What happened
Shares of Amyris (AMRS +0.00%) jumped nearly 23% today after the company announced the preliminary details of a long-awaited financial transaction with a major technology licensee and shareholder.
The synthetic biology pioneer's technology is used to manufacture a key chemical precursor to vitamin E, which allowed it to receive royalties from DSM (a Dutch multinational active in the fields of health, nutrition, and materials) on vitamin E sales. The pair have agreed to simplify the arrangement. DSM will acquire the royalty agreement from Amyris for $57 million, which exceeds the minimum royalty payments due under the original agreement. Under those terms, DSM committed to pay Amyris at least $33 million in total royalties from 2018 through 2020. The full details of the latest transaction will be available in an SEC filing later this week.
As of 1:22 p.m. EDT, Amyris stock had settled to a 19.6% gain.
Image source: Getty Images.
So what
The transaction has multiple implications for the business. First, the simplification alleviates what became a major headache for Amyris and its shareholders. The company was overestimating the royalties due from vitamin E sales throughout 2018. In fact, it recently announced it would have to restate past financial statements to reduce royalty revenue by at least $12 million. Cutting ties to the vitamin E market prevents that problem (albeit of management's own making) from recurring.
Second, it seems that selling the royalty agreement to DSM is the "business transaction" mentioned earlier this week in the company's last-minute effort to pay off a maturing batch of convertible debt. Roughly $57.6 million in debt came due this past Monday, but Amyris scrambled to repay the debt with an "equity investment" from Foris Ventures and a "business transaction." An SEC filing shows that Foris Ventures extended an $8 million loan to the company (not quite an equity investment), but that left the business in need of an additional $50 million or so to fully repay the convertible notes.
Investors can't know for sure until the full details are disclosed in an SEC filing later this week (an 8-K). Based on the preliminary details, it seems most of the $57 million in proceeds will go to paying down old debt, paying back Foris Ventures for the recent $8 million loan, and paying back Foris Ventures $2.5 million for yet another debt transaction that closed on April 15.
Now what
Amyris also noted that separate from the DSM royalty agreement sale, the pair agreed to alter a manufacturing agreement that could provide the synthetic biology pioneer with $30 million to $40 million in cost savings in the next three years as it looks to produce various commercial-scale products. Investors should take a "wait and see" approach to that news, as past "economic benefit" agreements have failed to materialize.
That said, while it's good to see Amyris make progress on its debt position, selling off assets isn't a sustainable way to remain in business. After all, Amyris sold its lone manufacturing facility in late 2017 for (ironically) $57 million to DSM. It used proceeds to repay debt and told investors it would realize positive product gross margin in 2018 as a result. The company ended up spending $1.15 to generate $1 in revenue last year. Simply put, until the business starts delivering on its lofty promises, investors should steer clear of this stock.
