What happened

Shares of Amyris (NASDAQ:AMRS) dropped as much as 32.1% today after the company reported third-quarter 2018 results. The business reported a 39% decline in revenue compared to the year-ago period, and racked up a $31.1 million operating loss in the most recent quarter. The giant leap backward was the result of sharply lower royalty and licensing revenue -- the key driver for the business in recent periods -- recorded in the third quarter of this year. 

While CEO John Melo characterized the disappointing results as being driven by the "volatility" and "unpredictable nature of the vitamin E market," Wall Street realizes that explanation doesn't add up. After all, royalty and licensing revenue dropped from $18.3 million in the first half of 2018 to just $142,000 in the third quarter. Turns out, this isn't that surprising.

As of 10:21 a.m. EST, the stock had settled to a 29.3% loss.

A declining chart on a chalkboard.

Image source: Getty Images.

So what

While Wall Street appears to have been caught off guard by the sudden deterioration in the company's financial reporting, The Motley Fool reported in detail the worrisome accounting mess brewing for Amyris back in August.

The problem hidden in plain sight was Amyris' use of a new accounting rule called ASC 606. The company applied the rule to estimate royalties created two steps removed from its part in the value creation chain for its vitamin E ingredient application, despite the fact that it was virtually impossible to accurately estimate amounts it was owed. Indeed, the most recent quarterly SEC filing showed that 86% of royalty revenue reported by the business in the first half of 2018 was related solely to the new accounting rule.

That discrepancy caught up with Amyris in the third quarter of 2018. The company was forced to significantly reduce its estimates for royalty revenue to just $142,000 in the most recent quarter, compared to $18.3 million in the first six months of the year -- of which $15.7 million never actually changed hands.

Now what

The worst may be yet to come, as Amyris could be forced to restate its past financial statements if the outstanding portion of the $18.3 million in royalty revenue isn't collected in a reasonable amount of time. Simply put, investors should avoid this synthetic biology stock.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.