Emerging specialty renewable products developer Amyris, once again, is facing material short-term debt maturities, partly due to its ongoing inability to come up with audited or re-audited financial statements for fiscal years 2017 and 2018.
Picture: Selection of Biossance products, the company's consumer beauty brand - Source: Company Website
As a remainder, the company disclosed in May that
"A material error had been made related to the accounting for certain payment obligations of the Company under the Partnership Agreement dated October 20, 2017 (the “Ginkgo Agreement”), between the Company and Ginkgo Bioworks, Inc. The contractual payment obligations of the Company under the Ginkgo Agreement and a related promissory note issued in connection therewith total $31.0 million over a five-year period ending on October 19, 2022 and had a present value of approximately $17.0 million to $19.0 million at the October 20, 2017 commitment date. A significant portion of these payment obligations had not been recorded as a liability or charged to the consolidated statement of operations as of December 31, 2017.
On May 14, 2019, as a result of the error discussed above, the Board, upon the recommendation of the Audit Committee after consultation with senior management and KPMG, determined that the Company will restate its audited consolidated financial statements for the year ended December 31, 2017. Accordingly, investors should no longer rely upon the Company’s previously released consolidated financial statements for the 2017 Non-Reliance Period. In addition, investors should no longer rely upon earnings releases for this period and other communications relating to these consolidated financial statements. Further, the Company’s disclosures related to such financial statements and related communications issued by or on behalf of the Company with respect to the 2017 Non-Reliance Period, including management’s assessment of internal control over financial reporting as of December 31, 2017, should also no longer be relied upon. Additionally, as previously reported, the Company expects to report material weaknesses in its internal control over financial reporting as of December 31, 2018. As a result of the material weaknesses, senior management concluded that the Company’s internal control over financial reporting and disclosure controls and procedures were ineffective as of December 31, 2018. Additional material weaknesses may be identified, and the scope of financial items or periods required to be restated may be broadened. The Company expects that KPMG will complete its re-audit of fiscal year 2017 when it completes its audit of fiscal year 2018.
On July 3, 2019, (I) BDO resigned as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019, prior to performing any substantive work with respect to the audit work for that year, and (II) the Company, with the approval of the Audit Committee, took the following actions: (A) dismissed KPMG as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2018 and 2017, (B) appointed Macias Gini & O'Connell LLP (“MGO”) as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2019 and 2018, subject to the completion of client acceptance procedures, and (C) appointed BDO as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2017, subject to the completion of client acceptance procedures. On July 9, 2019, MGO completed its client acceptance procedures and was formally engaged as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2019 and 2018. On July 10, 2019, BDO completed its client acceptance procedures and was formally engaged as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2017. The Audit Committee authorized KPMG to respond fully to all inquiries from BDO and MGO, and BDO to respond fully to all inquiries from MGO.
It should be noted that MGO is an independent member of the so-called BDO Alliance USA.
With former auditor KPMG having been dismissed entirely now, the newly appointed accounting firms will likely take their time to become acquainted with the company's business and financials.
Having worked for PwC a couple of years myself, I know about the manifold challenges arising by abruptly taking over a difficult client from a main competitor. Usually, you won't get any insight into the audit work carried out by your predecessor not to speak of the respective records.
Instead, you will have to largely rely on the company's accounting and internal audit department. With the latter not existent at smaller companies like Amyris and the former likely having caused the ongoing mess, I almost feel sorry for the respective teams of BDO and MGO in light of the anticipated work ahead of them.
Accordingly, investors shouldn't expect the company to become current with its SEC-filings anytime soon. The issue will require the company to address certain debt maturities within the next couple of weeks as respective waivers are about to expire:
- $53.3 million toxic convertible note (CVI Investments) - Waiver expires on July 22, convertholder has the right to put back the note to the company at 125% of principal amount from July 22 to July 29.
- $4.7 million toxic convertible note (B. Riley FBR) - Waiver expires on July 22, convertholder has the right to put back the note to the company at 125% of principal amount from July 22 to July 29.
In addition, the company also faces some regular short-term debt maturities:
- $9.7 million convertible note (TOTAL S.A.) - Note has been extended twice already from its original maturity date in May. Current maturity date July 18. TOTAL S.A. is a greater than 5% shareholder.
- $8.5 million promissory note (Foris Ventures) - Note issued just four weeks ago, maturity date August 28. Foris Ventures is a greater than 5% shareholder.
While I do anticipate the debt held by key shareholders to be extended without major penalties, this is unlikely to be case with the $58 million of toxic convertible debt held by CVI Investments and B. Riley FBR, particularly given the lucrative put option which can only be exercised for one week after waiver expiration.
Amyris will either have to offer substantial incentives to secure another waiver or redeem the notes at 125% of principal amount.
Frankly speaking, I have some problems understanding the rationale behind the mid-May decision to extend the $58 million in toxic convertible notes by just a couple of weeks in exchange for the above mentioned right to put back the note to the company at 125% of principal amount (in addition to issuing new warrants to the toxic convertholders), particularly after long-term shareholder John Doerr and his investment vehicle Foris Ventures stepped up to the plate just recently and saved the company from bankruptcy by a combination of debt-for-equity exchanges, new equity investments, new promissory notes and the purchase of outstanding third-party debt.
In total, Amyris exchanged or redeemed almost $87 million in convertible debt for approximately 23 million new shares and 16.3 million warrants, reducing total outstanding debt substantially to an estimated $157.5 million as of today (excluding the $14.5 million put option payment required under the toxic convertible debt discussed above).
On a recent investor conference, the company's CEO actually pointed to the remaining toxic convertible notes "to be put in the hands of a long-term shareholder" and the company to finish the year with long-term debt of around $90 million.
Given this statement, it is even more difficult to understand why John Doerr did not address the toxic convertible notes alongside the other convertible debt in May.
That said, the company likely had no other choice to prevent the toxic convertholders from declaring a debt default which would have resulted in the very same 125% redemption premium and likely triggered cross-default provisions under virtually all of the company's remaining outstanding debt.
So what is likely going to happen next?
Given the very significant capital contributions by John Doerr and other investors in recent months which actually saved the company from bankruptcy, I view a default on the toxic convertible notes as unlikely even if noteholders decide to exercise their juicy put options two weeks from now.
Instead, investors should prepare for another major, short-term equity infusion again led by Doerr / Foris Ventures which, at current prices, could result in the issuance of another 24 million shares.
That said, the majority of those shares has likely already been included in the company's most recent overview:
Source: Company Presentation
But even with the most recent short-term debt issues hopefully behind the company in a couple of weeks, Amyris still needs to address its very large cash burn from operations which amounted to approximately $30 million in Q4/2018, the company's last reported quarter.
Keep in mind that Amyris had to rely on short term liquidity infusions in the form of promissory notes by Foris Ventures in recent months and I do not expect this situation to change materially over the next couple of quarters.
While Amyris bulls are frequently pointing to the recent $300 million cannabinoid development, licensing and commercialization agreement with LAVVAN Inc. as an anticipated source of material short- to medium-term cash flows, I would actually caution investors to not rely on the company's often overly promotional announcements and instead wait for more tangible evidence of the new collaboration to indeed prove successful. At this point, not even the funding status of LAVVAN is known.
Without the company getting its financial house in order and becoming current in its periodic reports with the SEC, I do not expect any major strategic transactions either.
Given the most recent changes to Amyris' accounting firms, the financial performance of the company will likely remain a black box for much longer than previously anticipated. From my own experience as an auditor at PwC, I would be very surprised if the company becomes current in its periodic filings before 2020.
Moreover, the company is facing the likely requirement to repay $58 million in toxic convertible notes at a 25% premium to face value as soon as next month or otherwise offer very substantial incentives to noteholders to get another waiver.
Investors should prepare for John Doerr / Foris Ventures to lead another round of equity investment in the company to deal with the toxic debt maturity and avoid a potential default.
Without the company providing financial statements or at least a selection of key financial data, it is virtually impossible to assess the company's recent business performance but investors should be wary of the company's ongoing liquidity challenges as very much evidenced by the requirement to issue expensive, short-term promissory notes to Foris Ventures in recent weeks.
As long as the company does not become current in its periodic filings with the SEC, I would rule out a major strategic transaction thus the high probability of Amyris remaining on life support from John Doerr / Foris Ventures for the time being.
Personally, I have very little conviction in the company's ability to turn the corner given management's long and unbroken history of over-promise and under-deliver.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.