It seems pretty certain that the coronavirus pandemic will cause a recession in the United States and globally. It's a little too soon to know whether the economic fallout will expose the flaws in Silicon Valley's growth-at-all-costs and debt-binging funding models. If such a reckoning takes place, then the hype-driven field of synthetic biology is in a pretty poor position.
Take Amyris (AMRS 50.00%) as an example. It issued full-year 2019 operating results last week that spooked investors. It's impossible to tease out exactly how much of the tumble was due to macro concerns, and how much was due to company-specific anxieties, but investors don't seem to be running into the plunging small-cap stock.
When the company issued an update in an attempt to clarify the latest results and add more detail, it didn't quite help. Again, the broader market is falling, but Amyris still hasn't published the numbers investors actually need to see.
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Manufacturing renewable products (and losses)
Amyris is an industrial biotech company combining robots, machine learning, and an army of smart scientists to engineer microbes capable of spitting out renewable chemicals. Synthetic biology is a promising approach to designing and manufacturing materials, but for all of the cool science and potential, there's simply not been much progress in turning any of it into sustainable business.
In 2019, the business reported an operating loss of $122 million, and spent $1.27 to generate every $1 in product revenue. It ended the year with a book value (the net value of all assets and liabilities) of negative $255 million. Amyris reported a cumulative operating loss of $980 million from 2012 to 2019.
The company has been able to keep the lights on through a series of dilutive transactions, asset divestitures, hyped up marketing from friendly conference platforms, and simply maintaining a pulse during the greatest economic expansion in American history. Investors gave a lot of unsustainable businesses the benefit of the doubt during that time. Why not?
The answer is moot at this point. Given the threat of a global recession, investors might not be willing to take on such risks. Corporate America is drowning in debt, partly because debt has been historically cheap in recent years and partly because everyone thought it was a good idea to spend trillions of dollars on share buybacks.
Amyris has told investors that it can survive any coming downturn, but investors need to consider all possible outcomes, especially the ones where Amyris is a relatively low priority for a fiscal rescue. Unfortunately, investors don't have all the information they need -- even after the latest update this week.
The latest update didn't go far enough
When Amyris reported full-year 2019 operating results, it didn't separate out the performance of its consumer brands. They have the highest potential to generate gross profit and thrust the business onto sustainable footing, but that doesn't appear to be happening. The business reported a product gross margin of negative 27.3% last year.
The company attempted to assuage nervous investors with its latest update. To be blunt, it wasn't enough. Amyris still hasn't provided detailed GAAP revenue and gross profit for its consumer brands.
- CEO John Melo stated, "Our product gross margin for existing products was 36% in the fourth quarter of 2019, which was an improvement from 3% in the first quarter of 2019." Investors can't be sure what that means. Amyris reported product gross margin of negative 43% and negative 23%, respectively, in the first quarter and fourth quarter of 2019. Simply put, the company is relying too much on adjustments and adjectives.
- Amyris said its direct-to-consumer business is expected to generate $100 million in retail sales (a meaningless metric for investors) and $60 million in revenue (investors should focus on this metric) in 2020. If the company achieves its projected 66% gross margin for its consumer brands, then that would be excellent news for investors. It really could be what investors have been waiting years to realize. But, as noted above, investors can't be sure how the company is arriving at those figures.
- Amyris reminded investors that the exercise of warrants earlier this year resulted in $57 million in proceeds to its balance sheet, which provides a cushion compared to the $270,000 in cash reported at the end of 2019.
- The business says the exercise of additional warrants could allow it to raise an additional $100 million in the short-term, but those transactions would dilute shareholders by 34%. Investors weren't exactly reassured by that statement.
- Amyris maintained that it has enough inventory to weather a manufacturing shutdown for the entire second quarter or longer. It's not clear investors are worried about inventory during the coronavirus pandemic, but the second and third order effects from the global health crisis.
Amyris might say it doesn't want to provide detailed performance metrics for its consumer brands for competitive reasons, but that might be unacceptable for investors.
Solazyme proved the importance of pursuing consumer brands in the middle of the last decade. The company issued detailed revenue and gross profit metrics for its algae-based cosmetic brand, Algenist, which hit $25 million in revenue at a 67% gross margin in 2014. It, too, had deeply committed partners with big bank accounts and reputable shareholders. It won a couple of high-profile industry awards. It even pioneered the animal-free protein market before it was cool.
Unfortunately, Solazyme went bankrupt when operating losses piled up and an expensive manufacturing facility in Brazil encountered too many setbacks. Amyris managed to pivot away from similar problems, but investors are keenly aware the business remains in a precarious position.
One more time, with feeling
It would be a little easier to extend the benefit of the doubt to Amyris if management had done a better job earning the trust of investors in recent years. At various times in the last decade the company's main focus shifted from malaria treatments to renewable transportation fuels, polymers, lubricants, solvents, direct-to-consumer hand cleaners, and pharmaceutical ingredients. Amyris overpromised and underdelivered each and every time. None of those products are in active development today.
Amyris is now focused on small-scale volumes of flavor and fragrance molecules, a non-zero sweetener ingredient, cannabinoids, and a promising portfolio of direct-to-consumer personal care brands. If the right mix of those products finds market success, then this time really could be different for the company and its shareholders. Unfortunately, that's also true for the company's ability to successfully walk another financial tightrope during a global recession.
In a bid to gain the trust of investors, management can adopt straight talk and present GAAP revenue and GAAP product gross margin, not year over year percentages from shifting bases, for its consumer brands. If the company's portfolio of products is growing as suggested by adjusted numbers, then what does Amyris have to lose?
