Seeking Alpha

Alex Daley's  Instablog

Alex Daley
Send Message
Alex Daley is the senior editor of Casey’s Extraordinary Technology. In his varied career, he’s worked as a senior research executive, a software developer, project manager, senior IT executive, and technology marketer. He’s a technologist who has collaborated on the development of... More
My company:
Casey Research
View Alex Daley's Instablogs on:
  • The Biggest Mistake Tech Investors Make

    Arguably the biggest and most often committed mistake we tech investors make is to get so caught up in the promise of a company's technology that we become blinded to problems with the business model underneath… problems that eventually drive the stock price much lower and take our investment dollars with it.

    Today, investors in Amyris, Inc. (NASDAQ:AMRS) appear to be getting bit by this very bug.

    It's happened to all of us at one time or another. Whether it's a sales growth projection that we should know is essentially unattainable, expenses spiraling out of control, too much debt, regular management snafus… all of these issues can be swept under the rug by an investor who has become too enamored with a technology, or explained away by "growth stage economics."

    And that seems to be the case with Amyris, whose technology is easy to fall in love with. The company has developed a "synthetic biology platform to design microbes, primarily yeast, and use them as living factories in established fermentation processes to convert plant-sourced sugars into renewable hydrocarbons."

    Yep, "living factories." Cool, huh?

    Synthetic biology is an extremely attractive field, because in the long run, the applications are practically limitless. This emerging science grew out of the old human desire to manipulate living systems and make them do useful things for us, and involves redesigning organisms for new purposes and creating entirely new living things. New diagnostics, new therapeutics, new sustainable ways of energy production, and pretty much any other biomolecular or chemical manufacturing.

    That's a big list. Bigger than, say, 3D printing.

    Currently Amyris is focused on industrializing the process and developing renewable oils and other chemicals for several big markets: cosmetics, performance materials, lubricants, and transportation fuels. There's a few trillion dollars locked up in those markets. So, the company's long-term prospects are compelling. But there are some serious problems with the business today that could keep it from ever making it in the long term.

    Amyris started out making ethanol. But in 2012, they took an about-face and transitioned out of that business almost entirely. Instead, they began targeting higher-margin, lower-volume markets like cosmetics, flavors, and fragrances. It was a smart strategic shift to start moving away from the ruthlessly competitive commodity fuel space, but revenue has suffered, declining significantly in 2012 and 2013 and remaining essentially flat in 2014.




    Total Revenue ($ Millions)

    Behind those numbers is an even different story. Back in the ethanol days, the company also made a lot of money from government grants and collaborations with big oil. That's really fallen off lately, and the flat revenue for last year actually includes a 48% increase in real product sales.

    Certainly, product sales that might recur year after year are better than one-time grants, right? And the cost of those sales was down from 2013 too.

    Unfortunately, the product gross margin was still deep in negative territory. In other words, it costs the company far more to make its products than it can sell them for. Or at least it still did this past year.

    $ Millions20102011201220132014
    Product Sales$68.664$129.837$49.638$15.808$23.439
    Gross Profit($1.851)($25.778)($27.676)($22.445)($9.763)
    COGS % Product Rev102.7%119.9%155.8%242.0%141.7%
    Product Gross Margin-2.70%-19.85%-55.76%-141.99%-41.65%

    How's the old joke go? "We lose $100 a unit, but we'll make it up on volume!"

    Nor are production costs the only issue. Operating expenses are absolutely out of control.

    Research and development (R&D) expenses and selling, general, and administrative (SG&A) expenses were both down slightly in 2014. But they still totaled $105 million-nearly 2.5 times total revenue.

    Assuming the company didn't have to spend a single dime more on materials and labor than it does today, Amyris would have to grow its revenue by about 230% just to break even on an operations basis.

    $ Millions20102011201220132014
    Total Revenue$80.311$146.991$73.694$41.119$43.274
    Cost of product sales$70.515$155.615$77.314$38.253$33.202
    Other Op. Exp.*$0.000$0.000$45.854$9.366$4.804
    Total Op. Exp.$166.157$326.163$275.516$160.735$143.102
    Loss from Operations($85.846)($179.172)($201.822)($119.616)($99.828)
    SG&A+R&D % Rev119.1%116.0%206.7%275.1%242.9%
    Total Op. Exp. % Rev206.9%221.9%373.9%390.9%330.7%
    *Loss on purchase commitments, write off of production assets, and impairment of intangibles

    In reality, getting to profitability is probably much further down the road. As sales grow, so will the cost of product sales, albeit hopefully more slowly. Even if they get those gross margins up to 30%, they'd still need to grow product revenues by more than 700% to break even on an operating basis.

    All this ignores interest expenses, which have climbed to more than 66% of revenue as the company has added about $150 million in debt over the past year and a half.

    $ Millions20102011201220132014
    Total Revenue$80.311$146.991$73.694$41.119$43.274
    Interest Expense$1.443$1.543$4.926$9.107$28.677
    Int. Exp. % Rev.1.8%1.0%6.7%22.1%66.3%

    Now, technically Amyris reported a profit for 2014 of $2.2 million… but that's just because of a non-cash paper gain from a change in the fair value of derivatives of $133.6 million. If we take out that accounting adjustment, the net loss for 2014 would have been about ($131 million).

    What's more, the company has just $43.4 million in cash left, which is not enough even to cover the $45 million in principal and interest it has to pay over the next year.

    This means more debt and more shareholder dilution coming in 2015.

    We got the first glimpse of that dilution a few weeks ago with the announcement that the company has entered into a purchase agreement to sell up to $50 million of common stock (at a 3%-6% discount to the market price) to an entity called Nomis Bay Ltd. At the current stock price of $2.30, using the midpoint of the discount that Amyris is offering to Nomis Bay, $50 million would translate to about 23 million shares, increasing the total basic share count by about 29%.

    But that's not the whole story. On the most recent conference call, held February 24, CFO Raffi Asadorian said:

    Our debt at year-end was $232.5 million, net a discount of $80.2 million. As we previously noted, while the debt levels may be higher, the nature and quality of our debt should be considered. About 75% of the debt is in the form of convertible notes issued to our leading shareholders such as TOTAL, Temasek, and Fidelity, with another large piece consisting of loans from development banks in Brazil. All the holders of our debt are aligned with the success of the company.

    First of all, you're darn right the debt levels are higher. As noted above, interest alone is now eating up more than 66% of the company's revenue, and 2015's payments will consume all of the current cash reserves. But Asadorian does have a point. A lot of that interest would go away if those notes are converted to common stock. It's better than going bankrupt, but it's going to cause massive dilution for common stockholders.

    For example, if just the $75 million in convertible notes issued in May 2014 were converted to common stock at today's prices, it would increase the basic share count by more than 20 million-another 20% dilution. While the current basic share count is about 79 million shares, the fully diluted share count with the convertibles is around 147 million.

    Now, throw in the 23 million shares that will be issued to Nomis Bay this year because the company won't be able to afford not to tap that source of equity financing, the total diluted share count would be about 170 million.

    In other words, if all those convertible notes were converted to common stock and Amyris issues the $50 million in stock to Nomis Bay, it would dilute the average shareholder by more than 50%. And remember there's likely more debt and more equity that will be issued this year and beyond.

    Not a great proposition for your average retail investor.

    There is one thing that could fix a lot of the company's problems (aside from the dilution)-growing revenue, fast.

    So, you might be encouraged to hear that management is currently guiding for 2015 revenue between $100 million and $110 million, a 143% growth from 2014 at the midpoint.

    The problem is management has promised that before. It guided for 2014 revenue between $100 million and $115 million, a growth of 161%. But actual growth was a mere 5%.

    It's hard to believe management's projections given how badly they missed last year. What's more, the company has missed revenue estimates in each of the last eight quarters according to Thomson Reuters's Eikon.

    Is it possible for Amyris to actually hit 2015 projections and turn things around going forward? Sure, anything is possible. In the long run, AMRS could turn out to be a great investment opportunity. But there are a lot of red flags here.

    If you're looking at the stock today, don't fall prey to the tech investor's classic mistake: being blinded to problems with the business because the technology sounds so compelling.

    Tags: AMRS, technology
    Apr 08 11:18 AM | Link | 1 Comment
  • Jim Rickards: Obama's Abandoning The Saudis For Iran And Dooming The Petrodollar

    I sat down with Jim Rickards, author of many best-selling economics and investing books, including his latest, titled The Death of Money. In this exclusive interview, Jim shares his view on the changes in US foreign policy-the newly announced partnership with Iran to help fight ISIS and recent moves away from the petrodollar deal with Saudi Arabia-and what they mean for the dollar, gold, and investment markets in general.

    This interview just scratches the surface of the topics Jim covered in his speech at the most recent Casey Research Summit in San Antonio. You can grab a complete recording of that speech, and all 25 of the others, in the Summit Audio Collection, which is on sale with a juicy preorder discount for just a few more days.

    Alex Daley
    Chief Technology Investment Strategist
    Casey Research

    Oct 07 11:13 AM | Link | Comment!
  • Why I REALLY Moved To Puerto Rico, And You Should Too

    Much fuss was made yesterday when my colleague Nick Giambruno released a report outlining the incredible tax benefits to be had, by Americans no less (the only people in the world to be taxed back home even when we leave), in Puerto Rico.

    As you may have seen, that report was based in large part on my personal experience relocating to the island, a process I started in earnest last October. And, yes, I am here, writing you at this moment from beautiful Palmas Del Mar-if you ask me, the most beautiful piece of coastland on the island, but only just being rediscovered after a long hiatus from the spotlight.

    What can I say, I love a comeback story, especially when it looks like this…

    Yes, my decision to move to Puerto Rico was influenced by the tax incentives. But they were only one contributing factor. Why I chose to land in Puerto Rico is much more nuanced than that.

    It all boils down to one thing: Opportunity.

    Everyone likes to save on taxes. That's a given. But if I've learned one thing in my short business life thus far: it's that it's always better to make $4 than to save $2.

    No disparagement intended to Ben Franklin, but a penny saved is not a penny earned. Not if, in the time and effort saving it took, you could've created two or four or eight more pennies for yourself.

    I'm here in Puerto Rico because I believe it will provide me with the opportunity to make many more pennies.

    Here's why.

    Infrastructure and Convenience

    Unlike many other low-tax jurisdictions, Puerto Rico is in the unique position of having been a US territory for a century now. That means all sorts of things, from familiar legal systems to easy travel. But one of the most surprising implications is that US companies and even certain US government agencies have a presence down here.

    My town is a few miles down the road from the world's fourth-busiest Walmart. There is a Costco here. Closer, in fact, than the one we had in Vermont. There's also a Cartier-I'm not much of a jewelry buyer, but you get my point. Many if not most of the conveniences of the US are to be had here.

    And the same goes for far more than shopping. The highways across the island are much like in the US, including, unfortunately, the traffic into and out of the big city. But I'll take that any day over the frightening, windy back roads that litter Jamaica, Grenada, St. Kitts, the Caymans, and many of the other places considered before settling on this place. And gas here is just a tiny fraction more expensive than back in the States.

    Of course, roads rarely matter for me since I work from home, where my simple Internet connection is at least 10 times faster than the one in the office in Vermont-courtesy of Liberty cable. My cell phone, on AT&T, works much better here too.

    What's not the same here (they have the FBI, DEA, etc.) is at least comfortingly familiar (courts, MPH speed limits, and AutoExpreso, i.e., EZPass). But most importantly, it's fully developed. There's no grass hut customs office, no lack of a UPS store-the entire infrastructure needed to run a business well is here.

    We tend to lose power often, yes. A few times each month for a few hours at a time. And electricity rates are about twice as high as in the States, though we use so much less of it here without any need for heat and barely any for AC. Still, the power bill can be a drag. But not everything can be perfect, even when the weather is:

    86 and sunny. All year. 'Nuff said.

    Though my belly says differently, I like to exercise. I spent the last decade of my life split between some of the rainiest and snowiest locations in the US. And I hate gyms.

    Since coming here, I've lost 14 pounds and counting, just from getting outside to swim, walk, golf, and play tennis-activities that have been closed (to me) most of the year, and that apparently constitute enough caloric burn to make up for my awful, airport-heavy diet. I have more energy, I feel better.

    Many people are looking for that same lifestyle. Which, ironically, makes it far easier to recruit talent to the island than to many mainland destinations. I've already convinced a handful of people to make the move, and I'm not even actively hiring down here just yet-I'm waiting for some red tape to clear.

    If you're thinking of starting or expanding a business, think carefully about whether it will be easier to recruit people to the tax-free (state tax-free only, mind you) zone in Albany, NY, to the expensive and tiny island of St. John, or to a country bigger than Rhode Island or Delaware with year-round sunshine.

    But it's not like I need to recruit that many people here. There are already plenty here.

    Labor, Services and Networking

    The other day, during one of those intermittent power outages, I took the opportunity to swing up to Sam's Club and pick up a few things-all commercial sites, and most high-end homes, have generators to cope. $400 worth of crap I didn't really need later, I was waiting in line at the checkout, as the obligatory pile of cash was counted out at the register in front of me (almost no one here uses bank accounts or credit cards, and it's part of their well-known fiscal troubles…).

    While waiting, I told my wife about my struggle finding qualified PHP developers. These are jobs that pay $40-50/hour, i.e., $60K to $100K/year, and way up from there. Yet it takes us months to hire for them. The woman behind me in line must have overheard our conversation, because she started asking me if I worked for Palmas and were we hiring-she'd applied a dozen times already.

    She, like many others here, was looking for work. The official unemployment rate is 15%. According to the CIA World Factbook, it's 26%. The median household income is also a relatively low $18,000/year. That's double most places in the Caribbean, but still quite low compared to the States. Looked at societally, that's bad. For a business operator, though, it has distinct advantages.

    Yes, with high unemployment comes crime. But the reputation this island has garnered in the States is undeserved. The crime rate in San Juan is about the same as in Baltimore, Detroit, Cleveland, or Atlanta. Any large city has crime-ridden areas. But like those cities, San Juan has wonderful neighborhoods too. And it's surrounded by some beautiful suburbs. Go into the country, like I did, and it's calm and quiet and borderline idyllic.

    Our community is triple gated (community, development, building), which garners comments from friends and family who visit. But it doesn't need to be. It reminds me of the much more unsightly seven-foot walls with razor wire and broken-glass tops in Spain's posher areas, which are 90% to convey status. Once you understand the small cultural differences, not moving here because of crime is like not moving to Missouri because of St. Louis, to Florida because of Miami, or to Tennessee because of Memphis.

    When you do go to hire, employment laws are close to the same here as in the States. They have Social Security, Medicare, and worker's comp. Workers from the mainland can come here without a visa (and vice versa). It's familiar, yet there is a big labor surplus holding down wages.

    I've been thinking about starting a call center down here-just searching for the right person to run it (I've got a job I love and don't need another one)-as it's an ideally suited location:

    • A highly educated population. 94% literacy rate (India is 78%; China 96%). A 67% high school graduation rate (about the same as Florida and Georgia; well above Nevada, Louisiana, Mississippi, etc.). 22% of the working population have college degrees, not far behind the States' 33% average and well ahead of many of those same southern states.
    • Better average English skills than India or other common call center locations. 50% English-speaking population, versus 21% in India. In reality, I rarely meet anyone who doesn't speak enough to get along fine with me, a dolt who has yet to learn the language here. But for working purposes, about half the population speaks English.
    • No time zone issues. It's the same time here as Florida or New York (though here they are smart enough not to observe the idiotic tradition of "daylight savings"-it's the same amount of daylight here all year round and I never have to go to or leave work in the dark, let alone do both for months at a time).
    • And plenty of available labor to expand rapidly. The population of Puerto Rico is 3.7 million, a number that is slowly shrinking as more and more people emigrate to the US in search of work-something they can do freely as all Puerto Rican citizens are US citizens.

    One of these days-hopefully soon-I'll find that call center operator who will work for sweat equity to get things off the ground, or the bootstrap customer to pay them. But the labor is there.

    And not just labor for lower-skilled work, either. The island has a very large skilled labor population, too, thanks to that high college degree rate. There are hundreds of law offices, accountants, engineers, and other professional firms. Investment banks, construction companies, you name it. The colleges here are strong in math and business. And virtually any service provider or knowledge worker you'd look for in any other major metropolitan area can be found here. I've even got investment bankers knocking on the door.

    Then there are the other entrepreneurs. One of the things that attracted me most to Puerto Rico wasn't the tax incentives themselves, but the idea of living near and collaborating with so many like-minded people. And that's proven as good or better than I hoped. Between everyday social activities and organized mixers like the meetings of the "Act 20/22 Society," there has been a non-stop barrage of new people to meet, all of whom are as entrepreneurial as I am. Business ideas floated around dinner, hiring tips over golf, late-night real estate investment discussions, dozens of emails to share investment ideas-all just this week.

    The one thing that really stuck with me when I read Rich Dad, Poor Dad many years ago was the part that if you don't hang around with the kind of people who talk about money and how to make money, then you'll never learn how or find opportunities to make more of it. In life, I have always looked for those kinds of communities, and every place I've lived I've found small pockets of like-minded people. But here, it's like I just struck pay dirt.

    Ease of Starting and Operating a Business

    The same factors that make hiring in Puerto Rico easy make starting a business simple here too.

    I fully intend to learn Spanish-it's good for me, and good for the kids too. But I cannot be expected to do so in a matter of months, and certainly not as a prerequisite to doing business. Thankfully, that's not been an issue at all.

    All federal laws and forms are available in English, for one. Just about everyone you deal with in the business and government world speaks enough English to help you, and the majority, especially the younger population, speak it very well. Unlike farther-flung Spanish-speaking countries like Belize and Panama, running into someone at the local government office who cannot speak enough English to help you rarely happens here, except far outside of the cities. When it does, there are lawyers and accountants everywhere to help.

    LLCs, partnerships, corporations, and all that other stuff is effectively the same here as in the US. Payroll services can be had from US companies like ADP or from local ones. Same with insurance for your business, cars, health, and more. Banks are a little slower than in the US, but offer the same services like ACH, wires, credit lines, online access, etc. It's familiar, simple, and not overly burdened with red tape-you can even set up a corporation online in a few minutes.

    Sure, there are some tough parts about starting a business here. For one, they've yet to come to terms with virtual work, and the idea is at direct odds with one of their most stubborn bureaucracies: the town office permit folks.

    On the US mainland, at least anywhere I have lived, you do not need any special permit to use your home as an office, only as a retail business. Want to found an Internet startup from your garage? No problem. Want to sell antiques from your front lawn? Problem. In Puerto Rico, the model is backwards. To set up an office, you must register it with the town. The towns inspect your office to make sure it is real. They contact your neighbors to make sure they are OK with it. And they come back regularly to do it again and again.

    That struck me as odd at first. But the more I considered it, it's not much different than in the States: to own a business in Vermont, I needed half a dozen forms from half a dozen offices and paid a fee for each one. I didn't have to pay a fee to get a sales and use tax permit in Puerto Rico, though. They don't want to get in the way of my ability to pay taxes, as so many US agencies seem to want to. Instead, they are focusing on a different set of problems. Ones unique to a largely urban island with high unemployment. Like trying to stop the streets from looking like a Turkish bazaar as they do elsewhere around the Caribbean-something they've managed very well here.

    The quirks are just different from the quirks many of us grew up with, because the circumstances are different. But it's the big things that matter-things like tax policy, access to smart people, services, technology, and more. And there, Puerto Rico scores very highly.

    And, Yep, Lower Taxes

    I work hard for my money. I work hard to find great investments that translate into profits. And I work hard to run my businesses. And the more of each I get to keep, the more I earn next year by investing it further.

    Hopefully, growing up, someone taught you about the magic of compounding interest (I got it from my dad, who more than once said, "Hey, read this article on mutual funds in Esquire.") Well, one of the things almost none of those lessons include is the effect of taxes. When you pay taxes on your investment income, it decreases dramatically over time. The longer you can defer taxes, the better for your pocket book. If you can reduce them or remove them entirely, the benefits are huge.

    For instance, say you invest $100,000 in a 5% CD that compounds yearly. If you pay 35% tax on the interest each year, and reinvest the rest, then at the end of 20 years you've earned $89,583 in interest. Not bad for an incredibly conservative investment.

    However, take those taxes on interest down to 0%, which Puerto Rico's new tax incentives provide, and you earned $165,329, or 85% more income. That's a pretty big tax penalty the US imposes, and that many more years you have to work before you can retire.

    If you live in California, where the combined tax rate for some is now in excess of 50%, the effect is even more dramatic. You would have only earned $63,861, losing out on over $100,000 in earnings. That's enormous!

    Yes, you could earn $165K inside an IRA thanks to tax deferral. But then try withdrawing it. At 39.6%, federal taxes chip it right down to $99,858. Get stung by that California 50% and you're even worse off again.

    Now, here's the real kicker. In order to invest that $100K back home, you already had to pay taxes on it -they don't let you put nearly that much in an IRA or 401(k) each year. Before you paid those payroll taxes, it was probably $165,000 (assuming the same 39.6% in federal taxes). If instead you earned that income in Puerto Rico at a net effective tax rate of 15%-which can be easily achieved with Act 20 benefits for your business and a 4% tax on earnings-then you would have $147,283 to invest to begin with.

    After 20 years at 5%, you'd have saved $243,500 for your retirement-that's nearly three times what you would have earned in the United States, getting taxed again and again and again. Or about 2.5x what your IRA or 401(k) would have netted you.

    It's not about how much money you have to invest. It's how much you have to reinvest. And a big part of that is how much you have left over after taxes. Here in Puerto Rico, you could have much more left over, and many more opportunities to invest.

    The New Land of Opportunity

    To me, this is the new land of opportunity. There is a critical combination here of an underutilized but well-educated workforce, a culture that is obviously changing for the better, and a tax regime that is committed to letting entrepreneurs reinvest more of our money back into our businesses.

    Add those three together, and there would be something good going on down here. But there's another factor: The Internet. With the ability to do many jobs from the convenience of anywhere, thanks to Skype, GoToMeeting, Gmail, Dropbox, and thousands of other tools that finally make the home office a reality, the opportunity is enormous. Computer programming. Asset management. Graphic design. Public relations. Marketing and advertising. Research and development. Information processing. Customer service. The number of service-based businesses that can operate from here is amazing-far more potential than the manufacturing sector ever brought.

    Puerto Rico is off to a slightly slower start than its predecessors in India, Singapore, Hong Kong, and even around Latin America in recognizing the value wooing the service economy can bring to its people. However, it is on the right course now and has some tail winds to help it catch up-advantages that no other nation on earth can provide to the world's largest market of investors and entrepreneurs, Americans.

    It's hard for me to sum up all the things I like about Puerto Rico in a few pages-and there's no way the editors here will let me go longer, lest I bore you to death. But if you made it this far, then I encourage you to go one step farther. Consider joining me and your like-minded investors and entrepreneurs in Puerto Rico. Join me and the 200 or so other pioneers here in the new land of opportunity. Read my firsthand account of how, right here. And feel free to ask me any questions you'd like-in the comments below, or via email.

    The article Why I REALLY Moved to Puerto Rico, and You Should Too was originally published at

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: puerto rico
    Apr 07 1:45 PM | Link | Comment!
Full index of posts »
Latest Followers


More »

Latest Comments

Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.