Harnessing Nature to Save Nature

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In 2021, the Synthetic Biology (“SynBio”) sector re-entered mainstream media heralded as the ‘Next Big Thing’ by Barron’s; backed by billionaire moguls John Doerr and Bill Gates.

SynBio can best be described as the genetic re-programming of organisms for the development of molecular structures using a base feedstock.

Amyris (NASDAQ:AMRS ), the first SynBio public firm (9/28/10), forged virtually alone through the public markets for over a decade before having market comparables to help spread the “gospel” of SynBio and triangulate on valuation:

All three firms work with microbial platforms (e.g., bacteria, yeast) and distinct metabolic pathways/fermentation techniques to achieve molecular structures & products (typically at a bench scale); however, DNA and ZY serve as contract labs (e.g., mercenary labs earning upfront payments, fees/royalties, and/or equity) to third-parties agnostic to product or industry. They are not in the business of scaling-up production and/or taking products to market. Both have garnered a portfolio of clients, but the fates of their molecules are ultimately at their client’s discretion.

AMRS prefers to curate its own destiny by purposefully targeting natural molecules for attractive end-markets:

2. Or Building vertically-integrated-sustainable low-cost brands/product lines around molecular structures they create, manufacture, and sell

AMRS prioritized the beauty-care market as an initial launching pad for its branded/vertically-integrated products due to faster adoption and lower capex requirements:

Beauty/Health/Wellness markets represent large TAM Opportunities:

Source: AMRS - Corporate Overview

AMRS has already developed and grown eight brands (i.e., skincare/haircare/baby-care/color-cosmetics) with four additional brands launching in 2022 across three new verticals: Menopause, GenZ/Clean-Beauty, and Men’s Health/Wellness.

Sustainability is at the center of their mindset by focusing on synthesizing molecules found throughout nature that are in limited supplies, costly to extract, and/or environmentally unfriendly to extract:

AMRS pioneered its own proprietary Lab-to-Market platform with a home-grown Genotype-Specification-Language, (“GSL”), to facilitate and accelerate the genetic re-programming of yeast using sugarcane as the primary sustainable substrate.

After re-programming, the yeast is tested and brought to scale (i.e., >Kiloton production):

The resulting fermented “poop” is the end-product of a “google-maps”-metabolic-pathway designed to yield targeted molecules on a timely, scalable, sustainable, and low-cost basis.

Forbes posed the question: “can synbio make a difference at scale?”

Afterwards, on 8/3/21, ZY issued an announcement: it “no longer expects product revenue in 2021, and expects product revenue to be immaterial in 2022”. This inability to commercialize products and scale production triggered a sell-off across the SynBio space including a 75% decline for ZY.

This became a lingering stain on SynBio and planted a seed of doubt in the minds of shareholders as the worst performing healthcare sector of Q4’21:

However, unlike ZY or DNA, AMRS had bucked the trend and proven it had/can manufacture commercial sustainable product at scale on multiple occasions (i.e., five new strains/year) :

AMRS develops molecules derived from 15 Chemical Classifications…

…across >20 pathways leading to:

As a result of these proven commercialization efforts, AMRS leads the SynBio pack in recurring/growing/diversified revenues.

But a storm was brewing…

“The Perfect Storm” idiom originated from its namesake book in which a collection of rare events converged on an unsuspecting set of protagonists:

AMRS, experienced its own hellstorm following the ZY debacle and the AMRS Q3’21 earnings call and continuing until present-day, entered into a nose-dive in share price throughout…

… wiping out steep gains garnered earlier in the year from its commercial wins and bringing the share price in-line with the rest of the SynBio-peer group:

Amyris Discord Group and TD Ameritrade

The following discussion is meant to walk you through each event and provide an understanding of how AMRS is mitigating each circumstance.

Shareholders first learned about ­revenue issues and delays on the Q3’21 earnings call:

Confidence in management was shaken, in large part, because of a lack of any prior communication about these issues and perceived reverberations reminiscent of the ZY fiasco along with fears about upcoming Q4’21 results.

A one-time ~$16MM miss and short-term reduced Q4 guidance led to value destruction of ~$3Bn. Over-reaction?

The question was not about fundamentals of the business (i.e., sales/technology/product/customers), but about “Faith” and “Trust” in management in overpromising/underdelivering.

Had management guided to lower numbers instead, the reaction from the market may have been milder as the realized growth rates were already phenomenal; however, when coupling a "miss" with ZY’s festering memory, it was understandably met with skepticism.

Since then, AMRS stated in a single text block of a presentation that it will be within guidance at $65MM for Q4’21. If we take that one data point of information, we can break down the potential economics of the entire quarter to determine if it is recurring and in what form.

To do so, I started by compiling quarterly data for each the three Underlying Revenue segments for 2021…

… to generate a minimum estimate for 2022 Underlying Revenues of $279MM using the minimum 2022 CAGR forecast provided (+/- 50%):

Using the Consumer Revenue information (below), we can estimate a breakdown of Q4’21 and minimum 2022 Consumer Revenues expectations:

Now that we have both Underlying Revenue and Consumer Revenue information for Q4’21 and 2022, we can back into Ingredient Revenues for both time periods by estimating a forecasted range for R&D/Collaborations for Q4’21:

This then leads to my range estimates for Q4’21 and 2021 which show that AMRS will likely meet guidance for both as follows (note: forecasted Ingredients revenues are Max-to-Min, varying in opposition to R&D/Collaboration):

As a sanity check, I examined the D2C order performance across all D2C brands as a relative proxy:

Given that our prior estimate for Consumer Revenues for Q4’21 was $36.5MM, the $20.25MM in D2C Revenues (~55%) implying $16.25MM in BaM revenues (~45%) (in-line with expectations for a seasonal lean towards online shopping during the holidays given COVID/Cold-Weather/Black-Friday/CyberMonday).

Furthermore, since supply-chain issues remain an ongoing concern throughout 2022, management has put in tactical measures to mitigated supply-chain concerns until mid-2022.

AMRS also announced construction delays due to supply chain issues impacting two primary projects:

Barra Bonita is a Brazilian fermentation-based manufacturing plant providing four pairs of 200k L/Fermentation Tanks (with optionality for a 5th pair) capable of producing five different ingredients at a time and generating >$200MM /year.

Upon completion, AMRS will be able to expand production to meet the current demand rather than relying on CMOs, thereby reducing COGS by >50% (e.g., CBG with the 3rd party Leon/Spain facility).

Barra Bonita production is expected to ramp up over a 6-month period following the production start in Q2’22 (after sterilization/prepping) and, barring any unforeseen delays, should reach full production by Q4’22 end.

AMRS has already guided to a completion date of Q1’22 and Management has indicated construction remains on-track for a Q2’22 production start date.

Based on a Jan ’22 aerial drone survey, we are seeing significant progress towards completion:

For now, Contract Manufacturers (CMOs) are needed to meet near-term demand; however, due to excess ongoing demand and constrained capacity, after production begins on Barra Bonita, AMRS plans to break-ground on Barra Bonita#2 on the same project-land (designed to leverage existing utility infrastructure allowing for faster and lower-cost construction). The new production facility is expected to have a similar capacity with a capex of ~$80MM and begin production in 2023 while also generating >$200MM/year.

The Reno Consumer Production facility is a 150k sqft facility providing blending, packaging, and fulfillment capabilities to address ~80% of AMRS’ Consumer sales.

This facility will provide supply-chain control by moving the vast majority of consumer manufacturing in-house (i.e., resulting in a 10% gross-margin improvement) enabling real-time fulfillment.

As AMRS’ customer base expands into Europe/UK/Middle-East, AMRS anticipates a potential 2nd Consumer Production facility in Europe. I suspect Portugal may be a target location due to established relationships & partners.

The “storm” gained momentum after an announcement of a $400MM convertible-debt offering which was upsized to $690MM two days later (reflecting a 4.75x over-subscription and an exercise of the greenshoe):

It is important to understand that convertible debt offerings are not bad or unusual and had reached record high volumes over the past decade (accelerating with rising Fed Funds rates on the horizon):

The offerings provide low-cash cost funding with potentially minimal dilution (particularly among technology and healthcare/biotech companies):

AMRS’ convertible debt terms were in-line with historic precedents for the market capitalization of the Company (i.e., ~$4Bn) and the offering size ($690MM):

To mitigate convertible-debt dilution, AMRS used $81MM of the proceeds to enter into a capped-call transaction to raise the effective conversion price/share from $10.75 to $15.92 (a 100% premium to the prior day’s close) and to reduce the dilutive impact to 12%, while still maintaining a low effective interest rate of 4% and effectively unchanged interest expense:

The remaining proceeds will be used to fund the paydown of debt and operational activities leaving ~$300MM in net proceeds (on top of the prior $114MM cash balance) available for future use:

Unfortunately, many institutional convertible-debt holders engage in arbitrage practices…

And AMRS warns as much…

Source: 8-K: Convertible Debt Filing

…. driving AMRS’s Short Interest to ~2x historic levels by 12/31/21 and placing downward pressure on shares:

With plummeting shares at the end of the year, retail/institutional shareholders were incentivized to engage in Tax Lost Harvesting by selling AMRS-shares until 12/31/21 further compounding the fall in prices.

The final nails in the coffin were ongoing volatility from the Federal Reserve’s plans for ending quantitative easing and interest rate hikes pressuring “growth stocks” daily.

For better or worse, the Fed has since provided guidance and the volatility stemming from uncertainty will subside and the short-selling overhang of ~23% of the public float should unwind, returning to lower historic levels.

We are moving past short-selling, tax-loss harvesting, and Fed Rate uncertainty and starting to see the short-sales interest plateau over the last two periods. I suspect, as we converge towards the 2021 annual earnings call, it will unwind providing upward support on share prices.

Management provided guidance for 2022: >$500MM (doubling annually thereafter until 2025) and expects to achieve “recurring-cashflow profitability” and “recurring operating profitably” (excluding capex and changes in working capital) by 2023. It is a low chance for Q4’22 profitability due to costs of four brand launches, ramp-ups on staffing, ERP/System updates, stressed supply-chain costs, and increases in Shipping & Fulfillment/SG&A costs as D2C order volumes grow. In a worst-case scenario, Management has indicated that the current cash position is enough to sustain the company for 2-to-3 years at current cash-burn levels.

Revenues can be broken into four segments:

Consensus revenue estimates are >$400MM and milestone estimates for EBITDA profitability are split between 2022/2023:

To reconcile management and analyst forecasts, we can breakdown the four revenue segments to understand, validate and estimate the likelihood of success:

Over January, we tracked/estimated monthly Direct-to-Consumer (“D2C”) orders for Legacy/2021 Branded websites at $5.8MM for D2C Sales:

I layered January’s orders against historical-seasonal orders (below) based on Shopify-order numbers collected over the past two years (e.g., using Biossance, AMRS’ flagship brand):

Author Analysis of Shopify Orders

As a side note, you can see evidence of the August/September 7-week supply-chain disruption that impacted September/October order volumes and the strong rebound in November (as supply-chains normalized) with average-daily-order volumes rising 55% YoY for Jan’22-vs-Jan’21.

This online order growth is further validated from two additional sources:

1. Management commented that Jan’22 web traffic and order volumes were tracking 3x and 10x Year-over-Year, respectively (e.g., 3MM visitors/300k orders vs 1MM visitors/30k orders). The 3MM visitors for Jan’22, the weakest month seasonally, compares favorably against web traffic volumes from the seasonal peak Nov’21 which experienced only 2.5MM visitors, portending well for the remainder of 2022.

2. A review of the website traffic rankings from Alexa.com also shows that core branded websites exhibited significant traffic growth in the latter part of Q4’21 and Jan’22.

This growth stems from AMRS’s recent acquisition/deployment of the MG Empower platform which includes a network of Partners/Influencers driving traffic in Q4’21 and Q1’22:

Using Jan'22’s information as a baseline, I extrapolated against the seasonal data to forecast a 2022 D2C revenue range for Legacy/2021 Brands:

Management guided towards a 50/50-split mix between D2C/BaM; however, historically the bulk of revenues are derived from Biossance and JVN which cater towards D2C channels and may potentially shift D2C consumer product revenues higher than the 50%/50% vs BaM.

Therefore, I applied a historical split-ratio ranging between 50-to-60% for D2C and 40%-to-50% for BaM to determine 2022 Brick-and-Mortar (“BaM”) revenues for Legacy/2021 Brands:

The BaM segment is expected to grow from a combination of store re-openings (after COVID shut-downs), same-store-sales growth, and new door openings.

In support of the BaM retail growth case, we can look back to 2021’s BaM growth fueled by AMRS’ launch of ~10,000 new doors and compare this with the pipeline for new door launches accelerating in Q1’22 alone to >5,000 new doors:

Management has guided for 2022 Ingredient sales to be ~$100MM but also set expectations for 30-40% growth/year until 2025 (implying $80MM-$85MM for 2022) and that 70-80% of the 2022 revenues are already contracted.

My Ingredient forecast is indicative of that CAGR and level of contracted revenues, while also reflecting risk of potential issues on Barra-Bonita construction timelines/Supply-chains.

AMRS announced plans for three acquisitions targeting four new brands launching in Mid-2022/Q3’22 with expectations of $75MM in 2022 revenue contributions:

Of the three, only the Menopause-related acquisition of MenoLabs has been announced...

... establishing a launching pad to bring Menopause-related molecules/brands to market to an existing customer base in conjunction with AMRS’ Menopause partner/influencer, Naomi Watts (July-2021).

Pursuant to AMRS’ Molecular Launch Schedule and Chemical Class Chart, I believe Ectoine will be the “hero” molecule for the Menopause product-lines as clinical studies/patents have validated its use as a treatment for vaginal atrophy/dryness/itching.

The Menopause US-market opportunity checks off all of AMRS’ criteria and is >$5Bn (with 6,000 women in the U.S. alone entering perimenopause daily) with expectations to grow to ~$8Bn by 2028 (aging population, women’s awareness forums, treatments and general options for health):

Should AMRS extend this vertical into Europe/Middle Eastern markets, the TAM could double:

Two remaining acquisitions are pending announcement (e.g., a GenZ-Color-Cosmetics vertical leveraging AMRS’ 70% controlling interest in Ecofabulous and a Men's Health/Wellness vertical) and I have allocated/discounted the remaining $45MM of revenue guidance to both.

The R&D/Collaboration segment includes recurring revenue streams from DSM/Yifan/Firmenich/Minerva. Revenues have been historically tight-ranged: $15MM-$25MM. With the new addition of Minerva, I estimated upside to the top-end of that range:

There are two primary 2022 potential earnouts:

The DSM earnout is based on economic performance (i.e., Brotas Facility in Brazil) and payments are based on incremental 9x EBITDA from 2022 through 2024 (i.e., including carveouts/clawbacks/other restrictions).

Management has stated that Vanillin (a key ingredient of the earnout) has already exceeding expectations for 2021 and the earnout is on track.

AMRS has an opportunity to earn up to $35MM in earnouts from PureCircle/Ingredion based on Reb-M (sugar substitute) milestones/cost targets in addition to a profit-share of Reb-M consumer sales, as well as revenues from the supply of Reb-M product to Ingredion out of Barra Bonita:

Ingredion’s CEO emphasized the “massive growth opportunity globally” for Reb-M…

And believes the Reb-M ingredient platform has the most upside:

Subsequent results from Ingredion’s Q3’21 earnings demonstrate that PureCircle’s sales are exceeding expectations:

While my “Likely” revenue estimate is towards the high-end of analyst consensus estimates (though below management guidance), the delta with guidance is due to uncertainty around earnout mechanisms and the remaining acquisition targets (accounting for a differential of $70MM). If made more certain, this could elevate the forecast to >$500MM, to be in-line with Management's guidance.

AMRS has multiple additional monetization opportunities for 2022:

Novvi is A joint venture between…

…for the purpose of developing, producing and commercializing base oils, additives and lubricants derived from Biofene for use of the automotive, commercial, and industrial lubricants markets.

This venture, while executing well on product commercialization, is not core to AMRS’ target verticals and is a candidate for near-term monetization.

AMRS previously discussed a farnesene derivative that would be an opportunity for monetization. My research shows that AMRS has ~35 patents published jointly with Kuraray since 2015 (a global leader in specialty chemical, fiber and resin production) regarding the development of liquid rubber for tires (a farnesene derivative). Given the non-core nature of this product, I believe this is the derivative in question.

Since the Q3’21 earnings call, analysts have updated price targets reflecting ~200% to ~600% returns over the next 12-months:

In Jul ’21/Sep ’21, Management engaged in equity sales to satisfy tax withholding obligations upon vesting of restricted-stock-units (RSUs):

As a result, they are prohibited from purchasing shares for a period of six months, due to a combination of Section 16(B) rules of the Exchange Act...

... and pursuant to Rule 10b5-1:

I expect members of Management, after the Annual Report, may likely purchase shares if prices remain at/near current levels.

Management is likely in discussions, both internally and with the Board, regarding the pros and cons of a Share Repurchase Authorization. While this has not been decided, the merits of doing so are compelling:

f approved, Management will likely make a public announcement after the 10-K release due to Material-Non-Public-Information issues and also Rule 10b-18 guidelines.

AMRS is subject to near-term risks (12-months):

Investors’ confidence has been shaken, caught in a Perfect Storm. As Amyris navigates choppy waters, there is evidence indicating forthcoming tailwinds.

As we sail into 2022, there are milestones to watch for as Amyris earns back the faith and trust of its shareholders:

The extreme losses we have witnessed for Amyris is a statement about faith in management and not about business fundamentals.

Amyris is not a “start-up” and has multiple real products, customers, cash flows, partners, and scalability.

I believe that trust will be re-earned by management in the quarters to come as:

Amyris remains one of my favorite stocks, and I believe that the potential for triple-digit returns, shown in the price targets by analysts above, can be realized in the year to come.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of AMRS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Nm82 Coupling Additional disclosure: We truly pride ourselves on conducting extensive primary & secondary research, analyses, and/or interviews with Senior Management, Partners, and/or Customers in order to identify and vet undervalued investment opportunities. That said, we aren't always right and these are just our humble opinions. We always encourage everyone to do their own homework and research and as the saying goes... BUYER BEWARE. In the meantime, Happy investing!