Amyris - Earnings Call - Q3 2018

Transcript

Operator (participant)

Welcome to the Amyris Q3 2018 conference call. This call is being webcast live on the events page of the investor 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 investor 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, Carmen. Good afternoon, and thank you for joining us today. With me today are John Melo, our Chief Executive Officer, and Kathy Valiasek, 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 a 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)

Thank you, Peter. Good afternoon, and thank you for joining us today. Our Q3 results were disappointing. We delivered strong results from the activities we controlled, with continued execution on the promises we've made to you, and very poor results from the vitamin E royalty aspect of our business, an activity outside of our control. We have the right portfolio of products, technology, and partners to deliver on the significant trend by consumers towards clean health and beauty ingredients. This is being realized through the doubling of our recurring revenue year on year, while we are tripling our adjusted gross margin. Today, I'll address the challenge with the vitamin E market and our response. More importantly, I'll share the progress we are making delivering on our promises and delivering growth in our core health and beauty markets, both as an ingredient supplier and in our direct-to-consumer business.

Let me start with our vitamin E royalty performance and future expectations. Since the start of 2018, we have had no direct involvement in the vitamin E business. Short-term oversupply and selling price is the issue and a direct impact on our royalty revenue. We expected around $15 million of royalty revenue in the Q3 and realized zero. Let me explain. DSM produces farnesene for Nenter and supplies Nenter. Nenter has factories in China where they convert the farnesene into vitamin E. They sell the vitamin E to many Chinese and global customers. DSM is one of these customers. We earn a royalty that is calculated as 35% of all dollars above approximately $8.40 a kilo for 100% vitamin E oil sales. This royalty increases over the next 18 months to 45% of dollars above the approximately $8.40 a kilo threshold price.

The six-year average market price for 100% vitamin E oil has been in the range of $14 to $16 a kilo. This range accounts for price differences by region. The market price in the Q1 was well over $30 a kilo, and in the Q3 was near the $8.40 a kilo threshold level. Due to a BASF plant fire last year and a start of resupply in the Q3 of this year, the market has experienced significant volatility. We expect the situation to improve as we go into next year. Nenter is selling all the product they are making. Sales volume is not the issue. This is a market with strong growth, and they have the lowest cost and some of the best quality product in the market.

We receive sales and pricing results the month after each quarter ends and then have to assess and audit when necessary. We have no visibility on the actual royalty as it is calculated on the selling price of their contracts that have been at a significant discount to market prices. We have realized about $20 million in royalty payments during the first half of this year. We continue to believe and expect around $40 million of annual royalty payments in the short to midterm and after we get through the significant current market volatility. Our response going forward to make our business more predictable, we will remove this royalty expectation from our forecast and count all Vitamin E royalty payments as upside.

I have expressed concern about the Vitamin E royalty predictability on our last earnings call and now believe we have a better path forward in regard to how we forecast and run our business around this non-controllable component of our business activity. Looking beyond the Vitamin E royalty, I'll update you on our continued delivery on our promises and strong growth from our controllable business activity. We are making great progress with the leading ingredient portfolio in our industry, growing with the right partners and meeting customers' and consumer demand for clean and healthy ingredients. Our Clean Beauty activity continues to deliver very strong performance. We are continuing to deliver 300% year-on-year sales growth. We delivered about $2 million in monthly sales during the Q3. We are running at about $4 million in monthly sales during the Q4, or about a $48 million annualized sales run rate.

The Q4 sales run rate is important because it's very indicative of what we realized the following year if we look at the last two years' performance. Clean Beauty and skincare are the fastest-growing categories within the global beauty markets. We said we would deliver more than $20 million in Clean Beauty sales this year, and we are on track for over $30 million in full-year 2018 Clean Beauty sales. It's not a coincidence that our Clean Beauty brand is the fastest-growing skincare brand in the U.S. and that we have the best-performing moisturizer as the foundation to this result. We are the hero ingredient in the fastest-growing beauty brands in the world. We are seeing this clearly through the love our consumers have for our products, the loyalty we are receiving from the consumers and our channel partners, and the rapid expansion we are experiencing.

We have agreements to more than double the number of stores that sell our full product line end-caps. We are expanding into Mexico, Southeast Asia, and Europe, and our Brazilian business is performing much better than we expected. Our key metrics in this business are customer acquisition, sales conversion, loyalty, and doors available for end-cap sales. All of these metrics are delivering very strong performance. The Biossance business is delivering our strongest growth. Gross margins are better than 70%, and we're on track for over $12 million in sales for the year with the brand. Actually, to correct that, for the quarter for the brand. We are on track for a Clean Beauty product launch in the first half of next year, where we believe we will disrupt that market with the best-performing products with the best value to consumers.

Our core consumers for Biossance are in the early stages of their growing families and have told us they want a clean baby product from a company and brand they trust. This is the kind of success you can expect us to repeat with the best-tasting and lowest-cost, zero-calorie sweetener in the world. Our no-compromise promise delivers all of the good and none of the bad. Our next controllable activity and key strategic initiative for the company is our no-compromise zero-calorie sweetener from natural sugarcane. We are producing our sweetener at industrial scale and in process of shipping to customers as we speak today. We have the lowest-cost technology, the best-tasting product profile, and lowest CapEx investment production model. We expect a $35 million to 40 million annual run rate of revenue in the Q4 from this product, very quickly doubling during 2019.

With what we are experiencing in current demand, we are encouraged and anticipate coming in ahead of our expected $200 million in aggregate revenue from this activity by the end of 2020. In response to our partnership with ASR, one of the leading sweetener and sugar consumer brand owners in the world, DSM and Cargill have announced a partnership in sweeteners. I was pleased to hear this news as it validates our strategic direction in sugar reduction as one of the most critical initiatives for consumer health that is getting the attention of every major food and beverage company in the world. We have the best-tasting and lowest-cost technology and are the only source of a zero-calorie sweetener made from sugarcane. We also have the best partners in the world for these markets.

We've already announced one of these partners, and you'll get to meet the rest and hear from them why we have the winning technology. We know that first-to-market matters in this critical time of transition, and this is why our speed and effectiveness has given us a competitive advantage. We have a simple offer to our customers. We will provide any end customer purchasing more than 10 tons a year with a three-year supply contract that includes a volume and a lowest-price guarantee. This is very consistent with our no-compromise offer in the clean beauty market: best-performing, lowest-cost, and most sustainably sourced. We have taken over a 30% market share in three years while expanding the market for squalane. We now have over 2,500 global consumer brands using that product, and we are continuing to expand at a 50% annual growth rate.

We believe we can achieve this same type of market dynamic, and we are already experiencing much better traction in the early days of the sweetener versus when we first launched squalane. Why do we believe we can win in the sweetener market? We have tested all of the other products in the market. More importantly, our customers and prospects have tasted most of the options. We have the best-taste profile, the lowest cost, and the most sustainably sourced natural sweetener, zero-calorie that's available. We make our product from natural sugarcane, the same source as the best-tasting sugar in the world. Most other fermentation technologies, including DSM and Cargill, make theirs from dextrose or other GMO-based feedstocks. DSM has a light purity profile to ours, the only other product that is near our purity profile, but different in purities that have a negative impact on the consumer taste receptors.

We are much lower-cost and technology-advantaged. We are the most sustainably sourced and have the clearest value proposition to customers. Our plant is about half the CapEx compared to their typical plant. These are companies who have spent millions more than us and still don't have the winning product. We are faster, cheaper, and more sustainable, and we have the right channel partners to win. Keep in mind that the overall market size for sugar and sweeteners is about $90 billion. The current market for high-intensity sweeteners is about $10 billion and growing quickly. The current products for this market are mostly synthetic with a history of health risks, and the current natural sweeteners are not great-tasting, not sustainably sourced, and cost too much to really make a difference.

We are very fortunate to have invested early and built the world's leading platform to design, engineer, and produce the winning product. We have successfully proven this capability in fragrance ingredients, clean skincare, vitamins, and are now set to also win in sweeteners, our biggest opportunity to date. Our last core product area for a performance update is the flavor and fragrance ingredients. Our ingredients business is performing very well. We will deliver about 8% more revenue than we planned and about 7% lower product cost than expected. This is on a business plan that most thought was impossible to meet. This is an area of our business that is growing at over 50% a year on year and delivering better than 50% gross margins. We have several large shipments in the Q4 and expect to deliver well over $10 million from these ingredients by year-end.

We have four different fermentation molecules that we ship to three different customers that result in over six different core ingredients within their portfolio. What's distinctive about each of these is that for the ones that have been in the market for more than a year, we are the world's leading supplier. We have lowest cost and best product performance, and we are the most sustainable source. The F&F ingredients business delivers over $40 million of annualized recurring revenue. We can develop faster, cheaper, and better to the industry than any other company we are aware of. This is a segment where we also compete with DSM and where we supply products and technology where they can't match our capability. Let me now take a few minutes to discuss our activities in China. We have made better progress in China than we expected.

We've added two collaboration agreements that represent two technology families and specific vitamins that will add significant product revenue to our vitamin portfolio. These agreements should deliver around $10 million annually in milestones and around $100 million in annual product revenue at over 50% margin. We expect the first product revenue in 2021 from these agreements. These two deals deliver on our promise to execute two to three deals in China this year. The bigger story in China for us is the evolution of our strategy and the emerging scale of our business in China. After much engagement, we are clearly viewed as the key enabler to delivering on the Chinese government's strategy to transition from dirty to clean chemistry. With our proven technology platform and industrial production capability, we have demonstrated to leading Chinese companies that clean doesn't have to be more expensive.

In fact, clean is lower-cost and better-performing chemistry than what they are capable of producing today. This has led to significant acceleration of our China strategy and an increase in the size of the license we expect from operating with Chinese partners to a potential of a $50 million license fee. We are becoming a market leader in China for vitamins and API production, and we'll have completed the formation of our partnerships and base business structure over the coming months. Amyris in China has the potential of becoming as large as Amyris outside of China while being accretive to existing shareholders. Let me now end with a summary and our outlook. Vitamin E was very disappointing for us in the Q3, not a full surprise as we had signaled risk. We are making ourselves more predictable by not including this royalty in our outlook.

We still expect to eventually realize around $40 million annually from this royalty structure. Our clean beauty business is doing very well. We are the fastest-growing skincare brand in the U.S., and with the expected continued growth, we believe that based on current market multiples, we will have a business valued at over $1 billion within the next 18 months. We have the leading zero-calorie sweetener, naturally sourced from sugarcane. We are producing at industrial scale and shipping. This business has the strong potential of becoming another billion-dollar business within our portfolio in due time. Our core business activity is generating strong gross margin with clean beauty, the flavor and fragrance ingredient business, and now with our sweetener. Our adjusted gross margin dollars have tripled year over year.

We have generated $46.5 million in gross margin dollars for the year versus $16 million last year for the same period through the first three quarters. We are delivering at a 76.2% gross margin, well above the 70% we guided, and we expect to continue at this level. We expect HMOs to become our next major market opportunity, and we have a significant partnership with the leading global supplier where they have strong channel capability and can help us become the leading player combining our best-in-the-world technology to reproduce mother's milk molecules for infant formula and other markets, and we are exploring business activity for fermentation-based CBDs within the cannabinoid market where we have a strong technology advantage as the potential low-cost producer for the highest quality products. We are cautious about this market as it's full with hype.

However, we are actively in discussions to identify high-efficacy molecules where we can make strong inroads with a better low-cost product and deliver for the consumer. We expect our total revenue for the year at about $170 million. This is adjusted for removing the $30 million of second-half vitamin E from our plan while making up some of this vitamin E removal with better-than-expected underlying performance. We expect our gross margin to be above 70%. We are ending the year with an annual run rate of $200 million of recurring revenue. This is more than double the recurring revenue we ended 2017 with. You'll recall we had over $55 million of one-time benefit from the DSM transaction at the end of 2017. That resulted in 2017 full-year revenue of $143.4 million and a recurring revenue base of $86 million.

Our recurring revenue is generated from the more than seven fermentation molecules and over 20 products that we sell commercially that are derived from our core fermentation technology to make natural, high-performing ingredients at the lowest cost in the world. These are produced at two fermentation plants that we have scaled and two chemical finishing plants that we operate. We define recurring revenue as revenue from the multi-year agreements we have in place that range from three-year development agreements to 10-year supply agreements with some of the world's leading companies in their respective fields of flavor and fragrances, vitamins, skincare, and API intermediates. We expect our warrant holders to continue converting and have active ongoing discussions.

Assuming planned warrant swaps for those with better terms and warrants being exercised at their current and projected strike prices, these warrants represent as much as an additional $215 million in cash available to Amyris. We do expect to complete the restructuring of the outstanding convertible debt. This is most likely to be new debt on improved terms with a three to five-year maturity. Based on our outlook for cash generation and the expected completion of several active strategic discussions, we believe this will be less dilutive to shareholders over time than converting the debt to equity at this time. We're not planning for any equity raise outside of the above activity. I'll now turn to Kathy, where she will cover the financials and the outlook in more detail. Kathy?

Kathleen Valiasek (CFO)

Thank you, John, and good afternoon, everyone. Let me start by reiterating John's comments that although we had a disappointing quarter, we are pleased with our commercial progress and are very pleased with the demand we are seeing for the new products we are introducing this quarter and in 2019. This disappointing quarter does not change the expected long-term growth trajectory we have been discussing across our three core markets. We are experiencing very strong demand for our new sweetener product. We are increasing our clean beauty footprint globally across additional geographies where we expect rapid growth and are introducing new lines for baby, men, and hair. Additionally, we are seeing that the market for our clean chemistry in China is robust and better than we initially expected.

You can expect to see us announce one or more significant partnerships in China over the next few months that will showcase our capabilities to bring cleaner products and ingredients to the world's consumers and further bolster our growth. We are also particularly delighted by the robust interest and demand for our sweetener product and expect a sizable crowd at our invitation-only sweetener launch event on December 3rd in New York. We've already signed a key partnership agreement with ASR and expect others between now and year-end. These agreements are only the beginning as partners are seeing growing global demand for healthier sweeteners and consumers are being more label-conscious and aware when it comes to the food and beverages they consume and what's in them. Now let me review our Q3 results. Q3 2018 GAAP revenue was $14.9 million compared with $24.2 million for the Q3 of 2017.

On a comparative basis, when adjusted for the low-margin product sales on contracts assigned to DSM, revenue for the quarter compared to $22.5 million for the same period a year ago. To provide you with some color here, the biggest negative hit for Q3 2018 revenue was due to vitamin E royalties not coming in for the quarter, which had quite a material impact on revenue for the quarter, followed by a much smaller amount of fragrance partner royalty revenue that was earned but could not be recognized in Q3 due to ASC 606 requirements. Product sales were $9.6 million compared with $11 million for the Q3 of 2017, which included these low-margin product sales. On a comparative basis, excluding all vitamin E revenue, total product revenue for the quarter was $9.6 million and higher than the $9.3 million reported for the Q3 of 2017.

Grants and collaboration revenues were $5.1 million, down from $12.2 million for Q3 2017 due to delays in certain collaboration agreements and delayed revenue recognition on existing partnerships. Licenses and royalty revenue of $142,000 compared with $1 million for Q3 2017. We received an additional $2.5 million that were not recognized as Q3 revenue and are included in deferred revenue. Non-GAAP gross profit was $8.2 million, or 55%, compared with $8.3 million, or 34%, for the Q3 of 2017. Despite the shortfall in revenue, we continue to see much better overall margin results from our portfolio. For the Q3 of 2018, selling general and administrative expenses were $21 million compared with $15.5 million for Q3 2017. This primarily reflected higher consulting services and accounting and tax fees, SOX 404, ASC 606, as well as legal costs and lower attrition than expected.

In addition, this was also driven by Biossance's growth and an increase in headcount to support our growth. Research and development expenses of $16.4 million for the quarter were up from $15.2 million for the same quarter of 2017 due to increased spend for advancements in purification and process development for the commercial ramp of our sweetener product. GAAP net loss attributable to Amyris common stockholders for the Q3 of 2018 was $68.6 million, or $1.13 per basic and $1.67 per diluted share compared with a GAAP net loss attributable to Amyris common stockholders for the year-ago period of $42.8 million, or $1.14 per basic and diluted share. Of the net loss attributable to common stockholders for the Q3 of 2018, $26.8 million, or $0.45 a share, was due to the impact of derivative instruments.

Cash, investments, and restricted cash at September 30th, 2018, were $21.3 million and accounts receivable of $35.6 million. Some of you have asked about the projected cash value of our warrants. As John mentioned, we estimate the total cash value of these warrants and any remaining planned warrant swaps to be about $215 million at current and planned strike prices. As of September 30th, our debt has decreased by $4.4 million from the prior quarter, excluding debt discount. More recently, there was an additional decrease of approximately $23 million due to Total's mandatory debt conversions. We've made a lot of progress in removing the overhang on the balance sheet through our August secondary transaction where we brought in dozens of high-quality institutional investors while eliminating long-term warrants.

There is more work to be done to simplify our capital structure and improve our balance sheet, and you will see that transpire over the next couple of quarters. We continue to be confident in our ability to resolve the approximately $90 million of convertible debt maturing in Q2 2019 based on several things. Near term, our focus in addressing debt will likely be to source new replacement debt and thereby minimize dilution as much as possible while eliminating the inherent complexity of the debt on our balance sheet.

Longer term, there are several things that will help in addressing the debt, including the expected cash value of the warrants I just described, the positive trajectory of our sweetener business, and the strategic interest in Amyris that we are seeing in its emerging role in China where large companies are eager to invest in next-generation technology to solve their sustainability problem. In closing, while the impact of Vitamin E royalties on the Q3 is a setback, we are overcoming this with the diversification of our business and its performance where we largely continue to exceed our growth expectations. We are particularly excited by the growth curve of our sweetener product and in leveraging our technology in the China market. I would now like to open the line for any questions you may have. Carmen?

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, just press star and the number one key of your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Our first question is from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Hey, good afternoon, guys. John, you touched on the guidance for the year. I missed it. Do you mind just going over what we should expect for 2018 now?

John Melo (CEO)

Sure, Amit. We said $170 million, around $170 million in revenue. Again, the biggest thing we did was we adjusted out the total second-half vitamin E expectation of $30. Then we're doing a little bit better on the underlying performance than we expected. So better underlying, removal of E completely, any E we get would be upside.

As I sit on the call, it's not that I don't expect us to earn E in the future, but because of the volatility, it is something we cannot forecast and we are removing from plans going forward. So $170 million in revenue at about a 70% gross margin for the year.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Got it. So that leaves around $100 million for the Q4. Given how the Q3 came in, how should we sort of think about that?

John Melo (CEO)

$50 million of it, roughly, is recurring. It's all in the base business with existing customers or markets that we're in. And the rest of it is really around the China activity and specifically the license deals that we're in process with in China.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Okay, understood. That clarifies things. Thank you so much.

John Melo (CEO)

Great. Thanks, Amit.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

We should also remove Vitamin E from sort of our models for next year, do you think? I mean, just to be conservative.

John Melo (CEO)

I think to be conservative. Again, I just want to get away from not doing what we say on financials. So I would remove it and don't be surprised if we deliver to the upside. There is no reason for us to believe we won't be able to access at least what we've done this year. I mean, so far this year, we've realized about $20 million. And again, at target, let's assume there's no craziness in the market, $40 million would be the expected outcome. But we are not going to plan or guide to that. It still says going into next year, we have a very robust year, right?

Everything we have in place, assuming it continues to perform, we would be around $240 million of revenue for next year. So we feel great about next year, but we're not going to add E into our guidance for next year.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

So just one final question from me, and then I'll step back in queue. As we are ramping towards some of these sort of larger revenue numbers, larger deals, do you think, given that we are now close to the end of the Q4, balance sheet supports all these initiatives, given that these things may have to be started, work started on them pretty soon?

Tell me more, Amit, because everything that we're doing on the base activity, other than anything we haven't launched yet, is actually operating at a bit positive level. And then the new work we're doing from a development perspective is actually being paid for the partners or the licenses.

Okay, got it. And when you talked about the strategic interest from China, are these newer partners who are potentially coming in and taking a position in the company, or are these sort of more product-type partnerships?

John Melo (CEO)

Yeah, I can't really disclose. I can tell you they're not people that are foreign to us.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Understood. I'll take my other questions offline. Thank you.

John Melo (CEO)

Thanks, Amit.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Thank you. Our next question comes from Carter Driscoll with B. Riley FBR. Please go ahead.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Good afternoon. So where to begin. I guess maybe starting with, let's start on the collaboration revenue because I think you discussed, John, that you had some rev rec issues but also some delays. So can we talk more specifically about those delays and why you're confident that they will contribute to Q4? I mean, it was. I mean, vitamin E, and having that shortfall is surprising. I guess I can believe it's out of your control. I do find the push out of the collaborations a little surprising. Can we drill down on that first and then a series of other questions? Thank you.

John Melo (CEO)

Yeah, thanks, Carter. So we did realize the deals we expected. We actually brought in $2.5 million that ended up not being able to be revenue recognized but are being put in deferred revenue. And other than that, the only other deal we've been working on is the China deal, and we've upsized that significantly. So not any change.

And I think we had a bit of a mixed messaging because we had indicated that we were moving it from half year to end of year. And then it ended up actually showing up in some of the forecasts as half and half, split between the Q3 and the Q4. But again, from what we expected to do and the people we expected to sign, we actually achieved exactly what we expected in the Q3. We weren't able to get all the revenue because some of it got deferred from an accounting perspective. But none of the deals actually ended up slipping in the Q3.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. So now let's talk about the Chinese deals. It sounds like, well, let's say you can do $100 million plus and get to your revised guidance. You're saying $50 million is from recurring business. What level of visibility do you have on that in terms of the specific timing for Q4? And can you talk about. That's correct. Go ahead.

John Melo (CEO)

Yeah, the recurring is all signed as of right now, and it's all either in production or being shipped by year-end. There's nothing in the recurring piece that is a go-get piece of business right now.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. All right. So let's say $50 million, let's say you have half of that relative to $100 million, and the other is exclusively Chinese deals or partly revenue recognition of the $2.5 million deferred? Just trying to get a sense of how many of those.

John Melo (CEO)

Yeah, they're all. Go ahead. They're all Chinese, and they're all in final stage. They're not done, unlike the recurring base, but they're all in the final stage with the targets.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

All right. So one in particular was, I'm assuming, BGI Genomics, for which you had a fairly large, I think it was $10 million licensing payment. That's one of them, correct? Then there was what you have done, second, what you signed with Yifan. Then there's the pursuit with a third partner, and then you had mentioned potentially even a larger organization working on HMO-type products, and I think you mentioned infant formula. Is that correct? Am I characterizing that correctly?

John Melo (CEO)

Yeah. Let me—you are, and I'll just try to add a little color, although quite sensitive in that, again, we're in the middle of a very major transformative deal for the company that we are not prepared to disclose. But what I can do is break it down for you in a couple of steps, right? I think the HMO deal is not new. We just never really talked about it as HMOs. We actually have a significant HMO partnership. We have technology today where we are producing the leading HMO at the lowest cost in the world, and we are in process of actually scaling it and going to market.

That is a big deal. We've not spoken about it publicly before. It's with one of the world's leading companies to sell the product, and we also have a consumer partner that actually is one of the leaders in baby formula, so the only difference in this call is we talked about what the technology was, but this is a deal that's been done for some time, and we're now starting to talk about it because the technology has advanced faster than we expected.

I think as it relates to the other deals, I'll just reference one of them, which is, again, and we mentioned this mid-year that BGI was interesting. We were in active discussions, and we may end up with something that's quite different than we initially had discussed around the mid-year time regarding BGI. That's worked out the way we expected, and we are now, again, in the middle of a substantive transaction that will be transformative for the company that we are not prepared to really share more until we get it done.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Oh, and that's not with BGI. You said BGI scope is changed, but you're not referring to BGI, correct?

John Melo (CEO)

Exactly right. Okay. I think it was talked about. It is not somebody new in our portfolio. This is, again, somebody we know well, but somebody we've not really made public in the construct of the deal that we're in the process of doing.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. But in aggregate, if you sign all what you're discussing today within the Q4, so between now and year-end, so you've got roughly six or seven weeks, do you think that could materialize in $50 million in revenue? And of that composition, are we talking licensing? So, I mean, is this 100% margin? Can you talk just about the composition if you can't name names or even necessarily allocate amounts?

John Melo (CEO)

Yeah. No, I can do that. I can tell you that it is licensing and considered 100% margin revenue.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. All right. So that would get you, I guess what I'm trying to drive at is one of the things that you had been progressing towards is fixing the capital structure.

You'd made progress with the 18 maturities. Certainly, you appeared that you were making progress towards the 19 maturities. And I think certainly investors are rightfully concerned about the ability to refinance the significant bullets for those two payments that are due in April and May of next year. And you've talked about the mandatory converts with Total. You talked about your discussions with some of the warrant holders and potentially maybe shifting to more of a maturity push-out rather than a conversion.

I guess what I'm trying to get at is what is your comfort level that you will be able to refinance these in time while you're delivering on that positive cash generation Q4 that you had been talking about through the balance of this year that you give people comfort that you will be able to adequately recap them without a significant increase in the interest rate?

John Melo (CEO)

Yeah. Again, we have had no concern. We've heard the concern, by the way, so I acknowledge that it's, I mean, what you've just described, Carter, is something we have felt clearly from investors. Internally, I can tell you we've had no concern. I mean, number one, we have people around the table that could easily refinance if that's what they decided to do. And number two, we have had significant discussion, including explicit offers on the table for what we do.

What we've been trying to do is optimize timing because of what we can see as the cash generation of the business. We think putting ourselves in a position to pay off that debt is better than letting it go to equity. That's why we've been, again, trying to manage the discussions and timing as best as possible. Again, I think it's to be seen, right?

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Because of that component of, let's say you do close the $50 million of essentially 100% margin, so you would have a significant positive adjusted EBITDA on the quarter. I mean, would you be willing to say you would still do $10 million in positive adjusted EBITDA for the year?

John Melo (CEO)

I think that's a stretch, right? I feel uncomfortable with that for the year. I think your quarter statement is correct.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. All right. Let's shift gears a little bit. I had some questions about could you address, and you did in your prepared remarks talk about the tie-up, but maybe just the engagement process with DSM and Cargill. It sounds as though your partner had approached you at some point to do a partnership in the sweetener. You talk about what you saw as maybe positive and negative from that takeaway and just contrast that with your relationship with ASR.

John Melo (CEO)

Yeah. Happy to do that. We started discussions around the beginning of the Q4 last year, we, meaning DSM and Amyris, exploring and assessing our capabilities and the technology around sweetener. We did a pretty extensive deep dive with both teams.

I think we walked away, obviously, with respect for what they had accomplished, but realizing that our technology was actually more advantaged than theirs. Then we did a lot of validation by actually getting a lot of taste and response from the market, including with ASR, on our product to ensure that we weren't misjudging the capabilities of our technology. We then, at that time, decided, well, under certain conditions, a deal where we could be a supplier to DSM would be interesting, but not one where we would actually partner and share the technology with DSM. We then engaged in really negotiating what could have been a potential supply deal and just ended up at a point where both of us realized we're both going to end up competing in this market, so we did not end up coming to closure.

Again, not because of a choice they made on not wanting to partner with our technology, but a choice that we made in actually believing that we could create more value by going at it alone with our technology. And then the ASR selection was really simple. I mean, we've been talking to ASR about this market for at least the last year and a half, two years, and we really like ASR. We think they're a leading company. We think they're innovative. They're a big company that acts like an entrepreneurial company, and that matters a lot. We know the Cargill system well. It's not a system we want to be part of, and we believe we actually have the right path with the right partners to really make a difference in this market. So that's what we're doing. We're very pleased with our partners.

I think you and others will get to see at our event on December 3rd us announcing our first consumer partnership and then several other very interesting partnerships that really give us a significant edge in making this market work. And again, it all starts with you've got to have the best technology, and it's got to be the lowest cost.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Maybe just a couple others for me, and I'll get back into queue. You mentioned other partnerships with sweetener customers, hopefully by year-end. Do you think it could potentially be still? I think you had alluded to maybe being able to announce them during the upcoming event. Do you think that's still realistic, or is it more of a latter part of Q4?

John Melo (CEO)

No, no. As I just highlighted, Carter, I think all of our partners will be present at the event on December 3rd.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Got it. Okay. I'm sorry I missed that.

John Melo (CEO)

No, no. That's all right.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. All right. So let me take it just a step back, right? Because I think you have communicated consistently a number of different market opportunities that your technology is applicable to. There has been some investor concern about scope that your technology is so applicable to a number of different avenues that how do you prioritize some of the different opportunities? I think just recently you talked about skepticism in terms of the market opportunity with, well, not necessarily market opportunity, but the viability of the cannabinoid marketplace. How do you think about prioritizing, given that you're chasing so many opportunities? If you had to kind of rank the top five, I mean, obviously, sweetener's up there, and you're making a big push into the health and wellness market in China.

How do you think about Biossance in terms of is it a core product? Is it a core category for you in terms of the way you go to market? Would it be better served not being part of the business and maybe selling it to a more developed consumer products company? Take some of that direct marketing expense away from your business and just focusing on what you really do well, which helps solve problems for your customers. Just trying to get a sense of how you think about prioritization given so many opportunities and really some investor concern that you have so many that maybe focus is a problem and trying to just prioritize is a business in itself.

John Melo (CEO)

I guess if focus was a problem, we probably wouldn't be growing at double annual rate for our recurring business, right? So I think we are focused. We're focused on the consumer because we're damn good at it relative to other people and, more importantly, because we have the right ingredients and the right offer for the consumer. So giving that up at a point where we're not a billion-dollar valued brand yet, I think, is giving up shareholder value, and I don't think we're prepared to do that. I think, secondly, the focus actually comes into things where we don't think are ready yet, and I think that the cannabinoid is a perfect example.

Our technology is ready. We can actually, within a year of investment in our technology, be a leader in the CBD space, but why the hell do that if we actually don't understand the relationship between molecules and efficacy, and the regulatory process is such that we can't actually build a great national, never mind global business off the platform.

So I think we are prioritizing things that don't make sense. We've prioritized in everything we've gotten rid of that actually was a drain on our gross margin. I mean, our gross margin is already up three times versus what it was last year. Now, how the hell does that happen if we don't prioritize getting rid of stuff that actually doesn't make money? And I think in China, as an example, it's not a chase. I mean, again, when we make public the deal we're doing, it is immediately going to give us a scale and profit generation unprecedented in this industry. And again, because it's going to give us access and a real business delivering amazing profits in a market that reach to the consumer is the number one barrier to outside companies. So I think we're focusing.

I think we're focusing by doing what actually we are really good at, which is creating markets and winning in those markets by using our technology platform to deliver the best products. Remember, there are a lot of amazing ingredient companies that make 30% gross margin and have a valuation that's actually something that is not what we really want in the long term.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. I mean, just last, so if I were to just kind of summarize, so you were somewhat surprised with Vitamin E. I mean, when did you really learn? Is it really just after the quarter you learned that you would not be getting any Vitamin E sales for the quarter? I'm just trying to get a sense of when it became apparent that Vitamin E was not going to materialize in this particular quarter and that it was prudent to take it out.

I mean, I know you'd expressed some risk on the last quarter in terms of the disruption in the market, but could you pinpoint when you kind of realized that you wouldn't be receiving anything for this quarter?

John Melo (CEO)

Sometime around the end of October. So I mean, it was, again, as I've mentioned, we don't really have visibility. We know the volume because we know what the plant ships, and we know what that converts, and so far, Nenter has a great track record. They sell everything. I think the thing that became clear, I mean, obviously, at the end of October, when we get the final numbers from them, we knew, and then we started hearing noise because it appears that there's actually a process for selling of Nenter to a couple of real major global companies that are in that space.

I have a sense that this didn't happen by accident. But there's not much we can do. It is what it is. We're a bit of a pond that's receiving whatever behavior other players are participating in Vitamin E play with.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. So if you were to strip out, like you said, you strip out what you did not receive this quarter and don't put it into the next quarter, your current guidance is similar to what it was for the first couple quarters of this year, with the exception of?

John Melo (CEO)

Slightly better. Yeah. It's slightly better because if you take 30 off the 185, I think, was our point on guidance, right? So if you take 30 away from that, you're well below the 170, right? So we are making up some of the shortfall in E predominantly by a bit of luck and timing. The China opportunities have become better than we expected.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. But you will not have the same corresponding adjusted EBITDA that you had originally thought. Is that fair for the year, at least?

John Melo (CEO)

That is correct because that delta, it's really an important point you're highlighting. The delta of the 170 to the 185, that's $15 million that was 100% margin. So that is a direct impact on our EBITDA expectation for the year. That's the painful part of it.

Carter Driscoll (Vice President Analyst dedicated to the Alternative Energy Sector)

Okay. I appreciate taking all my questions. I'll get back into queue.

John Melo (CEO)

Thanks, Carter. Appreciate it.

Operator (participant)

Thank you. And ladies and gentlemen, as a reminder to get in the queue, just press star and then number one key of your touch-tone telephone. And our next question comes from Geoff Castle with PenderFund. Please go ahead.

Geoff Castle (Lead Portfolio Manager, Fixed Income)

Hi, John and Kathy. Could you just talk a little bit more about the plan to address the Q2 maturities? What kind of debt issuance are you thinking of? When would you expect to sort of be announcing terms? And have you engaged a banker already in this regard?

John Melo (CEO)

Yeah. We've actually had several bankers approach us with terms. We have not yet locked down which, if any, banker we would choose to work with. And we're in process of those discussions.

Geoff Castle (Lead Portfolio Manager, Fixed Income)

And would it be a convert or a straight debt? Or are you still working on that?

John Melo (CEO)

Again, I want to separate what we've been proposed because, again, we've not actually accepted anything at this time. What's been proposed to us are converts, not straight debt.

Geoff Castle (Lead Portfolio Manager, Fixed Income)

Okay. And so you're expecting to announce something early in the new year or late this year?

John Melo (CEO)

There's a lot of urgency on the bank side to get something done. And it's something we'd like to work with, right? So we're not actually pushing back saying we don't have the same urgency. And it really becomes an issue of where the dust settles and what kind of deal we could see putting in place. So with the right terms, I'd say that our board and management would love to see this done before the year ends.

Geoff Castle (Lead Portfolio Manager, Fixed Income)

Okay. Well, thanks a lot, guys, and good luck with the next quarter.

John Melo (CEO)

Thank you very much. Appreciate it.

Operator (participant)

Thank you. Our next question comes from David Snyder. Please go ahead.

Yes. Hello. The current market cap of the company is probably maybe around one and a half times the value of your property plant equipment, or maybe it's equal to the value of your property plant equipment in Brazil. Are there any of your partners that do not have a standstill agreement? Because it seems to me, if I were running one of those, I would be getting out my checkbook just to try to buy all of Amyris quite quickly.

John Melo (CEO)

Yeah. We have a standstill structure in place with DSM. And I believe that's the only standstill we have currently in place. And again, the idea was anybody around our board that has a material level of investment, and obviously, DSM fits. We wanted to ensure we had a standstill in place with. So we do have one with DSM.

Okay. Can you describe any progress that Novvi might be having because you've got some large partners there? Most of the discussion in the conference calls with vitamin E and your sugar replacement and Novvi's been left behind.

Yeah. No. Great call out, David. We really stopped highlighting Novvi after we moved away from commodity-priced farnesene. And also because we included the Novvi supply agreement with the DSM transaction. So the license we sold to DSM included farnesene for Novvi and then farnesene for the vitamin E market. Those were the two big components in that license sale last year. So that's why we've de-emphasized updates. But I can tell you, since we're still a shareholder of Novvi, I think we still own around 20% or so of Novvi. Novvi is having really great success. They are now a key supplier to several oil companies. They're a key supplier to Castrol on base oil, some of the most innovative base oil in the world being marketed by Castrol, is supported with technology from Novvi. And then secondly, Novvi has really been developing a deep strategic partnership with Chevron.

Chevron is also a 20% owner, has been increasing their ownership over time, is actually building out a factory with Novvi to be able to be a key base oil supplier, and the Novvi base oil technology is actually the technology that underpins Chevron's new base oil technology going forward, so Novvi's done extremely well. They've continued to really build out the supply of their base oil, and their base oil is perceived to be some of the best-in-class base oil for a lot of today's hot-running and high-revving engines, turbocharged engines.

So at what point in the future would investors be able to see Novvi contributing to either EBITDA or net income?

I think end of 2019, beginning of 2020, Novvi's expected to start actually contributing positive dividends.

Okay. That's good.

It seems like we're not including that in our plan, by the way. So again, we've just de-emphasized our focus on Novvi. But I wanted to answer your question directly as to how the Novvi business is going.

Yeah. Well, so that would be upside maybe to 2020 or the very end of 2019, possibly. And it seems like because we have the unpredictable timing of you signing deals in China and other places that often when you sign a deal, you'll get an upfront payment. So that makes modeling a little bit, well, more than a little bit. It makes it very tough. I'm sort of thinking out loud here. So all right. I guess that's about it as far as my questions.

Great, David. Thank you for the questions.

Thank you. And our next question comes from Graham Tanaka with Tanaka Capital Management. Please go ahead.

Graham Tanaka (President, Chief Investment Officer, and Chief Economist)

Thank you. Can you hear me, John?

John Melo (CEO)

I sure can, Graham. Thank you.

Graham Tanaka (President, Chief Investment Officer, and Chief Economist)

Okay. Thank you. Thank you. So I wanted just to get a little bit more clarity on how this transformative deal might affect 2019, 2020 in terms of revenues and profitability. Would it add incrementally to the three-year sales forecast that you had in your slides? And would it therefore proportionally add to profitability, even perhaps higher profitability? Or is that included in the guidance you gave us in the last few months?

John Melo (CEO)

Yeah. A couple of clarifications. None of the economics of the China deal are in our current guidance, with the exception of obviously the license for this year, but none of the accretive P&L or balance sheet impact. The P&L impact would be significant. If we were to land the structure that's in mind today, or it's a different structure that's in discussion, it would significantly change the shape of our P&L.

Top line would be very near two times what we're looking at. And again, bottom line would also change dramatically. But again, we haven't put it in our plans. We have not guided to it, mainly because the key is getting it done. And between now and getting it done, there's an evolution in how the deal might get structured. So I can give you what it looks like today, but it's not in our guidance. And again, the only thing we've looked at being able to consider in the short term is what we get in the upfront.

Graham Tanaka (President, Chief Investment Officer, and Chief Economist)

Okay. And that's good to hear. But I'm just sort of curious, how would it affect the margin profile for next year and 2020? Would it be consistent with the kind of higher margins that you've been talking about for flavors and fragrances, clean beauty, sweetener, etc., or slightly lower margins? And secondly, what are the capital requirements that might be entailed? Would there be, shall I say, capital-efficient addition to the business?

John Melo (CEO)

Yeah. A couple of thoughts. I mean, getting back to Carter's point of focus, we know what profile needs to fit in our business. And I think we've said long-term, we're not looking for anything that's anything less than about a 60% type gross margin profile. So you can expect that would be where this business activity would be. And I think from a capital perspective, you can also expect that we wouldn't be doing anything that isn't self-funded or accretive.

Graham Tanaka (President, Chief Investment Officer, and Chief Economist)

Okay. And when is, more importantly, depending upon when it starts, what would be the ramp of any possible deal? Is that something that would start in late 2019 or start pretty quickly? I'm just wondering what the ramp is because do they, for example, is there capacity already existing by whoever the partner is? Thank you.

John Melo (CEO)

Yeah. Thanks, Graham. Yes. There is capacity already existing. And assuming we are successful, it would impact our full financial starting in the Q2 of 2019.

Graham Tanaka (President, Chief Investment Officer, and Chief Economist)

Great. Thank you very much. Good luck on it.

John Melo (CEO)

Thanks, Graham.

Operator (participant)

Thank you. And ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to Mr. John Melo for final remarks.

John Melo (CEO)

Great, Carmen. Thank you. I really appreciate everybody's patience on the call and appreciate you attending the call. Again, we are frustrated with the Vitamin E environment. It is a great lesson in volatility. So we're clear about how to go forward. And we're very excited about the underlying pieces of our business, right?

I mean, the good news is there's nothing actually broken in our business. And I think we are in a much better place, not including in our forecast. And hopefully, we end up generating millions of dollars of upside that ends up actually having a call that has a different tone to it going forward as we take it out of our expectations. So thanks, everyone, and have a great rest of your evening.

Operator (participant)

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, and you may all disconnect.