Here's a list of words that were not uttered during the first-quarter conference call of synthetic biology leader Amyris (NASDAQ: AMRS ) on May 8:
- "Convertible debt notes"
- "$90 million"
Although it wasn't discussed on the call, the company did sneak a nugget into its press release about possibly raising $100 million in debt notes in favorable market conditions. I didn't think the market conditions were favorable, but I did daydream about a hypothetical version of Amyris that had more than$100 million on its balance sheet. Well, the company that is 20% owned by energy giant Total (NYSE: TOT ) thought otherwise, and decided to successfully offer, price, and close a financing deal amounting to $75 million in convertible debt notes with an option to grant an additional $15 million.
Amyris' ability to raise much-needed funds certainly means great things for shareholders, but there are some not-so-great conclusions from the deal, as well. Let's review the good, the bad, and the ugly, and what it means for your investment.
Heck, how's finally having cash on hand for some good news? This should alleviate any fears over growing concerns that were stated in the latest 10-K. If Amyris raises the maximum amount of funds, then investors can expect the company to end the second quarter with close to $100 million on its balance sheet after paying off a $25 million loan attained in the first quarter, and paying nearly $10 million to Total to retire old debt -- described in "The bad." To put that in perspective, the company hasn't ended a quarter with this much cash since the first quarter of 2012. Better yet, the company is in a much better place, both financially and technologically, than it was then.
It's also encouraging that Amyris was able to find suitors for the notes, and offer them at just 6.5% -- a relatively low and acceptable interest rate. Temasek purchased at least $10 million of the notes, despite just purchasing $28 million in notes in the first quarter and already owning more than 10% of Amyris. That hardly paints the picture of doom and gloom that others might conjure up about the company's future. While there are risks, I tend to agree with Temasek that the potential rewards are large and attainable.
Last but not least, this could be the last financing deal Amyris needs while on shaky financial footing. That doesn't alleviate the need for financing, but it provides flexibility for operations, and instills confidence in investors for future offerings. Consider that the synthetic biology leader is already guiding to achieve cash-flow positive operations in 2014. In fact, its biorefinery in Brotas, Brazil is expected to contribute $10 million-$15 million in cash this year, and $40 million-$50 million in 2015. Couple that with collaboration inflows of up to $70 million in both years, and the opening of a second facility twice as large as Brotas in 2016, and you can see the importance of the financing round.
Unfortunately for shareholders like me, it can't all be good news. While Amyris expects maximum net proceeds of nearly $86 million, investors should expect that to dwindle down by an additional $35 million. The company will need to pay off a straight-term loan of $25 million in addition to a $9.7 million payment to Total, which is allowed to exchange new debt notes for old debt notes under an existing agreement that protects the company from diluting itself. With $35 million essentially gone, the true net proceeds get less optimistic if the company does not raise the maximum amount from the financing. It appears that may partially be the case, as an SEC filing from Temasek shows just $10 million in notes. If that's for the option to purchase up to $15 million in additional notes, then Amyris fell $5 million short from the maximum financing possible.
In other words, investors should think of the financing in two parts: (1) debt consolidation of nearly $35 million, and (2) raising an additional and much-needed $50 million, at the most. The company ended the first quarter with $49 million in cash, so after accounting for the two parts above, and cash burned during the quarter, you'll arrive at an estimated $90 million in a best-case scenario. I consider that a major improvement over the quarter-to-quarter exercise of fretting over cash, but it's clear that Amyris is still paying for past engineering mistakes.
Even more unfortunate for shareholders like me is the fact that it can't all be good and bad news. Sometimes, it just has to get ugly. Some simple math shows that offering a maximum of $90 million of notes that convert to common stock valued at $3.74 per share equates to an additional 24 million shares hitting the market. That will increase the current number of outstanding shares by 31% when the notes come due! That kind of dilution will be tough to swallow for some investors -- and it's one of the biggest reasons to avoid Amyris as an investment. Investors need to decide for themselves if the risk and/or dilution are worth the potential reward.
Foolish bottom line
Honest investors will look at the financing with three different lenses on -- none of which are rose colored. There's good news to cheer about, bad news to gripe about, and ugly news to scream into a pillow about. If the company achieves cash-flow positive operations in 2014, then the cash raised could go much further than any past financing deals. Hopefully, this will provide the bargaining and financial power needed to complete the 65,000 metric ton per year farnesene facility for performance materials (tire applications), which could add more than $150 million in revenue by 2017, and considerably more at nameplate capacity.
Dilution isn't something investors can find comfort in, but at least Amyris will be able to continue cleaning up its financial mess on its way to rewarding patient investors. I'll be looking to add to my position in the coming weeks, and continue holding for the long haul.
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