Amyris - Earnings Call - Q2 2018

Transcript

Operator (participant)

Welcome to the Amyris Second Quarter 2018 conference call. This call is being broadcast live on the events page of the investors' section of Amyris' website at amyris.com. This call is the property of Amyris, and any recording, reproduction, or transmission of this call without the express written consent of Amyris is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the investors' section of Amyris' website. I would now like to turn the call over to Peter DeNardo, Director of Investor Relations and Corporate Communications.

Peter DeNardo (Director of Investor Relations and Corporate Communications)

Thank you, George. Good afternoon, and thank you for joining us today. With me today are John Melo, our Chief Executive Officer, and Kathy Valasek, our Chief Financial Officer. Please note that on this call you will hear discussions of non-GAAP financial measures, including gross margin figures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is contained in the summary financial information slides of the accompanying presentation or the news release distributed today, which is available at investors.amyris.com. The current report on Form 8-K, furnished with respect to our press release, is also available on our website as well as on the SEC's website at sec.gov. During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities and their anticipated financial impact on our business and financial results for 2018 and beyond.

These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed from time to time in filings Amyris makes with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties. Before we begin today, I'd like to note that included in our webcast is a slide presentation we will refer to in today's presentation. I'll now turn the call over to John Melo. John?

John Melo (CEO)

Thanks, Peter. Good afternoon, and thank you for joining us today. We've completed a very good first half in comparison to the first half of 2017 and a strong second quarter. We delivered much better revenue in the first half of 2018, much stronger gross margin, lower cost, and continued our improvement in net income. Our strategy of delivering strong, profitable growth is working, and we expect a very strong second half to build on the momentum of the first half. During our call, I will cover our year-to-date and second quarter business performance, progress on the execution of our strategic initiatives, and provide an outlook for the second half. Kathy will provide a financial update, and then we will both take your questions. Let me start with our business performance.

We delivered 8% revenue growth over the first quarter of 2018 and 15% growth over the second quarter of 2017 when you adjust for the vitamin E product sales that are now produced and supplied by DSM, no longer supplied or in the Amyris portfolio. Our first half of 2018 revenue is 48% better than the first half of 2017 when adjusting our vitamin E contract sold to DSM. This like-for-like improvement is a great example of the strong demand we are experiencing within our core product portfolio and a great testament to the strength of our strategy of focusing on the health and beauty markets and the simplification of our business model and product portfolio. In addition to the strong top-line performance, our gross margins and Adjusted EBITDA are also much improved over 2017.

Our Adjusted EBITDA is $4.7 million better in the second quarter of 2018 versus 2017, and our first half of 2018 is $9.7 million better. Our gross profit has also improved significantly from the first half of 2017. First half of 2017, we had 19% non-GAAP gross margin. In the first half of 2018, we are at 84% non-GAAP gross margin. The second quarter also at the 84% gross margin level. We delivered most of this first half performance on the back of our clean beauty business, the value share/royalty payments, and collaborations. Most of our ingredient shipments, all of our sweetener revenue, and our new collaborations are expected in the second half of 2018.

This is consistent with our business model of producing the ingredients we sell in single annual batches, and the phasing of our new collaboration agreements are also consistent with last year, predominantly in the second half of the year. All of the expected revenue for this year is either contracted or in the final contract phase. Our royalty/value share is continuing to do well, and our clean beauty business is growing faster than we expected. We are on track for our renewable product volume to be 46% higher in 2018 than we initially planned in our 2018 plan for the aggregate of all our ingredient businesses. This is unprecedented for us and a strong indicator of the consumer shift to natural, high-performing products that are sustainably sourced. Our Biossance brand has become the fastest-growing skincare brand in North America, based on the information we have around the clean beauty market.

Our collaboration revenue continues to be choppy quarter on quarter. We've always said to expect this. The collaborations are predictable for the full year, but for strategic reasons and because of the complexity of individual agreements, will not always fall in the quarter that we planned. We had this occur in the second quarter with a major collaboration in China that we decided to move into the second half, as it has strategic implications on two other deals that are now at the contract stage in China. This deferral would have resulted in an additional $10 million of revenue in the second quarter, and we now expect to realize this in the second half of the year.

These are all important collaborations for us, and the sequence of the signing of these deals has the potential to impact royalty and licensing arrangements that would have been negative to our long-term economics. We are very pleased with the progress we've made in China. We are recognized now as a leader in developing, scaling, and manufacturing high-value intermediates and ingredients for the nutritional products and generic pharma industries, and have a very exciting pipeline. You'll begin to experience some of this as we complete the third quarter.

In summary, we've delivered a very strong first half compared with the first half of 2017 and are on track to deliver on our business plan and the expectations we set with investors for the full year of 2018, while doing better than we planned for product demand of our sustainable, best-in-class performing ingredients for our Biossance brand and with stronger traction for our natural zero-calorie sweetener. We are doubling the product volume year on year on an underlying basis. Let me now transition to how we're doing on the execution of our strategic agenda. Our natural sweetener program is doing great. We've confirmed with three of the world's leading sweetener solution companies that we have the purest and best-performing zero-calorie natural sweetener product on the market.

Over the next three years, we have the most supply available and lowest cost performance of any high-purity natural sweetener product, and now have our supply through the end of 2020 called for by four customers that are each leaders in their respective markets. This represents over $200 million of aggregate revenue for this period and over $80 million of non-GAAP gross margin in the contract phase with these four customers. We've been quietly executing while continuing to learn about our product's potential, and are very excited to report our progress. We are making a huge difference in the taste, cost, and sustainability of product for the sweetener market. This is a game changer. This is an excellent time to deliver the consumer with a great experience that tastes great and is healthy at the right economics for our partners.

Our goal is to have the world's leading natural sweetener that is the same cost as sugar from a sweetness value equivalency. We have more work to do to achieve this goal, to be at the cost of the sugar. That target enables us to win in the sugar reduction market, and we continue to see that as our long-term objective with our natural sweetener. Our Biossance performance has been outstanding in the first half. We are now on track to exceed $20 million of retail sales in 2018. This compares to about $5 million in retail sales for 2017. Many of our key performance indicators are best-in-class for this segment and a great proof of the performance of our products and our ability to build a great consumer brand and engage consumers in a powerful way.

We are now delivering about 300% year-on-year growth, and we believe this is the fastest-growing brand of any company in clean beauty that reports their numbers publicly. We expect this level of growth to continue for the next few years, and we have the products, channels, and consumers to support this level of performance. We are on our way to creating a billion-dollar brand. Based on current multiples, we expect to achieve this type of valuation for our clean beauty business over the next three years. This includes our expected launches of products for the baby category, haircare, and for men. We have winning products in each of these categories that meet our clean standard and deliver on our no-compromise product promise. We are excited to finally make the world a healthy and clean place for babies. Babies don't deserve to have crude oil spread on their skin.

This is wrong for our skins, wrong for the planet, but really wrong for a baby that doesn't have the ability to choose. We are pleased to hear that Johnson & Johnson is adopting our level of standards for safety, and we hope they formulate for our level of performance. Our consumers love Biossance and love our products. We only use the best-performing ingredients and only what is sustainable and healthy. This is at the heart of our no-compromise promise and our desire to lead in clean beauty. Around 50% of our purchases are from repeat customers, and 17% are from brand loyalists who are purchasing more than three times a year from Biossance. Our entry into Brazil is a great example of the performance of our products and brand.

Within six weeks of entering this market, we've become one of the top five skincare brands inside Sephora in Brazil, and several of our products are now in the top three within their categories in Brazil. Another way to view our Biossance performance is by looking at comp sales of SKUs, of individual products that have been selling for over a year. Our comps that have been selling for over a year is about 38% growth, with over four of these products on target to each deliver well over $1 million each in retail sales this year. We expect the end of the year with over $2 million of monthly sales as our monthly sales rate. We expect to continue very strong gross margin performance in the Biossance business and to be profitable with this brand for full year 2019.

We believe we are only starting at this point and have much more to grow and deliver with Biossance and our consumer offers. Let me now end with our outlook. We expect to deliver with our prior stated target revenue range of $185 million-$195 million and to achieve a full-year positive EBITDA of around $10 million. Our key drivers of revenue for the second half are two major license payments, three major collaborations, continued strong growth of Biossance, our key ingredient shipments that are batch-produced and shipped in the second half of the year, our first commercial product revenue for our natural sweetener, and a great second half for the Aprinnova joint venture. That's our skincare business that's benefiting greatly from the performance of Biossance.

In aggregate, we expect these activities and our base business to deliver between $135 and $145 million of revenue in gross profit and gross profit in excess of $100 million in the second half. We feel very confident about the second half and have been exceeding our plan for the areas of our business that we control. The only area of our business that we have no control over is our Vitamin E royalty. In this activity, DSM is now responsible for the supply, and we are purely a receiver of value share or royalty based on market price and the volume sold by Nenter. This is a very volatile market, and we have no control over the price Nenter sells into this market. These royalties represent between $10 and $15 million of expected second-half performance, and that is built within the $135 to $145 million of expected second-half revenue.

We have been very effective at predicting market price to date, but there's no guarantee that we will always get this right. The key drivers of our growth are very strong consumer demand for natural, sustainable products that deliver great performance. This is driving our skincare and sweetener business. In addition to the large global brands wanting sustainable ingredients, we also have technology that is significantly advantaged to make vitamins at the lowest cost when crude oil is above $40 a barrel. We have three businesses within our portfolio where we are now off to the races: clean beauty, including Biossance and our Aprinnova joint venture, natural sweetener, and our vitamin portfolio. These are all businesses where we have the leading technology in the market, have the lowest cost, and are experiencing growth beyond our expectations.

Our gross margin is the best indicator of our earnings power and the quality of our strategy and product portfolio. We are at 84% non-GAAP gross margin year to date, and I believe we'll end the year well north of 70% in non-GAAP gross margin. We are currently generating $39 a kilo of revenue, or said that differently, $39 for every kilo of product in revenue for every kilo of product we produce, and $25 of gross margin for every kilo of product we produce. This is by far an industry best and is becoming material enough to get noticed. Compare this against less than $1 a kilo of revenue for commodity chemicals and renewable fuels and less than $0.20 a kilo in gross margin for each unit sold into those markets.

I believe this is the best performance of any company in our sector and a great bet for investors wanting to participate in the disruptive potential of what biotechnology can do to deliver clean, sustainable, naturally sourced products that are making sustainability mainstream for consumers throughout the world. Now, let me turn to Kathy for a detailed financial review of the second quarter. Kathy.

Kathleen Valiasek (CFO)

Thank you, John, and good afternoon, everyone. We are about where we expected to be at this point in the year and expect a large trajectory in revenue for the second half. This is bolstered by the many agreements we expect that John mentioned, which will fuel our business through year-end. This pipeline of business is sizable. In fact, we anticipate that our quarterly revenues in Q3 and Q4 will be at some of the highest quarterly levels we've experienced since executing the fuels business and at much improved profitability. This is representative of the leverage and power within our current business model that we expect will get us to profitability. Now, let me review our second quarter 2018 results. Q2 2018 GAAP revenue was $24.8 million compared to $25.7 million for the second quarter of 2017.

As a reminder, this reflects over $4 million of lower farnesene sales as a result of DSM now providing farnesene for vitamin E, offset by increased sales in clean beauty, vitamin E royalties, and collaboration revenue. Adjusting out the low margin revenues from 2017, our growth is 15% on an absolute basis. Grants and collaboration revenues were $11.4 million, up from $10.3 million for the same period a year ago. This increase was due mainly to activity for our human nutrition and vitamin A collaborations, as well as for collaboration with flavors and fragrances partner. Non-GAAP gross profit was $20.9 million, or 84%, compared with $8 million, or 31%, for the second quarter of 2017.

This underscores the amount of leverage in our business now and going forward with a much improved, higher margin product portfolio without the constraints of a production facility that was not designed for such product mix. For the second quarter of 2018, selling, general, and administrative expenses were $20.2 million compared with $15.9 million for second quarter 2017. This primarily reflected continued investment in our fastest-growing business activities connected with Biossance and the sweetener launch. Research and development expenses of $15.3 million for the quarter were up from $14.2 million for the same period of 2017 due to headcount increases to support new product development. GAAP net income attributable to Amyris common stockholders for the second quarter of 2018 was $2.6 million, or $0.05 per basic share, compared with a GAAP net loss attributable to common stockholders for the year-ago period of $10.3 million, or $0.44 loss basic share.

Cash, investments, and restricted cash at June 30, 2018, were $15.9 million and accounts receivable of $26 million. I will add here that with the large influx of revenue expected to Q3 and Q4, our cash flow and cash position will be significantly elevated. To update you on our debt plans, we continue to review a number of options that have been presented to us to solve our 2019 maturities, and we are pleased to have successfully closed on a non-dilutive term loan with Great American Capital to cover our July 2018 maturities. We now have no other significant debt issues to resolve through the rest of the year and plan to continue to execute on our business, so we are in a strong position to further address debt at the appropriate time.

I'm very, very pleased with the progress we've made so far this year in simplifying our capital structure and improving our margins and profitability. We have more work to do, and you can expect to see us make additional improvements over the next few quarters. Several of the holders of the remaining warrants from last year's transactions are in active discussions to exercise these to common stock. We expect several of these will be exercised during the second half, further helping us to simplify our capital structure by removing this longer-term overhang while generating over $30 million in proceeds for the company without the issuance of new shares. In summary, consistent with our revenue plan and outlook we provided earlier this year, we expect a back-half-loaded year, and we are excited by the robust number of agreements in our pipeline we are pursuing to get there.

Subject to final execution, these agreements will contribute significantly to our revenue and profitability for the year while expanding our geographic ability to make renewable products mainstream. I would now like to open the line for any questions you may have. George.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from queue, please press the pound key. As well, we do ask you to place your line on mute once your question has been stated to prevent any background noise during response. That is a star then 1 to ask a question. And our first question comes from the line of Carter Driscoll from B. Riley FBR. Your line's now open.

Carter Driscoll (Senior Vice President and Senior Analyst)

Quite a mouthful in the name there. Good afternoon. Appreciate taking my questions. John, Kathy, you talk about the percentage of contracted revenue or maybe some rough parameters that gives you comfort with your back-half-loaded year, and then maybe the timing of when you think what is left to be contracted, when it will be finalized. I have a couple of follow-ups. Thank you.

John Melo (CEO)

Carter, thank you, and thank you for being on the call. I'll try to give some color to your question, which is not all of the revenue comes in terms of contracts, right? So if you think about collaborations, licenses, our sweetener, all of that, and by the way, our ingredients, all or most of that is in a contract form, and I would say that most of that is either contracted or in the final contract stage, so well underpinned. The reason I bring the color is, as you can imagine, Biossance is something we sell to consumers, right? So we have channels, we've got the current access to be able to achieve the revenue that we've planned for, but that wouldn't be qualified or classified as contracted because every day matters.

So that's the only distinction I'd make is the part of the plan that either is not contracted or under contract negotiation is the retail piece with Biossance, and in that part of the business, we've been actually doing as good or better than planned, so we feel good about that.

Carter Driscoll (Senior Vice President and Senior Analyst)

Yep. No, it's very helpful. So essentially, it's your direct, and everything else is either contracted or in final stages or close to it.

All right. Can you talk about, if I heard you correctly, John, the collaboration revenue? You said it was approximately $10 million that you pushed or slid into 3Q because there were some other either sensitive contracts or discussions you had. Could you, first of all, is that correct that $10 million roughly was pushed from 2Q to 3Q? And then could you just address maybe either that particular collaboration or the geographic areas that it affects?

John Melo (CEO)

Yeah. It is specifically the China market. It is $10 million, so it is a specific impact of $10 million, and we know that because we're in the process of working three deals, three different partners, and the three different partners actually have a slightly different structure. One of them has a slightly different structure than the other two. Two of them are very consistent with our current collaboration structure, and these are a combination of additional vitamins and/or other ingredients that we're adding to our portfolio, so very exciting, exactly the kind of stuff that we like to add. Another one has a broader relationship, and that broader relationship actually connects to some of our future business there, which is why we are really focused on closing the first two collaborations and keeping them separate from the broader relationship, which is where the $10 million is deferred.

Carter Driscoll (Senior Vice President and Senior Analyst)

Got it. Okay. That's helpful. Maybe switching gears to the sweetener. So it sounds like you're very excited about the trials that are ongoing, the feedback you've been getting, and consistently been on message that you will have a commercial launch with at least one customer in the back part of the year. Is that correct from what I heard?

John Melo (CEO)

Yeah. We'll actually have four customers in the back half, and at least three will receive product during this year. So that's what the status is. And I would say we're beyond trial in that several of these customers will actually be using product and applications this year.

Carter Driscoll (Senior Vice President and Senior Analyst)

Got it. Okay. That's good to hear. And you did call out table sugar. I think it was one of the things that you had highlighted during your analyst day as a common ingredient. Just trying to take a swing for the fences here. Is that something potentially you're working on for what you had mentioned during the analyst day?

John Melo (CEO)

Yeah. What I can tell you, and I'm giving a lot more color because at the analyst day where we offer tasting, I was asked, "So you don't seem to be playing this up as much as you have been in the past. Does that mean that you're not as keen on it?" And I think I said during the analyst day that really it had nothing to do with being keen or not. It had really to do with, "I wanted to get more traction in the business before I brought it back to the highlight." Now that we've done that, I feel very good about where we are and am happy to discuss it again in its fullest color. And regarding the consumer, we have decided to make an entry in one of the largest and best-performing sweetener markets in the world, selling directly to the consumer.

We'd like the surprise, so we're not going to really describe to you where that market is, but it's one of the largest for sugar, and it's definitely the fastest-growing in sweetener. And it's a market that actually does not really have a good consumer offer. We've done a lot of consumer work in that market, and I've realized that consumers are really desperate for a great-tasting, zero-calorie product, and we think we have the answer for them. So we will have a consumer offer. All of the comments I made in my formal remarks during the call were to do with our B2B, our business-to-business supply of the sweetener, not the consumer part. I look at the consumer as being all icing on the cake. We are launching there. We think it's a very interesting market.

We think it'll add critical mass in our consumer focus, and we'll look forward to telling you more about it later this year. I would like to probably in New York and likely in Brazil actually have a couple of analyst days and market days where we're actually providing samples of our consumer products to investors and to analysts in the market. Again, the closer we've gotten and the more distinctiveness we think we have, the more we want to get it in the hands of people. So we will do that as a way to get people just more familiar with what we're doing.

Carter Driscoll (Senior Vice President and Senior Analyst)

That's excellent to hear. And you're anticipating maybe sometime later in 2018 to be able to do this?

John Melo (CEO)

Yeah. I'd say before 2018 is out, we will do some tastings, and we'll do it by either open houses or investor/customer days, one in New York and one in Brazil.

Carter Driscoll (Senior Vice President and Senior Analyst)

Okay. In terms of the kind of category expansion within Biossance, the haircare, the grooming, and the baby product, is there a laddered rollout? You're thinking, "Is there they ought to be done in conjunction?" Are there target areas that you're hoping to launch in first, like U.S, Canada, Brazil you did last time? Just trying to get a sense of how you're going to expand in your direct-to-consumer.

John Melo (CEO)

Yeah. I know, Carter. Good question. I would tell you that the U.S. first, and then we'll roll out beyond the U.S. We obviously expect to be beyond the current geographies by the end of this year. So we have geographic expansion underpinning our revenue and have a pretty good sense of channels we'll use for that as we go through the end of the year. But for the new categories, they'll all be U.S. first. And I can tell you baby and men are in strong competition for first. We haven't quite decided which one of them, but it'll either be baby or men, and it'll depend really on our channel and branding strategy and where we are for those. And I'd expect both of those or one of them in the first half of 2019.

So, baby and/or men, first half of 2019, and then haircare, we would expect for later in 2019. And again, both of those U.S.-based, and then once we get the traction we expect in the U.S, then we'll take it out through our channels outside the U.S.

Carter Driscoll (Senior Vice President and Senior Analyst)

Okay. Just a couple of quick ones for me. Any update on Brotas 2, either revised cost estimates up or down, timing, still hoping for or shooting for the end of 2019 for completion of construction for 2020 ramp?

John Melo (CEO)

Yeah. End of 2019 is still on track. We've made a lot of progress, which we'll hopefully be able to talk about at the end of the third quarter. Still expect end of 2019. From a cost perspective, it's come down, but a bit of it's a bit of luck. It's really because of currency. Regarding the project itself, it's really steady as she goes, no big change.

Carter Driscoll (Senior Vice President and Senior Analyst)

Okay. All right. Maybe let me throw a curveball out there. What did you not do well in the second quarter that you wish you could have improved upon?

John Melo (CEO)

I would tell you that if I could have done anything differently in the second quarter, it would have been to be about a quarter ahead of the Chinese deals. I think the phasing we did would not have changed. We would have had to have done that for a lot of technical reasons around the agreements we're structuring. But if we could have gotten them further advanced in the first quarter, we may have been in a place to actually pull one of them through in the second quarter. So that's where I have a bit of frustration and wish we could have done different.

I think across the rest of the business, whether it's what we're doing in Brazil with production, how our sweetener is developing, and a lot of the insight we've now gained around our differentiation, Biossance, both in talent, expansion, and success of the product with consumers, and our ingredients business, I mean, we're hitting on all cylinders. I just wish that timing would have been about a quarter better on how we did our China development. At the end of the day, we're going to end up with a business in China that's going to be a very material part, but that's really what I would have done differently.

Carter Driscoll (Senior Vice President and Senior Analyst)

Appreciate you taking all my questions. I'll take the rest offline. Appreciate it.

John Melo (CEO)

Great, Carter. Thank you.

Operator (participant)

Thank you. And as a reminder, ladies and gentlemen, if you wish to ask a question, please press the star, then the one key on your touch-tone telephone. And our next question comes from the line of Amit Dayal from H.C. Wainwright. Your line's now open.

Amit Dayal (Managing Director of Equity Research)

Thank you. Good afternoon, Kathy. Hi, John. Just going back to the guidance, it's good to see everything maintained for the year. How should we expect this to sort of play out in terms of Q3 and Q4 contribution relative to what's remaining?

John Melo (CEO)

Great question, Amit. And by the way, thank you for being on the call. Look, I think what we're learning is the pattern we had last year is probably not a very different pattern to how to think about this year. And actually, interesting enough, for all the same reasons. We batch manufacture last year. We had a big ramp in the second half of the year for Biossance, and our big strategic deals came together in the fourth quarter. Not that we started working with them in the fourth, but that that's how they phase through the year and how the contracts evolve. When I look at our current pipeline, all of our current activity and the level of maturity that each one of those conversations are, they're slightly better than we were last year.

It gives me very good confidence, but I don't think the revenue phasing will be very different than last year.

Amit Dayal (Managing Director of Equity Research)

Understood. Is the guidance dependent on any one or two larger deals?

John Melo (CEO)

No. I mean, unlike last year, there's actually, I'd say, the mix of the sweetener deals, three collaborations, and one big production deal. So call it eight deals in total spread across three different aspects of our portfolio that really make up the big ramp in the second half of the year. So no one deal is driving the full or no one deal is more than 20% of what we're looking for in the second half of the year.

Amit Dayal (Managing Director of Equity Research)

Got it. Good to hear that. With this guidance and all of the traction you're seeing in China, in 2018, will we see sort of more than 50% revenues coming from China? And is this a trend that we should be potentially thinking about over the next few years as well?

John Melo (CEO)

Let me think about that for a second, Amit. I would tell you I would say that a third of our revenue in the short to medium term from China is not a wrong expectation to have, and I think that's consistent even going forward. Because if I think about how these deals work in China, they're like our collaboration deals, except they're markets that are significantly bigger than what we do in flavor and fragrance, so when you think about the revenue potential in the vitamin markets and the margin that comes out of these collaborations, I'd expect that once the products reach commercialization, which the first one we think will be beginning of 2020, that you'll start to see a pretty good chunk of revenue to offset the early collaboration and license fees that we get.

So, I think thinking of it as maybe even giving you a range of 25%-30% of our revenue is Chinese-based companies in three categories. Number one, in biggest vitamins. Number two, intermediates for generic pharma. And number three, traditional Chinese medicine. The third being the smallest. That's kind of how you should think about our portfolio in China. And initially with three and total about four of some of the better companies in China to do this kind of activity with.

Amit Dayal (Managing Director of Equity Research)

That's great to hear. In regards to the licensing and the royalty revenue, I don't know if you can provide some additional granularity, but how much is coming from new products versus, say, legacy products? Or are there any one or two products that are accounting for most of this royalty revenues right now?

John Melo (CEO)

Yeah. Great question. I can tell you that all the licensing, which are the early bigger chunks of revenue that come out of China, all the licensing is for background IP that enables the development and production of new products. So none of them are existing products that are being transferred. They are about background IP and our platform being used to make new products. The products we're making exist. So we're not inventing anything new. We're just developing a new path that uses sustainable feedstock and is lower cost and higher purity than the existing source of these products. There is not one product we're developing for China that does not exist. And the partners we're working with are all leaders in the production of these products.

So it's not like we're entering with somebody who doesn't make or sell these products currently for the major collaborations that we're working through in China. There are parallel or I'll say ongoing discussions beyond the products that are at the contract phase with one of these companies that would like to represent squalane, specifically our Biossance ingredient. They are a very large, the largest actually, sales channel to the dermatology channel in China. In other words, they have about 20,000 salespeople that sell skincare products to dermatologists in China. And they are interested in representing some of our Biossance products, specifically made with the squalane ingredient for the Chinese market. So we are in active discussions about that, but that's not part of the licensing. That's literally a parallel deal that we're working with one of these potential partners.

Amit Dayal (Managing Director of Equity Research)

Got it. Really appreciate all the product. That's all I have, guys. Thank you so much.

John Melo (CEO)

Thanks, Amit.

Operator (participant)

Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press the star, then the 1 key on your touch-tone telephone. Again, that is a star, then one to ask a question. One moment for questions. And there are no further questions at this time. I would like to turn the call back over to John Melo, President and CEO, for closing remarks.

John Melo (CEO)

Thanks, George. Appreciate your help on the call. I'd like to thank everybody for their support and listening to our call. We're happy with the traction we have. We're continuing to focus on what drives profitable growth, and we're excited about that transition from not really knowing what to expect in our gross margin to seeing a good, strong margin coming from the products we're focusing and the markets we're focusing on. We'll be participating in the Jefferies 2018 Global Industrials Conference tomorrow and look forward to further updating you on our progress over the coming weeks as anticipated agreements are finalized, which we believe will have a very good impact on our 2018 revenue, and I look forward to seeing many of you show up for our tasting events and hopefully becoming long-term Biossance customers. Thank you and really have a good afternoon, and thanks for joining us again.