Amyris: Darkest Before The Dawn (NASDAQ:AMRS)

Amyris’ (NASDAQ:AMRS) problems have continued in recent weeks, with the strategic transaction slated for Q4 2022 pushing out into 2023 and as a result, outside financing being required to fund the business in the meantime. Management continues to point towards robust growth and a rapidly improving cost structure as reasons to remain optimistic, but investor confidence likely won’t improve until the company has demonstrated a clear path to self-financing.

Aprinnova Deal

On December 15^th 2022 Amyris entered into an agreement to purchase 39 shares of Aprinnova from Nikko and 10 shares from Nissa (representing 49% of the outstanding membership interests in Aprinnova) for 49 million USD cash. The closing of the transaction will occur within 60 days (13^th February 2023). This deal was likely necessary to clear the way for the strategic transaction, which probably involves squalane and hemisqualane.

Strategic Transaction

Amyris had been expecting a licensing deal for 2 molecules to close in the fourth quarter, for 350 million USD upfront cash and 500 million USD total deal value. Given the volatile macro environment and tightening financial conditions, relying on this deal timeline was risky and arguably became a mistake that was costly to shareholders in my view. While the deal still appears to be on track, Amyris appears to have been caught by the need for an anti-trust review period before the deal can close.

Potentially related to the bungling of the strategic transaction, Amyris appears to have fired their Chief Legal Officer on the 16^th December 2022. Given that this occurred after the Aprinnova transaction but before the announcement of the HSR related delay to the strategic transaction, it is not clear what Amyris knew or when.

There remains some confusion amongst investors over the status of the deal due to a lack of communication from Amyris. Management stated that they have completed the negotiation of key financial and business terms and that the transaction is subject to antitrust review under the Hart-Scott-Rodino Act with a standard waiting period of thirty days. The parties must not close the deal until the waiting period has passed or the government has granted early termination of the waiting period.

A premerger notification must be filed, with both the buyer and seller required to file forms and provide data about the industry and their own businesses. It is not certain when or if the filing has occurred, although CEO John Melo stated on the 11^th of January 2023 that they are currently working through the HSR review. Amyris now expects the deal to sign and close early in the first quarter of 2023, although it is not clear when Amyris will receive any cash.

Amyris also expects to enter a long-term R&D collaboration partnership with the counterparty for the development of new molecules. While this has been presented as a positive, it is possible Amyris has been forced to offer attractively priced R&D services to help sweeten the deal.

Financing

Amyris’ lack of a cash buffer and the sudden delay to the strategic transaction appears to have left the company desperate for additional cash over the Christmas / New Year period. Amyris raised approximately 50 million USD by issuing 33.3 million shares along with warrants that could result in the issuance of an additional 25 million shares (this would result in an additional 45 million USD cash for Amyris). While this was disappointing and completely avoidable, it doesn’t materially impact the potential returns of the stock.

Growth

Amyris continues to grow at a reasonably rapid pace, although far below management’s prior guidance. The end of year sales period appears to have gone well, with Biossance expected to achieve its first month of 20 million USD in retail sales in November. The next top three selling brands (JVN, Rose Inc and MenoLabs) after Biossance, grew their combined DTC revenue more than 400% versus last year’s Black Friday week. Amyris consumer brands achieved 80% YoY growth in the DTC channel during the 2022 Cyber Monday shopping event.

John Melo recently stated that YoY consumer revenue growth was slightly under 100% in Q4 and QoQ consumer revenue growth was approximately 25%. It should be noted that these figures are not really consistent, with the YoY figure representing something under 64 million USD consumer revenue in Q4 and the QoQ figure representing something like 58 million USD consumer revenue. Melo also stated that core revenue grew more than 40% in Q4, which implies that Q4 core revenue should be above 99.5 million USD and in line with prior guidance.

While no revenue numbers were given for the ingredients business, Melo stated that the 3 large lines at Barra Bonita were running in Q4 and that the ingredient business is sold out for 2023. The 2 small lines (40,000 L) at Barra Bonita are not operational yet, with the purported reason being that Amyris has not had molecules that made sense for the smaller lines. A new ingredient for the cosmetics industry is expected to be produced on one of the small lines in Q1 2023.

Cash Burn

Given Amyris’ razor thin cash buffer, cash burn will remain a concern, even after the closing of the strategic transaction. Amyris recently suggested that cash usage will decline by approximately 440 million USD in 2023, with the improvements backloaded in the year.

Amyris finished Q3 2022 with approximately 18.5 million USD and received 100 million USD from DSM in the quarter, which probably puts cash burn for the fourth quarter somewhere around 115-120 million USD. A significant improvement both QoQ and YoY.

Gross profit margins in the consumer business are improving, driven by a restructuring of Amyris’ supply chain. The cost of components is 30% lower in Brazil, and the total reduction in consumer COGS is expected to be around 50%. The consumer business has received an unduly large amount of criticism from investors, but as bad as it has been over the past 12 months, it has still been far better than the ingredients business. Melo recently suggested that on a direct spend basis the consumer business lost less than 10 million USD in the fourth quarter. I think this figure is somewhat meaningless though, as the phrase direct spend likely implies that a large amount of costs are being excluded.

The margin profile of the ingredients business should also improve significantly over the next 12 months as supply chain costs normalize and Amyris shifts production to Brazil. Amyris has done an extremely poor job of communicating their supply chain issues over the past 18 months, but recently highlighted that energy costs in Spain increased 6x, resulting in a 3-4x increase in unit production costs. This is an issue I have highlighted previously, although these numbers are even worse than I had estimated. Ingredient gross margins in Spain have therefore likely been well below -100%, even before considering elevated shipping costs.

While ingredient margins will improve, it should be noted that the strategic transaction will likely undermine the economics of the business somewhat going forward. The strategic partner is not giving Amyris money for nothing, and a substantial portion of Amyris’ ingredients business will now be tied up producing low-margin molecules for partners.

In addition to supply chain normalization and Amyris’ fit-to-win initiatives, Amyris is also reducing their executive team by about 30%. This, in combination with lower CapEx and working capital requirements, is expected to reduce net cash usage to 150-200 million USD in 2023.

These estimates are aggressive though, particularly the amount of expected operating leverage which would likely require in excess of 250 million USD revenue growth. Amyris is also expecting reduced inventory to be a source of cash, but it is hard to reduce inventory in a rapidly growing business. Accounts payable have also been increasing rapidly, which is likely not sustainable. Higher than expected cash burn again raises the specter of management failing to manage their cash balance appropriately. More conservatively, Amyris should be prepared to use in excess of 400 million USD cash in 2023, which would mean outside financing or another strategic transaction is required prior to the end of the year.

Amyris’ current cash balance is probably sufficient to fund operations until early February, at which point they will need the cash from the strategic transaction to fund operations and finance the Nikko deal.

Sources of Cash

After the Aprinnova and molecule licensing deals close in Q1, Amyris should have approximately 350 million USD to fund operations in 2023. There is also another strategic transaction (likely squalene as a vaccine adjuvant) long slated for 2023, with an expected value of 150 million USD.

Amyris also has a number of brands that could be divested, and based on Melo’s recent statements, I believe Amyris may choose to go down this path in 2023 / 2024. Amyris has grouped their consumer brands into category leaders and growth brands. Amyris expect their category leader brands to be profitable at a direct operating level by the end of 2023 and are targeting 3 USD revenue for every 1 USD of paid media spend. Amyris is targeting 20 million USD revenue from each of their growth brands in the next 24 months or they will exit them (presumably divest).

Amyris believes that their category leader brands are currently worth approximately 1.9 billion USD, with an annualized revenue run rate of around 230 million USD. In the current environment these value estimates are likely aggressive, although it is somewhat academic as they are unlikely to be divested if they are on the verge of profitability.

Management stated that they recognize that the consumer business does not always work, and that that is why the consumer portfolio has been split. This suggests that growth brands will be divested if they continue to drag on the company’s finances. While the growth brands are unlikely to be a large source of cash, they could likely generate in excess of 50 million USD and divestment would also reduce cash burn.

Amyris could also turn to outside financing if they can raise capital on more attractive terms. If Amyris can demonstrate a clear path to profitability, it would not be unreasonable for the company’s equity to be worth 2-3 billion USD in the next 1-2 years. In this scenario, only a small amount of dilution would be needed to bridge any cash shortfall before the company is self-sustaining.

Conclusion

Amyris’ business has been hit extremely hard by supply chain issues, which will dissipate in 2023, regardless of the management team. In addition to the two strategic transactions planned for 2023, Amyris will likely need another several hundred million USD before they are sustainably generating free cash flow. Some of this could come from brand sales and strategic transactions, but outside financing may also still be required. Amyris needs to demonstrate that they have a viable business before this point is reached again.