September 23, 2014

management | biotech

Company's Debacle Is Lesson for Executives

A Matter of Chemistry: Dyadic, a once promising biotech company, was left teetering after problem involving a relatively unimportant subsidiary.

Mike Vogel | 9/1/2009

The cell phone in Mark Emalfarb’s pocket rang on a Saturday afternoon in 2007 as he stood in a parking lot in Palm Beach Gardens where he was condo shopping with his wife. On the phone were the directors and legal counsel for Dyadic International. As founder, chairman and CEO of the Jupiter-based company, Emalfarb was stunned to find out his board was meeting without him. More shocks lay ahead. The board members had unpleasant questions.

Mark Emalfarb
Things started to unravel for Dyadic founder Mark Emalfarb after his board got wind of mismanagement at a subsidiary in China. [Photo: Matt Dean]

Within days, the company’s outside legal counsel talked him into a leave of absence while the company conducted an investigation into troubling financial revelations about a Dyadic subsidiary called Puridet based in Hong Kong. Within months, the company released a 500-page report that suggested Emalfarb was a liar who covered up accounting mischief at the Chinese firm.

Emalfarb, however, did not fade quietly into the ranks of disgraced CEOs whose careers and companies foundered amid allegations of cooked books. Emalfarb didn’t fade at all, launching a court and shareholder fight that has put him back in control. Or, as he sums up his contest against those who ousted him, "F.U. I’m back."

A University of Iowa journalism major whose family was in the landscape stone business, Emalfarb founded Dyadic in 1979 and became a supplier of pumice for stonewashing to makers of jeans. When textile companies turned to enzymes — proteins that speed up other chemical reactions — to create stonewashed denim, Emalfarb knew his pumice-supplier days were numbered. He traveled to Russia, where scientific talent came cheap, to secure his own proprietary enzymes from a fungus. "Jeans to genes," he liked to say. He set up a research arm in The Netherlands, Jupiter and Greensboro, N.C., production in Poland, distribution in China and his home in Jupiter.

While breeding the fungus to be more productive, Dyadic’s scientists lucked into a mutation that enables it to produce many more enzymes at a lower cost for sale to the textile, brewery, animal feed and paper industries. Dyadic’s $16 million in annual revenue made it only a bit player in the $3-billion industrial enzyme industry. But Emalfarb wanted the company to be a star. He believed that Dyadic’s fungus could save money in the development of everything from drugs to cellulosic ethanol, the Holy Grail of ethanol.

Bad investment

When Gov. Jeb Bush in 2003 enticed the Scripps Research Institute to open a campus in Emalfarb’s back yard, Emalfarb pounced. He convinced Scripps’ chief, Richard Lerner, to chair Dyadic’s scientific advisory board, a position Lerner still holds. Emalfarb, nothing if not a relentless booster, positioned his tiny company as the "poster child" of an emerging industry and himself as biotech advocate. "To my mind, he was the classic entrepreneur, the guy who lives, eats and sleeps his business," says Stephen Warner, a co-founder and managing director of venture capital firm CrossBow Ventures in West Palm Beach.

Richard Lerner and Mark Emalfarb
Mark Emalfarb (right) convinced the president of Scripps, Richard Lerner (left), to chair Dyadic’s scientific advisory board. Lerner still holds that position, five years later. [Photo: Dyadic]
Emalfarb readied the company to go public. Meanwhile, since 1998, he had been increasing Dyadic’s investment in and control of Puridet, a Hong Kong-based enzyme company with a mainland China subsidiary. Puridet was run by Robert Smeaton, a hard-drinking Australian well-schooled in the way business is often done in China. Judging from an e-mail trail and letters written by subordinates, Smeaton saw Emalfarb as naive about Puridet’s business practices and as someone best kept in the dark. Meanwhile, Puridet struggled. It accounted for 40% of Dyadic’s revenue, but no profits.

In December 2003, roughly a year before Dyadic went public, Emalfarb received a long anonymous e-mail from an unhappy employee warning him that employees in China were ripping Dyadic off and making a passing reference to it boosting revenue by passing cash sales — from customers who wanted to avoid local taxes — through a dummy company.

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