It appears that Amyris (NASDAQ:AMRS) is finally turning a corner. High-margin product revenue from consumer brands is growing at a healthy clip. If the trend continues throughout 2020, then it's possible the business could be on the path to generating operating income and positive operating cash flow in the next year or two even after factoring in large investments in a new manufacturing facility. 

However, as if often the case with the synthetic biology pioneer, investors need to dig deeper than the company's press releases and storytelling. A closer look at SEC filings reveals that a balance sheet item called "deferred cost of product revenue" is accumulating at a rate that makes little sense when compared to public statements by management. 

At the very least, the issue raises some unanswered questions for investors. What does it all mean for the small-cap stock?

A 96-well plate such as those used in biotech labs.

Image source: Getty Images.

A solid strategy is in place

Amyris is an industrial biotech company that engineers microbes to manufacture renewable chemicals at commercial scale. The business has thrown its technology platform at renewable fuels, anti-malaria compounds, hand cleaners, lubricants, car tire materials, and other markets with little sustainable success. That might be changing, however, as the company has wisely turned its focus to three high-margin consumer brands: Biossance in cosmetics, Purecane in zero-calorie sweeteners, and Pipette in personal care.

Consumer brands generate higher margin revenue than selling bulk ingredients to other businesses for a handful of reasons. By volume, the company's moisturizer ingredient might only comprise a very small percentage of all ingredients in a face lotion. If Amyris sells the ingredient to a larger brand, then it only captures a fraction of the value of the cosmetic product. But if Amyris sells the face lotion product, then it captures all of the value. In effect, the latter scenario makes the moisturizer ingredient worth several times more to the company. 

Similarly, selling products directly to consumers through online channels -- a brand's website or an online retailer -- results in significantly improved margins compared to selling through a physical retail store such as Sephora. The coronavirus pandemic has inadvertently pushed all sales into the highest-margin channels.

If first-quarter 2020 operating results are any indication, then Amyris could finally be reaping the benefits of its new "consumer first" strategy. 

Metric

Q1 2020

Q1 2019

Change (YoY)

Renewable product revenue

$17.8 million

$11.9 million

50%

Total revenue

$29.1 million

$14.4 million

102%

Cost of product revenue

$11.8 million

$17.7 million

(34%)

Product gross margin

33.9%

(48.9%)

N/A

Operating income

($31.8 million)

($49.4 million)

N/A

Data source: SEC filing. YoY = Year over Year.

But things are never quite so simple with Amyris. 

The latest source of financial uncertainty

Investors that dig through SEC filings will see reasons for caution among optimism stemming from recent operating results. For example, Amyris recorded no operating lease amortization expenses in cost of product sold in the first quarter of 2020, but recorded $1.8 million of such expenses in the year-ago period. That alone accounted for 30% of the improvement in cost of product sold in the comparison period. 

To be blunt, that's not a big deal in the grand scheme of things. It might not be so easy to dismiss how the company accounts for cost of product revenue related to its Purecane zero-calorie sweetener ingredient. 

Amyris currently has a contract with DSM to produce the ingredient through 2022. In late 2018, Amyris began accounting for a large portion of the cost of sweetener products sold as a deferred asset. Rather than report the cost on the income statement when incurred, the business has chosen to expense the amount to cost of products sold on a units of production basis as Purecane is sold over time. 

There isn't necessarily anything wrong with that accounting strategy. To be sure, despite its warts in other areas, Amyris has been the most transparent industrial biotech when it comes to reporting manufacturing expenses. Peers have hidden ramp-up expenses in research and development expenses or other categories, but Amyris has been relatively straightforward. 

That's what makes the recent decision to defer capacity fees related to Purecane product revenue disappointing for investors, especially considering the deferment has been adding up in recent quarters. 

End of Quarter

Deferred Cost of Product Sold, Current

Deferred Cost of Product Sold, Non-Current

Total Deferred Product Costs

Q1 2020

$3.5 million

$12.8 million

$16.3 million

Q4 2019

$3.7 million

$12.8 million

$16.5 million

Q3 2019

$1 million

$15.9 million

$16.8 million

Q2 2019

$1.5 million

$15.9 million

$17.4 million

Q1 2019

$1.5 million

$9.0 million

$10.5 million

Q4 2018

$0.5 million

$2.8 million

$3.3 million

Data source: SEC filing. YoY = Year over Year.

According to SEC filings, Amyris says it will expense the deferred cost of product revenue (an asset on the balance sheet) to cost of product revenue (an expense on the income statement) as Purecane products are sold. As SEC filings make clear, the company hasn't expensed much of the deferred costs of Purecane products to the income statement in recent quarters. 

Does that mean the product isn't selling? Or does that mean Amyris isn't properly recording a contract with DSM? 

The numbers don't square up with public statements from management. On the first-quarter 2020 earnings conference call, CEO John Melo stated the "second-biggest revenue contributor for the year is expected to be our zero-calorie natural sweetener from sugarcane". On the same call with investors and analysts, COO Eduardo Alvarez stated "we are in the middle of our next production campaign for our sweetener product". 

If Amyris expects Purecane to be the second-largest revenue generator in 2020, then investors might expect a large amount of the deferred cost of product revenue to be expensed in the next three quarters. If Amyris is currently producing the next batch of Purecane products, then investors might expect the deferred cost of product revenue to jump in the next three quarters. So, what's going on?

Investors might be understandably nervous considering improper accounting of an unrelated contract with DSM in 2017 and 2018 forced Amyris to restate multiple years of financial statements and crashed the stock price to all-time lows. I was the only industry analyst to report on the issue before it came to light.

A hand drawing a stick figure holding up a falling chain of dominoes.

Image source: Getty Images.

Management needs to provide more answers

Investors need more clarity from management on this issue. On the first-quarter 2020 earnings conference call, Amyris said it expected Purecane to be the second-highest revenue generator in 2020 and said the next production run was under way in early May. If more product is on the way, then what will happen to the product presumably sitting in inventory and waiting to be expensed? Will the company need to write it off? That would have certainly made product gross margin less impressive during the most recent quarter. 

This is an issue worthy of the attention of investors. It shouldn't be downplayed, especially given the company's history of overpromising and underdelivering. Amyris very well could be on the path to building a sustainable business with consumer products, but investors can't be too sure given the large discrepancies in Purecane products in recent quarters.