiently express therapeutic proteins, vaccines, monoclonal antibodies and other biologics which may be stuck in their development programs because of the lack of expression levels with the more common expression systems. We believe that pharmaceutical companies will find C1, among the novel, cutting-edge expression systems now available, to be one of the more attractive because of its long track record in industrial applications, its robust growth and fermentation characteristics, and its ability to be readily programmed and easily scaled. While using the C1 Expression System for biopharmaceutical applications should be considered an early-stage endeavor, we currently have two active projects and are seeking to expand to find additional partners and fund more development.  We have been working with Sanofi since 2011:

· Sanofi, our collaborator, is currently developing a vaccine using the C1 expression system that is in the R&D phase. In addition to funded R&D, we have the potential for milestone payments and other opportunities should the research project and the subsequent technology transfer be successful.

Industrial (enzymes for the animal feed, pulp and paper, textiles, food and beverage and other end markets) – Enzymes for industrial applications represent our oldest and largest business segment. Already a $5 billion global market in 2013, we believe enzymes will continue to replace existing technologies due to the precision that these biocatalysts demonstrate relative to existing chemical approaches.  We currently operate a small, but growing, business selling proprietary enzyme products to approximately 100 customers in 35 different countries. The business grew 25% year-over-year in 2013 versus 2012, and grew 28% year-over-year in the six months ending June 30, 2014 versus the six months ending June 30, 2013. While the majority of our existing enzyme sales are from our historical non-GMO Trichoderma technology, we are currently focused on developing cutting-edge new products based on our C1 Expression System. While we may release next generation products for industrial applications such as textiles and pulp and paper sooner, we expect our major new product introductions to happen no earlier than 2017 due to development cycles and registration requirements for the animal feed and food and beverage industries. Our primary licensees, BASF and the animal health company described in the “Business Overview” section of this document, represent two critical components to our strategy in the Industrial market.

· BASF, our licensee, is currently developing commercial products using the C1 Expression System by both funding research at Dyadic and through, we believe, their internal efforts. Products developed using the C1 Expression System for BASF will have access to one of the world’s foremost sales, marketing and distribution organizations to commercialize these products in a number of end markets. For example, BASF is already a market leader in animal feed and detergent enzymes.

· Our Animal Health Licensee began work with Dyadic in 2011 to develop a next-generation enzyme to potentially replace their market leading product.  We continue to refine that product through funded R&D and hope they will commercialize this product within the next few years. Together BASF and our animal health licensee already represent a significant portion of that enzyme market, and we hope to facilitate their growth

We believe in the saying that “The expression system is not everything, but everything is nothing without a good expression system.” Experts in academia and industry regard Dyadic’s C1 Expression System to be among the foremost expression systems in the world. We have licensed, on a non-exclusive basis, our C1 Expression System to some of the world’s largest and renowned companies in their respective fields of applications. We believe that utilizing our C1 Expression System may be the critical differentiator in allowing Dyadic, our collaborators and licensees to compete against much larger rivals in these technology-driven markets.

 
Revenue

 
 
Six Months Ended June 30,
   
Incr (Decr)
 
Sales by Product:
 
2014
   
2013
   
2014 vs 2013
 
Product related, net
 
$
4,916,724
   
$
3,837,358
   
28
%
 
License Fee
   
-
     
5,000,000
   
(100
%)
 
Research and Development ("R&D")
   
1,129,991
     
725,248
   
56
%
 
Total Sales
 
$
6,046,715
   
$
9,562,606
   
(37
%)
 

In the six months ending June 30, 2013 and June 30, 2014 we derived revenue from three sources: (i) from the sale of our proprietary Trichoderma and C1-related enzyme products, (ii) from licensing of our technology to third parties; and (iii) from funded R&D projects with third parties, both public and private.
 
· Net product related revenue increased 28% primarily due to growth in the animal health and nutrition, starch and alcohol, and brewing product segments in the Americas and Europe regions, partially offset by revenue declines in Asia Pacific due to rationalization of low margin products.

· The decrease in licensing fees is due to no new license agreements in 2014 compared to the payment received in 2013 for the agreement with BASF. The BASF license agreement revenue is recognized in the USA.
 
· R&D revenue increased 56% due to due to a key project reaching certain milestone expectations earlier than targeted, and several new projects initiated in 2014, which were enabled by the recent expansion of the Company's R&D center in the Netherlands. R&D revenue is recognized in Europe.

Product Related Revenue, Net

 
 
Six Months Ended June 30,
   
Incr (Decr)
 
Product Related Sales by Geography:
 
2014
   
2013
   
2014 vs 2013
 
Americas
 
$
1,505,129
   
$
1,360,122
    11
%
 
Asia Pacific
   
622,841
     
784,344
   
(21
%)
 
Europe
   
2,788,754
     
1,692,892
   
65
%
 
Total Product Related Sales
 
$
4,916,724
   
$
3,837,358
   
28
%
 

· The increase in the Americas product related revenue of $145,007 or 11% is primarily due to two new accounts.
· The decrease in Asia Pacific product related revenue of $161,503 or 21% is primarily due product rationalization of low margin products.
· The increase in Europe product related revenue of $1,095,862 or 65% is primarily due to two new accounts and a new product registration by a key animal feed account.

Gross Profit
 
 
 
Six Months Ended June 30,
   
Incr (Decr)
 
Gross Profit and Margin:
 
2014
   
2013
   
2014 vs 2013
 
Gross Profit
 
$
1,909,411
   
$
5,664,604
   
(66%)
 
Gross Margin %
31.6
%
59.2
%
(27.6%)Pts
 
   
 
 
   
 
 
 
 
 
The gross profit decline of 66% is due to the reduction in 100% gross margin license fee revenue of $5,000,000, partially offset by an increase in gross profit of $112,452 from product related revenue growth, an increase in gross profit of $106,043 from R&D revenue growth, continued productivity improvements of $747,497, and 2013 inventory obsolescence for product rationalizations of $278,815.

The gross margin percent decline of 27.6 percentage points is due to the 31.0 percentage point margin impact of the reduction in license fee revenue, partially offset by an increase in gross margin due to product related and R&D revenue growth, continued
productivity improvements and 2013 inventory obsolescence for product rationalizations of 3.4 percentage points. Product related gross margin for the six months ended June 30, 2014 improved by 18.0 percentage points versus the same period a year ago, driven by improvements in our manufacturing processes, higher fermentation yields, reduced inventory obsolescence and other operational initiatives.
 
Operating Expenses
 
 
Six Months Ended June 30,
   
Incr (Decr)
 
Operating Expenses:
 
2014
   
2013
   
2014 vs 2013
 
General and Administrative Expenses ("G&A")
 
$
3,628,587
   
$
2,405,739
     
51%
 
Sales and Marketing Expenses
   
582,970
     
419,612
     
39%
Research and Development Costs
   
655,171
     
569,494
     
15%
 
Foreign Currency Exchange (Gain) Loss, Net
   
(12,000
)
   
33,050
     
136%
 
Total Selling, General and Administrative ("SG&A")
 
$
4,854,728
   
$
3,427,895
     
42%
 
% of sales
   
80.3
%
   
35.8
%
 
44.4% Pts
 
 
Operating expenses increased by 42% to $4,854,728 versus the same period last year. The ratio of operating costs to sales was 80.3% reflecting an increase of 44.5 percentage points versus the same period last year.

· General and Administration G&A increased by 51%, representing 59% of revenues
· Sales and Marketing increased by 39%, representing 10% of revenues
· R&D increased by 15%, representing 11% of revenues
 
· Foreign Currency Exchange (Gain) Loss, Net decreased by 136%, representing 0% of revenues

The increase in G&A expenses year over year is primarily due to the ongoing costs of legal representation and expert testimony in connection with our lawsuit against former outside counsel of $600,000, a 2013 bad debt recovery of $300,000 and the additional investment in business development resources of $322,848. The increase in sales and marketing costs is due to additional sales resources and growth initiatives in Europe and the Americas. The increase in R&D is due the expansion of our R&D facility in the Netherlands, and additional resources to support organic product development and improvements in the C1 Expression System Platform. The 2014 cost increases were offset by actions to reduce SG&A including the closure of our Greensboro, NC Laboratory and strategic sourcing cost reduction initiatives. The decrease in foreign exchange is due to favorable currency fluctuations.

Other Income (Expense)

 
Six Months Ended June 30,
   
Incr (Decr)
 
Other Income (Expense):
 
2014
   
2013
   
2014 vs 2013
 
Interest Income
 
$
16,533
   
$
3,016
     
448%
 
Interest Expense
   
(338,822
)
   
(339,641
)
   
(0%)
 
Gain on Sale of Fixed Assets
   
19,755
     
-
   
NM
 
Total Other Income (Expense)
 
$
(302,534
)
 
$
(336,625
)
   
(10%)
 

Net Income (Loss)

 
 
Six Months Ended June 30,
   
Incr (Decr)
 
 
2014
   
2013
   
2014 vs 2013
 
Net Income (Loss):
 
$
(3,247,851
)
 
$
1,862,084
   
$
(5,109,935
)
Net Income per share - Basic
 
$
(0.10
)
 
$
0.06
   
$
(0.16
)
Net Income per share - Diluted
 
$
(0.10
)
 
$
0.05
   
$
(0.15
)
Weighted average common shares - Basic
   
34,036,295
     
32,135,525
     
1,900,770
 
Weighted average common shares - Diluted
   
34,036,295
     
34,175,467
     
(139,172
)

Based on the factors discussed above, the net loss for the six months ended June 30, 2014 was $3.2 million, or ($0.10) per basic and fully diluted share, as compared to a net income of $1.9 million, or $0.06 per basic and $0.05 per fully diluted share, for six months ended June 30, 2013.  Our net income relies strongly on licensing partnerships and other collaborations.  We believe that it is likely that if we do not sign another license deal, we will incur losses in the near term primarily because of our planned levels of R&D and additional general and administrative expenditures that will be necessary to grow the Bioenergy, Enzyme and Biopharmaceutical businesses.

The above net loss includes litigation related expenses of approximately $1.1 million for our lawsuit against our former outside legal counsel and other related events, which had a negative impact on earnings per share of $0.02 for both basic and fully diluted shares for the six months ended June 30, 2014, as compared to a negative impact of $455,000, or $0.01 for both basic and fully diluted share for the six months ended June 30, 2013.

Financial Position and Cash Flow Analysis

 
Six Months Ended June 30,
   
Incr (Decr)
 
Cash Flows:
 
2014
   
2013
   
2014 vs 2013
 
Net Cash Provided by (Used In) Operating Activities
 
$
(4,468,117
)
 
$
3,066,768
   
$
(7,534,885
)
Investing Activities
   
(163,785
)
   
(131,977
)
   
(31,808
)
Financing Activities
   
40,000
     
123,303
     
(83,303
)
Net Increase (Decrease) in Cash and Cash equivalents
 
$
(4,591,902
)
 
$
3,058,094
   
$
(7,649,996
)

At June 30, 2014, cash and cash equivalents were $4.3 million compared to $8.9 million at December 31, 2013.  The $4,591,902 use of cash and cash equivalents for the six months ended June 30, 2014 was due to:
 
Cash Flows from Operating Activities
 
As reflected in our condensed consolidated financial statements, we incurred a loss of $3,247,851 for the six months ended June 30, 2014.  Including adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of $1,220,266, net cash used in operating activities was $4,468,117. The following summarizes cash used in operating activities:
 
· Cash used in operating activities excluding changes in assets and liabilities, and litigation of $1,686,080.
 
· Cash used from changes in operating assets and liabilities of $1,718,628 is primarily due to an increase in inventory to support sales growth and avoid product outages of $978,717, a decrease in liabilities of $553,378 and deferred R&D obligations of $405,821, partially offset by a decrease in other current assets of $218,879.
 
· Cash used in operating activities for litigation against outside counsel was $1,063,409.
 
Cash Flows from Investing Activities
 
· Cash used for investing activities of $163,785 is primarily due to purchases of fixed assets at our research center in The Netherlands in support of our new product development initiatives. The expansion of the lab was completed in January 2014.
Cash Flows from Financing Activities
· Cash provided by financing activities was $40,000 which was received as a repayment of a stock subscription receivable under our 2013 Employee Loan Program (the “Loan Program”), in connection with an exercise of stock options to purchase 250,000 shares of common stock.  Amounts borrowed under the Loan Program bear interest at 3% per annum and are payable within 24 months from the date of the loan agreement.  The loans are collateralized by the shares of common stock issued in connection with the exercise of the stock options and warrants.  At June 30, 2014, advances to employees under the Loan Program were approximately $146,000 and are included in Stockholders’ Equity in the June 30, 2014 condensed consolidated balance sheet.
The $3,058,094 increase in cash and cash equivalents for the six months ended June 30, 2013 was due to:
Cash Flows from Operating Activities
 
As reflected in our condensed consolidated financial statements, we incurred a profit of $1,862,084 for the six months ended June 30, 2013. Including adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of $1,204,684, net cash provided by operating activities was $3,066,768. The following summarizes cash provided by operating activities:
 
· Cash generated in operating activities excluding changes in assets and liabilities, and litigation of $2,655,655.  During the six months ended June 30, 2013, the Company received $5.0 million from the BASF upfront license fee.
 
· Cash generated from changes in operating assets and liabilities of $856,721 is primarily due to reduction of inventory of $370,366, an increase in liabilities of $332,989 and a decrease in other current assets of $269,133, partially offset by a decrease in deferred R&D obligations of $105,767.
 
· Cash used in operating activities for litigation against outside counsel was $445,608.
 
Cash Flows from Investing Activities
 
· Cash used for investing activities of $131,977 is primarily due to purchases of fixed assets and patent costs at our research center in The Netherlands in support of our new product development initiatives.
 
Cash Flows from Financing Activities
 
· Cash provided by financing activities of $123,303 is primarily due to cash received from proceeds from the exercises of warrants and stock options, granted under our equity plans, with exercise prices ranging from $0.15 to $0.60 per share.

Financial Condition and Liquidity at June 30, 2014 and 2013

Historically, the Company has financed operations primarily with proceeds from the sales of the products from its industrial enzyme business, upfront fees from its licensing our technology, external borrowings, borrowings from its stockholders, sales of common equity securities, and the receipt of settlement proceeds from its lawsuit against the Company’s former outside legal counsel.
 
As of June 30, 2014, the Company has liabilities that exceed its assets, negative working capital, and cash flow deficiencies.  In order to address these indicators, the Company’s is exploring several value-creating transactions, including, but not limited, licensing its C1 technologies to new collaborators, expanding technical or geographical licensing options, raising additional debt or  equity financing, and extending the maturity dates of its existing convertible subordinated debt and it’s note.  In addition, the Company expects to reduce its professional fees by approximately $750,000 in aggregate for the remaining six months of 2014 as compared to the first six months of 2014.  The Company is also actively drawing down inventory and targeting a $1.0 million reduction from its June 30, 2014 inventory levels. The financial statements do not include any adjustments to reflect further effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if the Company’s plans are unsuccessful.

Based upon the current status of our R&D and operating needs, we believe that our existing cash and cash equivalents will be adequate to satisfy our needs for at least the next 12 months. However, our actual capital requirements will depend on many factors, including those factors potentially impacting our financial condition as discussed in “Risk Factors That May Affect Future Results”, more specifically, our ability to extend the maturity dates on some, if not all of our outstanding debt, our ability to encourage our debt
holders, all or in part, to convert their debt holdings to shares of common stock, and our ability to source out new investors.  There is no assurance that the Company will be successful in obtaining the necessary funding to meet its business objectives or reduce its operating costs to a level sufficient to provide positive cash flow.
 
Debt

Total Debt (“Debt”) as of June 30, 2014 was $8,242,941 which includes the following:
 
·
Note Payable to Shareholder
 
$
1,424,941
 
 
 
       
·
2010 Convertible Subordinated Debt
 
$
3,818,000
 
 
 
       
·
2011 Convertible Subordinated Debt
 
$
3,000,000
 
 
Note Payable to Shareholder
 
The Amended and Restated Note dated November 14, 2008 (the “Note”) payable to the MAE Trust under agreement dated October 1, 1987, as amended, matured on January 1, 2009. On January 12, 2009, the Company repaid $1.0 million of principal of the Note leaving an outstanding principal amount of approximately $1.4 million. As of January 1, 2010, the MAE Trust and the Company agreed to reduce the interest rate on the outstanding principal balance of the Note from 14% to 9.5% per annum.  The Note is collateralized by the assets of the Company. On October 11, 2013, the maturity date of the Note was extended to January 1, 2015. All other provisions of the Note remain unchanged.  Consequently, the Note is classified as short-term in the accompanying June 30, 2014 condensed consolidated balance sheet.  Pursuant to a divorce decree dated March 18, 2014, the $1.4 million note was transferred to Lisa K. Emalfarb, a stockholder, on April 1, 2014.  Under certain conditions, Mr. Emalfarb has the right to assume the Note at maturity should Lisa K. Emalfarb be unwilling or unable to extend the maturity date of the Note, if requested by the Company.

Interest expense on the Note amounted to approximately $67,000 for both of the six month periods ended June 30, 2014 and 2013.

2010 Convertible Subordinated Debt

On August 23, 2010, the Company completed the private placement of $4,000,000 aggregate principal of convertible subordinated secured promissory notes (the “2010 Notes”) with ten investors. The 2010 Notes pay interest quarterly at 8% per annum and are convertible at the holder’s option after January 1, 2011, into unregistered shares of the Company’s common stock at a price of $1.82 per share, which represents 120% of the average closing price of the Company’s common stock for the 30-day period preceding August 23, 2010. The Company will not effect any conversion of the 2010 Notes, to the extent that after giving effect to such conversion, any holder would beneficially own in excess of 4.9% of the Company’s outstanding common stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation may be waived by the holder upon not less than 61 days prior notice. The 2010 Notes are subordinated to the Note, and are collateralized by substantially all of the assets of the Company. On October 7, 2013, the Company extended the maturity date of the 2010 Notes to January 1, 2015. The amendment includes a provision that allows the Company to prepay all or part of the outstanding principal, without penalty, any time after March 31, 2014. Consequently, the 2010 Notes have been classified as short-term in the accompanying June 30, 2014 condensed consolidated balance sheet.

One of the Company’s third party note holders converted $182,000 of its 2010 Notes during the six months ended June 30, 2013 into an aggregate of 100,000 shares of the Company’s common stock at a conversion price of $1.82 per share. As a result of this conversion, the outstanding principal balance of the 2010 Notes was $3,818,000 at June 30, 2014.

2011 Convertible Subordinated Debt

In October 2011, the Company completed the private placement of $3,000,000 aggregate principal of convertible subordinated secured promissory notes (the “2011 Notes”) with five investors. The 2011 Notes pay interest quarterly at 8% per annum and are convertible at the holder’s option into unregistered shares of the Company’s common stock at a price of $1.28 per share. The Company will not affect any conversion of the 2011 Notes, to the extent that after giving effect to such conversion, any holder would beneficially own in excess of 4.9% of the Company’s outstanding common stock. The Beneficial Ownership Limitation may be waived by the holder upon not less than 61 days prior notice.
 
The 2011 Notes are subordinated to the Note, and are collateralized by substantially all of the assets of the Company. On October 7, 2013, the Company extended the maturity date of the 2011 Notes to January 1, 2015. The amendment includes a provision
that allows the Company to prepay all or part of the outstanding principal, without penalty, any time after March 31, 2014. Consequently, the 2011 Notes have been classified as short-term in the accompanying June 30, 2014 condensed consolidated balance sheet.

Approximately $1,900,000 of the 2010 Notes and the 2011 Notes are held by four related party interests, which include members of management and the Board, as well as another related party. Interest expense on the convertible subordinated debt for the six months ended June 30, 2014 and 2013 was approximately $270,000 and $273,000, respectively.
Revenue

 
Year Ended December 31,
   
Incr (Decr)
 
Sales by Product:
 
2013
   
2012
   
2013 vs 2012
 
Product related, net
 
$
9,800,767
   
$
7,819,547
   
25
%
 
License Fee
   
6,000,000
     
5,500,000
   
9
%
 
Research and Development ("R&D")
   
1,333,974
     
2,282,173
   
(42
%)
 
Total Sales
 
$
17,134,741
   
$
15,601,720
   
10
%
 

In 2012 and 2013 we derived revenue from three sources: (i) from the sale of our proprietary Trichoderma and C1-based enzyme products, (ii) from licensing of our technology to third parties; and (iii) from funded R&D projects with third parties, both public and private.
 
· Net product revenue increased 25% primarily due to growth in the animal health and nutrition market segments, and the addition of two new customers and a product registration by a key animal feed account in Europe.
 
· The increase in licensing fees is due to the $6,000,000 payment received in 2013 for the agreement with BASF as compared to the $5,500,000 received in 2012 for the agreement with Abengoa to expand their non-exclusive C1 license. License agreements are recognized in the USA.
 
· R&D revenue decreased 42% due to start-up delays in certain external R&D projects and reallocation of resources to new product development initiatives related to the C1 technology platform.
 
Product Related Revenue, Net

 
 
Year Ended December 31,
   
Incr (Decr)
 
Product Related Sales by Geography:
 
2013
   
2012
   
2013 vs 2012
 
Americas
 
$
3,534,248
   
$
3,019,469
    17
%
 
Asia Pacific
   
1,623,064
     
1,975,029
   
(18
%)
 
Europe
   
4,643,455
     
2,825,049
   
64
%
 
Total Product Related Sales
 
$
9,800,767
   
$
7,819,547
   
25
%
 

· The increase in Americas product related revenue of $514,779 or 17% is due to two new accounts and organic growth in the USA, partially offset by discontinuation of sales in Venezuela due to the political environment.
 
· The decrease in Asia Pacific product related revenue of $351,965 or 18% is primarily due to rationalization of low margin products.
 
· The increase in Europe product related revenue of $1,818,406 or 64% is primarily due to the addition of two new customers and a new product registration by a key animal feed account.
Gross Profit
 
 
 
Year Ended December 31,
   
Incr (Decr)
 
Gross Profit and Margin:
 
2013
   
2012
   
2013 vs 2012
 
Gross Profit
 
$
8,030,784
   
$
7,985,498
   
1
%
 
Gross Margin %
46.9
%
51.2
%
(4.3%)
Pts
 
The gross profit improvement of 1% is due to the increase in 100% gross margin license fee revenue of $500,000 and an increase in gross profit from product related revenue of $390,220, partially offset by a reduction in gross profit of $398,244 from lower R&D revenue and higher manufacturing expenses and lower yields of $446,690.
 
The gross margin percent decline of 4.3 percentage points is due to unfavorable product line mix impact of 3.3 percentage points and higher manufacturing costs and lower yields impact of 2.6 percentage points, partially offset by the margin impact of 1.6 percentage points from additional licensing revenue.
 
Operating Expenses
 
 
Year Ended December 31,
   
Incr (Decr)
 
Operating Expenses:
 
2013
   
2012
   
2013 vs 2012
 
General and Administrative Expenses ("G&A")
 
$
5,546,999
   
$
4,802,653
   
15
%
 
Sales and Marketing Expenses
   
944,124
     
700,778
   
35
%
 
Research and Development Costs
   
1,066,471
     
921,714
   
16
%
 
Foreign Currency Exchange (Gain) Loss, Net
   
(83,312
)
   
(27,989
)
 
198
%
 
Total Selling, General and Administrative ("SG&A")
 
$
7,474,282
   
$
6,397,156
    17
%
 
 
43.6
%
41.0
%
2.6%
Pts
 
Operating expenses increased by 17% to $7,474,282 versus the same period last year. The ratio of operating costs to sales is 43.6% reflecting an increase of 2.6 percentage points versus the same period last year.
 
· General and Administration G&A increased by 15%, representing 32% of total revenues
 
· Sales and Marketing increased by 35%, representing 6% of total revenues
 
· R&D increased by 16%, representing 6% of total revenues
 
· Foreign Currency Exchange (Gain) Loss, Net increased by 198%, representing 0% of total revenues
 
The increase in G&A expenses is due to the increased ongoing costs of legal representation and expert testimony in connection with our lawsuit against former outside counsel approximately of $1,100,000 partially offset by the 2013 bad debt recovery of $300,000 and other spending reductions of $55,654. The increase in sales and marketing costs is due to additional sales resources and growth initiatives in North America. The increase in R&D is due to additional resources to support organic product development initiatives and improvements in the C1 Expression System Platform. The decrease in foreign exchange is due to favorable currency fluctuations.
 
Other Income (Expenses)
 
 
 
Year Ended December 31,
   
Incr (Decr)
 
Other Income (Expense):
 
2013
   
2012
   
2013 vs 2012
 
Interest Income
 
$
14,613
   
$
5,245
   
179
%
 
Interest Expense
   
(686,022
)
   
(701,090
)
 
(2
%)
 
Gain (Loss) on Settlement of Litigation
   
(313,143
)
   
525,000
   
160
%
 
Total Other Income (Expense)
 
$
(984,552
)
 
$
(170,845
)
 
476
%
 
Settlement of Litigation
 
On September 25, 2007, Mark A. Emalfarb commenced an arbitration proceeding (the “Emalfarb Arbitration”) against the Company before the American Arbitration Association seeking monetary damages resulting from his termination for cause pursuant to his employment agreement dated as of April 1, 2001 (as amended, the “Employment Agreement”).  This arbitration action asserts, among other things, that “cause” as defined in the Employment Agreement, did not exist and that his reputation had been damaged by the Company. On October 22, 2007, the Company filed an answering statement and motion to dismiss the arbitration.  On April 1, 2008, Mr. Emalfarb responded to Dyadic’s answering statement and motion to dismiss and filed a Supplemental Demand for Arbitration against Dyadic asserting various counts and demanding full recompense from the Company for damages relating to such termination.  The Company’s primary and excess insurance carriers denied coverage for the Emalfarb Arbitration based on their interpretation of exclusions and assertion of other coverage defenses contained in the Company’s insurance policies.
 
In consideration for the contribution by the insurance carriers to the resolution of the stockholder class action litigation against the Company, which was resolved on July 27, 2010, all pending claims with such insurance carriers with respect to the Emalfarb Arbitration were released.
 
On October 22, 2013, in consideration for the dismissal of the arbitration proceedings, the Company agreed to reimburse Mr. Emalfarb approximately $313,000 for past expenses incurred.  Such amount is included in other expense in the consolidated statements of operations for the year ended December 31, 2013.  In addition to this reimbursement, Mr. Emalfarb will be entitled to receive 5% of the proceeds to the Company net of legal expenses up to $25,000,000 and 8% of any net proceeds in excess of $25 million, but in any case the maximum amount payable will be $6,000,000 of the net proceeds, if any, received by the Company related to the professional liability lawsuit against the Company’s former outside legal counsel discussed above.
 
During the year ended December 31, 2013, the Company recognized a loss of $313,000 on settlement of litigation, which is described above. During the year ended December 31, 2012, the Company received $525,000 in settlement of claims against certain former outside legal counsel. This litigation remains ongoing with additional defendants. For further discussion of this litigation, see Note 5 “Litigation, Claims and Assessments—Pending Actions” to our Consolidated Financial Statements dated December 31, 2013 and 2012 in Exhibit 1.1.
 
Provision for Income Taxes
 
There was no current U.S. income tax provision recognized during the year ended December 31, 2013. The Company’s current U.S. income tax provision for the year ended December 31, 2012 was $68,000. The Company has incurred operating losses and has established a full valuation allowance. The Company's operations in The Netherlands are subject to income taxes in those jurisdictions. No provision for current foreign income taxes has been recognized for either of the years ended December 31, 2013 or 2012.
 
There was no provision or benefit for either U.S. or foreign deferred income taxes for the years ended December 31, 2013 and 2012.
 
Net Income

 
 
Year Ended December 31,
   
Incr (Decr)
 
 
 
2013
   
2012
   
2013 vs 2012
 
Net Income (Loss):
 
$
(428,050
)
 
$
1,349,497
   
$
(1,777,547
)
Net Income per share - Basic
 
$
(0.01
)
 
$
0.04
   
$
(0.05
)
Net Income per share - Diluted
 
$
(0.01
)
 
$
0.04
   
$
(0.05
)
Weighted average common shares - Basic
   
32,797,253
     
31,608,841
     
1,188,412
 
Weighted average common shares - Diluted
   
32,797,253
     
34,225,590
     
(1,428,337
)

Based on the factors discussed above, the net loss for the year ended December 31, 2013 was $428,050, or ($0.01) per basic and fully diluted share, as compared to a net income of $1.3 million, or $0.04 per basic and fully diluted share, for year ended December 31, 2012.  Our net income relies strongly on licensing partnerships and other collaborations.  We believe that it is likely that if we do not sign another license deal, we will incur losses in the near term primarily because of our planned levels of R&D and additional general and administrative expenditures that will be necessary to grow the Bioenergy, Enzyme and Biopharmaceutical businesses.
 
The above net loss includes litigation related expenses of approximately $1.8 million for our lawsuit against our former outside legal counsel and other related events, which had a negative impact on earnings per share of $0.05 for both basic and fully
diluted shares for the year ended December 31, 2013, as compared to a favorable net litigation impact of $325,000, or $0.01 per basic and fully diluted share for the year ended December 31, 2012.
 
Financial Position and Cash Flow Analysis

 
 
Year Ended December 31,
   
Incr (Decr)
 
Cash Flows:
 
2013
   
2012
   
2013 vs 2012
 
Net Cash Provided by (Used In) Operating Activities
 
$
5,095,854
   
$
365,172
   
$
4,730,682
 
Investing Activities
   
(414,090
)
   
(103,938
)
   
(310,152
)
Financing Activities
   
220,570
     
37,073
     
183,497
 
Net Increase (Decrease) in Cash and Cash equivalents
 
$
4,902,334
   
$
298,307
   
$
4,604,027
 

The $4,902,334 increase in cash and cash equivalents for the year ended December 31, 2013 was due to:
 
Cash Flows from Operating Activities
 
As reflected in our consolidated financial statements, we incurred a loss of $428,050 for the year ended December 31, 2013. Including adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of $5,523,904, net cash provided by operating activities was $5,095,854. The following summarizes cash used in operating activities:
 
· Cash generated in operating activities before changes in assets and liabilities, and litigation of $1,290,317.
 
· Cash generated from changes in operating assets and liabilities of $4,925,351 is primarily due to reduction in license receivables of $3,389,307, mainly the receipt of $3,500,000 from Abengoa, a increase in liabilities of $1,112,823 and deferred R&D obligations of $347,369, and a decrease in inventory and other current assets of $75,852.
 
· Cash used in operating activities for litigation against former outside counsel was $1,119,814.
 
Cash Flows from Investing Activities
 
· Cash used for investing activities of $414,090 is primarily due to purchases of fixed assets and patent costs at our research center in The Netherlands in support of our new product development initiatives.
 
Cash Flows from Financing Activities
 
· Cash provided by financing activities of $220,570 is primarily due to due to cash received from proceeds from the exercises of warrants and stock options, granted under our equity plans, with exercise prices ranging from $0.15 to $0.60 per share.
 
The $298,307 increase in cash and cash equivalents for the year ended December 31, 2012 was due to:
 
Cash Flows from Operating Activities
 
As reflected in our consolidated financial statements, we generated a profit of $1,349,497 for the year ended December 31, 2012. Including adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of $984,325, net cash provided by operating activities was $365,172. The following summarizes cash provided by operating activities:
 
· Cash generated in operating activities before changes in assets and liabilities, and litigation of $3,412,487.
 
· Cash used from changes in operating assets and liabilities of $3,004,938 is primarily due to the license fee receivable from Abengoa of $3,500,000 and a decrease in liabilities of $546,224, partially offset by cash proceeds from a reduction of
inventory of $266,195, an increase in deferred R&D obligations of $538,266 and decrease in other current assets of $236,825.
 
· Cash used in operating activities for litigation against outside counsel was $42,377.
 
Cash Flows from Investing Activities
 
· Cash used for investing activities of $103,938 is primarily due to purchases of fixed assets and patent costs at our research center in The Netherlands in support of our new product development initiatives.
 
Cash Flows from Financing Activities
 
· Cash provided by financing activities of $37,073 is primarily due to cash received from proceeds from the exercises of warrants and stock options, granted under our equity plans, with exercise prices ranging from $0.15 to $0.23 per share.

Financial Condition and Liquidity at December 31, 2013 and 2012

Historically, the Company has financed operations primarily with proceeds from the sales of the products from its industrial enzyme business, upfront fees from its Licensing business, external borrowings, borrowings from its stockholders, sales of common equity securities, and the receipt of proceeds from one of the defendants in the lawsuit against the Company's former outside legal counsel.
 
Based upon the current status of our R&D and operating needs, we believe that our existing cash and cash equivalents will be adequate to satisfy our needs for at least the next 12 months. However, our actual capital requirements will depend on many factors, including those factors potentially impacting our financial condition as discussed in “Risk Factors That May Affect Future Results”, more specifically, our ability to extend the maturity dates on some, if not all of our outstanding debt, our ability to encourage our debt holders, all or in part, to convert their debt holdings to shares of common stock, and our ability to source out new investors.  There is no assurance that the Company will be successful in obtaining the necessary funding to meet its business objectives or reduce its operating costs to a level sufficient to provide positive cash flow.

Debt

Total Debt (“Debt”) as of December 31, 2013 was $8.2 million which includes the following:
 
·
Note Payable to Shareholder
 
$
1,424,941
 
 
 
       
·
2010 Convertible Subordinated Debt
 
$
3,818,000
 
 
 
       
·
2011 Convertible Subordinated Debt
 
$
3,000,000
 
 
Note Payable to Shareholder

The Amended and Restated Note dated November 14, 2008 (the “Note”) payable to the MAE Trust under agreement dated October 1, 1987, as amended, matured on January 1, 2009. On January 12, 2009, the Company repaid $1.0 million of principal of the Note leaving an outstanding principal amount of approximately $1.4 million. As of January 1, 2010, the MAE Trust and the Company agreed to reduce the interest rate on the outstanding principal balance of the Note from 14% to 9.5% per annum.  The Note is collateralized by the assets of the Company. On October 11, 2013, the maturity date of the Note was extended to January 1, 2015. All other provisions of the Note remain unchanged.  Consequently, the Note is classified as long-term in the accompanying December 31, 2013 condensed consolidated balance sheet.  Pursuant to a divorce decree dated March 18, 2014, the $1.4 million note was transferred to Lisa K. Emalfarb, a stockholder, on April 1, 2014.  Under certain conditions, Mr. Emalfarb has the right to assume the Note at maturity should Lisa K. Emalfarb be unwilling or unable to extend the maturity date of the Note, if requested by the Company.

Interest expense on the Note amounted to approximately $135,000 for both of the years ended December 31, 2013 and 2012.
2010 Convertible Subordinated Debt
 
On August 23, 2010, the Company completed the private placement of $4,000,000 aggregate principal of convertible subordinated secured promissory notes (the “2010 Notes”) with ten investors. The 2010 Notes pay interest quarterly at 8% per annum and are convertible at the holder’s option after January 1, 2011, into unregistered shares of the Company’s common stock at a price of $1.82 per share, which represents 120% of the average closing price of the Company’s common stock for the 30-day period preceding August 23, 2010. The Company will not effect any conversion of the 2010 Notes, to the extent that after giving effect to such conversion, any holder would beneficially own in excess of 4.9% of the Company’s outstanding common stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation may be waived by the holder upon not less than 61 days prior notice. The 2010 Notes are subordinated to the Note, and are collateralized by substantially all of the assets of the Company. On October 7, 2013, the Company extended the maturity date of the 2010 Notes to January 1, 2015. The amendment includes a provision that allows the Company to prepay all or part of the outstanding principal, without penalty, any time after March 31, 2014. Consequently, the 2010 Notes have been classified as long-term in the accompanying December 31, 2013 condensed consolidated balance sheet.

One of the Company’s third party note holders converted $182,000 of its 2010 Notes during the year ended December 31, 2013 into an aggregate of 100,000 shares of the Company’s common stock at a conversion price of $1.82 per share. As a result of this conversion, the outstanding principal balance of the 2010 Notes was $3,818,000 at December 31, 2013.

2011 Convertible Subordinated Debt

In October 2011, the Company completed the private placement of $3,000,000 aggregate principal of convertible subordinated secured promissory notes (the “2011 Notes”) with five investors. The 2011 Notes pay interest quarterly at 8% per annum and are convertible at the holder’s option into unregistered shares of the Company’s common stock at a price of $1.28 per share. The Company will not affect any conversion of the 2011 Notes, to the extent that after giving effect to such conversion, any holder would beneficially own in excess of 4.9% of the Company’s outstanding common stock. The Beneficial Ownership Limitation may be waived by the holder upon not less than 61 days prior notice.

The 2011 Notes are subordinated to the Note, and are collateralized by substantially all of the assets of the Company. On October 7, 2013, the Company extended the maturity date of the 2011 Notes to January 1, 2015. The amendment includes a provision that allows the Company to prepay all or part of the outstanding principal, without penalty, any time after March 31, 2014. Consequently, the 2011 Notes have been classified as long-term in the accompanying December 31, 2013 condensed consolidated balance sheet.

Approximately $1,900,000 of the 2010 Notes and the 2011 Notes are held by four related party interests, which include members of management and the Board, as well as another related party.  Interest expense on the convertible subordinated debt for the years ended December 31, 2013 and 2012 was approximately $546,000 and $562,000, respectively.

Contractual Obligations Table:
 
Descriptions
 
2014
   
2015
   
2016
   
2017
   
2018
   
2019
 
Xerox Copier Lease
   
8,400
     
8,400
     
8,400
     
8,400
     
7,700
     
-
 
Jupiter Lab Operating Lease
   
-
     
-
     
-
     
-
     
-
     
-
 
Intracoastal Pointe Dr Operating Lease
   
56,028
     
59,464,
     
-
     
-
     
-
     
-
 
Greensboro Operating Lease
   
-
     
-
     
-
     
-
     
-
     
-
 
Dyadic Nederland B.V. Operating Lease
   
252,080
     
252,080
     
252,080
     
252,080
     
252,080
     
-
 
 
   
316,508
     
319,944
     
260,480
     
260,480
     
259,780
         
 
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Summary of Critical Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intra-entity transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities, at the date of and for the period of the consolidated financial statements.  Actual results could differ from those estimates, and those differences could be material. Significant estimates include the allowance for doubtful accounts, inventories, intangibles, income and other tax accruals, stock-based compensation, the realization of long-lived assets, and contingencies and litigation.
Cash and Cash Equivalents
 
The Company considers all interest-bearing deposits or investments with original maturities of three months or less to be cash equivalents.

Restricted Cash

The Company had restricted cash of approximately $200,000 and $192,000 at December 31, 2013 and 2012, respectively, which was used as security for the build-out of the Company’s laboratory in the Netherlands. Twenty percent of the outstanding restricted cash balance is refunded to the Company each year on the lease anniversary date through its expiration. The five year lease term expires on December 31, 2018.

Accounts Receivable

Accounts receivable are recorded at their net realizable value on the date revenue is recognized or the Company has a contractual right to receive money, either on demand or at fixed or determinable dates. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligations. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to pay, additional allowances may be required.

The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience, adjusted for existing market conditions. If market conditions decline or the Company’s customers experience economic difficulties, actual collections may not meet expectations and may result in decreased cash flows and increased bad debt expense.  The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company are exhausted, the determination for charging off uncollectible receivables is made. The Company does not accrue finance or interest charges on past due accounts receivable.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents and uncollateralized accounts receivable. The Company invests its excess cash in money market funds with SunTrust Bank and ABN AMRO.

Inventory

Inventory consists of raw materials and finished goods, including industrial enzymes used in the industrial, chemical, and agricultural markets, and are stated at the lower of cost or market using the weighted average cost method. The value of finished goods is comprised of 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.

Fixed Assets

Fixed assets are recorded at historical cost and depreciated and amortized using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized over the lesser of their useful lives or the lease terms. Upon sale or retirement, the cost and related accumulated depreciation and amortization are eliminated from their respective accounts, and the resulting gain or loss is included in the results of operations. Repairs and maintenance charges, which do not increase the useful lives of the assets, are charged to operations as incurred.

Intangible Assets

Intangible assets include patent and technology acquisition costs, which are being amortized, using the straight-line method over the estimated useful lives of the patents, determined to be twelve years. Capitalized patent and technology costs during the years ended December 31, 2013 and 2012 were approximately $94,000, and $80,000, respectively. Amortization expense for the years ended December 31, 2013 and 2012 was approximately $52,000.

Estimated annual amortization expense for each of the next five years is approximately $63,000.
Long-Lived Assets

The Company reviews its long-lived assets for impairment, including fixed assets that are held and used in its operations, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If such an event or change in circumstances occurs, the Company will estimate the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted future cash flows is less than the carrying amount of the related assets, the Company will recognize an impairment loss if the carrying value exceeds the fair value. Assets to be disposed of are reclassified as assets held for sale at the lower of their carrying amount or fair value less costs to sell. Write-downs to fair value less disposal costs are reported as a part of loss from operations.

The Company does not believe that there were any events or changes in circumstances, which indicate that the carrying amounts of its long-lived assets may not be recoverable as of December 31, 2013 and 2012, respectively.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, license fee receivable, inventory, accounts payable, accrued expenses, deferred R&D obligation and accrued interest payable, approximate their fair values due to the short-term nature of these assets and liabilities. The note payable to stockholder and convertible subordinated debt approximate fair value based upon their short maturities and current rates available to the Company for loans with similar maturities.

Revenue Recognition

Revenue is recognized when (1) persuasive evidence of an arrangement exists; (2) services have been rendered or product has been delivered; (3) price to the customer is fixed and determinable; and (4) collection of the underlying receivable is reasonably assured.  The Company recognizes revenue on product sales when title passes to the customer based upon the specified freight terms of the respective sale. Revenues are comprised of gross sales 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 revenue earned for the goods provided and are included in net product related revenue in the accompanying consolidated statements of operations. Costs of shipping and handling are included in cost of goods sold.
Upfront and milestone payments received are recognized as revenue when products are delivered, services rendered ratably over the requisite service period and/or performance criteria are met. The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of any services performed, and recognizes revenue pursuant to the related pattern of performance based on total labor hours incurred relative to total labor hours estimated under the contract. As of December 31, 2013 and 2012, the deferred R&D obligation totaled $914,000 and $567,000, respectively. The Company recognizes milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the Company’s past R&D services, as well as its ongoing commitment to provide R&D services under the collaboration, are charged at fees that are comparable to the fees that the Company customarily charges for similar R&D services.

R&D Costs

R&D costs related to both present and future products are charged to operations when incurred.
Foreign Currency Translation
 
The financial statements of the Company’s foreign subsidiaries have been translated into U.S. dollars. 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 currencies other than the functional currencies of the Company and its subsidiaries. These amounts are adjusted to reflect period-end exchange rates.

Share-based Compensation

The Company values its stock options on the date of grant using the Black-Scholes valuation model. Any stock options with modified terms are re-valued using the Black-Scholes valuation model based on the new terms at the date the modifications are approved by the Company’s compensation committee (the “Compensation Committee”) of its board of directors. Any incremental cost resulting from the revised valuations is charged to results of operations, and the remaining unvested portions of the options are amortized over the modified remaining vesting period.

The Company accounts for equity instruments issued to non-employees by calculating the fair value of the equity instrument using the Black-Scholes valuation model at each reporting period with charges amortized to the results of operations over the instrument’s vesting period.

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A deferred tax asset valuation allowance is established if, in management’s opinion, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized.

GAAP requires that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the years ended December 31, 2013 and 2012.

The Company’s management believes it is no longer subject to income tax examinations for years prior to December 31, 2010.

Net Income (Loss) Per Share

Basic income (loss) per share excludes any dilution. It is based upon the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. During the years ended December 31, 2013 and 2012, 7,867,496 and 4,211,784 shares of common stock, respectively, underlying stock options and convertible debt were not included in computing diluted earnings per share because their effects would be anti-dilutive.
 
Quantitative and Qualitative Disclosures About Market Risk
We are affected by changes in non-U.S. currency exchange rates and interest rates.

Currency Exchange Rates

In general, we conduct the majority of our business in U.S. dollars and the euro, both considered to be among the most stable currencies in the world. We do not hedge currency risks of non-U.S. –dollar-denominated investments in debt instruments and loans receivable with currency forward contracts or currency interest rate swaps. Gains and losses on these non-U.S. currency investments are generally offset by corresponding losses and gain through natural hedges. Substantially all of our revenue is transacted in U.S dollars and the euro. However, a significant amount of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro. For further information, see “Risk Factors” on page 39 of this Form 10.

Interest Rates

We generally do not hedge interest rate risks of fixed-rate debt instruments with interest rate swaps. Our debt instruments are not publicly traded and therefore not subject to gains and losses that may result from short term changes interest rates. We are exposed to interest rate risk related to our indebtedness. Our indebtedness includes our debt issuances and the liability associated with a convertible subordinated and note payable secured by assets of the company. Our current debt matures on January 1, 2015, therefore, there is a risk that we may not be able refinance the debt at current interest rates, or at all. If we are unable to refinance the debt at current rates, we may be at risk of additional economic loss or dilution of our shareholders in the event we must raise equity capital to fund the debt refinance and/or operations.

Item 3. Properties
 
Our corporate headquarters are located in Jupiter, Florida, where we occupy 4,872 square feet under a lease that expires on December 31, 2015.  We also lease a quality assurance laboratory facility in Jupiter which consists of approximately 3,500 square feet on a month-to-month basis.  Our R&D facility in The Netherlands consists of approximately 9,375 square feet pursuant to a lease that expires on December 31, 2018.   We anticipate expanding our Netherlands R&D Facility by an additional 4,434 square feet in around November 2014.
 
We believe that our current and anticipated facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space is available to accommodate any expansion of our operations, but such space may not be available in the same building if and when such space is needed.

Item 4. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial ownership of our common stock as of August 1, 2014 (except as noted below), by:

· each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock;
 
· each of our directors and named executive officers; and
 
· all of our directors and executive officers as a group.

The percentage of ownership depicted below is based on 34,048,745 shares of common stock outstanding on August 1, 2014 plus the dilutive effect of each shareholders’ equivalent converted shares from convertible debt, stock options and restrictive stock units.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power, which includes the power to vote or direct the voting of a security, or investment power, which includes the power to dispose of or to direct the disposition of a security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days of August 1, 2014. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.

 
 
Beneficial Ownership of Holdings
 
Name of Beneficial Owner
 
Number of
Shares of
Common Stock
   
Percentage of
Outstanding
Common Stock
 
 
 
   
 
5% Stockholders:
 
   
 
 
 
   
 
Mark A. Emalfarb Trust (1)
   
4,439,639
     
12.7
%
The Francisco Trust U/A/D February 28, 1996(2)
   
4,400,710
     
12.8
%
Lisa K. Emalfarb
   
3,416,688
     
10.0
%
Abengoa BioEnergy
   
2,136,752
     
6.4
%
 
               
Our directors and named executive officers(3):
               
 
               
Mark A. Emalfarb(1)
 
(See above)
   
(See above)
 
Danai E. Brooks(4)
   
163,999
     
*
 
Richard H. Jundzil (5)
   
190,000
     
-
 
Frank P. Gerardi (6)
   
231,107
     
*
 
Robert D. Burke, MD (7)
   
553,488
     
1.6
%
Seth J. Herbst, MD (8)
   
318,438
     
*
 
Stephen J. Warner (9)
   
373,488
     
1.1
%
Michael P. Tarnok
   
7,500
     
*
 
All executive officers and directors as a group (11) persons
   
6,790,417
     
19.5
%


* Signifies less than 1%.

(1) Represents (i) 3,427,688 shares held by Mark A. Emalfarb beneficially through the Mark A. Emalfarb Trust U/A/D October 1, 1987, of which Mr. Emalfarb is the sole beneficiary and serves as sole trustee; (ii) 549,451 shares of common stock issuable upon the conversion of convertible debt and related accrued interest; and (iii) 462,500 shares issuable upon the exercise of stock options.  Pursant to the the Emalfarb’s divorce decree March 18, 2014, Lisa K. Emalfarb has beneficial right to 207,904 common share options to which Mr. Emalfarb disclaims any beneficial ownership.
(2) Represents (i) 4,010,085 shares of common stock; and (ii) 390,625 shares of common stock issuable upon the conversion of convertible debt and related accrued interest. The trustee of the Francisco Trust U/A/D February 28, 1996 is Morley Alperstein and the beneficiaries thereof are the descendants of Mark A. Emalfarb. The address of the Francisco Trust U/A/D February 28, 1996 is 17236 Gulf Pine Circle, Wellington, Florida 33414. Mr. Emalfarb disclaims beneficial ownership of such shares.

(3) The business address for each such person is c/o Dyadic International, Inc., 140 Intracoastal Pointe Drive, Suite 404, Jupiter, Florida 33477.
 
(4) Represents (i) 141,000 shares of common stock issuable upon the exercise of stock options; and (ii) 24,437 restricted shares held by Mr. Brooks.

(5) Represents 190,000 shares of common stock issuable upon the exercise of stock options.

(6) Represents (i) 63,611 shares held by Frank P. Gerardi; (ii) 94,008  shares of common stock issuable upon the conversion of convertible debt and related accrued interest; and (iii) 73,488 shares issuable upon the exercise of stock options.

(7) Represents (i) 480,000 shares held by Robert D.  Burke and (ii) 73,488 shares of common stock issuable upon the exercise of stock options.

(8) Represents (i) 215,000 shares held by Seth J. Herbst; and (ii) 105,438 shares of common stock issuable upon the exercise of stock options.

(9) Represents (i) 300,000 shares held by Stephen H. Warner; and (ii) 73488 shares of common stock issuable upon the exercise of stock options.
Item 5. Directors and Executive Officers

The following table provides information regarding our executive officers and certain key employees, and directors as of August 14, 2014:

Name
 
Age
 
Position(s)
Director Since
 
  
 
  
Mark A. Emalfarb(3)
 
59
 
Chairman, President, Chief Executive Officer
2004
Danai E. Brooks
 
37
 
Executive Vice President and Chief Operating Officer
---
Thomas L. Dubinski
 
58
 
Vice President and Chief Financial Officer
---
Michael J. Faby
 
48
 
Vice President, Finance
---
Richard H. Jundzil
 
42
 
Vice President, Operations
---
Thomas M. O’Shaughnessy
 
54
 
Vice President, Sales and Marketing
---
Wim van der Wilden
 
64
 
General Manager, Dyadic Netherlands
---
Frank P. Gerardi(1)(2)
 
68
 
Director
2008
Robert D. Burke, MD(1)(2)
 
57
 
Director
2008
Seth J. Herbst, MD(3)(4)
 
56
 
Director
2008
Stephen J. Warner (1)(4)
 
74
 
Director
2004
Michael P. Tarnok(1)(2)
 
59
 
Director
2014
 
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
(4) Member of the Conflicts Committee.
 
EXECUTIVE OFFICERS
Mark A. Emalfarb, President, Chief Executive Officer and Chairman of the Board of Directors
 
Mark A. Emalfarb is the founder of Dyadic and currently serves as President, Chief Executive Officer and Chairman of our Board of Directors.  He has been a member of Dyadic’s board of directors since inception, excluding a leave of absence from April 23, 2007 to September 6, 2007. Mr. Emalfarb has served as Dyadic’s Chairman as well as President and Chief Executive Officer from October 2004 until April 2007, and from June 2008 until the present.  Since founding Dyadic in 1979, Mr. Emalfarb has successfully led and managed the evolution of Dyadic from its origins as a pioneer and leader in providing ingredients used in the stone-washing of blue jeans to the discovery, development, manufacturing and commercialization of specialty enzymes used in various industrial applications and the development of an integrated technology platform based on Dyadic’s patented and proprietary C1 fungal microorganism.  Mr. Emalfarb is an inventor of over 26 U.S. and foreign biotechnology patents and patent applications resulting from discoveries related to the Company’s patented and proprietary C1 fungus, and has been the architect behind its formation of several strategic licensing, R&D, manufacturing and marketing relationships with U.S. and international partners.  Mr. Emalfarb earned his B.A. degree from the University of Iowa in 1977. We believe that Mr. Emalfarb is qualified to serve on our board of directors due to his scientific expertise and his experience as the founder of Dyadic.
 
Danai E. Brooks, Executive Vice President and Chief Operating Officer
 
Danai E. Brooks joined Dyadic in June 2013 as our Executive Vice President and Chief Operating Officer.  Prior to Dyadic, Mr. Brooks served as Vice President in J.P. Morgan’s investment bank.  While at J.P. Morgan, Mr. Brooks advised clients across a broad spectrum of sectors, including chemicals, renewable energy and industrials.  He has also held senior operational, engineering and manufacturing positions with Dell Inc., Mars Inc. and Ford Motor Company.  Mr. Brooks started his career as an industrial engineer at Ford Motor Company, where he worked in vehicle operations, new product launch and production supervision roles.  At Dell, Mr. Brooks was an Operations Manager in charge of the production and assembly of servers and desktops.  While at Mars, he led efforts to implement lean manufacturing in their North American facilities.  Mr. Brooks received a B.S. in Industrial Engineering and Master of Engineering from Cornell University in 1999, a Master of Engineering Management from Northwestern University and an MBA from Northwestern’s Kellogg School of Management in 2006.
 
Thomas L. Dubinski, Vice President and Chief Financial Officer
 
Thomas L. Dubinski joined Dyadic in August 2014 as our Vice President and Chief Financial Officer.  Mr. Dubinski has held various financial positions of increasing responsibility in the healthcare and biotechnology industries.  Prior to Dyadic, Mr. Dubinski served as a management consultant where he advised public and private clients on financial strategy and operations.  He has also held
senior finance and accounting positions at Walgreens, Novartis Medical Nutrition, MTS and Abbott Laboratories.  Mr. Dubinski earned his B.S. degree in Accounting from the University of Illinois, Urbana-Champaign and he is a certified public accountant in the state of Illinois.
 
Michael J. Faby, Vice President, Finance
 
Michael J. Faby has been Dyadic’s Vice President of Finance since joining the Company in December 2009 and was Chief Financial Officer from February 2012 to August 2014. Mr. Faby has over 24 years of financial, accounting and operational experience.  Prior to joining the Company, he served in various financial capacities of increasing responsibility for Perry Slingsby Systems, Inc. (f/k/a Perry Tritech Inc.), a multi-national designer and manufacturer of remotely operated vehicles for the international offshore oil and gas, telecommunications, military and defense industries including, most recently, as its Chief Financial Officer.  Mr. Faby is also a member of the board of directors for the Palm Beach County Workforce Alliance.  Mr. Faby earned his B.S degree in accounting from Florida State University in 1988 and an MBA from the Florida Institute of Technology.  Mr. Faby is a certified public accountant in Florida and a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants.
 
Richard H. Jundzil, Vice President, Operations
 
Richard H. Jundzil has been Dyadic’s Vice President of Operations since May 2010, Director of Development & Quality since September 2008 and has held various laboratory, quality and regulatory positions of increasing responsibility since joining the company in August 2003.  Mr. Jundzil has over 20 years of quality and operations experience in the biotechnology industry.  He is also able to use his significant experience in process engineering and project management in the management of Dyadic’s production and distribution of industrial enzyme products.  Prior to joining Dyadic, Mr. Jundzil worked for 10 years at Genzyme Corporation as both a researcher and process engineer producing enzymes for patients with rare genetic diseases.  Mr. Jundzil earned a certificate as a Biotechnology Technician from Middlesex College in 1993 and also studied biomedical/clinical sciences at Boston University and earned a B.S. degree in Quality Systems Management from The National Graduate School.
 
Thomas M. O’Shaughnessy, Vice President, Sales and Marketing
 
Thomas M. O’Shaughnessy has been Dyadic’s Vice President of Sales & Marketing since joining the company in May 2010.  Mr. O’Shaughnessy has over 23 years of sales, marketing and business development experience in the chemical industry.  He began his career with the General Electric Company where he spent 12 years in various sales and marketing positions of increasing responsibility and leadership.  From 1996 to 2002, he served as Business Development Manager at Occidental Chemical Corporation, one of the largest chemical companies in the United States.  For the past eight years prior to joining the Company, Mr. O’Shaughnessy served as the Global Business Manager for Momentive Specialty Chemicals (formerly Hexion Specialty Chemicals), the world’s largest producer of thermosetting resins, performance adhesives, UV-curable coatings and the building-block chemical, formaldehyde, for various wood and industrial markets.  He is Six Sigma certified and earned a B.S. degree in computer sciences with a minor in marketing from Plattsburgh State University in 1982.
 
KEY CONSULTANT
 
Wim van der Wilden, General Manager, Dyadic Netherlands
 
Wim van der Wilden has been General Manager of Dyadic Netherlands since its founding in 2002 and leads our R&D operations. Dr. Wilden serves as a full-time consultant to Dyadic. Prior to joining Dyadic, he worked at The Netherlands Organization for Applied Scientific Research (TNO) as Director of the Food and Biotechnology division and Director of Marketing and Sales.  Prior to TNO, he co-founded Cosmoferm, a spin-off company of Gist-brocades, which was acquired by Evonik in 1998.  Dr. van der Wilden began his career in the industry at Gist-brocades (later part of DSM), where he held senior level positions in charge of R&D for Baking and Pharmaceuticals.  Dr. van der Wilden received a B.S. in Biology and Chemistry from Wageningen University in the Netherlands in 1973 and a PhD at ETH-Zurich, Switzerland in 1977.  He performed his post-doctoral studies at the University of California San Diego and Ruhr-Universitat Bochum in Germany.  Dr. van der Wilden is also active as Business Director of the Kluyver Centre for Genomics and Industrial Fermentation and a member of the International Nomenclature Committee of the Personal Care Products Council.
 
NON-EMPLOYEE DIRECTORS
 
Robert D. Burke, MD, Director
 
Robert D. Burke, MD has been on Dyadic’s board of directors since June 2008 and is a board certified neuroradiologist.  Dr. Burke is the founder and, from 1991 until July 2008, was the President of Midtown Imaging, LLC, an imaging center with multiple locations throughout Palm Beach County, Florida.  From 1994 to 1996, Dr. Burke was the co-Founder and President of U.S. Diagnostic Inc., a publicly traded national diagnostic imaging company.  Dr. Burke is on the board of directors of Stonegate Bank, a publicly traded bank serving Southeast Florida.  Dr. Burke also serves on the board of directors and is the President of the Palm Beach
County Chapter of the Leukemia & Lymphoma Society.  He is also a member of the Scripps Clinic and Research Foundations Board of Scripps Florida.  Dr. Burke earned his B.A. degree from the University of Louisville in 1977 and his medical degree from the University of Louisville School of Medicine in 1981.  Dr. Burke completed his radiology residency at the University of Chicago and a fellowship in neuroradiology at the University of Rochester.  We believe that Dr. Burke is qualified to serve on our board of directors due to his experience in the biotechnology and life science industries and as an entrepreneur executive and board member of publicly traded companies.
 
Frank P. Gerardi, Director
 
Frank P. Gerardi has been on Dyadic’s board of directors since June 2008.  From February 2007 to the present, Mr. Gerardi has been a managing partner at QuantWorks, LLC, a registered investment advisor.  From June 2003 to December 2006, Mr. Gerardi was the Chief Executive Officer of IGI, Inc. (now known as IGI Laboratories, Inc.), a public company that engages in the development, manufacture, filling, and packaging of topical, semi-solid, and liquid products for pharmaceutical, cosmeceutical, and cosmetic companies.  Since 1986, he has also served as the President of Univest Management, Inc., a private management consulting company.  Mr. Gerardi was a member of the New York Stock Exchange from 1969 to 1986.  Mr. Gerardi has served on the boards of numerous New York Stock Exchange member firms and was a registered principal with the National Association of Securities Dealers (NASD). We believe that Mr. Gerardi is qualified to serve on our board of directors due to his experience in the pharmaceutical and biotechnology industries and his service on the board of other poublicly traded comapies.
 
Seth J. Herbst, MD, Director
 
Seth J. Herbst, MD has been on Dyadic’s board of directors since June 2008 and is a board certified obstetrician/gynecologist who is also board certified in advanced laparoscopic and minimally invasive gynecologic surgery.  Dr. Herbst is the founder and President of the Institute for Women’s Health and Body, an OB/GYN practice with multiple locations in Palm Beach County, Florida.  He is the co-founder of Visions Clinical Research, which performs medical and surgical clinical trials throughout the United States.  Dr. Herbst is also a consultant for multiple medical device companies in the United States and a member of medical advisory boards for these and other companies.  He received his B.S. degree from American University in 1978 and his medical degree from Universidad del Noreste School of Medicine in Tampico, Mexico in 1983.  Dr. Herbst completed his OB/GYN residency and was Chief Resident at Long Island College Hospital in Brooklyn, New York. We believe Dr. Herbst is qualified to serve on our board of directors due to his scientific experties and extensive research experience.
 
Stephen J. Warner, Director
 
Stephen J. Warner has been on Dyadic’s board of directors since October 2004, and a director of the Company’s wholly owned subsidiary, Dyadic International (USA), Inc. since August 2004.  From June 2010 through February 2012, Mr. Warner served as the Chief Financial Officer of Gulfstar Energy Corporation, a public and, later, private oil and gas production company based in Kentucky.  Since 2012, he has been a Managing Member and Chief Financial Officer of Search Automotive Technologies, LLC, a Florida based automotive aftermarket company.  Mr. Warner has over 30 years of venture capital experience.  In 1981, Mr. Warner founded Merrill Lynch Venture Capital Inc., a wholly owned subsidiary of Merrill Lynch & Co. Inc. in New York, and served as its President and Chief Executive Officer from 1981 to 1990.  Under his leadership, Merrill Lynch Venture Capital managed over $250 million and made over 50 venture capital investments.  From 1999 until 2004, Mr. Warner co-founded and served as Chairman and Chief Executive Officer of Crossbow Ventures Inc., a venture capital and private equity fund that invested in early and expansion stage technology companies primarily located in Florida and the Southeast, with over 20 venture capital investments in Florida.  Mr. Warner is on the board of directors of Brookhaven Medical, Inc., a private, Atlanta based medical device company.  Mr. Warner earned a B.S. degree from the Massachusetts Institute of Technology in 1962, an MBA from the Wharton School of Business at the University of Pennsylvania in 1966, an LLB from the Blackstone School of Law (Correspondence) in 1967. We believe that Mr. Warner is qualified to serve on our board of director due to his experience in the various industries as a venture capitalist and his service on the baord of other biotechnology companies.
 
Michael P. Tarnok, Director
 
Michael Tarnok has been on Dyadic’s board of directors since June 2014.  He is the current Chairman and former Interim CEO of Keryx Biopharmaceuticals, Inc., a biotechnology company focused on the development of therapeutics for renal disease.  Prior to joining Keryx in 2007, Mr. Tarnok spent the majority of his career at Pfizer Inc., joining in 1989 as Director of Finance for U.S. Manufacturing.  From 2000-2007, he served as Senior Vice President in Pfizer's U.S. Pharmaceuticals Division.  Prior to joining Pfizer, he worked primarily in financial disciplines for ITT Rayonier, Inc., Celanese Corporation, and Olivetti Corporation of America.  Mr. Tarnok earned an MBA in marketing from New York University and a Bachelors of Science in accounting from St. John's University.  He also serves on the Board of the Global Health Counsel, a Washington, D.C.-based NGO. We believe that Mr. Tarnok is qualified to serve on our board of directors due to his substantial leadership experience in the biotechnology industry.
 
Involvement in Certain Legal Proceedings
 
None of our directors or executive officers have been convicted in any criminal proceeding during the past 10 years and none of them have been parties to any judicial or administrative proceeding during the past 10 years that resulted in a judgment, decree or final order enjoining them from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws or commodities laws. Similarly, no bankruptcy petitions have been filed by or against
any business or property of any of our directors or officers, nor has any bankruptcy petition been filed against a partnership or business association in which these persons were general partners, directors or executive officers, except that Dr. Herbst was a partner in a company called Physician Billing Solutions, Inc., which filed for bankruptcy protection under Chapter 7 in December 2007.
 
Related Party Relationships

There are no family relationships between or among any of our directors or executive officers.

There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

Board Committees

Our board of directors has four standing committees to assist it with its responsibilities. These committees are described below.

The Audit Committee, is governed by a board-approved charter that contains, among other things, the committee’s membership requirements and responsibilities. The Audit Committee oversees our accounting, financial reporting process, internal controls and audits, and consults with management and our independent registered public accounting firm on, among other items, matters related to the annual audit, the published financial statements and the accounting principles applied. As part of its duties, the Audit Committee appoints, evaluates and retains our independent registered public accounting firm. It maintains direct responsibility for the compensation, termination and oversight of our independent registered public accounting firm and evaluates its qualifications, performance and independence. The Audit Committee also monitors compliance with our policies on ethical business practices and reports on these items to the board of directors. The Audit Committee has established policies and procedures for the pre-approval of all services provided by our independent registered public accounting firm. Our Audit Committee is comprised of Messrs. Gerardi, Burke, Warner and Tarnok. Mr. Gerardi is the Chairman of the Audit Committee.

The board of directors has determined that Mr. Gerardi is the Audit Committee financial expert, as defined under the Exchange Act. The board of directors made a qualitative assessment of Mr. Gerardi’s level of knowledge and experience based on a number of factors, including his experience serving on various corporate boards and financial sophistication from his years managing public companies and investment funds. The audit committee has engaged the consulting services of Sunera LLC which it has determined is an audit committee financial expert. All members of the committee understand financial statements.

The Compensation Committee, determines all compensation for our Chief Executive Officer; reviews and approves corporate goals relevant to the compensation of our Chief Executive Officer and evaluates our Chief Executive Officer’s performance in light of those goals and objectives; reviews and approves objectives relevant to other executive officer compensation; reviews and approves the compensation of other executive officers in accordance with those objectives; administers our stock option plan; approves severance arrangements and other applicable agreements for executive officers; and consults generally with management on matters concerning executive compensation and on pension, savings and welfare benefit plans where board of directors or stockholder action is contemplated with respect to the adoption of or amendments to such plans. The Compensation Committee makes recommendations on organization, succession, the election of officers, consultantships and similar matters where board of directors approval is required. Our Compensation Committee is comprised of Messrs. Burke, Gerardi and Tarnok. Dr. Burke is the Chairman of the Compensation Committee.

The Nominating Committee considers and makes recommendations on matters related to the practices, policies and procedures of the board of directors and takes a leadership role in shaping our corporate governance. The Nominating Committee’s functions include: establishing criteria for the selection of new directors to serve on the board of directors; identifying individuals believed to be qualified as candidates to serve on board of directors; recommending for selection by the board of directors the candidates for all directorships to be filled by the board of directors or by the stockholders at an annual or special meeting; reviewing the board of directors committee structure and recommending to the Board the directors to serve on the committees of the board of directors; recommending members of the board of directors to serve as the respective chairs of the committees of the board of directors; developing and recommending to the board of directors, for its approval, an annual self-evaluation process of the board of directors and its committees and, based on those results, making recommendations to the board of directors regarding those board of directors processes; and performing any other activities consistent with the committee’s charter, our bylaws and applicable law as the committee or the board of directors deems appropriate. The Nominating Committee does not currently have any formal minimum qualification requirements that must be met by a nominee to serve as a member of the board of directors. The Nominating Committee will take into account all factors it considers appropriate, which may include experience, accomplishments, education, diversity, understanding of the business, and the industries
in which we operate, specific skills, general business acumen and the highest personal and professional integrity. The Nominating Committee generally seeks individuals with broad experience at the policy-making level in business, or with particular industry expertise. The Nominating Committee currently has no fixed process for identifying new nominees for election as a director, thereby retaining the flexibility to adapt its process to the circumstances. The Nominating Committee has the ability, if it deems it necessary or appropriate, to retain the services of an independent search firm to identify new director candidates. The Nominating Committee has determined that it will give consideration to any potential candidate proposed by a member of our board of directors or senior management. Any director candidate so proposed will be personally interviewed by at least one member of the Nominating Committee and our Chief Executive Officer and their assessment of his or her qualifications will be provided to the full Nominating Committee.  The Nominating Committee uses the same criteria for evaluating candidates nominated by stockholders and self-nominated candidates as it does for those proposed by other board of directors members, management and search companies. Our Nominating Committee is comprised of Mr. Emalfarb and Dr. Herbst. Mr. Emalfarb is the chairman of the Nominating Committee.
 
The Conflicts Committee considers and makes recommendations on matters related to the practices, policies and procedures of the board of directors relating to conflicts of interest. The purpose of the Conflicts Committee is to assess, with the power and authority to resolve on behalf of the Company, all pending and future claims between the Company and any of Mark A. Emalfarb, the Company’s President and Chief Executive Officer, his children, and any and all trusts under which Mr. Emalfarb or any of his children is a beneficiary. Our Conflicts Committee is comprised of Messrs. Warner and Herbst. Mr. Warner is the chairman of the Conflicts Committee.

Board Independence

We are not currently listed on any national securities exchange that has a requirement that any members of the board of directors be independent. However, in evaluating the independence of its members and the composition of the committees of the board of directors, the board of directors utilizes the definition of “independence” as that term is defined by the rules promulgated by the SEC. We believe that Drs. Burke and Herbst as well as Messrs. Gerardi, Warner and Tarnok qualify as “independent” directors, as that term is defined by SEC rules.

Code of Conduct and Ethics

Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our chief executive officer, chief financial officer, and persons performing senior executive level functions. The Code of Business Conduct and Ethics is available at our website at www.dyadic.com.

Item 6. Executive Compensation

Philosophy and Objectives

The philosophy underlying our executive compensation program is to provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executive officers and other key employees necessary to deliver sustained high performance to our shareholders, customers, and communities where we have a strong presence. Our executive compensation program is an important component of these overall human resources policies. Equally important, we view compensation practices as a means for communicating our goals and standards of conduct and performance and for motivating and rewarding employees in relation to their achievements.  The organization’s executive compensation program is designed to:

· Encourage the attraction and retention of high-caliber executives.
· Provide a competitive total compensation package, including benefits.
· Reinforce the goals of the organization by supporting teamwork and collaboration.
· Ensure that pay is perceived to be fair and equitable.
· Be flexible to potentially reward individual accomplishments as well as organizational success.
· Ensure that the program is easy to explain, understand, and administer.
· Balance the needs of the both the Company and Employees to be competitive with the limits of available financial resources.
· Ensure that the program complies with state and federal legislation.

From time to time, Company will employ a reputable compensation specialist to determine whether its overall compensation practices and policies are appropriate for the specific market conditions for the Company and the industries in which it operates.
Employment Agreements
 
Mark A. Emalfarb

We entered into an Employment Agreement with Mr. Emalfarb dated as of October 23, 2013 (the “Emalfarb Employment Agreement”).  Pursuant to the Emalfarb Employment Agreement, Mr. Emalfarb has agreed to serve as our President and Chief Executive Officer.  The Emalfarb Employment Agreement has an initial term of three years and automatic renewals of two years at the end of each term, unless either party provides a notice of non-renewal.  Mr. Emalfarb’s base salary is $425,000 and he is eligible for a discretionary annual bonus.  Additionally, Mr. Emalfarb is entitled to a performance bonus equal to (i) 20% of the value of the first $4,000,000 of any new revenue streams generated by the Company during his employment, for a maximum of $800,000.  Mr. Emalfarb is also eligible to receive benefits at the same level as other similarly situated employees of the Company. Mr. Emalfarb has agreed to certain restrictive covenants, including non-disclosure, non-solicitation for three years following termination of employment and non-competition for three years following termination of employment.

Upon a termination by the Company without cause or a resignation by Mr. Emalfarb for good reason, in each case as defined in the Emalfarb Employment Agreement, subject to his timely execution of a release of claims in favor of the Company, Mr. Emalfarb will be entitled to the following severance benefits: (i) continued payment of his base salary and provision of other benefits for a period of three years following termination of employment and (ii) full vesting acceleration of all stock options.

Danai E. Brooks

We entered into an Employment Agreement with Mr. Brooks dated as of April 29, 2013 (the “Brooks Employment Agreement”).  Pursuant to the Brooks Employment Agreement, Mr. Brooks has agreed to serve as our Executive Vice President and Chief Operating Officer.  The Brooks Employment Agreement does not have a specific term, but will renew daily such that it remains effective for a 12 month period at all times, unless we or Mr. Brooks provides notice of non-renewal.  Mr. Brooks’ base salary is $275,000 and he is eligible for an annual target bonus of up to 40% of his base salary. On April 29, 2013, in accordance with the terms of the Brooks Employment Agreement, our compensation committee of the board of directors granted Mr. Brooks (i) an option to purchase 400,000 shares of common stock at an exercise price of $1.83 per share that vests as to 1/48 of the shares subject to the option each monthly anniversary of the date Mr. Brooks commenced employment with us (the “Brooks Start Date”), subject to his continued service through each vesting date; and (ii) 69,000 restricted stock units that vests as to 1/36 of the restricted stock units each monthly anniversary of the Brooks Start Date, subject to his continued service through each vesting date. Under the Brooks Employment Agreement, Mr. Brooks is entitled to a retention bonus of $100,000 that is paid 50% on each of the first and second anniversaries of the Brooks Start Date.  Mr. Brooks is also eligible to receive benefits at the same level as other similarly situated employees of the Company. Mr. Brooks has agreed to certain restrictive covenants, including non-disclosure for three years following termination of employment, non-solicitation for one year following termination of employment and non-competition for one year following termination of employment.

Upon a change of control of the company, as defined in the Brooks Employment Agreement, if Mr. Brook’s is still employed by the Company, he is entitled to (i) full vesting acceleration on all outstanding equity awards and (ii) a lump sum payment within 30 days of the closing of the change in control in an amount equal to the sum of one year of base salary and annual target bonus (assuming 100% satisfaction of all performance goals), in each case in effect for the year of the change of control.

Upon a termination by the Company without cause or a resignation by Mr. Brooks for good reason, in each case as defined in the Brooks Employment Agreement, subject to his timely execution of a release of claims in favor of the Company, Mr. Brooks will be entitled to the following severance benefits: (i) payment of full annual bonus potential for the year prior to termination and the year of termination; (ii) one year of base salary paid in 12 monthly installments; (iii) 12 months of Company-paid COBRA premiums.

Additionally, if the Company enters into a Transaction Agreement (as defined in the Brooks Employment Agreement) during Mr. Brooks employment or during the three month period following a termination without cause or a resignation for good reason, Mr. Brooks shall receive the following: (i) 2% of the aggregate licensing fee and technology transfer and/or access fees, paid in a lump sum within 30 days of the Company’s receipt of payment and (ii) if the Company forms a joint venture and the other entity contributes capital in the form of cash to the joint venture, 2% of such cash capital contribution paid in a single lump sum within 30 days of such capital contribution.

Richard H. Jundzil

We entered into an Employment Agreement with Mr. Jundzil dated as of June 1, 2011 (the “Jundzil Employment Agreement”).  Pursuant to the Jundzil Employment Agreement, Mr. Jundzil has agreed to serve as our Vice President Operations.  The Jundzil Employment Agreement does not have a specific term, but will renew daily such that it remains effective for a twelve (12)-month period at all time, unless we or Mr. Jundzil provides notice of non-renewal.  Mr. Jundzil’s base salary is $206,000 and
he is eligible for an annual target bonus of up to 40% of his base salary.  Mr. Jundzil is also eligible to receive benefits at the same level as other similarly situated employees of the Company. Mr. Jundzil has agreed to certain restrictive covenants, including non-disclosure for three years following termination of employment, non-solicitation for two years following termination of employment and non-competion for one year following termination of employment.
 
Upon a termination by the Company without cause, as defined in the Jundzil Employment Agreement, subject to his timely execution of a release of claims in favor of the Company, Mr. Jundzil will be entitled to the following severance benefits: (i) pro rata annual bonus for the year of termination based on actual achievement and (ii) one year of base salary paid in twelve monthly installments.

Summary Compensation Table

The following table sets forth information regarding compensation earned by our principal executive officer and two other most highly compensated executive officers who were serving as executive officers at the end of 2013 (collectively, the “Named Executive Officers”).

Summary Compensation Table

Name and Principal
Position
Year
 
Salary
($)
   
Bonus
($)(1)
   
Stock
Awards
($)(2)
   
Option
Awards
($)(3)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)(4)
   
Total
($)
 
(a)
(b)
 
(c)
   
(d)
   
(e)
   
(f)
   
(g)
   
(h)
   
(i)
   
(j)
 
Mark A. Emalfarb(*)(5)
2013
 
$
385,417
     
-
     
-
     
-
     
-
     
-
   
$
15,586
   
$
401,003
 
 
 
                                                               
Danai E. Brooks
2013
 
$
160,417
   
$
35,000
   
$
133,170
   
$
536,000
     
-
     
-
     
-
   
$
864,587
 
 
 
                                                               
Richard H. Jundzil
2013
 
$
200,000
   
$
25,000
     
-
     
-
     
-
     
-
     
-
   
$
225,000
 

(*)  Mr. Emalfarb also serves as Chairman to the Board of Directors for which he receives no direct, indirect or incremental compensation.
(1) The bonuses in the column paid to Mr. Brooks and Mr. Jundzil were earned in 2013, but paid in April, 2014.
(2) This column represents the aggregate grant date fair value of the stock awards granted in 2013, in accordance with FASB ASC Topic 718.  These amounts do not correspond to the actual value that will be recognized by the named executive officers. The assumptions used in the valuation of these awards are consistent with the valuation methodologies specified in the notes to our consolidated financial statements.
(3) This column represents the grant date fair market value of each option granted in 2013, computed in accordance with FASB ASC Topic 718. These amounts do not correspond to the actual value that will be recognized by the named executive officers. The assumptions used in the valuation of these awards are consistent with the valuation methodologies specified in the notes to our consolidated financial statements.
(4) The compensation paid to Mr. Emalfarb represents the sum of $12,891 for a car allowance and $2,695 for fuel reimbursement.
(5) Bonuses are normally given on a discretionary basis, however, given current liquidity, the Board of Directors decided not award Mr. Emalfarb a bonus for 2013.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity award holdings held by the Named Executive Officers at December 31, 2013.
 
Outstanding Equity Awards at Fiscal Year-End

 
 
Option Awards
 
Stock Awards
 
 
 
Number of
Securities
Underlying
Unexercised
Options
   
Number of
Securities
Underlying
Unexercised
Options
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
   
Option
Exercise
 
Option
 
Number
of
Shares
or Units
of
Stock
That
Have
Not
   
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
   
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
   
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
 
Name
 
(#)
Exercisable
   
(#)
Unexercisable
   
Options
(#)
   
Price
($)
 
Expiration
Date
 
Vested
(#)
   
Vested
($)
   
Vested
(#)
   
Vested
($)