AMRS - Amyris: New Debt Defaults Unsustainable Capital Structure - Sell

2023-05-10 18:00:07 ET

Summary

• Cash-strapped specialty renewable products developer reports another set of weak quarterly results.
• Despite accounts payable ballooning further to $200 million, Amyris burned another $95 million in cash. At the end of Q1, outstanding debt principal had increased to $962 million.
• Company discloses defaults related to $92.5 million in senior secured debt obligations. Lenders have agreed to forbear from exercising their respective rights until June 23.
• Based on my assumptions for the company's Q2 cash usage, I would expect Amyris to be virtually out of funds by the end of June again.
• Given the likely requirement to raise a substantial amount of additional capital over the course of this year or even pursue a restructuring under chapter 11 of the U.S. Bankruptcy Code, I believe investors should continue to avoid the shares or consider selling existing positions.

Note:

I have covered Amyris, Inc. (AMRS) previously, so investors should view this as an update to my earlier articles on the company.

After the close of Tuesday's regular session, cash-strapped specialty renewable products developer Amyris reported another set of weak quarterly results with all-important consumer revenues down on a year-over-year basis and gross margins remaining firmly in negative territory even after adjusting for a $4.2 million inventory write-off related to the decision to exit the company's just recently acquired EcoFabulous brand.

Management blamed the disappointing consumer revenues on a lack of marketing spend as the company's liquidity remained notoriously tight.

Despite accounts payable ballooning further to $200 million, Amyris burned another $95 million in cash during Q1.

At the end of the first quarter, outstanding debt principal had increased to a new all-time high of $962 million.

Subsequent to quarter-end, the company finally managed to close on a much-touted strategic transaction with Givaudan SA ([[GVDBF]], [[GVDNY]]) and received $200 million in desperately-needed funds but nevertheless failed to honor an aggregate $92.5 million in senior debt obligations, as disclosed in the company's quarterly report on form 10-Q:

On May 9, 2023, the Company entered into forbearance agreements (Forbearance Agreements) with each of DSM Finance B.V. ((DSM)), Foris Ventures, LLC (Foris), and Perrara Ventures, LLC (Perrara) (collectively the Lenders), pursuant to which the Lenders agreed to forbear from exercising their respective rights and remedies related to certain payment defaults under the following agreements until June 23, 2023: (i) the Amended and Restated Loan and Security Agreement (DSM LSA), dated December 12, 2022 (as amended, restated, supplemented or otherwise modified from time to time), by and among the Company, certain subsidiaries of the Company party thereto, and DSM, (ii) the Amended and Restated Loan and Security Agreement (the Foris 2019 LSA), dated October 28, 2019 (as amended, restated, supplemented or otherwise modified from time to time), by and among the Company, certain subsidiaries of the Company party thereto, and Foris, (iii) the Loan and Security Agreement (the Foris 2022 LSA), dated September 13, 2022 (as amended, restated, supplemented or otherwise modified from time to time), by and among the Company, certain subsidiaries of the Company party thereto, and Foris, and (iv) the Loan and Security Agreement (the Perrara LSA), dated March 10, 2023 (as amended, restated, supplemented or otherwise modified from time to time), by and among the Company, certain subsidiaries of the Company party thereto, and Perrara.

In exchange for each of the Lenders entering into a Forbearance Agreement, the Company agreed to certain conditions and covenants, including, among other things, (1) with respect to the DSM LSA, the ongoing payment of 20.0% interest per annum on outstanding principal amounts under the DSM LSA, and (2) with respect to each of the DSM LSA, Foris 2019 LSA, Foris 2022 LSA, and Perrara LSA, the ongoing payment of default interest to each Lender during the forbearance period. Except as set forth above, all other terms, conditions and rights of the DSM LSA, Foris 2019 LSA, Foris 2022 LSA, and Perrara LSA and the related transaction documents remain in full force and effect, which were described in the Company's prior disclosures.

On the conference call , management tried to downplay the issue and stated its belief to successfully negotiate an adequate long-term solution until the end of the forbearance period on June 23.

Quite frankly, I do not expect this to be the case as senior creditors like DSM and John Doerr only agreed to the bridge financings under the provision that Amyris would use parts of the funds received from Givaudan to repay them immediately after the close of the strategic transaction.

In addition, the company's capital structure looks unsustainable with almost $1 billion in debt and estimated additional cash outflows of at least $250 million for the remainder of the year.

On the call, management pointed to anticipated proceeds of between $50 million and $100 million from a new biomanufacturing joint venture currently under negotiation and another $100 million from the sale of certain consumer brands (down from the $150 million projected on the March conference call).

In addition, the company hopes to advance the proceeds of up to $350 million from future performance-based earn-outs and milestone payments related to recent strategic transactions.

Quite frankly, I would be surprised to see the company generating any meaningful cash proceeds from its efforts to reduce its portfolio of consumer brands in the current market environment.

Moreover, I do not expect Amyris to receive material upfront cash from the proposed biomanufacturing joint venture either as the partner will apparently be on the hook for both working capital and the construction of a new plant.

Lastly, I believe it will be difficult for the company to monetize potential earn-outs ahead of time, particularly after Amyris just failed to perform under a $100 million earn out-related promissory note issued to DSM last year.

Based on my assumptions for the company's Q2 cash usage, I would expect Amyris to be virtually out of funds by the end of June again:

Clearly, in my opinion something needs to happen for the company to become a sustainable business and get back on track with key suppliers and stakeholders following a number of recent lawsuits and a surprise termination notice from manufacturing partner Renfield Manufacturing LLC:

In October 2021, the Company entered into a 10-year manufacturing partnership agreement with Renfield Manufacturing, LLC (Renfield) to provide manufacturing services and third-party logistics processes, including inventory management, warehousing, and fulfillment for certain of the Company's consumer product lines. On September 22, 2022, Renfield notified the Company that it was terminating the Manufacturing and Fulfillment Agreement and the Right of First Refusal Agreement due to failure to pay certain amounts due to Renfield. The Company disputes Renfield's allegations and the purported termination of the two agreements.

Amyris has also been served with a complaint by the sellers of Beauty Labs International, a business acquired by the Company on August 31, 2021 alleging, among other things, a breach of contract related to $31.3 million in earnout payments.

In addition, the company's new, large-scale precision fermentation facility in Brazil is still awaiting full commissioning as the company simply lacks the funds to pay for the remaining capital expenditures.

Judging by the trading price of the company's convertible bonds, noteholders are already anticipating a major haircut in a potential restructuring down the road:

While Director and key stakeholder John Doerr has repeatedly helped the company to avoid bankruptcy in recent years, the terms of the March bridge loan required immediate repayment following the receipt of the Givaudan funds thus signaling a potential change to Doerr's approach.

That said, I can't remember Doerr trying to take control of a company in bankruptcy in recent years so he might very well continue to just throw good money after the bad here.

At least in my opinion, the company should try to negotiate a comprehensive solution for its persistent debt and liquidity issues with Doerr taking control of Amyris in return for an adequately-sized debtor-in-possession financing sufficient for the company to become a self-sustaining entity without the requirement for repeated asset sales going forward.

Bottom Line

Given ongoing, elevated cash requirements and very limited near-term funding availability, I believe Amyris will likely run out of funds again at the beginning of the third quarter.

With the company currently in default under a number of senior debt facilities, it might be time for management and key stakeholder John Doerr to consider a comprehensive solution for Amyris' persistent debt and liquidity issues.

While management still expects up to $200 million in cash proceeds from the sale of non-core brands and the potential formation of a new biomanufacturing joint venture, investors would be well-served to take these projections with a huge grain of salt, particularly when considering the current market environment.

Given the likely requirement to raise a substantial amount of additional capital over the course of this year or even pursue a restructuring under chapter 11 of the U.S. Bankruptcy Code, investors should continue to avoid the shares or consider selling existing positions.

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