Amyris: Entering Robust Revenue Ramp, Initiate Buy Rating

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About: Amyris, Inc. (AMRS)
by: Singular Research
Summary

AMRS transformation nearly complete moving from biofuels To high-margin biosciences applications.

The company has 16 partnerships developing a rich pipeline of innovative products to launch over the next few years.

Aggressive product partnerships and launches could produce $200 million in revs by 2020.

Amyris, Inc. (NASDAQ:AMRS) is likely to experience robust revenue growth as new molecules developed through strategic partnerships become commercialized through long-term supply agreements. Most of the Company's 15 commercialized products are just beginning to scale and AMRS expects to transition another 20 products to commercial production over the next three years. We initiate coverage of AMRS with a BUY rating and a $2.80 price target.

52-Week Range

$.31 - $1.81

Debt (net of debt discount)

$181.4M

Shares Outstanding

263 million

LT Debt/Equity

NM

Insider/Institutional

60% 9%

ROE (LTM)

NM

Public Float

87 million

Book Value/Share

-$0.68

Market Capitalization

$188.1 million

Avg Volume (3 mos)

2.31 M

FYE DEC

FY 2015

FY 2016E

FY 2017E

Adjusted EPS

ACTUAL

CURRENT

PREVIOUS

CURRENT

PREVIOUS

Q1 Mar

$(0.41)A

$(0.16).A

$(0.07)E

Q2 Jun

$(0.47)A

$(0.14).A

$(0.07)E

Q3 Sep

$(0.23)A

$(0.07).A

$(0.05)E

Q4 Dec

$(0.16)A

$(0.04).E

$(0.04)E

Year*

$(1.88)A

$(0.42)E

$(0.23)E

P/E Ratio

NM

NM

NM

Change

FYE DEC

FY 2015

FY 2016E

FY 2017E

Revenue ($ mil.)

ACTUAL

CURRENT

PREVIOUS

CURRENT

PREVIOUS

Q1 Mar

$7.85A

$8.81A

-

$23.50E

-

Q2 Jun

$7.84A

$9.60A

-

$25.80E

-

Q3 Sep

$8.59A

$26.5A

-

$40.50E

-

Q4 Dec

$9.85A

$42.50E

-

$48.00E

-

Year*

$34.15A

$87.41E

-

$137.80E

-

Change

.

175 %

-

47%

-

* Adjusted EPS excludes gain (loss) on change in value of derivatives. Numbers may not add up due to rounding.

Investment Thesis

  • AMRS has exited loss-producing renewable fuels and is focusing instead on high margin applications for its innovative bioscience technology in healthcare, nutrition, personal care and industrial markets.
  • The Company currently has 16 product development partnerships, 15 commercialized products and 18 products in its pipeline. Product sales grew 47% last quarter to $5 million and are forecast to reach $30 million in H2:16 and $60-80 million next year.
  • AMRS's genetically engineered ingredients replace expensive or difficult-to-source plant and animal-based materials. The Company is differentiated by its ability to develop, scale and commercialize new molecules in 12 months or less.
  • Strategic partnerships provide AMRS with upfront funding and milestone payments for R&D and drive revenue growth through long-term supply agreements with profit-sharing on downstream product sales.
  • A new agreement with Ginkgo Bioworks may more than double the number of new products AMRS moves into production in FY:17. The partners expect to advance at least 20 products to commercialization in the next three years.
  • We initiate coverage with a BUY rating and a $2.80 price target.

Primary RISKs

  • AMRS is presently generating net losses, must refinance near-term debt to extend maturities and needs to raise additional capital. The Company plans to raise $40-$60 million through asset sales during H2:16.

INVESTMENT THESIS

In 2016, AMRS has transformed from a loss-producing biofuels business into a fast-growing industrial biotechnology company that is partnered with leading players in the health, nutrition, personal care and industrial markets. The Company is building its business through strategic collaborations with partners, who provide upfront funding for R&D, milestone payments, revenues from long-term supply agreements after the product is commercialized and profit-sharing on downstream sales.

At present, AMRS has collaborations with 16 partners. The Company projects that its existing collaborations and the long-term supply agreements that follow as products are commercialized could generate $200+ million in revenues through 2020.

AMRS has 15 commercial products in its portfolio and another 18 commercial products in the pipeline. At maturity, the Company expects many of these existing products to generate $30 million to $40 million of annual product sales and 60% gross margins. AMRS supplies ingredients to over 500 top brands, including high performance polymers for Michelin tires, cosmetic ingredients for Revlon and synthetic jet fuels for KLM. Brands that use AMRS ingredients touch more than 150 million consumers worldwide.

At present, the Company produces a versatile, high-volume engineered molecule called farnesene that has applications in cosmetics, nutraceuticals, polymers, fuels, lubricants and solvents. AMRS has customer commitments in place for farnesene shipments that are running its manufacturing facility in Brotas, Brazil at full capacity this year and next year. The other molecules currently being produced by AMRS are two high-value, low-volume fragrance molecules.

The Company's partners in the fragrance market include four of the world's five largest fragrance houses The overall personal care business, which includes flavors, fragrances, food ingredients and cosmetics, represented $25 million of the Company's FY:15 revenues and is expected to contribute $40 million to FY:16 revenues. AMRS will begin producing a third fragrance molecule later this year and a cosmetic ingredient next year.

A supply agreement with an unnamed nutraceutical partner in China will consume 80% of 2017 production capacity and contribute approximately $15 million to FY:17 product sales. In the area of healthcare, AMRS recently signed a development agreement with Biogen (NASDAQ:BIIB) that is potentially transformative to its business. Per the agreement, AMRS will use its proprietary bioscience platform to evaluate and develop host micro-organisms that can replace mammalian cell lines needed for drug manufacturing.

AMRS targets the production of at least three new molecules each year through 2020 and anticipates a significant acceleration in new molecule scale-up and production as a result of its new partnership with Ginkgo Bioworks. Ginkgo develops custom microbes for customers across various markets. Together the two companies will have 70 products under contract for delivery to customers and the partners anticipate advancing at least 20 of the 70 products through to commercialization in the next three years.

We expect AMRS to deliver high double-digit revenue growth over the next several quarters and achieve positive quarterly EPS by FY:18, which should lead to exponentially higher shareholder returns. The Company's key near-term growth catalysts are highlighted below:

  • New Strategic Collaborations. The Company has added three new strategic partners so far in 2016, increasing its total number of strategic collaborations to 16. These partners have provided AMRS with approximately $50 million per year of funding.

Partners collaborate with AMRS because they want to replace expensive or difficult-to-source materials with a sustainably-sourced ingredient. The Company is focusing on applications for its bioscience platform in personal care, health and nutrition, and industrial products. Longer-term, AMRS is also working with its partner Total to produce high-performance renewable jet and diesel fuels. Management believes farnesene's success as a renewable fuel will require reducing production costs from $2-$3 per liter currently to $1 per liter, a goal AMRS targets achieving by 2020.

AMRS's business strategy focuses on commercializing high-margin, low volume specialty products through strategic collaborations while moving commodity products such as fuels and lubricants into joint ventures with bigger partners. This approach provides access to capital and the necessary resources to support large-scale production and global distribution for its products.

The Company's collaborative business model funds R&D expenses while eliminating market access risk. Strategic partnerships provide AMRS with upfront funding, milestone payments, sales under long-term supply agreements and profit sharing on downstream sales. As a result of existing supply agreements, AMRS has commitments for over 90% of FY:16 production and roughly 80% of FY:17 production. Q2:16 was AMRS' best quarter ever for signing new partnerships. Agreements signed in H1:16 have delivered cash payments of approximately $20 million, representing half of its FY:16 collaboration revenues target.

A more detailed look at the Company's strategic partnerships is provided in the Strategic Collaborations Overview, which begins on page 6.

  • Manufacturing Expansion. The Company commenced industrial-scale production through a contract manufacturer in 2011 and began operating its own large-scale production facility in 2012. This facility is located in Brotas, Brazil, in the state of São Paulo, and is adjacent to an existing sugar and ethanol mill operated by Tonon. The Brotas plant has an annual production capacity of 25 million to 35 million liters and can produce multiple products in addition to farnesene. AMRS began producing farnesene at the Brotas facility in 2013 and fragrance ingredients in 2014. This facility is currently running at full capacity and AMRS needs to add capacity to meet customer supply commitments for next year and beyond.

Assuming all of its existing product development agreements result in commercialized products, AMRS believes farnesene demand could grow from less than 10,000 metric tons currently to 100,000 metric tons by 2020, a roughly 10-fold increase in four years. Instead of spending millions of dollars to construct a new plant or expand Brotas, AMRS plans to increase production capacity by partnering with South Korea-based CJ CheilJedang Corp. to manufacture farnesene at some CJ facilities.

The Company recently signed a Memorandum of Understanding with CJ CheilJedang. If the deal closes, AMRS gains enough additional production capacity to meet anticipated farnesene demand though 2020. A partnership with CJ also creates opportunities for CJ Bio (a division of CJ CheilJedang) to market AMRS products in Asia and for AMRS to develop products for CJ Bio.

Fragrance molecules are a low-volume, high-margin business for AMRS. The Company plans to add a dedicated flavors and fragrance manufacturing unit at its Brotas plant and is in active discussions with current partners and collaborators to provide financing for the project. In addition to two fragrance molecules currently being produced at Brotas, AMRS will commence manufacturing a third fragrance molecule later this year.

Monetize Non-Core Assets. To help fund its business expansion, AMRS plans to raise capital by selling non-core assets in H2:16. The first asset sale occurred in Q2:16 when AMRS sold a 33% equity stake in its Novvi joint venture to American Refining Group. This transaction provided AMRS with roughly 20% of the $40-$60 million it hopes to raise through asset sales this year. In addition, with Novvi now funded, AMRS will benefit from lower cash costs and realizing roughly $2 million of revenues in H2:16 from supplying farnesene to Novvi.

Proceeds from asset sales will provide one source of capital. Other sources will include new and existing collaborations, milestone payments and non-dilutive funding from existing partners that are willing to invest in AMRS. According to management, existing partners have indicated their willingness to provide AMRS with a total of $70-$100 million in funding.

STRATEGIC COLLABORATIONS OVERVIEW

Partnerships expected to drive near-term revenue growth are described below:

Firmenich and Takasago. In 2010, AMRS began partnering with a top fragrance manufacturer (Firmenich) to produce a cost-effective sustainable ingredient for the fragrance market. The Company delivered its first fragrance ingredient ahead of schedule and below cost. A second fragrance ingredient for this customer entered production this year and another two fragrance ingredients are in engineering. AMRS' other partners in the fragrance market include International Flavors and Fragrances, Takasgo, and Givaudan.

Together these names represent four of the top five companies in the fragrance industry and roughly 54% of fragrance industry market share. During Q2:16, AMRS began commercializing a novel fragrance product for Takasago, its third fragrance molecule. As a result of these agreements, AMRS is on track to become one of the largest suppliers of key ingredients to the fragrance industry.

Ginkgo Bioworks. The Company's agreement with Ginkgo Bioworks could more than double the number of products that AMRS is able to scale and move into production in FY:17. Together, the two companies will have more than 70 products under contract for delivery to customers in the industrial, health and personal care markets. Over the next three years, AMRS and Ginkgo anticipate advancing at least 20 of the 70 products through to commercialization.

This represents a major step-up for AMRS, which has scaled five products into commercial production in the last five years. As part of the initial licensing arrangement, AMRS received a $15 million cash payment from Ginkgo in Q2:16, which will be booked as revenues in Q3:16. The partnership also provides AMRS with a 10% royalty on commercialized products and a 50-50 value share of the sales margin.

The 20 products AMRS expects to commercialize through this agreement are predicted to cumulatively contribute as much as $200 million to annualized revenues when they reach full production. Excluding COGS, these products could create $156 million of operating revenue for the partnership and approximately $78 million for AMRS.

Givaudan. A new collaboration agreement with Givaudan covers the development of cosmetic active ingredients. Givaudan will fund the development of new molecules (approximately $12 million in funding over two years) and commit to a long-term supply agreement that will enable AMRS to scale and produce the molecules. This agreement expands AMRS' relationship with Givaudan beyond fragrances into a new area, cosmetic active ingredients. AMRS anticipates product revenues from this partnership beginning late in 2017 and a revenue run rate upon scale-up of more than $50 million a year.

Janssen Biotech and Biogen. A new collaboration with Janssen Biotech (a subsidiary of Johnson & Johnson) expands AMRS' foothold in biosynthetic drug discovery. In addition, the Company is partnering with Biogen to develop a lower-cost drug manufacturing technology using AMRS' bioscience platform. Collaborations in the biotech space will be monetized through technology licensing agreements. Management believes the Biogen partnership in particular has the potential to be transformative for the Company's portfolio.

AMRS will use its' advanced microbe engineering platform to develop and evaluate multiple host micro-organisms as replacements for difficult-to-source mammalian cell lines used in drug manufacturing. AMRS anticipates completing Phase 1 of the Biogen partnership by Q2:17. Phase 2 would involve a significant expansion and milestone payments.

US DARPA and DOE. The Company has a development agreement with US DARPA (Defense Advanced Research Projects Agency) targeting the development of 400+ different molecules over the next three years. The $34 million DARPA grant funds research into new biological materials with specialized military applications. DARPA will own the rights to military applications for the materials developed through the agreement while AMRS will own the commercial applications.

AMRS has met the first two milestones and anticipates a significant acceleration of development work under the DARPA contract in H2:16. The Company was also awarded a three-year, multi-million dollar contract with the DOE (Department of Energy) in August to develop a manufacturing-ready process utilizing wood as a feedstock for farnesene-based biofuels.

Nutraceuticals partner. AMRS recently signed a five-year supply agreement with a nutraceuticals partner for farnesene purchases valued at approximately $10 million this year, more than $15 million next year and over $100 million over the life of the contract. The Company's first shipments to this partner commenced in Q3:16. Both parties have agreed to keep the product and the customer's name confidential.

Fuel and lubricants partners. AMRS has partnered with the world's 4th largest international oil and gas company (Total) to produce renewable diesel and jet fuel. The joint venture's renewable diesel fuel is sold in niche markets in Brazil, and renewable jet fuel is being tested by participating airlines on certain routes. While the fuel products aren't generating cash, they support ongoing efforts to reducing farnesene production costs to levels that would make farnesene-based fuels commercially viable. Total owns the rights to the jet fuel while AMRS retains the rights to the diesel fuel.

One of the largest industrial corporations in Brazil (Cosan SA) is working with AMRS to produce base oils and lubricants through its Novvi joint venture. A third partner, American Refining Group, purchased an equity stake in Novvi in July. Through other customer agreements, AMRS is supplying farnesene for the commercial production of liquid rubber (for tires), adhesives and solvents.

AMRS Branded Products

In addition to products being developed through collaborations and joint ventures, AMRS produces and sells branded farnesene-based products such as Neossance® emollients for the cosmetics industry. In 2015, the Company introduced its Biossance® line of skin care products and recently added a facial mask and an eye gel to the Biossance™ product line. Another branded product is Muck Daddy™ high-performance hand cleaner. Sales of these products are currently generating modest revenues. We think AMRS may opt to sell these brands to raise business expansion capital.

SYNTHETIC BIOLOGY PLATFORM

AMRS has built an industry-leading synthetic biology platform that is capable of genetically engineering the DNA of yeast and other living cultures to achieve its desired chemistry on a commercial scale. The Company's synthetic processes create high-quality molecules that perform as well or better than plant and animal-derived materials, but are much less expensive to produce.

AMRS' platform is able to engineer microbes to create "living factories" that metabolize plant-based sugars into high-value hydrocarbon molecules. The Company's industrial fermentation technology replaces costly and complex chemical manufacturing processes. To date, most of AMRS' efforts have focused on engineering yeast. A variety of feedstocks can be utilized, but the Company has relied primarily on Brazilian sugarcane due to the materials' renewability, low cost and stable pricing.

AMRS has invested approximately $450 million in its technology. A major competitive advantage of its platform is that the Company has refined its lab-scale fermenting processes to be accurate predictors of industrial-scale production. Its California research facility boasts the world's largest yeast engineering data repository and AMRS' high throughput systems can produce and screen more than 100,000 strains per month. In the past seven years, costs per strain have been reduced by 95%.

Time-to-market has also been greatly accelerated. Using automation and proprietary processes, AMRS can transition from concept to manufacturing within 12 months for most ingredients and the Company anticipates a further reduction in time-to-market to eight months.

MAJOR MARKETS SERVED

Cosmetics and Skincare

The global cosmetics market was valued at $460 billion in 2014 by Researchandmarkets and is forecast to reach $675 billion by 2020. AMRS converts farnesene molecules into squalane, a premium emollient in cosmetics and other personal care products. Its synthetic squalane offers performance attributes equal or superior to squalane derived from olive oil or shark liver oil, which requires killing the shark for harvesting. In the past, the high cost and unreliability of squalane supplies have limited its use to luxury items. AMRS' ability to provide a reliable supply of low-cost squalane may to lead to its use in many more skin care formulations.

The Company recently introduced a second low-cost emollient for the cosmetics market and is supplying this ingredient to regional distributors in Asia, Europe and the Americas as well as directly to some cosmetics formulators. Its Biossance™ branded skin care products are sold directly to retailers and consumers in the US.

Flavors and Fragrances

According to Global Industry Analysts, the value of the worldwide fragrance market will exceed $40 billion by 2020, fueled by product innovation and robust demand from emerging markets. AMRS has partnered with four of the five top fragrance companies. Many of the natural oils used in fragrances ingredients are expensive due to limited supply and most synthetic alternatives require complex chemical conversions.

AMRS provides a reliable, low cost alternative to these high-value ingredients. The Company currently produces two fragrance molecules for one customer, added a third molecule for another customer this year, and has several additional fragrance molecules in engineering.

Hand Cleaners

Kline Consulting estimated the US market for industrial strength hand cleaners at $1.5 billion in 2015 and forecast 4% annual market growth through 2020. AMRS launched its Muck Daddy™ hand cleaner in 2015 and markets this product online to consumers and through distributors and retailers.

Healthcare and Nutraceuticals

According to Transparency Research, the global nutraceuticals market was valued at $165.5 billion in 2014 and is projected to grow nearly 70% to $279 billion by 2021. AMRS commenced farnesene shipments to a global nutraceuticals partner in Q3:16 and anticipates a significant ramp-up in demand when the partner brings a new manufacturing facility on-line next year that doubles production capacity.

Solvents, Polymers and Lubricants

The global solvents market is forecast to grow 3.2% annually and reach $29.3 billion by 2018, according to Transparency Market Research. AMRS developed a best-in-class renewable solvent and secured EPA approval in 2015 to begin commercializing industrial cleaners for the auto repair industry. In addition, the Company has developed applications for farnesene as a high performance polymer used in tires and partnered with chemical manufacturer Kuraray Co. Ltd. to develop farnesene-based liquid rubber.

Farnesene can also be chemically modified to serve as a base oil or lubricant. Marketsandmarkets estimated the value of the global lubricants market at $144.4 billion in 2015 and projects growth to a $166.6 billion market by 2021. AMRS is pursuing opportunities in base oils and lubricants through its Novvi joint venture.

HISTORY

Amyris was founded in 2003 by scientists from the University of California, Berkeley. In 2005, the Company's scientists developed a technology that could create microbial strains that produce artemisinin, an anti-malarial drug. In 2008, Amyris granted a royalty-free license to Sanofi-Aventis to produce artemisinic acid using this technology, which has resulted in millions of artemisinin-based anti-malarial treatments being distributed worldwide.

In 2007, Amyris began applying its bioscience technology to the development and manufacture of sustainable alternatives for a broad range of materials. Its building block was farnesene, a hydrocarbon molecule manufactured through fermentation. Since its inception, the Company has engineered more than 4.6 million unique yeast strains. AMRS is using its innovative technology to develop products for the personal care, food and nutrition and industrial markets, and recently began exploring applications for its technology in pharmaceutical manufacturing.

RESEARCH & DEVELOPMENT

AMRS's research and development organization has approximately 123 employees, 63 of whom hold PhDs. Their efforts have resulted in 614 issued and pending patents. R&D costs were $44.6 million in FY:15, $49.7 million in FY:14 and $56.1 million in FY:13. Strategic collaborations provide funding that more than covers R&D expense.

In addition to genetically engineering new molecules, AMRS' R&D efforts have focused on reducing farnesene production costs, which have declined from $40 per liter initially to approximately $2 per liter today, with visibility to reducing production costs to less than $1 per liter. At that level, farnesene-based fuels become commercially viable.

COMPETITIVE POSITION

AMRS engineers organisms through a proprietary process that allows renewably-sourced plant carbons to be substituted for molecules traditionally derived from plant, animal or petroleum sources. In the renewable fuels segment, AMRS has several competitors, including Gevo, Virent Energy Systems, Synthetic Genomics, TerraVia Holdings and Renewable Energy Group. Another competitor is Zymergen, a start-up founded by ex-Amyris employees. AMRS' eventual success in the fuels area will require lowering farnesene production costs.

In personal care, nutrition and healthcare, and some industrial markets, AMRS is differentiated from competitors by its ability to genetically engineer unique ingredients and transition them to scale up and production on a commercial scale in twelve months or less. AMRS is the only competitor at present engineering microbes in its laboratories and producing them at commercial scale in its fermentation facility.

MANAGEMENT

CEO John Melo (age 50) has served as AMRS' CEO and a director since 2007. Before joining AMRS, he held various senior management positions at BP Plc from 1997 to 2006, most recently as president of US fuels operations from 2004-06, and previously as Chief Information Officer of the refining and marketing segment from 2001-03, He earlier served as senior advisor for e-business strategies from 2000-01 and as director of global brand development from 1999-2000. Before joining BP, Melo worked for Ernst & Young, and was part of the management team at several startup companies, He presently serves on the boards of US Venture and Renmatix and is board vice-chairman of BayBio.

CFO Raffi Asadorian (age 46) joined AMRS as CFO last year. His prior experience was as CFO of Unilabs S.A., a pan-European medical diagnostics company (2009-14) and Group CFO at Barr Pharmaceuticals. He earlier was a partner at PricewaterhouseCoopers in its M&A advisory group.

R&D President Dr. Joel Cherry (55) has held his current post since 2011 and joined AMRS as Senior VP Research and Operations in 2008. He previously served as a senior director at Novozymes, a biotech business focusing on industrial enzymes (1992-2008). At Novozymes, he also served as principal investigator and director of its BioEnergy Project, which was initiated in 2000 and funded by US DOE. He holds a doctorate in biochemistry from the University of New Hampshire.

Major AMRS equity stakeholders include Total Energy (36% of the stock), Mauritius Pte, Ltd (34.5%), entities associated with Fidelity (8%) and Foris Ventures (7.2%). Foris is owned indirectly by AMRS director John Doerr. Shares owned beneficially by AMRS director Philippe Boisseau represent the stake owned by Total

INVESTMENT RISKS

  • AMRS has an accumulated deficit of $1.04 billion and expects to incur losses and negative cash flow from operations into 2017. The Company also has $186 million of debt (net of debt discounts) and contractual obligations related to capital and operating leases.
  • The Company must raise additional capital to fund its business operations. Management plans to raise funds through the sale of non-core assets and targets $40-$60 million from asset sales in FY:16. AMRS has already raised some funds through the sale of an equity stake in Novvi. AMRS' large shareholders have also committed to funding the business. As a result, we don't worry about bankruptcy risk, but are concerned that its convertible debt may cause dilution.
  • AMRS is running full out at its Brotas manufacturing facility and already has customer commitments for 80% of FY:17 farnesene production. The Company plans to add capacity by partnering with CJ CheilJedang Corp. to manufacture farnesene at CJ facilities. However, there is no guarantee that an agreement will be reached. In addition, AMRS may experience delays and challenges when some of its farnesene production is shifted to an outside plant.
  • The Company has a limited share float due to the controlling interest held by its partners and other insiders. Executive officers, directors and their affiliates (including Total) together hold approximately 44% of AMRS outstanding shares.

FINANCIAL PERFORMANCE

AMRS delivered 47% product sales growth in Q2:16 and total revenues of $9.6 million, up 23% from $7.8 million in Q2:15. Quarterly collaboration revenues were flat year over year at approximately $4.7 million while product sales grew to $4.9 million. AMRS anticipates continued growth in its personal care business in H2:16 and a major ramp-up in its industrial and health segments from existing contracts The Novvi funding, scale up of the nutraceutical product and continued growth in personal care lines are expected to fuel an increase in product sales to $25-30 million in H2:16 from $8.1 million in H1:16.

Adjusted gross profit (excluding depreciation, inventory provision and excess capacity charges) more than doubled to $5.6 million in Q2:16 from $2.3 million in Q2:15. Adjusted gross margin improved to 58% from 29%. The significant improvement reflects a better product mix and discontinued sales of diesel fuel. Reported gross loss was $912,000 in Q2:16, down significantly from $7.6 million in Q2:15.

SG&A expenses declined 21% to $11.4 million in Q2:16 from $14.4 million in Q2:15, reflecting ongoing actions to reduce operating expense. This improvement was partially offset by higher R&D expense, mainly driven by the cost of new technologies developed under the DARPA contract. R&D expense increased 18% to $13.2 million in Q2:16 from $11.2 million in Q2:15. Total costs and operating expenses declined 11% to $32.5 million in Q2:16 from $36.5 million in Q2:15. Management targets full-year cash operating expenses of approximately $75 million, down roughly 45% from approximately $138 million in FY:15.

Reported net loss for Q2:16 declined to $13.6 million, or $0.11 per fully diluted share, from $47.1 million, or $0.62 per fully diluted share, in Q2:15. Reported net loss included a $20.9 million gain from a change in the fair value of embedded derivatives this year and a $28.8 million gain last year. The Q2:15 gain was offset by expenses of $36.6 million related to acceleration of amortization of debt discounts. Excluding these items, Q2:16 adjusted net loss was $32.7 million, or $0.15 per share, down from an adjusted net loss of $37.3 million, or $0.47 per share, in Q2:15.

BALANCE SHEET

AMRS improved its balance sheet in FY:15 by converting $175 million of debt to equity. Since then, it has refinanced other debt to provide more flexible payment terms. At June 30, 2016, the Company's balance sheet showed cash and short-term investments of $2.5 million and total debt of $229 million. Of this debt amount, $157 million is convertible at prices ranging from $1.14 to $7.07 per share and $42.6 million is mandatorily convertible at maturity.

Approximately $47.6 million of the existing debt has maturity dates in Q1:17, $32.4 million matures in Q2:17 and Q3:17 and $23.5 million matures in Q3:18. During H2:16, AMRS will focus on amending or refinancing its existing debt to push maturities out to 2019.

The agreement signed with Ginkgo Bioworks last quarter provided AMRS with approximately $15 million of cash going into Q3:16. Concurrent with the execution of the Ginkgo partnership, AMRS amended approximately $30 million of senior secured debt previously held by Hercules to extend its maturity to 2019. Monthly debt repayments and restrictive financial covenants were also eliminated

Other steps taken to bolster AMRS's cash position included closing a $5 million equity investment from the Bill and Melinda Gates Foundation, issuing $10 million of convertible notes and negotiating a $5 million loan from Foris Ventures. Additional funding of $40-$60 million is expected to come from asset sales in H2:16.

EPS GUIDANCE AND ESTIMATES

AMRS is guiding for FY:16 revenues (collaboration revenues and product sales) exceeding $90 million and cash operating expenses of approximately $75 million. For FY:17, AMRS targets collaboration payments of $50-$60 million and product sales of $60-$80 million. At this higher revenue run rate, AMRS anticipates positive cash flow from operations sometime next year.

Longer term, the Company targets 50% annual growth in product revenues, 30% gross margins on sales of farnesene products and 50-60% gross margins on sales of specialty molecules. AMRS targets a FY:20 revenue mix consisting of 50% farnesene products and 50% specialty products. Assuming FY:17 product sales of $70 million and 50% annual growth for the next three years, by FY:20 product sales could exceed $236 million. On a 50/50 mix of farnesene and specialty molecules and product sales of $236 million, gross profits could exceed $100 million and EBIT could exceed $35 million.

VALUATION

We calculate a price target for AMRS using a DCF valuation. For our DCF model, we incorporate our forecasts through FY:19 and apply a 5.0% growth rate to EBIT after FY:19. With a cost of capital estimated at approximately 9%, our DCF model derives a price target for AMRS of $2.80.

As shown in a one-year price chart, AMRS shares peaked near $2.50 last October, but the share price has since declined to a $0.50 trading range as a result of steadily falling oil prices, which have made the Company's renewable fuels business commercially unviable. AMRS has exited sales of renewable fuels in 2016 to focus instead on more profitable opportunities for its technology in fragrances, cosmetics, nutraceuticals, healthcare and industrial applications.

Disclosure: I am/we are long AMRS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.