Amyris: Delay To Key Strategic Transaction; May Run Out Of Funds (NASDAQ:AMRS)

Note

I have covered Amyris, Inc. (NASDAQ:AMRS) previously, so investors should view this as an update to my earlier articles on the company.

On Tuesday, specialty renewable products developer Amyris tried to reassure investors regarding its ability to close a much-touted strategic transaction in the very near future:

Amyris (…) today announced that it has completed the negotiation of key financial and business terms of the previously communicated strategic transaction for the exclusive rights to supply two of Amyris’ ingredients.

The transaction is subject to antitrust review under the Hart-Scott-Rodino Act (“HSR”) with a standard waiting period of thirty days. Accordingly, the transaction is expected to sign and close early in the first quarter of 2023. Both parties have agreed to confidentiality regarding further details about the transaction during this period.

The transaction, with an expected value of over $500 million, is expected to follow a structure similar to those completed by Amyris in 2021, and include an exclusive worldwide license for the distribution, marketing and selling of two Amyris ingredients. Amyris would continue to develop, scale and manufacture the ingredients. In addition, the parties are expected to enter a long-term R&D collaboration partnership for the development of new molecules.

Please note that according to statements made by CEO John Melo on the Q3 conference call last month, board approval was anticipated for early December and the transaction to close before year-end. At that time, there was no mention of a mandatory antitrust review.

While on the surface, a one-month delay doesn’t appear to be earth-shattering, at least in my opinion there are several issues with Tuesday’s announcement:

1. While the company announced it has “completed the negotiation of key financial and business terms” the transaction appears still far from being cut and dried. Usually, a definitive agreement is signed and approved by the board of directors and then submitted for antitrust review. But this does not seem to be the case here. That said, the parties could still file a signed term sheet or letter of intent (“LOI”) for review but the press release does not provide any information regarding this key issue. As of this point, investors simply don’t know if a HSR filing has been made already and what issues are really causing the ongoing delay.
2. Two weeks ago, Amyris surprisingly fired its long-standing Chief Legal Officer and Secretary Nicole Kelsey, a highly unusual move in the midst of key strategic negotiations and another major red flag regarding the terms of the proposed transaction.
3. Applying the terms of a similar strategic transaction with related party DSM Nutritional Products (“DSM”) last year, the upfront cash payment might be well below the $350 million threshold frequently asserted by management. Receiving up to 70% of the deal value upfront would result in rather low earn-out and manufacturing payments. Even if the company manages to extract the targeted $350 million upfront, this would greatly increase the likelihood of manufacturing the ingredients at a loss for many year to come.
4. Amyris is running out of funds. Even when assuming a 25% sequential reduction in quarterly cash usage and considering the funds raised so far in Q4, the company is likely to run out of cash next month.

Thanks to the tireless work of fellow contributor In The Ruff Research, it seems fair to assume Swiss fragrant and beauty giant Givaudan SA (GDVBF) being the likely suitor of the company’s Squalane and Hemisqualane ingredients.

Unfortunately, the business includes the company’s Apprinova joint venture with subsidiaries of Japanese Nikkol Group which resulted in the recent requirement to acquire virtually all membership interests from the joint venture partners for a purchase price of $49 million in cash plus an estimated $2.4 million in additional payments. Nikkol Group will retain a 1% ownership in Apprinova.

The Apprinova purchase is expected to close until February 15 so Amyris will apparently use a good chunk of the anticipated upfront payments to pay out Nikkol Group thus reducing the net proceeds of the strategic transaction by more than $50 million.

Bottom Line

At least in my opinion, something fishy is going on regarding the proposed strategic transaction as a definitive agreement apparently still hasn’t been reached and Amyris firing its long-standing Chief Legal Officer on the homestretch of a key strategic transaction.

Moreover, applying the terms of a similar transaction with DSM last year, upfront cash proceeds might be substantially below the $350 million projected by management.

In addition, the delay will likely require the company to conduct another emergency financing next month.

But even if the company manages to close the deal by the end of next month at the terms envisioned by management, the requirement to acquire the Apprinova JV will reduce net cash proceeds by more than $50 million.

Generously assuming quarterly cash usage to decrease to $75 million next year, absent further asset sales, the company would run out of funds again in early 2024.

Should my suspicions be correct, I would expect shares to mark new all-time lows next year.

Investors should continue to avoid the shares, until Amyris finally starts delivering on management’s promises.

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