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Welcome to the Amyris Third Quarter 2019 Financial Results 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 a 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. Sir?
Thank you, Dennis. Good afternoon, and thank you for joining us today. With me today are John Melo, our Chief Executive Officer; Eduardo Alvarez, Chief Operating Officer; and Jonathan Wolter, our Chief Financial Officer.
Please note that on this call, you will hear discussions of non-GAAP financial measures including gross margin figures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is contained in the summary financial information slides of the accompanying presentation or the news release distributed today, which is available at investors.amyris.com. The current report on Form 8-K furnished with respect to our press release is also available on our website as well as on the SEC’s website at sec.gov.
During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities and their anticipated financial impact on our business and financial results for 2019 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 that Amyris makes with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Amyris disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties.
Before we begin today, I'd like to note that included in our webcast is a slide presentation we will refer to in today's presentation.
I'll now turn the call over to John Melo. John?
Thank you, Peter. Good afternoon and thank you for joining us today. Joining me today are Eduardo Alvarez, our Chief Operating Officer, who will share highlights and the outlook of our operational performance; and Jonathan Wolter, our CFO, who will review our financial results and also provide an update on the resolution of our CVI/Heights convertible debt.
I am very please to announce that subject to our Board approval, Jonathan will be joining us as our permanent CFO and we are dropping the interim from his title. His focus on delivery and his significant background and experience are critical components for supporting our growth with accurate and timely financial reporting and disciplined leadership inside of Amyris. Welcome, Jonathan, great to have you on Board. I'm very pleased to welcome him and also thank – and also very happy that we are back into a normal reporting cycle for our financials for the first time since the third quarter of 2018.
This has been a really challenging year with a lot of trials along the way. Yet our business has remained solid and we are delivering the best growth in our history and doing it with a leading product and customer portfolio in our industry. This has resulted in considerable momentum for Amyris that has led to record volumes of product production, which Eduardo will discuss later. Although our capital constraints have made this difficult to manage, I believe these constraints have made us more resilient and efficient, while we continue to grow.
We are pleased with our year-to-date results and we are already having an excellent fourth quarter that we believe will enable us to exceed our business outlook of $150 million in revenue for 2019 by at least $10 million. Our product production volumes have continued at record levels in the fourth quarter. And this is expected to result in product revenues that are 150% better than the fourth quarter of 2018 and much better than the record third quarter of this year. Our total revenue for the four quarter is currently tracking to be about shorter than 50%, better than the four quarter of 2018 and almost double the third quarter of this year. I'll touch more on our outlook in a moment, so you can better calibrate our anticipated revenue for the year.
Now let me review our business highlights for the third quarter and provide some color on what we expect for the remainder of the year. Total revenue for the third quarter was $35 million, product revenue comprised $19.7 million, rounding up to about $20 million. Our product revenue for 2019 is well above our target of more than doubling 2018. Our product revenue includes royalties/value share that are part of our business model for product revenue with many of our long-term collaboration partners. When we reference product revenue, we always include the value share component or what's recorded as royalty component for products we produce and ship to partners that have this component in the product pricing structure of our long-term supply agreements to these customers.
To put this in perspective, so you can dial in this as part of our revenue expectation for 2019. Total product revenue for 2018 was $33.6 million and year-to-date total product revenue for 2019 is at $44 million. And we are tracking to end the year well over $17 million in product revenue. We are likely to deliver almost as much product revenue in the fourth quarter of this year as for all of 2018.
Today I'll focus on grouping our growth drivers in two categories as we did on our last call. Clean Beauty, which includes our Biossance and Pipette brands as well as our Aprinnova squalane ingredients business, and then our second category health and ingredients, which includes HMOs, cannabinoids, vitamins and flavor and fragrance ingredients as well as our sweetener business.
Let me start with Clean Beauty. Clean Beauty continue to perform very well in the third quarter and is already on track in the fourth quarter to more than double the third quarter of 2019 revenue. We are on track for gross sales in Clean Beauty to be about $60 million for the year. Biossance is currently approaching a run rate of $1 million in weekly gross sales. Our biossance.com daily sales have more than doubled this quarter over last quarter and are about 3 times what they were this period last year.
We are tracking to deliver as much in sales from biossance.com in the fourth quarter as all of last year on biossance.com. Our launch of the Clean Academy and our partnership with Jonathan Van Ness are achieving excellent consumer engagement and feedback. We are excited to lead the beauty industry transition to clean ingredients and to help educate consumers on the meaning and benefits of Clean Beauty. Clean Beauty is quickly becoming the Beauty market. This is the right thing for our planet and the health of everybody's skin.
We are achieving this growth with much lower level of discounting than last year and with a much better return on advertising dollars spent. We have also doubled our consumer loyalty ratio from last year. For example, our return on advertising spend for Biossance has gone from about $1.40 return for every $1 spent in the first quarter of 2018 up to about $3.40 of revenue for every $1 spent in the third quarter of 2019. This along with a great assortment of clean skincare products has led to repeat purchases based on the percent of repeat customers growing from 15% in the first quarter of 2018 to 48% in the third quarter of 2019. This is fostering great customer retention and growth for our Biossance brand.
We are spending less to acquire every new customer and we are getting more of these customers back as repeat buyers. Our Sephora sales and productivity growth, which is defined by the average weekly sales in Sephora stores more than doubled during the period at stores with a full end cap format. Also sales at those stores were the smaller wall assortment of products and no end caps grew by almost 150%. Keep in mind that full end caps in Sephora are still in high growth deployment with our expectation that 247 out of 480 stores will have end caps by the end of this year and that at the end of the third quarter there were 219 stores with Biossance end caps.
Stores with full end caps have about 2 to 2.5 times the sales of stores where they limited assortment wall only formats. We believe that our sales productivity is not far from Drunk Elephant’s. The big difference in revenue between Biossance and Drunk Elephant is that they have formats with a full product line placement in all 480 stores and we will be in 247 stores by the end of the year, which will have the full Biossance product line. Biossance continues its great organic and comp growth as the top performer at Sephora and the continued ramp in end caps at the store level, will further propel our sales.
We have also delivered significant geographic expansion in the quarter and since with Biossance sales now in New Zealand, Australia, and more recently Thailand and South Korea. You can see how growth in Sephora end caps, our digital sales and geographic expansion all have been and will continue to be the drivers of Biossance growth for the next several years.
To help you value our performance with Biossance, you can consider our current quarter run rate at over $50 million in annual gross sales and applying the recent valuation multiples for large company acquisition of Clean Beauty, high growth brands like Drunk Elephant, Biossance would be valued today at somewhere between $350 million and $400 million. We have no interest in a sale at this time and we believe the current pipeline of products, our markets and continued execution will lead to a potential value of over $1 billion over the next 18 months. Our mission and focus is to build the leading skincare brand in the world and help the entire industry transition to clean formulas and ingredients that do right by the consumer and our planet. We now have a proven investment and growth model in Clean Beauty and are just starting to expand.
Our Pipette baby care brand is receiving great consumer response. We have over 1,700 consumer ratings with over 98% averaging five out of five stars. We have experienced over 140,000 visitors to the pipettebaby.com site. This is over 3 times the activity we had experienced with Biossance at the same maturity level. We are now actively selling across each of our early sales channels and we are seeing excellent week over week sales performance. We are hearing great feedback from our channel partners at Amazon and Buy Buy Baby, along would be available through our pipettebaby.com website and Buy Buy Baby, amazon.com and Dermstore as well as walmart.com in the coming weeks.
We are in active negotiations with another big box retailer with a goal of launching at that retailer in the first half of 2020. Both of these brands use our hero ingredient squalane and our squalane ingredients business continues to deliver. We will deliver record volumes of squalane this year driven by a growing recognition of how effective this clean moisturizer is among the Clean Beauty trend. This ingredient is so effective and absorbable in the skin that our tests – our clinical tests have shown that it is about 14 times more effective as a carrier of other active ingredients as compared to Jojoba oil, Argan oil or other mineral oils.
This will serve as an advantage platform when it comes to including CBD within our Biossance products and within other skincare or topical brands that use our top performing squalane. There is clear synergy between our squalane and future CBD offerings. We are tracking to be about 70% of the global market for squalane over the next year, while also playing a big role in expanding the squalane market at double the rate of the overall skincare market or about 10% to 15% total market size increase year-on-year.
In health and ingredients, our flavors and fragrance business has continued to be a stable source of revenue growth and innovation. Our partners like Firmenich and Givaudan are global leaders in the market and have a deep understanding of consumer tastes and preferences. Givaudan has had an expert hand in helping us formulate our sweetener and making it the best tasting and most sustainable natural sweetener in the market today. Not only are both great collaboration partners, they are the go-to-source for CPG companies and a great source of advice on consumer trends and market entry strategies.
There is synergy in our sweetener and cannabinoids opportunities since food and beverage products that are infused with cannabinoids, which often need a flavor enhancing agent like our sweetener along with formulation expertise to avoid any off tastes from cannabinoids. Purecane and our zerocalorie natural sweetener has continue to do very well. We now have several of the largest users of stevia in Latin America converting to our stainable best tasting Purecane sweetener with the first orders now received and we have also gained significant traction as a sweetener for use in flavor formulations.
In North America, we have great interest in early sales from innovators. These are smaller brands that are disrupting the industry leaders with brands and products that consumers are switching to. We also have advanced to the negotiation stage with leaders in specific vertical markets from nutrition to bakery that will become key drivers of our future revenue in sweeteners. As Eduardo will cover, we have sold out all that we have produced at this time and already have orders for the volume from the next production batch.
We have learnt much and also achieved significant breakthroughs during the scale up last year and through the early part of this year. These learnings are now mostly behind us and we are very excited about the continued progress of this product and our leadership in this category. Our Purecane Consumer brand is in the process of launching this month and we are excited to provide consumers a healthy choice to make their life sweeter. We are very pleased with our cannabinoid development program and are ahead of plan. We are on track to commercially scale CBD and another cannabinoid in 2020, assuming regulatory conditions are met.
Our progress has been better than expected and we expect to deliver samples of two cannabinoid molecules including CBD for early testing and formulation development starting early in the first quarter. The LAVVAN executive team is very experienced in delivering excellent insight and guidance. They have a track record of leading the industry. We are confident that this will be highly profitable for both companies. Some of you have asked about the royalty structure. What I can share is that it is essentially based on production margin and LAVVAN's business profit margins. In addition, we do have certain controls and minimums to protect Amyris’ and LAVVAN's returns.
I think it's safe to say that both parties see that fermentation-based, highly pure cannabinoid ingredients will be the key enabler for consumer brands globally to deliver what consumers are demanding, doing it safely, sustainably and with a highest efficacy of any source of cannabinoids in the market. This confidence is based on the fact that the first two cannabinoid products will represent the 11th and 12th time that Amyris has successfully scaled a natural fermentation product that is the most sustainable source and lowest cost supply for the end market.
It will be another proof point of our market leadership in delivering natural, sustainable clean chemistry that delivers a No Compromise product to consumers, brands and our partners. We have certain carve-outs in the agreement with LAVVAN for Amyris to serve skincare and beverage segments on our own with cannabinoid ingredients. As you can imagine, this is applicable to Biossance and Aprinnova as well as serving leading beverage companies. We are in discussions with two top beverage companies regarding very large scale CBD supply opportunities.
When it comes to adding CBD products, the winning companies will be those that can assure purity and consistent quality at reduced costs and that's exactly what fermentation can provide. This purity need is a growing importance to private companies and consumers. A recent U.S. study by LegitScript found that our products from 300 online CBD merchants 98% were noncompliant with at least one regulation, one product even contained 18.5 times the allowable amount of lead.
The cannabinoid market is ready for a company that can offer superior ingredients with less risk on quality, providing high purity, more dependable production and scalability and assuring consumers that they are getting – what they are getting a safe and exactly what it says on the label. We continue to view the canabinoids opportunity as one of our most valuable businesses. The belief that we will be the first synthetic biology company to successfully commercially scale multiple lower costs, highly pure cannabinoids from our fermentation technology.
Now let me begin summarizing. We are delivering on our key strategic goals and have the leading portfolio in our industry. Our strategic goals are; first, exit commodity markets with extremely volatile pricing where we have no control. We have done this resulting in a simpler and more focused portfolio of the leading health, nutrition and beauty, clean products meeting a mega trend for natural and sustainable products for consumers. Number two, we are investing in markets where we have the number one product, customer or partner and where we are delivering the leading solution to the industry. We call this our strategy of number one's. Next, markets where the current growth and outlook is at 2 times or better GDP. Next, markets where there is a mega consumer trend where we have the leading technology platform to win with. This enables us to be a sustainable business. Lastly, markets where we have access to the consumer and can execute a No Compromise value proposition that enables us to be the growth leader.
We want to make big bets where we have the capability to win and deliver mega impact for global issues that matter. Here are some examples of where our focuses. First, we want to lead the sugar reduction strategy for the world. Secondly, we want to create a sustainable replacement for opioids. We need pain and anxiety management for an aging population and we want to do this safely. Thirdly, we want to move the beauty industry to a clean beauty world where we use clean ingredients that perform better than the alternative and don't do harm to people or our planet. This is No Compromise, Clean Beauty. And then lastly, we want to deliver the best performing safest products for babies. They are our future and they deserve the best without harm. Pipette is delivering on a need and a promise for our children and our planet.
We shared with you some clear strategic metrics for you to measure our progress. Let me go over some of these. We've said that we would double product revenue and we are doing better on year-to-date and tracking to exceed this expectation for the full year. We said that you should expect us to end the year with about $100 million or better of recurring revenue that builds a strong base for next year. We are on track to do this by the end of this year with over $110 million and a clear path to doubling that again next year.
We provided a gross margin range for our business of 55% to 65% and we are on track to be around the mid point or slightly better. We said that we would exit the highly volatile vitamin E market and more than we place it with a high value market where we had much more control over our destiny. We've achieved this with the cannabinoids program. This program will more than replace the royalties we expected from vitamin E and has enabled us to significantly simplify our R&D portfolio. It's a largest single contract in our history and has a potential for hundreds of millions in annual recurring revenue from product sales as our technology scales.
We frequently get asked how we compare against others in the sector. This is very difficult, that's our only public direct competitor is Intrexon where we have a lower cost base. We are growing at a significantly higher rate and we have a very different portfolio of markets that are much nearer term in delivering strong financial performance. Our other way to compare it is the private market. Our biggest direct competitor in the private market is Ginkgo Bioworks. Based on public data from their recent fundraising, we can determine they are burning a higher level of cash. We have three markets that each will do more revenue than all of Ginkgo’s 2008 revenue. We are almost there total 2008 revenue in our third quarter. We are growing at a much higher rate.
We have leading positions in strategic markets that have billions of dollars in TAM and are growing. Our best estimate is that they will need $500 million to $700 million of new investment to reach our current run rate of performance, while we are looking at achieving positive cash generation from operations in our business in this coming year.
Our biggest negative against the competition has been our balance sheet and the equity value of our business, that's what we've been working on this year and what I'm hopeful, we will be out of going into next year. We really respect these companies and competitors and most importantly, we believe strongly that together we are making the world better and we appreciate all the work they're doing to improve and make the industry a reality for everybody.
We've also heard concern from some investors that we are selling our future. To-date, we have monetized two products through technology licenses, where we can no longer participate in the future economics. These are for number one, renewable diesel in Europe, which we monetized to Total and Vitamin E from farnesene to DSM. The combination of these two markets generated over $400 million of cash to Amyris. We have several hundred molecules, where we have proof-of-concept complete and hundreds of additional markets where we continue to have access to the long term revenue streams.
The last competitive question I'll address today is, whether our business is sustainable long term. I’ll give you three simple data points. We have over 3,000 large customers, who are buying our products globally today and expanding every quarter. We have over 20 customers, who each generate over $1 million annually and most of these are currently doubling year-on-year. Most of our products that have been commercial for over two years generate at least $1 million of annual revenue and each are growing at over 40% annually. We have a sustainable business that is the fastest growing in our sector with a strategic portfolio that is the most advantage to grow efficiently.
Our fourth quarter is starting very well. We are tracking for around $60 million of total revenue and most of it recurring. The fourth quarter can be extrapolated into a full year run rate of about $240 million for 2020. Our gross margin for the full year is continuing to trend towards the midpoint or slightly higher of our 55% to 65% guidance. We expect the gross margin continue to expand into 2020. We have already implemented actions that would reduce our cost of goods sold by $10 million on this year's volume, and we believe lower our COGS by almost $21 million for next year.
Eduardo will cover these in more detail. Our core markets are continuing to deliver very strong growth. And Eduardo will cover our operational performance and margin improvements to ensure, we deliver a full year positive EBITDA in 2020. After Eduardo and Jonathan provide their updates, I'll provide an outlook and detailed steps for our continued performance into 2020. Let me now turn to Eduardo. Eduardo?
Thank you, John, and good afternoon, everyone. Let me start by summarizing our production results.
In the third quarter, we produce 770 tons, which resulted in the total of $35 million. The product revenue portion of this corresponded to about $20 million or 56% of total revenue. We produced nine fermentation and fermentation deliver products in this quarter. Of these, four of them were ahead of reduction targets and three were in plan. Our production year-to-date is for 2,170 tons. We also have made the required process on production improvements are now on track to deliver 1,330 tons for the fourth quarter. And we will finish 2019 with a total production volume of 3,400 tons.
Two reasons, we feel confident about finishing the year, which with such a strong finish. First, as I reported in our last financial review, we continued making process and technical improvements to our squalene production processes, this change were implemented during the second and third quarter. And they are paying off in our production throughput. We are planning to finish the fourth quarter with over 475 tons of production for squalene. And in fact, squalene production for the full year will be 1,400 tons as we have plan.
The second reason is we worked hard to secure the required farnesene supply, which has allowed us to start the fourth quarter production with momentum. We are confident that we can meet the higher production expectation required for this quarter. For example, as of last Friday, we had already produced 35% of our expected volume for the quarter.
Beyond the production volume, I also wanted to share some other key accomplishments for the third quarter. As we discussed in our last earnings call, production of zero calorie sweetener resulted in a six-fold productivity improvement over our campaign in the first quarter of 2019. And we are happy to report, as John mentioned that we sold out all of our third quarter production already.
During the third quarter, we also scaled our ninth product. This product is a fragrance for one of our key partners Firmenich. This first campaign was very successful and let me give you some examples of why. Our production volume was 80% higher than target. Our quality purity measures were 100% at our goals and our unit costs were 5% lower than plan. By all measures, this first campaign was a great success.
We will introduce our second new product in the fourth quarter. In fact, our production campaign is currently underway for this new flavor product for a partner Givaudan, results to-date confirm that this production campaign will also be successful. We have clear plans to reduce our unit costs in the fourth quarter in five or for nine products. We will complete our year with our cost of goods sold on target. And let me offer one example of how we are doing this.
For Hemisqualane, we have shifted our production from North Carolina to a production site in Brazil, where we have also implemented a new process that will increase production yield by 14% and also are working on reducing our logistics and transportation costs and both of these factors will result in a unit cost reduction decrease of 18% by the fourth quarter. In 2020, we will continue to focus on this cost of goods sold and gross margin improvement in our products.
We expect to see that these improvements will amount to $46 million. And let me describe how, let me talk about this in four areas. We see a $7 million improvement in lowering material costs, primarily due to lower sourcing of farnesene. Second, $12 million improvement in our unit costs, due to technical, process, improvements and scaled efficiencies across four existing products, including our sweetener. These are efforts very similar to the one for Hemisqualane that I just described. Third, $2 million improvement from new products that we are currently scaling up in particular these two flavor and fragrance products I just mentioned we introduced this year.
If you are – in fact though, the first three points that I just mentioned, you will derive the $21 million product margin figure that John just mentioned. The fourth and final improvement that I see also in 2020 is a margin improvement due to the higher volume growth over Clean Beauty brands, Biossance and Pipette. And that should total the $46 million.
I also wanted to share a couple of examples of how we continue to optimize our capital. During the third quarter, we invested $200,000 in our plant Leland, North Carolina, and increased its production rate by 45%. This throughput improvement resulted in the volume increase that equates to about $10 million more in squalane revenue production capacity on an annualized basis.
And let me offer a second example. During the last four months, we have invested $7 million in our sweetener production line, this specific investment is in new purification equipment, which will triple production volume for the next campaign. This campaign is beginning in December and will continue into the first quarter of 2020. The revenue from the sweetener production capacity will be about $5 million per month and we expect to pay off this investment in less than a quarter.
I will close with an update upon our future production priorities for 2020 and beyond. We are progressing on our production for our plant at Barra Bonita site. As mentioned previously, we've broken ground and beginning our new next stage of sugar construction. In addition, we're moving rapidly with our production plans for CBD for 2020. We continue to work with our LAVVAN partners and are in the final stages for selecting the contract manufacturing partner and site.
Our plan is to secure this capacity to produce these two molecules that John mentioned earlier in this call. Finally, we are confident on our plan to meet the 2020 production expectation for 5,400 tons. When we remember that our 2018 production volume was 2,000 tons and that we will complete 2019 with 3,400 tons. We are proud to deliver in 2020 with 30-year old growth with more than 70% annual product volume growth. We are more than doubling revenue from this product volume as we continue to improve the mix to higher priced applications for this volume.
Now let me turn the call over to Jonathan.
Thank you, Eduardo. I'm happy to report that after achieving SEC filing and Nasdaq compliance last month, that we expect to file our Form 10-Q for the third quarter on time tomorrow.
Now during my review of our third quarter results, I will refer mostly to rounded millions of dollars. So let's review those results. GAAP revenue for the third quarter of 2019 was $35 million, compared with $14 million for the same period of 2018. Product sales and license and royalties directly connected to these product sales. Also known as the value share component of our product sales was $20 million and doubled over the $10 million in the same of 2018. Grants and collaboration revenue of $15 million in Q3 2019, compared with approximately $5 million for the same period of 2018.
Non-GAAP gross profit of $17 million or 47% of total revenue for the third quarter of 2019, compared with approximately $8 million or 53% of total revenue for the same quarter a year ago. This was largely due to higher product sales, which equated to higher CMO production costs and other costs, as we continue to work to scale our sweetener product. We expect non-GAAP gross profit will improve in the fourth quarter based on product mix as well as the steps that Eduardo and his team have taken to improve manufacturing and cost efficiencies and which he just discussed previously.
Based on product mix and collaboration milestone expectations in Q4, we anticipate that we'll end the year at the approximate midpoint or slightly higher within our gross margin of 55% to 65%. Sales, general and administrative expenses of $33 million in the third quarter of 2019, compared with $27 million for the same quarter of 2018. The increase reflects higher headcount to support our growth investment in our Biossance business and the one-time spend on expenditures for professional fees to assist in resolving our previous non-compliance filing standards.
The non-compliance expenditures comprised $7 million in expense in the third quarter and we expect now that sales, general and administrative expenses will trend down sequentially in future quarters and then resume a more historical norm. Managing these operating expenses overall is a key area of our focus as we plan for 2020.
Research and development expense of $19 million for the third quarter 2019 increased from about $16 million for the same quarter of 2018, which was due to higher R&D headcount to support collaboration work for our partners that this quarter produced over $15 million of collaboration revenue. Financially, supporting the company and maintaining reasonable working capital to meet product demand and debt requirements was certainly no easy task during the period of non-compliance of SEC filing.
As John previously mentioned, this caused us to leave some revenue on the table during Q3. And candidly and frankly, we were fortunate to have the support of board members and other investors during the period. Doing so is no easy task and we did our best to manage these activities and relevant financing terms.
We are now pleased that we have finalized resolution today and closing is expected tomorrow to refinance our CVI Heights convertible debt. We plan and anticipate to disclose the details of this as early as a filing tomorrow, November 8. With this behind us and outside of about $10 million in debt that we've managed well and extended with our partner Total. We have no material debt maturities until 2021. We believe this gives us runway on which to execute our strategic goals and growth plans. We believe that we are now in a much more financially flexible and attractive position by which to fund our necessary business and working capital needs and the interim toward achieving positive cash flow in 2020.
Many thanks and I'll now turn this back to John.
Thanks, Jonathan. We're delivering the strongest revenue growth [Audio Gap]
At this time, we will open question-and-answer session. [Operator Instructions]
Dennis, I believe that we just rejoining. This is Eduardo.
Are you guys, sorry, you guys there?
I’m sorry, yes, sir.
Okay. Where did we drop?
Dennis, we’re rejoining with John and then we'll open up for question.
Eduardo, we were just…
You were just beginning, John. We lost you when you were taking over from Jonathan.
Sorry about that. So apologies for the technical issues. We're delivering the strongest revenue growth in our industry. We are doing this both on product and total revenue and we have a solid recurring revenue base that has the potential to underpin most of our 2020 expectations.
We are making significant progress on our gross margin and our OpEx is trending down in the fourth quarter, as we put the accounting and legal costs related to our accounting issues and debt behind us. Consumers are demanding natural products that are sustainably sourced. They want these products from clean ingredients they can trace and understand. They don't want to compromise on price and performance. This is exactly what we are delivering in each of our core markets.
We are just getting started. We have a strong pipeline of new products that are making excellent progress. Our technology platform continues to lower our costs of developing and scaling new products. As we look into 2020 here's the path to positive EBITDA. We have $28 million in EBITDA improvements from the restructuring of agreements with Yifan and DSM. This includes a doubling of molecules with Yifan and a restructuring of the current vitamin agreements with Yifan.
This also includes a move to monthly payments from DSM over the next few quarters for the HMO agreement. This is both an EBITDA improvement and a contribution to 2020 revenue of about $28 million. Secondly, we expect $50 million of incremental payments for the CBD program from LAVVAN in 2020. This is also an impact to revenue and direct contribution to EBITDA improvement. We are expecting about $50 million of reduced OpEx from the elimination of all the accounting and service fees associated with the delay filings. This is already starting in the fourth quarter. This impacts EBITDA but not revenue.
We are expecting $46 million of incremental product margin from product sales, improved cost of goods sold and brand revenue growth. This is net of investment and will impact revenue and EBITDA. On the downside, we have $57.5 million of DARPA and DSM payments that were received in 2019, but will not repeat in 2020. This is the part of our revenue that is not recurring in 2019. This $57.5 million will be reflected in both EBITDA and revenue for 2019.
We are expecting three to four new molecules at commercial scale next year. This is above the two to three range, we previously communicated and reflective of our improved pipeline and technology leadership. We expect continued doubling of our product revenue and we are expecting a record year in collaboration payments. As we've said before, these collaboration payments more than fund all of our R&D costs and deliver future product revenue, as these projects represent our product pipeline and each have long term commercial supply agreements.
2019 has been a year of addressing critical balance sheet issues, getting our accounting in order, while supporting our core business activity and strategically shifting into industry leadership. 2020 will be all about getting the P&L in order, while continuing the growth and strategic execution of our business. We share a common goal with our largest shareholders. We believe the future is about sustainable chemistry that delivers natural and clean products. Consumers are demanding all over the world.
We are in a unique position. We have leading brands in the best consumer markets for growth and profitability and these brands are powered by the world's leading technology for making natural and sustainable products becoming a reality. We are extremely thankful for our partners from Raizen and Yifan to Sephora and L'Oreal, who are each global leaders’ passionate about sustainability and share our values for no compromise consumer products. We have cleared our short term debt and are now focused on establishing a stable and solid balance sheet to fully support our growth.
Thank you for your continued support. And now operator, we would really like to go to questions.
We will now begin the question-and-answer session. [Operator Instructions] We'll have a question from Amit Dayal from H.C. Wainwright. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for all the color providing on the call. It was actually very helpful. Just touching on Biossance first, your – roughly at around of half of Sephora stores, I thought John, within the next 18 months are you potential going to be at full penetration of Sephora? Or you just start to getting specific geographies?
We are – first of all, it's hard to predict that perfectly. We do know there is significant expansion happening in the first half of next year and we hope to be at most stores in North America with our whole line. So the numbers I refer to are North America, not the rest of the world. And in the rest of the world, again, it was really launched by country. Like I described on the call, and the countries I mentioned on the call are all countries, where we are entering through Sephora and focusing on Sephora as our channel in the near term.
Understood. And outside Sephora, are we exclusively tied to Sephora? Or can we also please these products with other channels?
I mean, what I would say is, at this point in time, we are very pleased with the Sephora relationship. And as long as we maintain the kind of growth level we're experiencing with Sephora, we'd expect the stay exclusive to Sephora. Those agreements come up every year. And as you can imagine, those were always interesting discussions.
Understood. So I'm assuming that these renewables will at least for the near term, continue to be put in place.
Correct.
Okay, thank you. And then moving onto the sweetener side, John, I mean, it looks like you've sold out pretty quickly, what do you sales – is there any concentration – customer concentration here right now for sweetener?
I could tell you that the larger volume of sales are going into the flavor industry. And then outside the flavor industry, it's actually very balanced and spread between customers in Latin American and customers in North America.
Understood. And the sales is going forward, will this sort of trend be intact in the near term in terms of sweetener sales to similar mix of customers in the near term?
I would say, as we go through the next 12 months North America will become a larger and larger volume driver. Just because it's a bigger, a much bigger market, right. And then, I would say, we all sort of into start seeing the consumer piece really play into the mix of total revenue for sweetener going into next year. So I would say for next year, a bigger piece of consumer and then as we end the year next year more North America versus Latin America.
Got it. And in your commentary, you indicated sort of a $60 million run rate amounting to roughly $240 million level type of sales for 2020. With products now becoming sort of a bigger portion of sales, how will the next four quarters or say the quarters in 2020 look like? We've had some lumpiness in the past, will this smooth out a little bit going forward now?
Yes, I think the way you should see the year play out is, obviously, the first quarter is always much softer and then steady through the following three quarters, by steady, I mean, just a continued growth at a constant level for the following three quarters, obviously, peaking in the fourth. So that kind of shape is, what we should expect for 2020. It's not going to be as choppy as one big one small, one big one small. It's more a smaller quarter, first quarter and then building through the year.
Got it. That’s all I have now John. I will stop here and follow up offline. Thank you so much.
Thank you, Amit. Thank you for your time.
The next question is from Graham Tanaka from Tanaka Capital Management. Please go ahead.
Yes. First off, congratulations on all that you've been doing, particularly in the balance sheet, every aspect of the company and operations also. Just wanted to get to the financing and the balance sheet side, what is the share count that you expect by the end of this year, perhaps the debt levels by the end of this year and then longer term, what are your expectations on debt? Thanks.
Lot of questions, Graham. So I will let – I'll start with Jonathan talking about the share count and some of the August things and then whatever Jonathan wants to pass to me, I'll help support.
On the share accounts side, we would anticipate issued and outstanding in the range of 103.5 – 104,000 shares. As we said a bit earlier that, we see short term debt maturing in 2021 of about $10 million, pardon me? Did when I referred to share as I think I said million shares, it’s not – that then I misled you. What were the rest of the…
Yes, fully diluted account – I guess what the investors want to hear?
Yes. I don't have that readily available and I'd prefer not to add that, but I'd be happy to follow up with you individually.
Okay, fine. Great.
Additionally, we're filing our 10-Q tomorrow. So we feel comfortable with that disclosure.
Okay. Okay. All right. Well, I guess, we'll wait to see what the announcement is going to be on refinancing the Heights debt convertible. Moving onto some of the items, which you did announce on revenues and progress on new products, this acceleration to CBD products, I didn't quite hear John, what you said would be done by in the first quarter in the CBD two molecules. Thanks.
Thanks Graham. We'll start providing samples of the first two molecules in the first quarter.
And you're providing samples to LAVVAN to some of LAVVAN's customers already?
A little bit of both. The idea is for folks to start testing and looking at formulations early. So we've got several in the mix for that.
And this would be what – how many verticals?
I can tell you that early on we've got three, well, two verticals and then obviously the flavor industry.
The flavor industry is the one that Amyris is going to be negotiating on its own.
I think in all three we have – we're currently in discussions and actively working all three. And then, both companies us and LAVVAN have different customers that we're actually bringing to the table and two them in the verticals.
Great. Okay. And these address a market center, how large?
Well, put it this way, we're not in all three. We're dealing with $1 billion customers and markets, nothing small.
Does this include the beverage market?
It does.
I can move – I could – well I did want to ask there are a lot of issues that we as investors want to know about in terms of transition. You've done a great job of breaking out what the differences in costs are going to be next year versus this year in terms of some of the non-recurring items. But just want to understand so that for planning purposes, when do you think that Biossance, Pipette and Purecane might reach a breakeven cash flow or earnings? Just roughly which quarter?
Yes, we see – I mean, obviously the fourth quarter will be a profitable quarter for Biossance of this year, but we see next year, full year being a net income positive here for Biossance. And obviously, we're still investing in Pipette and Purecane is that will be their first full years.
So they won't – they may or may not be profitable next year or you're just not sure.
Yes, I would not expect Pipette or Purecane to be profitable next year. And I do expect Biossance to be.
Okay. Thank you. I'll let you go on others. Thank you.
Thanks, Graham. I appreciate your time.
[Operator Instructions] Our next question is from Randy Baron from Pinnacle. Please go ahead.
Hi guys. John, I want to echo what Graham said and on behalf of all of your investors, just congratulate you and your team. I'm putting this annus horribilis behind us. It's a great call. So congratulations. Jonathan, I just wanted to follow up on one of the answers you gave Graham. It's a little odd that we're having a conversation where CVI Heights is a big topic, but we're not really talking about it. October 3, I just pulled up the presentation from B. Riley. It shows your $191 million fully diluted share, is that number, are we north of $200 million now? And just want to get a direction in a public forum to put that out there. Thank you.
I'll answer to two things, Randy. First of all, I completely agree that I would love to be able to share a lot more detail. We literally were exchanging signatures as we came on the call. So we don't, we think it would be irresponsible to get through a lot of detail, but we're happy to do a follow-up call once the 8-K is out and release is out in covering the details of the deal we did. So I wanted to touch that point directly. I think secondly, as you can imagine, lots of moving pieces in our outstanding or fully diluted share count. And what I would tell you is the fully diluted, I don't expect post all this to be significantly more than the number you quoted.
Okay. Well that's at least a helpful answer. As you look to next year, and now that we're kind of regaining our footing and the companies isn’t going great. But as a financial goal and concern you’re becoming more of a normal company. What do you think and maybe Jonathan, this question is for you. But what do you think a, the average cost of debt for Amyris overall is going to be next year? Call it on average. And then secondly, what are your actual cash needs going to be next year? Thank you.
Randy, we anticipate that the current cost of capital from a public debt standpoint is going to stay in the range of approximately 12%. And in terms of our cash needs, we believe that we will obtain positive EBITDA in the latter part of next year and entering that 2020 we see a need and a desire for cash capital in the range of $125 million to operating cash. So I hope that's helpful.
And is there an update on the Brazil plant on the last call? I think we talked about there may have been a partner who is going to take some of that burden off of you guys. I believe that was $70 million.
Yes, Randy, a couple of things. We're working through that with a partner and we've also had some additional options come to the table. And I also want to make sure I build on Jonathan's point about the outstanding cash needs. That includes everything which has plant that has some movement of current debt to lower costs. So there's a lot in the number. So what I would say is, starting in the second quarter, we start generating a positive EBITDA. From an operating perspective, we're self-sustaining. And the question is working capital wise plant and then trying to move the debt to longer-term lower cost options. We're obviously looking at those options and we've been approached by several fairly large institutions where we think we can actually lower our cost of capital if we could execute those deals going into the year. So I wanted to add a little color to the overall number for you.
Well, I appreciate the color. Because at some point, we all assume Amyris will be able to start borrowing against its account receivables, which shouldn't be 12%. That's the comment. John, let me just ask one last question. You mentioned biossance.com and how that's booming. Can you talk a little bit about gross margins at biossance.com? How that compares to the blend and maybe just a little bit about the lifetime value of biossance.com customers. Thank you.
Yes. Thanks, Randy. So I would tell you that, especially with the much lower discounting that we're experiencing right now, you could think of biossance.com margins in high 80s, low 90%. You could think of blended margin for Biossance at about 70%. So that gives you the first part of the answer. And then you can think about the lifetime value of customers right now running at about $1,200 to $1,400 per customer and growing very rapidly. Because, as you can imagine, as our loyalty percentage is going up, obviously our lifetime value is starting to grow pretty quickly. I would not be surprised over the next six months or so, if our lifetime value doesn't exceed $2,000 and we don't get to about 60% or better repeat customer base.
[Operator Instructions] We have a question from Graham Tanaka from Tanaka Capital Management. Please go ahead.
Yes. John, you had mentioned that or maybe it was actually Jonathan, I'm not sure which one you guys mentioned that. Expect double the collaboration payments. Did I hear that properly? Which would more than pay for R&D. I wasn't sure if I heard that correctly. And if so, what are the main sources of that for next year? Thanks.
Yes. We – Graham, I had mentioned that during the initial part of the call and there's actually two comments there. One is that currently, our collaboration payments more than pay for all of our R&D expenses. I think the second statement is that we are in the process of year-on-year just about doubling our collaboration payments. The major driver of that – there are two major drivers, the biggest is obviously, the LAVVAN partnership. And the second is the Yifan partnership. And those two are changing significantly. The Yifan partnership was about double in cash coming in next year. And then LAVVAN as I said before, is about $50 million incremental next year versus this year.
So LAVVAN is – just to be clear. The LAVVAN, is that going to be $15 million or 20 million this year and then being increased by $50 million?
Yes, between $20 million to $25 million this year and increasing by $50 million next year.
In other words $70 million to $75 million next year.
That's correct.
This would be kind of spread out over the year or front loaded because the acceleration of the two molecules?
It's actually pretty spread out when the milestones get delivered.
And so this is going to provide – this is going to be all cash, right? So it should provide – what proportion of your cash needs are going to be provided by these collaboration payments. Obviously it's more than the R&D and maybe a big chunk towards the capital spending.
Yes. I would say about 70% to 80% of our cash needs will be provided by the collaboration payments next year.
Of your cash needs for working capital plus CapEx?
Well, everything but what I'll call production working capital, right. The cycle of paying for raw materials to make products, but everything else will get funded by a 70%, 80% level by the collaboration cash.
I guess, I should – sorry to be asking it specifically, what might your capital expenditures be next year versus this year? And then kind of to close a loop, how much funding might you need in terms of additional debt at that lower cost next year? Thanks.
Yes. I mean, we've not disclosed that publicly and we really don't want to put that out there at this point. But I'll answer part of the question, which is, from a CapEx perspective, what are the needs next year? And based on what we're putting into the plant this year or by the end of this year, you could expect somewhere around $50 million, maybe probably more than that to be our CapEx needs going into next year.
And that's roughly versus how much spent this year – can be spent this year?
To be spent this year, I think when we're done this year, there's probably around $30 million to $40 million total CapEx somewhere in that range.
But not a big increase.
No.
Thank you.
And our next question is from Randy Baron from Pinnacle. Please go ahead.
Hi. Sorry that we're cycling. I just want to follow-up on the cash question and what Graham was asking. Just the warrant cash, are you still expecting warrant cash plus everything you talked to Graham to cover your needs? Or how much is the warrant cash could it raise at this time? Thank you.
Yes. No, Randy, without stating an exact amount, I'll answer the question this way. Between what I'll call lower cost, much longer term structured debt and our warrants, we think there's a high possibility of covering most if not all of our cash needs.
Fantastic. Thank you.
You're welcome.
And this will conclude our question-and-answer session. I would like to turn the conference back over to John Melo for any closing remarks.
Great. Thank you very much. Well, I'd like to thank everybody for making the call. And I’d like to also just thank you for your continuous support. It is so pleasing, I think for us and I'm sure for all of you to be able to have a quarter where we're back to normal. Having an earnings call, getting the Q on file and then ensuring that we're getting our debt corrected and getting defaults out of our way, so we could focus on having a normal business environment. So we're happy to be here and we're really looking forward to a good fourth quarter and a great 2020 ahead of us. Thank you and look forward to seeing some of you as we travel or have calls over the coming months. Have a great evening everyone.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.