Facing pressure to carve out market share for cellulosic ethanol, company shenanigans -- like that of enzyme developer Dyadic International, which is imploding under the fallout of an alleged financial scandal -- could be a sign of what some key executives are willing to do to keep an edge.
"A lot of these small R&D companies have gone to technically creative ways of finding money," said Rick Kment, a biofuels analyst for research firm DTN.

The soap-opera-like situation in which Jupiter, Fla.-based Dyadic has found itself comes as no surprise to Kment.

Public scrutiny into Dyadic’s troubles took off in September, when the company fired its founder and CEO, Mark Emalfarb, and "requested" that he voluntarily resign from the board immediately. Dyadic blamed Emalfarb for "willfully" concealing a tax scandal at Puridet, a wholly owned Chinese subsidiary.

On Tuesday, Dyadic aired more dirty laundry, releasing details from an independent investigation by law firm Moscowitz & Moscowitz.

According to the investigation, Puridet’s largest customer, Pui Shing, actually is a dummy company that Puridet used -- along with others -- to collect product sales from numerous small cash-paying Chinese customers who wanted to avoid reporting the sales under Chinese tax laws.

The fabricated company represented about 25 percent, or $6.1 million, of Puridet’s reported 2006 net sales and about 33 percent, or $1.7 million, of Dyadic’s net accounts receivable.

The investigation also found that a second company, named South Dragon, also had been fabricated. South Dragon was Puridet’s largest customer before it stopped "buying" in July 2004, the same month sales to Pui Shing began.

According to the press release, the investigation alleges that Emalfarb was "aware of and condoned" the financial improprieties and even was involved in structuring one of the "dummy" customer entities.

Emalfarb could not be reach for comment. But relations between Emalfarb and Dyadic have hardly been friendly.  

Emalfarb, along with two hedge managers with stakes in Dyadic, have entered into a voting agreement that represents 52.4 percent of the company’s common stock, according to the South Florida Business Journals.  

According to a Feb. 12 letter filed with the SEC, those hedge funds, Pinnacle Fund and Knott Partners, call for Emalfarb to be given a contolling position on the board after Dyadic was delisted from the American Stock Exchange to the Pink Sheets after it failed to file financial reports and host its annual shareholders meeting.  

The company’s turmoil has also come with the onslaught of arbitration and lawsuits, including an arbitration proceeding from Emalfarb, who is seeking monetary damages for his alleged wrongful discharge and character defamation.

So what’s Dyadic to do? According to press releases, the company is pursuing a sale.

All the company’s troubles could well discourage potential buyers, but some buyers might overlook those issues if the technology is worth it, Kment said.

That’s because cellulosic-ethanol companies are in a heated race to establish themselves as the first players to the market.

Advocates contend that cellulosic ethanol -- ethanol from nonfood parts of crops, like wood chips, switchgrass and corn cobs -- could one day allow ethanol to meet a significant portion of the world’s fuel needs.

Enzymes, like the ones Dyadic are identifying and developing, are a key ingredient in converting cellulosic material into ethanol.

As Kment sees it, the ethanol industry will experience a shakeout of sorts in the next three to five years, leaving a few select winners in cellulosic technologies.

"Those who are late to market will have a huge disadvantage to getting the industry to conform to their technology or product," he said.

With such pressure, Kment sees how companies like Dyadic could be tempted into using unconventional -- if not downright illegal -- tactics to assure their future position.