Amyris Inc (NASDAQ:AMRS) has fallen victim to loan sharks wearing black hoodies, steel-toed boots and perfectly wicked sneers, its SEC filings suggest.
Now the California biotech’s new filings show it’s gotten stuck with a $25 million debt financing deal spiked with – don’t you love the word - “covenants” so draconian they’ll set your hair on fire.
Don’t take TheStreetSweeper’s word for it. Take the words from the company’s recent filing with the US Securities and Exchange Commission. With that costly loan deal and others in its frayed coat pocket, poor AMRS is in such a fix it may:
“…need to issue … discounted equity, agree to onerous covenants …”
Now, AMRS may be in an even worse fix as the company approaches its quarterly earnings call scheduled for Thursday, May 8. The company has reported worse earnings numbers over each of the past five quarters than those anticipated by analysts – and those experts expected earnings losses as bad as 29-to-45 cents. Analysts this quarter expect a loss of about 28 cents per share.
Insiders and others may feel their trigger finger quivering right now. AMRS is trading at about $3.35 per share yet there are options as cheap as $2.15. With 76.4 million shares outstanding, an astonishing 54.7 million shares could potentially hit the market.
“The upside of any equity investor would be severely limited by these options,” said an analyst who requested anonymity.
Despite all this – plus the fact that the CEO himself has eagerly sold off some $8.9 million worth of AMRS shares and evidently has remained equally busy counting proceeds from his days as prior director of a dying biofuels company – AMRS chief executive John Melo recently asserted that the company has quite the 2014 business plan.
Mr. Melo, however, forgot to tell investors the SEC-filing details of the business plan that form the company’s exit strategy.
The business plan depends on brutal current collaborations and undefined, not yet identified collaboration and licensing deals that may:
“… require us to relinquish commercial rights or grant licenses … not favorable to us …”
The SEC filing goes on to spill another shocker: “going concern” language. AMRS wrote the investors-get-the-heck-outta-Dodge language this way:
“If we fail to secure such funding, we could be forced to curtail our operations, which would have a material adverse effect on our ability to continue with our business plans and on our status as a going concern.”
AND IT GETS WORSE
Worse yet, the going concern language is in a delayed annual filing.
A delayed filing is always a red flag. But it’s even more worrisome that AMRS was forced to file late because it was looking at “liquidity needs” and “contingency plans.” AMRS had to somehow offer a way to attempt to dig out of massive indebtedness and a measly $15.8 million in revenue or about half the prior year figure.
Once AMRS finally got the annual report filed, it contained more language that rings ominously in investors’ ears.
The report notes:
“(Our) debt agreements contain various covenants, including restrictions on business that could cause us to be at risk of defaults.”
The Emeryville, Calif.-based company has accumulated a deficit exceeding $820 million in its efforts to turn sugar-chomping bugs – actually controversial genetically modified yeast - into micro-factories that use Brazilian sugarcane (a feedstock with an arguably negative environmental impact) to ultimately create products such as niche fuels (see this link or this one to TheStreetSweeper’s story to learn about its unfortunately futile jet fuel effort) and cosmetics.
CUT RESEARCH, SUSPEND OPERATIONS
AMRS borrowed $25 million from Hercules Technology Growth Capital just a few weeks after TheStreetSweeper’s warning in March that AMRS desperately needed money. The draconian terms force AMRS to pay 9.5 percent or 6.25 percent above prime and meet a rat’s nest of performance covenants and requirements. And if AMRS can’t cough up an “equity financing covenant,” it must come up with another $10 million on May 31, 2015.
Not counting that overhanging loan, AMRS regulatory filings show it also faces a daunting pile of contractual obligations ranging from old debts to purchase deals to leases.
That’s $24.8 million in other obligations. All due this year.
It’s becoming obvious why AMRS is obsessed with an exit strategy.
As it all comes crashing down and if there’s a funding hitch for AMRS, SEC filings say as early as “the second quarter of 2014” the company plans to begin cost-cutting efforts such as:
* “Significantly reduced” new product and commercial development.
* “Suspend operations” at pilot and demonstration facilities.
But, particularly at this stage, the company obviously must focus on R&D – not cut it.
Pilot and demonstration facilities are also key because the company currently produces only farnesene (it hopes to soon add another product) at its only production plant which is located in Brazilian sugar cane country.
The filing note on Page 12 states the Brazilian plant production has been tough and costly, and it just may never prove economically viable. New possibilities rely on what pilot and demonstration facilities cook up, though even those offer no guarantee of being translatable to actual commercial production.
AMRS cuts its own throat if it is forced to cut R&D and suspend those operations.
COMPANY STARVING, INSIDERS SELLING
With AMRS shoveling millions of dollars in obligations and scratching furiously for more loans to add to its mountain of debt, what do you suppose company insiders are doing?
They are selling company stock.
That’s right. After the market closed April 23 – and after several weeks of stock price-friendly announcements largely devoid of meaning or details – company insiders filed notice with the SEC that they were holding their own private fire sale.
Company officers and directors have been privately selling a load of about 1 million shares of AMRS since April 14.
Yep, that’s about $4 million right in their old overstuffed wallets.
WHO IS SELLING OUT
Mr. Melo, who is named in two class action lawsuits alleging securities violations and making false and misleading claims in SEC filings, has really stuffed his wallet in the past three years.
Mr. Melo has sold about $8.9 million worth of AMRS stock.
He’s drained his AMRS stock holdings - both directly and indirectly – down to little more than 240,000 shares, records indicate. He often sells his stock options as soon as possible - and they cost as little as 28 cents a share.
Just recently, Mr. Melo joined relative newcomer Susanna McFerson’s lead as she dumped 49,841 shares in March in a non-market sale at $5.05 apiece for a cool $251,000. On April 1 and April 9, three fellow officers fetched $3.96-$4.44 per share in their sell off of well over 330,000 shares.
Mr. Melo surprised investors last April Fool’s Day with his non-open market sale at $4.44 each of 353,484 shares. He plumped up his wallet that day alone by about $1.6 million.
Maybe Mr. Melo and his fellow insiders have no more faith in AMRS than partner Total Energies Nouvelles ActivitA. We previously described how AMRS gave away the farm when it inked a joint venture to allow Total to exploit AMRS technology. Now it seems this partner distrusts AMRS so much that reports of AMRS cash, equivalents and short-term investments must be sent to Total every single month. And Total is so unsure of AMRS’s future that it holds tight to “No-Go” privileges that let it back out on its partner.
Investors may find other viewpoints about AMRS here, including those of a blogger who owns shares of AMRS, writes for AMRS shareholder Motley Fool and is paid to write for SynBioBeta, which has AMRS’ Tim Gardner scheduled as keynote speaker for the synthetic biology industry promoter’s conference this year.
CEO DIRECTED A DYING BIOFUELS COMPANY
Despite AMRS’ struggles, its chief executive does pretty well, with his salary and bonus alone running around $700,000.
And this isn’t Mr. Melo’s first rodeo – or his first big sell-off of his own company’s stock. He got practice vigorously selling company stock as a director, along with former AMRS director Ralph Alexander, for desperately foundering biofuels company KiOR Inc (NASDAQ:KIOR) .
On KIOR’s perilous ride down from $20 stock in September 2011 to $12 stock four months later, Mr. Melo sold that biotech stock. This link shows the drastic stock price declines after Mr. Melo sold both KIOR and AMRS shares.
KIOR stock is now about 67 cents.
KIOR and AMRS share another unfortunate similarity. Despite getting a $100 million infusion just last fall, KIOR included in its March SEC filings a “going concern” issue. Much like AMRS.
TOUGH SELL
AMRS has touted farnesene refinement product squalane that can be used to make facial creams, even bragging the company has locked up 18 percent of the market. The chief executive, Mr. Melo, said the peak market is about $180 million.
Something’s wrong here.
AMRS sales were just $15.8 million. But Mr. Melo said squalane is just one-third of that. That’s about $5 million.
But for AMRS to claim that much of the supposed market, the squalane revenue would have to be more than $32 million – that’s over six times the company’s squalane revenue.
The market is much smaller than Mr. Melo claims. Or AMRS’ share is much smaller than he claims.
Either way, it’s another huge, snapping red flag.
Add to that Mr. Melo’s bold claim that AMRS can somehow boost the market to $300 million. We agree with the astonished analyst who asked, “How do you do that?”
DESPERATE OR RUDE?
The manufacturer that took six weeks to produce enough biofuel to fly a jet a few days has now cranked out some fiery news. And we do mean fiery.
AMRS announced it has begun selling its chemical farnesene online.
It’s for anyone interested in acquiring their own stash of the chemical –at $595 per kilogram or about $2,380 per gallon - so that customers can get creative. They can supposedly use it to make designer jet fuel, adhesive, resin, perfume or even a brand-new set of tires.
“We expect to accelerate Amyris’s commercialization by simplifying access to high-purity, renewable farnesene,” said CEO Melo.
Don’t worry about the poor delivery guy who brings this highly flammable, highly toxic chemical to customers’ doorsteps. It’s hard to imagine Fed-Ex or the US Post Office agreeing to ship this dangerous hydrocarbon. But that’s what AMRS would have investors believe.
If this online pitch is an actual strategy to sell more product, it’s absurd. If it’s a strategy to make investors think AMRS is trying to open up another doorway to commercialization, it’s insulting.
CONCLUSION
The company’s floating along primarily on collaborative funding and borrowed money. The loan sharks have already chomped and more are breaking through the doors. AMRS doesn’t need any more problems but, since our last article, TheStreetSweeper has dug up a quivering pile of them, including:
* “Going concern” language, delayed 10-K and overhanging shares foreshadow even tougher road ahead – one that potentially includes an exit strategy.
* Announcement of online sales of farnesene sugar-chewing bug mix is ridiculous, insulting.
* CEO’s claims of squalane market are exorbitant, misleading.
* AMRS works beneath heartbreaking toxic financing and collaboration deals that make it even harder to operate a business.
* The company struggles. Yet the CEO and other insiders are sending signals to get out, we believe, as they sell multi-millions in AMRS stock.
The signs are all there. A knife is at AMRS’s throat and only a huge capital infusion can help this debt-riddled company now.
Disclosure: The owners of TheStreetSweeper hold a short position in AMRS and stand to profit on any future declines in the stock price. Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover.