Abengoa Buys in to Dyadic's Technology: Should Investors Buy the Stock?
technology looks like the real deal. Does that make Dyadic
a good investment?
Dyadic International (PINK:DYAI)
announced yesterday that Abengoa (MCE:ABG, PINK:ABGOY)
has expanded its exclusive license agreement for a payment of $5.5
HistoryI last wrote about Dyadic back in October 2009, when I called it "A Stock to Avoid," based on the facts that the company
- was not then publishing financial statements,
- was unprofitable and had insufficient reserves when it had last published financials,
- had had a dispute with the SEC over security law violations, and
- I did not like their business plan, as I've long been
skeptical about the cost-effectiveness of cellulosic biofuels.
The AgreementI have not really looked at the stock since then, but thought it might be interesting to review, given the announcement.
The expansion of the Abengoa agreement is a validation for Dyadic's technology. The expanded license agreement allows Abengoa to "use Dyadic’s C1 platform technology to develop, manufacture and sell enzymes for use in second generation biorefining processes to convert biomass into sugars for the production of fuels, chemicals and/or power" worldwide. The previous agreement was limited to certain territories. In addition to the $5.5 million payment for the expansion,
Dyadic is entitled to receive royalties on the commercial production and use by Abengoa, its affiliates and third party sublicensees, as well as royalty fees on the sale of products by Abengoa and its affiliates. Abengoa will have the right to work with third party sublicensees to further develop C1 enzymes.Codexis (NASD:CDXS) also has a non-exclusive licensed agreement with Dyadic to use the C1 platform in a number of areas, although that is unlikely to lead to significant future revenues, as it was structured as a one-time payment.
According to Jeff Cianci, CEO and CFO of greentech-focused asset manager Green Science Partners, the announcement is big for Dyadic. "Abengoa really wants to roll out a lot of [cellulosic ethanol] plants. This should validate the technology for others."
Financial StrengthWhile the technology validation is great, the $5.5 million will also come in very handy.
Dyadic had revenues of $10.25M, and lost $4.74 million in 2011. With only $3.7M cash on hand at the end of 2011, the new cash should allow Dyadic the ability to operate for another year without raising funds from the market. They had raised $3M in convertible debt in 2011, and compensate management with millions of dollars worth of options at exercise prices well below the current share price. The associated dilution is probably the main reason for the stock price decline over the last few years.
Dyadic will release first quarter results and hold a conference call on May 10th. Given the payment from Abengoa, I would expect Dyadic to report something on the order of $14 million in current assets and a little over $4 million in current liabilities, if recent revenue and expense trends continue.
I don't think that will be enough to get them to profitability, but without the immediate need to raise funds, they may be able to do so without significant dilution, and it may not be necessary if the Abengoa agreement gives other players the confidence to adopt Dyadic's technology.
GovernanceThe Litigation, Claims and Assessments section of the annual report is quite long, and includes disputes with former auditors which the company lost in arbitration. The auditor's report contains no opinion on the company's internal controls. As a pink sheet company, Dyadic is not required to have such controls, but without them, I'd want to have a lot of confidence in management's honesty before I considered investing. The company's history of SEC rule violations and disputes with auditors may not be relevant, however: There has been a management change since the last time I covered the company. One of the legal disputes is with the former CEO.
ConclusionIn 2009, I thought Dyadic was toxic. Although much is improved, both in the company's reporting, and in validation of the technology. Cellulosic technology is also making headway, and I'm less pessimistic about it than I was three years ago. The company's balance sheet is not strong, but the $5.5 million from Abengoa will do a lot to remedy that.
Dyadic's technology in particular receives high praise from industry insiders. Jim Lane, Editor of Biofuels Digest, calls Dyadic "a company with a compelling technology platform whose time has come." Dyadic has interest from a reputable and well funded player in the biofuels industry, and may achieve outstanding revenue growth and earnings if commercialization is successful.
However, I don't expect cellulosic biofuels will ever be a high-margin industry. Just like first generation biofuels before them, I expect cellulosic biofuels to create their own commodity squeeze once they are successfully commercialized. Dyadic's technology licensing model might still be profitable in such an environment. Like most companies in the industry, they talk about applying their platform to produce higher value products, such as chemicals and pharmaceuticals.
Although technology enthusiasts may disagree, I see no reason to rush in. Picking a winning cellulosic technology always seemed like a chancy proposition to me, especially when there are simpler ways to get exposure to the potential for cellulosic biofuels. I still prefer to invest in the companies which own the feedstock, particularly Municipal Solid Waste. Waste Management (WM) is once again beginning to look attractive after a price decline on a disappointing first quarter.
Disclosure: Long WM
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