© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
This means that the stock is removed from a stock exchange and can no longer be traded.
Delisting typically occurs when a stock no longer meets exchange requirements. Other reasons for delisting may include legal violations, bankruptcy, a decrease in the number of shareholders, and acquisition by another company.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Amyris Third 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 express written consent of Amyris is strictly prohibited. As a reminder, today’s call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of Amyris’ website.
I would now like to turn the call over to Peter DeNardo, Director of Investor Relations and Corporate Communications.
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 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 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?
Thank you, Peter. Good afternoon and thank you for joining us today. Our third quarter 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 expect it around $15 million of royalty revenue in the third quarter and realized zero. Let me explain, DSM producers 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 first quarter was well over $30 a kilo and in the third quarter was near the $8.40 a kilo threshold level.
Due to a BASF plant fire last year and a start of resupply in the third quarter 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 products 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 an 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 mid-term 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 had expressed concern about the Vitamin E royalty predictability on our last earnings call. And now I believe we have a better path forward in regards 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 deliberate about $2 million in monthly sales during the third quarter. We are running out about $4 million in monthly sales during the fourth quarter or about a $48 million annualized sales run rate.
The fourth quarter of 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 skin care 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 skin care 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 to 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 in 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, our customer acquisition, sales conversion, loyalty and doors available for in-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, correct that for the quarter for the brand. We are on track for a Clean Baby 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 fourth quarter from this product, very quickly doubling during 2019. With what we are experiencing 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 taste 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 a much lower cost and technology advantage. We are the most sustainably sourced and have the clearest value propositions to customers. Our plant is about half the CapEx compare 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 and fragrance ingredients, clean skin care, 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-on-year and delivering better than 50% gross margins. We have several large shipments in the fourth quarter 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 off. This is a segment where we also compete with DSM and we resupplied 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 and 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 biggest 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 strategy to transition from dirty to clean chemistry.
With our proven technology platform and industrial production capability, we have demonstrated the 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 $50 million license fee.
We are becoming a market leader in China for vitamins and API production and will 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 third quarter. 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 a $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 $1 billion 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 at 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 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 in 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 current 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 scale 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 flavors and fragrances, vitamins, skincare and API intermediates. We expect on warrant holders to continue converting and have active ongoing discussions, assuming plan warrants swaps for those with better terms and warrants be an exercise if they’re current and projected strike prices. These warrants represent as much as an additional $250 million in cash available to Amyris.
We do expect to complete the restructuring of the outstanding convertible debt. This is more slightly to be new debt on improved terms with the three to five-year maturity. Based on our outlook for cash generation and the expected completion of several active strategic discussions, we believe this would be less dilutive to shareholders over time than converting the debt to equity at this time. We’re not planning for any equity raised outside of the above activity.
I’ll now turn to Kathy where she will cover the financials and the outlook in more details. Kathy?
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 a 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 3 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 third quarter results. Q3 2018 GAAP revenue was $14.9 million compared with $24.2 million for the third quarter 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 royalty is 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 the $11 million for the third quarter 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 third quarter of 2017.
Grants and collaboration revenues were $5.1 million down from $12.2 million for third quarter 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 third quarter of 2017. Despite the shortfall in revenue, we continue to see much better overall margin results from our portfolio.
For the third quarter of 2018, selling, general and administrative expenses were $21 million, compared with $15.5 million for the third quarter 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 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 third quarter 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 third quarter of 2018, $26.8 million or $0.45 share was due to the impact of derivative instruments.
Cash investments and restricted cash at September 30, 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 30, 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 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’s 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 minimizing 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 and address 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 it’s 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 third quarter is a setback, we are overcoming this would that diverse vacation of our business in its performance where we largely continue to exceed our growth expectations. We are particularly excited by the growth curve of our sweetener product and leveraging our technology in the China market.
I would now like to open the line for any questions you may have. Carmen?
Thank you. [Operator Instructions] And our first question is from Amit Dayal with H.C. Wainwright. Please go ahead.
Right, 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?
I’m sure of it. We said $170 million, around $170 million in revenue. And again, the biggest thing we did was we adjusted out the total second half Vitamin E expectation of 30%. And then we’re doing a little bit better on the underlying performance than we expected. So better underlying removal of the completely. Any E we get would be upside. As I said on the call, I don’t – it’s not that I don’t expect us to earn an E in the future that because of the volatility it is something we cannot forecast and we are removing from plants going forward. So $170 million in revenue at about 70% gross margin for the year.
Got it. So that leaves around $100 million for the fourth quarter, given how the third quarter came in. How should we sort of think about that?
$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 were in process within China.
Okay. Understood. That clarifies things. Thank you so much. We should also remove Vitamin E from sort of our models for next year, do you think? I mean just to be conservative.
I think to be conservative, again, I just want to get away from not doing what we say on financial. 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 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.
So just one final question from me and then I’ll step back in queue. As you’re 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 fourth quarter, balance sheets supports all these initiatives given that these things may have to be started – work start on them pretty soon?
It tell me more, because everything that we’re doing on the base activity other than anything we haven’t launched yet, is actually operating in EBITDA 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 were potentially coming in and take a position in the company or these sort of more a product type partnerships?
Yes, I can’t really disclose. I can tell you there are not people that are foreign to us.
Understood. I’ll take my other questions offline. Thank you.
Thank you. Our next question comes from Carter Driscoll from B. Riley FBR. Please go ahead.
Good afternoon. Here we begin. I guess maybe starting with – let’s start on the collaboration revenue because I think you discussed, John, that you have some rev rec issues but also some delays, if we talk more specifically about those delays and why you’re confident that they will contribute to 4Q. I mean it was – I mean, Vitamin E is having that shortfall in surprising, I guess, I can believe it’s out of your control. I do find the push out of the collaborations, a little surprising. So can we drill out on that first, and then series of other questions. Thank you.
Yes, 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 upsize 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. It’s half and half split between the third quarter and the fourth quarter. But again, from what we expect it to do and the people we expect that to sign, we actually achieved exactly what we expected in the third quarter. 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 third quarter.
Okay. So now let’s talk about the Chinese deals. It sounds like – 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 time 4Q and can you talk about. Go ahead.
Yes, 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 – nothing in the recurring piece that is a go get piece of business right now.
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 in rev rec of the $2.5 million deferred. Just trying to get sense – how many of them…
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.
All right. So one in particular was, I’m assuming BGI Genomics for which you add a fairly large – I think it was $10 million licensing payment. That is, 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 the 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 the correct? Am I characterizing that correctly?
Yes. 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 go in a 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 midyear 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 midyear 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.
And that’s not with BGI. Is BGI scope is changing and you’re not referring to BGI. Correct?
Exactly, right.
Okay. I think we 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.
Okay. But in aggregate, if you sign all what you’re discussing today within the fourth quarter, so between now and year end, so you’ve got roughly six or seven weeks. You think that could talk – that could materialize in $50 million in revenue and have that composition. Are we talking licensing? So I mean, is this 100% margin? Is it – can you talk just about that composition if you can’t name names or even necessarily allocated amounts?
Yes. No, I can do that. I can tell you that it is licensing and consider 100% margin revenue.
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 and you’d made progress with the 2018 maturities certainly appeared that you’re making progress towards the 2019 maturities and I think certainly, investors are rightfully concerned about the ability to refinance a significant bullets for those two payments that are due in April and May of next year. And you 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 fourth quarter that you had been talking about through the balance of this year, as it gives people comfort that you will be able to adequately recap them without a significant increase in interest rate.
Yes. 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 and what we’ve been trying to do is optimized timing, because of what we can see as the cash generation of the business. We think putting ourselves in a position to payoff that debt is better than letting it go to equity. And that’s why we’ve been, again, trying to manage the discussions and timing as best as possible. And again, I think it’s to be seen, right? But it has not been a significant concern whether or not we could resolve that debt. That’s kind of the least of my worries.
All right. But because of that component of – let’s say you do close the $50 million of – 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?
I think that’s a stretch, right? I feel uncomfortable with that for the year. I think your quarter statement is correct.
Okay. All right. Let’s shift gears a little bit. Just some questions about, could you address and you did in your prepared remarks, you talked about the tie-up, but maybe just the engagement process with DSM and Cargill, and 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?
Yes. Happy to do that. We started discussions around the beginning of the fourth quarter last year. We, meaning the DSM and Amyris, exploring and assessing our capabilities and the technology around sweetener, we did a pretty extensive deep dive with both teams. And I think we walked away, obviously with respect for what they had accomplished, but realizing that our technology was actually more advantage than theirs. And 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 the DSM would be interesting, but not one where we would actually partner and share the technology with DSM. We then – we’re engaged and 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 and actually believing that we could create more value by going out alone with our technology.
And then the ASR selection was really simple and we’ve been talking to ASR about this market for at least the last year and a half, two years, and we really liked 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 3, us announcing our first consumer partnership and then several other very interesting partnerships that really give us a significant edge and making this market work. So and again, it all starts with you’ve got to have the best technology and it’s got to be the lowest cost.
Give me just a couple of others for me and I’ll get back in queue. You mentioned other partnerships with sweetener customers hopefully by year-end. Do you think it could potentially be, so I think you had alluded to maybe being able to announce them during the upcoming event? Is that – do you think that still realistic or is it more of a latter part of 4Q?
No, no. As I just highlighted Carter, I think all of our partners will be present at the event on December 3.
Got it. Okay. I’m sorry, I missed that. Okay. So let me just – let me take just a step back, right, because you have – 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 you have – 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 are taking so many opportunities? Have you had to kind of rank the top five? I mean, obviously sweeteners 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 for your business and just focusing on what you really do well, which is help solve problems for your customers. Just trying to get a sense of how you think about harmonization to 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 business in itself.
I guess the 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 $1 billion valued brand yet. I think it’s 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 buy within a year of investment in our technology, be a leader in the CBD space, but why the hell do that is 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 – nevermind, global business off the platform.
So I think we are prioritizing things that don’t make sense. We prioritize and everything we’ve gotten rid of that actually was a drain in our gross margin. I mean, our gross margin is already up 3x 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 reached 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.
Okay. Just last, so if I were to just kind of summarize, so you were somewhat surprised, 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 again, you had expressed some risk on the last quarter in terms of – a little bit disruption in the market. Could you pinpoint when you kind of realized that you wouldn’t be receiving anything for this quarter?
Sometime around end-ish 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. And 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 and Vitamin E play with.
Okay. So if you were to strip out, like you said, you strip out what you did not receive this quarter and put it in to the next quarter. Your current guidance is similar to what it was for the first couple of quarters of this year.
Slightly better because if you take $30 million off the – $185 million I think was our point on guidance, right? So if you take $30 million away from that, you’re well below the $170 million, 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.
Okay. But you will not have the same corresponding adjusted EBITDA that you had originally thought. Is that fair for the year at least?
That is correct. Because that delta, it’s really an important point you’re highlighting. The delta of like the $170 million to the $185 million that’s $15 million with 100% margin. So that is a direct impact on our EBITDA expectation for the year. That’s the painful part of it.
Okay. I appreciate taking all my questions. I’ll get back into queue.
Thanks Carter. Appreciate it.
Thank you. [Operator Instructions] And our next question comes from Geoff Castle with PenderFund. Please go ahead.
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 you engaged a banker already in this regard?
Yes. 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.
And would it be a convert or a straight debt? Are you still working on that?
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.
Okay. And so you are expecting to announce something early in the year or late this year?
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.
Okay. Thanks guys. And good luck with the next quarter.
Thank you very much. I appreciate it.
Thank you. Our next question comes from David Schneider [ph]. Please go ahead.
Yes. The current market cap of the company is probably maybe around 1.5x the value of your property plant equipment or maybe it’s equal to the value of your property plant equipment in Brazil. So 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 cutting out my checkbook just to try to buy all of Amyris quite quickly.
Yes. 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 with DSM.
Okay. Can you describe any progress that Novvi might be having? Because you’ve got some large partners there, most of it less the discussion in the conference calls with Vitamin E and your sugar replacement and Novvi’s been left behind.
Yes. Great call out, David. We really stop 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’d be emphasized updates.
But I can tell you since we’re still a shareholder of Novvi, I think we still own around 20 percentage 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, turbo charged engines.
So at what point in the future would investors be able to see Novvi contributing to EBITDA or net income?
I think end of 2019 beginning of 2020, Novvi is expected to start actually contributing a positive dividends.
Okay, that’s good.
We’re not including that in our plan by the way. So again, we’ve just deemphasized our focus on Novvi. But I wanted to answer your question directly as to how the Novvi business is going.
Yes. So that would be upside maybe to 2020 or at the very end of 2019 possibly. And it seems like because we have the unpredictable climbing, have you signing deals in China and other places that – often when you sign a deal you’ll get an upfront payment so that, because that makes modeling a little bit – well, more than a little bit, it makes it very tough. I’m sort of thinking out last year. 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.
Thank you. Can you hear me, John?
I sure can, Graham. Thank you.
Thank you. So I want to just 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 proportionately add to profitability and perhaps higher profitability? Or is that included in the guidance you gave us in the last few months?
Yes, 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. And if we were to land, the structure that’s in mind today or different – the structure that’s in discussion, it would significantly change the shape of our P&L. Top line would be very near 2x what we’re looking at. And again, bottom line would also change dramatically.
But again, we’re not – 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. 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.
Okay. And that’s good to hear. 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 flavor and fragrance, Clean Beauty, sweetener, et cetera, or slightly lower margins? And secondly, what are the capital requirements that might be entailed? Would there be – capital efficient addition to the business?
Yes. 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 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.
Okay. And when is – more importantly, depending upon when it starts, what would be the ramp of any possible deal? That’s something that will start in late 2019 or start pretty quickly. I’m just wondering what the ramp is because – for example, is your capacity already existing by whatever, whoever the partners. Thank you.
Yes. Thanks Graham. Yes, there is capacity already existing and assuming we are successful it would impact our full financial starting in the second quarter of 2019.
Great. Thank you very much. Good luck on it.
Thanks, Graham.
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.
Great. Carmen, thank you. I 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 ended 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.
And with that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program and you may all disconnect.