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Good day, ladies and gentlemen, and welcome to the Amyris First Quarter 2018 Conference Call. This call is being webcast 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 expressed 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.
Thank you, Howard. 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures is contained in the summary financial information slide 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 activity 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?
Thank you, Peter. Good afternoon. Thank you for joining us today. The first quarter marked a strong start for the year, and we are very encouraged by our continued progress. We've successfully transitioned our Brotas fermentation facility to DSM, and we are delivering on our strategy of growing our revenue at above the rate of our peers and doing it profitably at the gross margin level.
We exceeded our guidance for the year of about 70% gross margin and delivered strong revenue growth. We delivered activity in the first quarter that would have represented an additional $1 million in revenue. This would have been mostly 100% gross margin revenue that is expected to be accounted for in the second quarter due to timing. This is what we consider growing sustainably, and we have very good visibility on continuing at this rate or better for the next several years. We delivered strong growth in both, our consumer business and our ingredients business during the quarter; and our business model continue to deliver strong cash performance. Our royalty payments, which we used to call value share from products, delivered was $11.4 million in the first quarter versus $225,000 for the same period last year. This is a strong indication of the underlying performance of our products in the respective end markets and the sustainability of our differentiated and advantaged business model.
We are continuing to perform very well in our target markets. Our best performance in the first quarter was from our Health and Wellness market, with $14 million of revenue versus $2 million for the first quarter of 2017. This was also mostly value share since the production and product sales were mostly through DSM since the completion of our transaction at the end of 2017. This is also where we had about $1 million of revenue for activity delivered in the first quarter that due to timing is now expected to be recognized as a second quarter revenue and gross margin. We expect continued strong performance and growth from our Health and Wellness market sector. We did benefit from a very strong environment in the vitamin market during the first quarter, along with our partner, DSM. We expect the vitamin market within the Health and Wellness sector to be somewhat softer for the rest of the year, but continuing within our guidance for the full year.
The Clean Beauty market continued to perform very well with $4 million of revenue in the first quarter compared with $2 million of revenue in the first quarter of 2017. We expect the ingredients business within Clean Beauty to grow at around 40% to the rest of the year, and we anticipate the consumer business within Clean Beauty to grow at over 300% to the rest of the year. Our Flavors and Fragrances business was down from the first quarter of 2017. We delivered $5 million in the first quarter versus $6 million for the first quarter of 2017. This is driven by the timing and phasing of our production as we have much tighter windows of production this year as a result of managing for the Farnesene demand with DSM at their Brotas facility, and the start-up of our contract site at Antibióticos. We expect the Flavors and Fragrances business to deliver solid revenue growth this year versus 2017, and this is expected as profitable growth with our royalty payments included.
I'll now share some of the delivery highlights on our key growth initiatives for the quarter, and then I'll turn the call to Kathy, who will cover the detailed financial results for the quarter. During the quarter, we shipped our zero-calorie No Compromise sweetener product to our partner for sampling and formulation testing with end customers. I am pleased to report as well, that our partner has received generally regarded as Safe or GRAS certification from the FDA for our product as we anticipated. This is our first food and beverage ingredient for a major market opportunity, and we are working on a second flavor labor ingredient for one of our major flavor and fragrance partners planned for launch later this year, that is a key ingredient in many products, which many of you probably consume daily.
We have received a very strong positive feedback from the sampling and testing performed on our zero calories No Compromise natural sweetener, which we are making through fermentation and sourcing sustainably from non-GMO sugarcane. This is an excellent sweetener molecule that is found in nature at very limited levels. Because of how difficult the extraction and purification process is from the lead [ph] source, our product has the better taste profile, is pure, more consistent, and at the target industrial scale we believe will be much less expensive.
Our consumer industry partners are telling us we have what they have been looking for; we've also discovered that it's not very useful to call this molecule by it's traditional name since every supplier that is trying to make this molecule is delivering a different profile of impurities. This is leading to significantly different taste profiles for a product many are calling by the same name. With our advantage profile, we are working on a specific consumer offering to provide clear differentiation. We expect first commercial product revenue from our sweetener business later this year. This is the start of a market opportunity that we believe we are well positioned to lead. We are very enthusiastic about removing calories while providing the world a truly sustainable healthy sweetener without the bad taste profile. We have a sweetener that is better for you than the alternative source, is zero calories and costs less to make; this is real sustainability, and it is what responsible brands are looking for to meet consumer demand.
We progressed well on our other collaboration projects that are expected to drive significant revenue growth in the next several years. These include our vitamin A, as well as second nutrition molecule collaboration with DSM in addition to a major effort in a new class of human nutrition ingredients. These ingredients are an essential part of human health from an infant age on, and we're excited that the prospect of producing more products that support healthier people across the planet. We believe we will be a leader in producing new fermentation products for animal and human nutrition that come from a sustainable source to better the health of people and our planet. This is our mission, and one that we are executing with No Compromise.
Our consumer business performed very well in the first quarter. Biossance.com delivered over 400% growth in the quarter and is now about 35% of our consumer Clean Beauty revenue. Our Sephora channel continue to perform very well, and we continue to be very impressed with the partnership and the commitment Sephora has to Clean Beauty. We successfully introduced Biossance in Brazil and in Canada; both have exceeded our expectations with Biossance quickly becoming one of the Top 3 skincare brands within Sephora, Brazil. Our focus here is simple, win and keep one consumer at a time by delivering the best No Compromise products and winning in Clean Beauty. In January of 2017, we were selling to 198 new consumers a day. In April of 2018, we were at about 1,242 consumers a day; and by the end of this year, we are aiming for over 4,000 new consumers a day buying Biossance products. This is our way of measuring daily progress towards winning in Clean Beauty and making our planet and consumers healthier every day.
Let me now summarize before turning to Kathy. Number one, we are completely focused on three markets where we have the leading product position and have significant traction. These markets are delivering very strong revenue growth and some of the strongest gross profits in our industry. Secondly, we successfully transitioned our high volume low-margin business to DSM and are benefiting from a very good partner and a very strong strategic relationship. We are only just beginning with several products in the pipeline for DSM that we believe will significantly grow our revenues and margins from the partnership in the coming years. Thirdly, our consumer business is growing faster than we expected and has the best product gross margins of our portfolio at over 74%. We have a very strong product pipeline with a new product planned every few months in skin, hair and other growth categories. Fourthly, we now have 7 different strains of yeast making 7 completely different fermentation molecules at industrial scale. These molecules have produced 15 different commercial products and over 20 different consumer products when you consider the SKUs we sell to consumers. This is the most commercial products of any company in our sector, by far, and most of these products each generate well over $1 million of profitable revenue every year. Fifth and last, we are just starting to benefit from a business model that is really working, and we are laser-focused on markets and products that we can deliver on our No Compromise promise while becoming a sustainable company.
Many of you have asked recently whether the skincare business and our position in the skincare business can create a big enough opportunity. Skincare is a $121.8 billion global market and hair care is $74.9 billion. The U.S. and Latin America geographies represent about 22% of the global market. We believe we are the fastest growing in both of these markets. We are targeting Clean Beauty products, and this is a category within skincare that is growing at 2x to 3x the market as a whole, and is already about 20% of skincare. Skincare is growing globally at 6.1% a year from 2017 through 2021, and we are in the fastest-growing parts of the market. These are extremely fragmented markets where the small independent brands are talking directly to the consumer and delivering the best products. The combination of our digital platform, our relationship with Sephora, and some of the best performing products in the industry; has enabled us to deliver very strong profitable growth, and we believe we can support continuing this growth for the next several years.
We expect to quickly become a $100 million brand in skincare and continue to be the world's leading supplier of the world's leading [indiscernible] for your skin. We are deeply committed to making No Compromise skincare sustainable for all. We are setting the standard for Clean Beauty and believe this focus will continue rewarding investors, along with doing right by consumers and our partner brands.
Let me end by reminding you of our key delivery for the year. First, we expect to end the year between $185 million and $195 million of revenue. Secondly, we expect to end the year at better than 70% non-GAAP gross margin. And thirdly, we expect to deliver a minimum of $10 million in positive adjusted EBITDA.
Now let me turn to Kathy for a detailed financial review of the fourth quarter. Kathy?
Thank you, John, and good afternoon, everyone. As I look back to our performance in 2017 and our results for the first quarter of 2018, I'm very happy to see that we delivered a strong quarter and are continuing to execute on our plan in positioning the company for more profitable revenue growth in 2018 and beyond.
Now let me review our first quarter 2018 results. Q1 2018 GAAP revenue was $23 million, up 77% over $13 million for the first quarter of 2017. As a reminder, on our Q4 2017 teleconference, we noted that due the growth of our royalty or value share revenues, for Q4 onward, we begin reporting them on a separate line item as license and royalty revenue, and they were no longer be grouped within product revenues. Prior year amounts are also classified to conform to this presentation. For Q1 2018, license and royalty revenues contributed $11.4 million while the prior period amount was $225,000. The $11.4 million is all royalty revenues.
Product sales were $5.2 million compared with $8 million for the first quarter of 2017. The decrease was attributable to the sale of the Company's Farnesene license to DSM and discontinuing lower margin product sales, partially offset by continued strong Biossance growth and demand for the Company's Aprinnova skincare ingredients. Collaboration revenues were $6.4 million, up from $4.7 million for the same period a year ago. Something to know is that we completed and recorded revenue for a significant DARPA milestone in Q4 2017 with a significantly lesser amount recorded for Q1 2018. Other partners that also contributed collaboration revenue in Q1 included Givaudan, Firmenich, the DOE and DSM.
Non-GAAP gross profit was $19 million or 82.6% compared with negative $574,000 or negative 4.4% for Q1 2017. This is an indicator of much improved margins going forward based on product mix and royalty revenue as we work toward our goal of adjusted gross margin for 2018 of about 70%. For the first quarter of 2018, selling, general and administrative expenses were $18.8 million compared to a $12.8 million for the first quarter of 2017. This primarily reflected faster than expected ramp-up in increased headcount, costs associated with a new employee bonus plan of approximately $2 million, professional services cost and cost related to the Amyris, Brasil transaction with DSM. The new bonus plan was implemented because the prior plan was not competitive with market. It's critical that we attract and retain top talent, and we put several things in place in the second half of 2017 to do just that. And in fact in Q1 2018, Amyris was voted one of the top companies to work for in the Bay Area out of over 500 Top companies.
Research and development expenses of $18.8 million for the quarter were up from $14.8 million for the first quarter of 2017 due to increased headcount, operating lease and lab supplies cost and DARPA/DOE project reimbursable consulting fees.
Additionally, research and development expenses for Q1 2018 included expenses for initial development costs for some of our newer products.
GAAP net loss attributable to Amyris common stockholders for the first quarter of 2018 was $91.9 million or $1.79 per basic and diluted share compared with a GAAP net loss attributable to Amyris common stockholders for the first quarter of 2017 of $37.4 million or $1.93 per basic and diluted share. Of the net loss attributable to common shareholders, $63.9 million or $1.25 per share was due to the impact of derivative instruments. As we have mentioned, we are working on improving our debt and capital structure to alleviate the negative impact of derivative instrument accounting on our earnings per share going forward.
Cash, investments and restricted cash at March 31, 2018 were $27.5 million. In April, we received gross proceeds of approximately $15.9 million from the exercise of cash warrants from certain investors that participated in our May 2017 tranche 1 financing. We retained Oppenheimer to assist with this, to conduct the exercise in reasonable terms in a controlled fashion to mitigate the impact on our share price. It is possible that some other warrant holders may also elect to exercise in the near-term based on the performance of our stock price but that remains to be determined by them. We have continued to review our current debt structure and have several parties engaged to further decrease our debt and/or restructure the terms of our debt to alleviate some of the interest expense burden that we have occurred during the past few years. We will share more on that at the appropriate time.
We are very pleased to have completed an excellent first quarter for Amyris and have executed well on multiple fronts. These include revenue growth quarter-over-quarter, rationalizing our manufacturing and improving and building out our product portfolio. The results of these endeavors position us well for the rest of 2018 and should help leverage our pursuit of profitability.
We would now like to open the line for any questions you may have. Howard?
[Operator Instructions] Our first question or comment comes from the line of Amit Dayal from H.C. Wainwright. Your line is open.
One of my questions is around the royalty and the licenses side; is the $11.4 million, all of it royalties for the quarter or are there any license fees in it, too?
Just about all of it actually is royalty or what we used to call value share. So there is no license revenue in the quarter.
Understood. And how should we sort of look into these royalty revenues going forward? Will this kind of be steady-state at these type of levels or will there be some variances depending on the end market sales?
Yes. I mean, the way I would look at it -- I think what we said in the last call is that we would generate around $50 million to $60 million of value share for the year, and that is the royalty line, and that's what you should expect. It won't be perfectly linear for the year, so you'll see some choppiness, but again, for the full year, $50 million to $60 million -- I'd expect some choppiness, but full year strong flows, no change.
Understood. A question on the cost of products sold. Is there a certain volume or dollar value of sales that allows you to sort of observe all of the overheads to generate positive gross margins here? Can you just help us understand sort of the mechanics behind the profitability of this segment of the revenues?
Yes. What I would suggest is for most of the products we're selling currently; we are already at volumes that absorb most of the fixed cost base, especially now with the relationship that we have with DSM and how we're getting Farnesene produced. So I don't expect that you'll see a lot of variability; I think we had a very strong gross margin performance because of the weight of the royalty payments in the first quarter. I think what you'll see is -- it likely won't be 82.6% all year round, but it will be between this and 70% which is what we've guided for the year. Kathy, anything you want to add to that?
No, I think that's good. Another piece of it also, obviously, is that we don't have sort of the downtime that we used to have with the Brotas 1 facility, so we're not covering the overall cost of that facility anymore. It also impacts it.
Just one last one for me. Is any other work you are doing on the R&D front is going to translate into revenues this year or is this more sort of longer term initiatives?
I think we've said a couple of new products to market yearly, two to three. And I think we're tracking for that, so you'll see a couple of new products in the market this year that are coming out of the R&D pipeline. You'll see the same thing next year and the year after; and these are fermentation products. We, obviously, are putting out more than that when you consider the new SKUs we're selling to consumers but from a fermentation level, which is the outcome of R&D, think of it as two to three new products a year and there will be a couple of new products this year that will have a material impact on the top line.
Our next question or comment from the line of Carter Driscoll from B. Riley FBR.
First question, if I may. So you seem very confident in the competitive positioning of your sweetener product. Can you talk about maybe one or two of the characteristics you think is most differentiated? And then maybe talk about potential growth in the number of customers that might adopt that particular market? And then maybe contrast that with some of the other opportunities within the sweetener market as a segmentation or as much as you think people segment that particular end market?
I'll take a stab. And I want to highlight, Carter, as you can imagine, as disruptive as our technology is, I'm sure there will be a lot of noise trying to slow us down as we go to market. So this will not be -- I'm sure, perfectly smooth sailing even though we'd like it to be. So let's talk about, first of all, the three points of differentiation that our product has and I would say taste, cost and sustainability. So here is the way we think of it. Taste profile is -- we've now tasted more importantly, a lot of the consumer companies we've worked with have tasted many different alternative sweeteners. And without question, they've come back and identified us as the best taste profile. And what's been surprising to us is we thought that all molecules that are called the same have the same taste profile and the reality is, the taste profile of this molecule from different sources including the plant-derived material all have a very different taste profile. And we've been fortunate enough that through some of the breakthroughs we've had with our technology, we've been able to come out with the purest and most importantly, the right impurity profile. So again, taste, number one.
Number two is cost. I mean, we have a very clear path to being the lowest cost producer, and we think that's important. We think that's important because that makes it sustainable and it enables big brands to really switch volume and have confidence they have a sustainable source that's going to deliver a consistent profile product at a cost that's locked in for a long time. And then the last point is sustainability. Part of sourcing any natural-like material is having a sustainable source that can provide and scale up significant volumes at a consistent cost and do it without damage to our planet, and do it while providing a healthy solution and impact of the end consumer. And we also think we score the highest in sustainability year from the processes that currently are available to market. So taste, cost, sustainability, are the three areas of advantage.
I think your other question regarding the competitive landscape, again, I think it's early and what I would say is, the only thing we can bank on is what are we hearing from the consumer side; and by consumer, I mean, consumer brands. And what I would tell you is, we've kind of looked at this as -- there is an opportunity around consumer experience for the end consumer, and we're looking at that very carefully as a consumer offer of the product. Secondly, there is a bulk industry, which is -- I mean, a great example of bulk is if you buy a coffee and you flavor it with the syrup, that syrup is a large user of sugar in the world. And getting to that syrup being super sweet without calories is a very strong interest of the market. So that's one area of bulk. There is baking, and then there is what I'll call consumer use, which is call it candy, and sodas, right? And we are looking at and are currently in discussion with different partners for each of those segments.
So that's the way you should think about our go-to-market and our strategy is really partnering or engaging with leaders in each of those segments and doing it in conjunction with our partner. We have a great partner in this project, one that has been very cooperative in developing the technology and one that we expect to be helpful and partner with us in ensuring that all consumers have access to the most sustainable source of a zero calories sweetener.
Is it possible that the zero calories sweetener could be applied to, let's say, a carbonated beverage drink that traditionally has not used that? I mean, could it be an actual replacement for a sugarcane-based product or high fructose-based product? I mean, is that feasible at some point?
We are currently in formulation work to be able to prove that out. We would love to be able to say yes, we think it's possible, we need to do work and actually get it proven out, and we're in the process of that right now.
So shifting gears in just a tiny bit. So obviously, you're very comfortable with your non-GAAP gross margin target for the year, obviously, on a blended basis, it's going to be a little bit of variability on Q-to-Q basis. Is there any material outside of the new plan you put in place for employee retention? Is that going to be the main driver, Kathy, of the [indiscernible] GAAP and non-GAAP gross margins for the most part?
The GAAP versus non-GAAP doesn't really have anything to do with the bonus plan -- the revised bonus plan that we've put in place, yes.
But the stock compensation expense is essentially the main difference and/or between the different lines?
Correct.
That's correct.
Okay. So maybe just switching over to the different opportunities you have to help mitigate what is still a large investor concern is just the cap structure. I know you have a lot of different venues to potentially resource or recap going forward; do you envision potentially taking off or fixing the '18 and '19 payments with one particular type of structure, whether that's debt or equity, straight or convert? Or doing it in a more piecemeal fashion as you approach the different balloon payments? Just trying to get a sense of magnitude.
Yes, sure, I understand the question, Carter. So we have been looking at it at length, right? And we can't say anything today -- what I would say is that we are addressing the investors wants, which is to not address it in a piecemeal [ph] way, to address it wholeheartedly so that it's not a factor when investors are looking at the company or it's very understandable, and it's all dealt within -- in one or two transactions at most. So it's about simplification and basically taking the noise out of the picture of Amyris and our story.
John, you're obviously very bullish on Health and Wellness segment and Clean Beauty, Flavors and Fragrances is probably, if I had envision, being the slowest of the three growth segments. Do you imagine you're still growing to grow year-over-year in that business even though it doesn't probably has the same growth potential as two other segments, is that a fair statement?
You framed it very well, Carter. I mean, a great example is the longest ingredient we've been supplying to the fragrance industry will grow over 30% this year. So that gives you an example of -- we definitely see continued growth in Flavors and Fragrance. We have a couple of new ingredients, one of which we expect to be ready for commercial late this year and really see some significant revenue next year, and we think as that ingredient gets to market, you could see fairly quickly doubling of the Flavor and Fragrance ingredient opportunity for us going into 2019. So it is by no means slow, it's just slower than the other two because the other two are on a rocket ship right now, and it's very stable, we have great partners. And I would probably venture to say because I've seen some of the other portfolios in the industry that we have the highest value portfolio, both in terms of value, selling price and our cost of goods of anybody in the world right now for what we're doing in our space. So we like it, we love our partners, we see continued growth, and we see that growth accelerating next year as a result of a new launch.
Is there a possibility to use the success you've had in the different geographic launches with Sephora to introduce other types of skincare product lines?
Yes. And I'll -- something we didn't throw in the script, but one of our next product which we're here extremely excited about, and I'll sort of give you a couple of examples. The next one, and it's one I've been using -- actually my whole household have been using is a natural deodorant, which we -- we love that as a category, we love it is a category because most natural deodorants suck or maybe you should say stink. And what we've done is we've removed the aluminum, we've gone from antiperspirant to our real deodorant to let you breathe, and it actually works. So I'm very excited about that category, I think we can do very well. And Sephora is super excited about that category as you guys will see in the near future. I think the next one after that is hair care. We have found amazing science around the impact of Biossance on hair. And you'll see us come out before the end of the year with a couple of amazing products in the hair space.
So the answer to your question is, absolutely. And we already have the products in the pipeline and we'll be introducing over the coming months into categories that we're not in today that we believe we can do the same thing and really do well with the consumer.
Maybe just a couple of others. ASC606, any impact there, Kathy?
There is a deminimis impact on, Carter. Interesting question, a deminimis impact for us. Though you can read about it in our 10-Q, but it's relatively deminimis.
And then there was some discussion I thought also about maybe the timing of royalty recognition versus product recognition. Any update there you can share?
So, in the instance of our -- the agreement that we have with DSM, right, and the Nenter royalty revenue; so that is recognized a little bit differently than our traditional value share or royalty revenue agreements and the difference is that in that instance we aren't doing the manufacturing. So rolling forward, anything that we're -- any product where we are we manufacturing and the royalty revenue will be recognized when we actually ship the product whereas the royalty revenue under the DSM and Nenter agreement is recognized when Nenter is selling into the market.
So the mix of the royalty might change again depending on who's doing what in a particular quarter; but as you add more outside of those relationships, I'm assuming it would be the latter. So you might get a little bit more, I will say, visibility might not be the right word, but the timing difference might be mitigated a bit?
Yes, it will be more predictable is probably the best way to say because we used to wait for the payment and then look; now we can actually book when we ship the product out of the door. That's the big change around, and it's really around the Flavor and Fragrance space that we do that quite a bit.
[Operator Instructions] We have a question or comment from the line of John Parker from Sedum [ph] Capital.
I wanted to follow-up on the previous questions on Biossance. I was wondering if you broke out what percentage of revenues come through your direct-to-consumer line versus through a middleman like a distributor like Sephora?
We highlighted that during the script which we said was about 35% from our digital platform.
Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the call back over to management for any closing or additional comments.
Thank you, Howard. And thank you, everyone, for your continued support. As a reminder, we will be participating in the Oppenheimer Emerging Growth Conference tomorrow and the B. Riley FBR Annual Conference on May 23. We will also be hosting BioDisrupt, an event focused on how we are making sustainability and No Compromise products the standard in Clean Beauty, Health and Wellness and the Flavor and Fragrance industry. This event is for investors and industry participants and will be held on May 22 here at Amyris. A portion of the event will be video-cast, and we invite you to tune in that day to learn more about our technology platform and what's driving our business, along with some very interesting guest speakers.
Thanks again, for joining us today, and good afternoon.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.