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Edited Transcript of AMRS earnings conference call or presentation 18-Mar-19 8:30pm GMT

Q4 2018 Amyris Inc Earnings Call

EMERYVILLE Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Amyris Inc earnings conference call or presentation Monday, March 18, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John G. Melo

Amyris, Inc. - President, CEO & Director

* Kathleen Valiasek

Amyris, Inc. - CFO

* Peter DeNardo

Amyris, Inc. - Director of IR & Corporate Communications

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* David Schneider

* Graham Yoshio Tanaka

Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director

* Phillip Scott Schaeffer

Scott's Cove Management LLC - Managing Member, Chief Compliance Officer and Senior Portfolio Manager

* Randy Baron

Pinnacle Associates Ltd - Lead Portfolio Manager

* Scott Christian Buck

B. Riley FBR, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amyris 2018 Fourth Quarter Financial Results. (Operator Instructions)

I would now like to turn the conference over to Mr. Peter DeNardo. Sir, please begin.

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Peter DeNardo, Amyris, Inc. - Director of IR & Corporate Communications [2]

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Thank you. Good afternoon. Thank you for joining us today. With me today are John Melo, our Chief Executive Officer; and Kathy Valiasek, our Chief Financial Officer.

Please note that on this call, you will hear discussions of non-GAAP financial measures, including gross margin figures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is contained in the summary financial information slides of the accompanying presentation or the news release distributed today, which is available at investors.amyris.com.

The current report on Form 8-K furnished with respect to our press release is also available on our website as well as on the SEC's website at sec.gov.

During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities and their anticipated financial impact on our business and financial results for 2019 and beyond. These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed from time to time in filings Amyris makes with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties.

Before we begin today, I'd like to note that included in our webcast is a slide presentation we will refer to in today's presentation.

I'll now turn the call over to John Melo. John?

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John G. Melo, Amyris, Inc. - President, CEO & Director [3]

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Thanks, Peter. Good afternoon, and thank you for joining us today.

In 2018, Amyris delivered, in my view, a disappointing performance despite consistent progress in our underlying business. Our financial results were far below our expectations. The shortfall is due to 3 significant issues. I will discuss these along with the clear resolutions that we have in place, each well understood by the management team and our board. At our core, however, our recurring revenue base is growing strong. Our key products and markets are delivering strong revenue and margin performance, and our first quarter revenue is starting very well, one of our best starts to the year-to-date when you exclude the vitamin E royalty from our base business.

In the fourth quarter, we delivered a 29% higher product revenue than the same period the prior year. And so far for the first quarter of this year, we're around a 60% year-on-year growth for product revenue on a like-for-like basis.

I will take some time to go through the 3 main drivers of our negative results in 2018 and the fourth quarter and what we're doing to resolve these. First, as we previously reported after the third quarter, when the vitamin E pricing collapsed in the second half of 2018, this had a direct impact on our expectations for royalty. This resulted in $30 million to $40 million less revenue than we expected and also a direct hit to cash as this was 100% gross margin. We now have an agreement in place to mitigate this risk going forward, which I will explain in fuller detail in a few moments.

Second, the nature of our collaboration agreements for R&D have been unpredictable and complex. We have averaged over $50 million annually for the last 3 years in collaboration dollars that fund our R&D and drive our product pipeline. The model is working, but the financial flows and accounting treatment is choppy and unpredictable. Many of these agreements come in the form of large upfront or milestone payments that are sometimes difficult to account for in a given quarter. We experienced this in 2018, which resulted in $30 million to $40 million less than we expected from this activity. The CBD agreement that we announced today delivers the majority of the expected collaboration revenue for the next 2 to 3 years in a single agreement. This allows us to simplify our collaboration portfolio and predict revenue with much better accuracy.

The third significant issue that impacted our performance in the fourth quarter was our speed to scale on our new launch of our 0-calorie natural sweetener. Our full-scale production was about 30 days behind schedule, and as a result, we could not recognize revenue in the fourth quarter for most of our sweetener sales during the quarter. Our production is back on track, and we have been shipping our sweetener to customers from the start of the first quarter.

As I said earlier, our 2018 results failed to meet our expectations. We could have avoided most of the disappointment with a much more conservative approach to expectation management. I've heard this from many of our investors, and we are responding to this feedback by changing how we communicate financial expectations. Going forward, we will set external expectations based on what we have in place and not what we believe we could achieve. We believe by communicating in a much more conservative approach, we can better realize the true value of our business in our share price.

In light of the revenue recognition challenges we face around the end of the year agreement with Yifan, we decided to focus on 2 long-term agreements that would make our business better and provide the best short-term liquidity. Looking forward. We are advancing 2 agreements that address our 2018 issues and are expected to deliver short- and medium-term funding to support our growth and debt.

I'll start with what we've done regarding vitamin E. We've concluded that this is not part of our core business long term and that we would be better served by monetizing the remainder of our agreement now. We started by entering into the Yifan agreement for a $50 million payment for a portion of our vitamin E royalty at the end of 2018. This agreement was a result of working through a potential license agreement as we have announced previously. However, in the end, the terms of the license agreement became overly complex and too costly, especially around our intellectual property. This was not in the best interest of Amyris and our shareholders.

At the start of 2019, DSM, our largest shareholder, expressed interest in an alternative to the Yifan royalty buyout that is much more attractive for Amyris and less risky. Late last week, we reached an agreement with DSM that would be a positive impact for Amyris' short- and medium-term liquidity. We expect to execute this agreement in April after approval of the terms by both companies. As a result of these discussions, we have agreed to a mutual termination with Yifan around the assignment of the vitamin E royalty agreement.

During the fourth quarter, we also announced our start on a CBD collaboration. Our objective with this collaboration is to create value, leveraging our world-class technology that is best suited for making highest purity and naturally sourced cannabinoids through fermentation. This collaboration enables us to simplify our product pipeline and technology portfolio. We are very pleased to announce the signing of the final agreement for this program and expect to start first commercial production early next year. We believe this is the fastest of any fermentation source for these products and very consistent with the timing of our last 3 commercialized molecules in this class of technology.

Let me share a little bit about our partner and plan around CBD. LAVVAN was formed by a group of industry leaders across the pharmaceutical, cannabis and financial sectors. Substantial financial resources and industry relationships in all the verticals needed to make this partnership successful. LAVVAN is making a very big bet on the space and on Amyris. They've done extraordinarily thorough scientific due diligence. LAVVAN is going to be at the vanguard of the modernization of the cannabis industry. They're going to bring world-class scientific manufacturing and commercialization capabilities to a market that is still the Wild West. There's plenty of really obvious reasons why the backers of this entity want to keep themselves under wraps. That said, in the coming weeks and months, LAVVAN will be making its presence known. Some of the names backing the company will start talking about it publicly. The CEO, Etan Bendheim, comes out of a leadership position at Phibro Animal Health, a leading animal health and mineral nutrition company. So he comes with tremendous fermentation, commercialization and regulatory experience, pretty much perfectly suited for this opportunity.

This agreement for cannabinoids further simplifies our cost structure. We see a path to reduce our cash operating expenses for 2019 by around $10 million versus our full year 2018 spend. With the vitamin E agreement in hand and the CBD agreement, we have removed the 2 largest variables from our 2018 results. These agreements help solve our short- to medium-term cash needs and are part of a solution for our debt payments. As I referenced earlier, these 2 deals also have resulted in a much simpler product and technology portfolio. We will reference the remaining portfolio as core products and markets and our R&D pipeline.

Our core products and markets are performing very well. We have successfully scaled 8 fermentation products to market with each of them delivering best-in-class performance and growing well over 50% annually. Every product with over 12 months of commercial sales is producing well over $1 million in annual revenue. Our 2 largest core markets, skin care, is on track for over $50 million of revenue this year; and flavors and fragrance ingredients for over $30 million this year, and both are expected to be EBITDA positive in 2019.

Let me now cover some highlights from our core markets. Our skin care market continues to be our best performer with more than 100% growth last year and full year 2018 revenue of over $22 million. We're on track for over $50 million in revenue this year. This business is powered by the world's leading moisturizer, squalane. Our products and formulas for the consumer have developed a cult-like following, and we are very excited about the significant expansion in the U.S. and international markets this year. We delivered many successes in this business during the fourth quarter, including significant expansion with L'Oreal, Estée Lauder and Coty. And one of our most exciting success is on the ingredients side, the launch of a new beauty brand in China based on our squalane product. This brand is called Native Beauty and was launched during the first quarter this year with our supply for this product shipped in the fourth quarter of last year. The brand sold over 110,000 units in the first 6 hours and has been sold out of product since. We believe this is only the start of our sales to the Chinese consumer, and we expect to further expand with this channel to also sell our natural sweetener and baby products direct to the Chinese consumer.

Now for our 0-calorie natural sweetener. Our new sweetener is our latest success story. It represents the eighth molecule we successfully manufactured at scale and our 16th successfully commercialized product. Amyris has developed a sweetener that is naturally sourced from sugarcane, has 0 calories and has the best taste profile of any natural sweetener on the market. We introduced the product in early December. We have now sold the first 3 brands to deliver the product directly into consumer products and 5 customers overall. The first consumer products will be in the hands of consumers in April. We have a pipeline of over 100 brands. And to date, the success rate has been almost perfect once the brand starts working with a product. What we are hearing consistently from brands, it's the best taste profile and they love that it's 0 calories from sugarcane. Based on what we've seen reported publicly, we have now sold more in one quarter than the cumulative of all the companies in our sector that are participating in the high-intensity, natural sweetener business. This is a great testament to our product and our team. We have developed a brand name, Purecane. We have a clear positioning for the product: 0-calorie, natural sweetener from sugarcane. We will have our first consumer product sold and labeled as Purecane in Brazil by the end of this year. We have engaged more than 10,000 consumers. The message from consumers is clear: The consumer wants natural products that are sustainably sourced, and they have a strong preference for a product that comes from sugarcane versus fructose-based fermentation.

Let me now cover our product pipeline. Our biggest opportunity in the product pipeline is the cannabinoid program, CBD. This is where the majority of our resources are focused. Our second-biggest program in terms of long-term value is HMOs, and this program is ahead of schedule and going very well with our partner DSM.

Our third focus area is flavors and fragrance ingredients, and we are partnered with Firmenich and Givaudan and have a strong pipeline of molecules where we expect continued commercial success working with these partners. We are continuing a few vitamin projects with Yifan and believe they will continue to be a key partner as we continue to build our market in China. This is it. Our pipeline is focused around 3 key programs and one minor one. They are all making great progress in each market where we have competitively advantaged technology. We intend to expand with this group of world-class companies.

Let me now summarize. It is now time to simplify our business and get back to doing the basics well. I believe this will serve us better. We will provide guidance based on what's done versus what we expect to deliver. We will operate with about $10 million in lower cost this year, and we will focus on the skin care market and the 0-calorie natural sweetener market. This is where we own the best products in the market and where we can deliver significant growth without significant push. We will focus our technology portfolio on one key product: CBD. We will deepen our relationship with 4 key partners: DSM, Firmenich, Givaudan and Yifan. This will help us be much more effective and reduce complexity and cost in our organization.

We are the most successful company in our sector based on product hits, absolute product revenue and growth and gross margin. The fact that this is not represented in our company valuation is a result of our own doing by not meeting the expectations we set. It's time for a clear change.

For 2019, we expect our total revenue for the year at around $150 million. We expect to continue introducing 2 to 3 new molecules each year, in line with the last several years and the expectations we set earlier. Our business outlook remains unchanged. Our skin care business continues as the fastest-growing brand in North America, and we are in process of expansion across new geographies. Our 0-calorie sweetener is proving to be the best-in-class and is delivering great sales results. We expect this to quickly grow like skin care or better. Our pipeline has a great future hit with CBD becoming an excellent opportunity in markets where the legal framework supports it. We have successfully transitioned to a marketing company, powered by the world's leading science, to deliver the natural products consumers are demanding in a sustainable way for our planet.

Let me now turn to Kathy, where she will cover the financials and the outlook in more detail. Kathy?

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Kathleen Valiasek, Amyris, Inc. - CFO [4]

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Thank you, John, and good afternoon, everyone.

As John mentioned, our financial results for the quarter and year were way off from our expectation. We need to do a far better job at forecasting with the increased certainty of hitting our goals based on product demand as well as increased certainty of closing deals. Towards that end, where possible, we are also structuring deals to have less of a chunky, large, upfront revenue impact, which can hamper our quarterly results if deal execution is delayed or doesn't occur and planning deals with more of a smoothing out of revenue flow as signed deals hit completed development milestones over time. This will enable us to have greater visibility into our quarterly and annual financial results and allow for better business planning.

A key example of that is the $300 million CBD agreement we announced today. This agreement has in place near-term initial milestone of $10 million, which will bring in cash quickly, followed by R&D milestones that generally range from $10 million to $15 million as each are hit. Toward commercialization, where certain cost targets per kilogram are hit, a few of these payments equate to $25 million. Given how quickly we believe we can execute on development success, we believe that we can earn a significant portion on these payments by the end of 2020 with perhaps approximately $30 million to $40 million in total anticipated to be earned during 2019 alone.

Now let me review our fourth quarter 2018 results. Q4 2018 GAAP revenue was $19.4 million compared with $80.6 million for the fourth quarter of 2017. The year-ago period reflected $57.3 million during the period for our multielement agreement with DSM. And on a comparative basis, when adjusted for the low-margin product sales on contracts assigned to DSM and onetime revenues, revenue for the quarter compared to $17.7 million for the same period a year ago. Revenue did not come in on plan due to the vitamin E situation John described, the shift of significant sweetener revenue from Q4 to Q1 due to delay in a large-scale start-up that was quickly solved. Product sales were $12.1 million compared with $13.4 million for the fourth quarter of 2017, which included low-margin product sales contracts assigned to DSM. Excluding all vitamin E revenue for the period, product revenue for the fourth quarter of 2017 was $9.4 million. Grants and collaboration revenues were $6 million, down from $9.4 million for the fourth quarter of 2017 due to lower grant revenues from the DARPA program and lower collaboration revenues from Givaudan. Licenses and royalties revenues of $1.2 million, down from $57.7 million for the year-ago period reflected a onetime $57.3 million license fee from DSM in Q4 of 2017.

Non-GAAP gross profit was $5 million compared with a non-GAAP gross profit of $64.3 million for the fourth quarter of 2017, which benefited from significantly higher revenue and the positive impact of royalties.

Selling, general and administrative expenses were $27 million compared with $19 million for the fourth quarter 2017. This primarily reflected Biossance's growth and an increase in headcount as well as onetime costs.

Research and development expenses of $18.1 million for the quarter were up from $12.8 million for the fourth quarter of 2017 due to increased R&D costs for product development and an increase in headcount to support it.

GAAP net loss attributable to Amyris common stockholders for the fourth quarter of 2018 was $53.2 million or $0.72 per basic and $1.03 per diluted share. This compared with a GAAP net loss attributable to Amyris common stockholders in fourth quarter 2017 of $2.9 million or $0.06 per basic and diluted share. Of the net loss attributable to common shareholders for fourth quarter 2018, $30.4 million or $0.41 per share was due to the impact of derivative instruments.

Cash, investments, restricted cash at December 31, 2018 were $47.1 million and accounts receivable of $24.4 million. At December 31, our debt was $209.9 million. We successfully closed on the sale of $60 million of unsecured convertible senior notes in December. Coupled with the short-term payments from the expected DSM agreement and the payments from our collaboration, we are confident in our ability to pay down our near-term debt maturities. This will have the added benefit of substantially simplifying our capital structure, which has been a strong element of our debt management plan.

In closing, we acknowledge that our financial results are not acceptable, and we want to avoid this in the future by better assessing what are realistic revenue assumptions versus those that are simply potentially possible and they have elements we cannot control. The result is that we will exercise much more conservative projected revenue analysis from here on out to improve our ability to avoid quarterly disappointments and instead meet or exceed our goals. And as with our CBD agreement, we will, when possible, structure large collaboration agreements to have a revenue flow, which is more suitably aligned with our revenue outlook so we can be positioned toward meeting expectations.

I would now like to open the line for any questions you may have. Howard?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Amit Dayal from H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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A lot to digest here, but I'll limit myself to maybe 2 or 3 questions and then follow up offline. So in the context of the vitamin E business, are you planning to completely exit the vitamin E business? And how much do you expect to receive or generate from this if that is the case?

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John G. Melo, Amyris, Inc. - President, CEO & Director [3]

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Amit, thank you for being on the call. I would say our intention is to exit. And the amount received, we expect to be significantly greater in magnitude. Think of it in magnitude potentially more than double or around double what we were getting in value from Yifan.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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And does this development sort of -- I don't want to use the word jeopardize, but does it create any problems for you with Yifan in your future efforts with them?

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John G. Melo, Amyris, Inc. - President, CEO & Director [5]

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We, both Amyris and DSM, have a long-term relationship with Yifan. We have some significant technology partnerships with them that are going very well. And then DSM has been doing business with Yifan for a very long time. So as you can imagine, we actually had to work very carefully between all parties, and we didn't -- we avoided any surprises and kept people aligned as we were navigating through the right long-term solution for Amyris.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Got it. In the context of the cannabinoid announcement today, this $300 million, is this sort of the final number you have right now? And can you give us any color on this LAVVAN, Inc., who these people are, how they are funded, et cetera? Any color on that would be helpful.

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Kathleen Valiasek, Amyris, Inc. - CFO [7]

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Sure. So the value of the contract is $300 million is the final number in terms of the upfront milestone payments and is also an R&D budget built into that $300 million figure. And of course, as we disclosed in our previous release and the current release, that doesn't include the back-end royalty revenues that we'll be seeing, which is really the significant piece of the overall program when you consider the possibilities in the field.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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Got it.

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John G. Melo, Amyris, Inc. - President, CEO & Director [9]

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And Amit, to your question about LAVVAN, who they are, we are under significant restriction regarding disclosing anything more than the name and the CEO. We can tell you that the people involved are significant. They're connected to the major segments that are currently playing in the cannabinoid market, and they're very, very familiar and connected to both the Canadian market and some of the global brands that are obviously involved inside the CBD market. So that's what I can describe for you. And the one thing they are very clear about is, they've got a pretty clear communication strategy around how LAVVAN evolves over the next several months and what becomes public. So I think you will hear a lot more. But again, we're excited to be in partnership with them, and we see this as being a significant business over time, starting with the first commercialization early next year.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [10]

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Understood. And just lastly, on the sweetener side of things, what caused sort of this delay in production, et cetera? Are those issues behind you? And of the $150 million you're guiding for 2019 in revenues, how much should we expect sweeteners to contribute?

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John G. Melo, Amyris, Inc. - President, CEO & Director [11]

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Yes. I mean, what I would tell you is, out of what we expect sweetener to contribute in '19, about 1/4 of it, if not slightly more, would already be done in the first quarter. So again, I think Kathy's view on where we're going with our conservative nature, you can expect that we've got in hand what we need to deliver on our $150 million. And obviously, it has upside because nothing has changed regarding our belief about the business. We just want to change our whole guidance and expectation setting around how we talk to the financial community.

Regarding the issues, again, they were all about -- we have a pretty complex manufacturing system, right. We make the fermentation product in one site, and we have to move it to a second site to finish it. And getting all the logistics to work and get us in practice of being able to manage all that took quite a bit of time. So we were delayed by 30 days. But all the equipment, all the process and all of the technology is working very well. We've actually ended up with a product that's higher quality than we expected. And we've ended up with a product that the beverage industry is telling us is actually the most stable, natural sweetener for them to use in beverage products. So we're very excited about where we ended up. It took 30 days more than we expected. I think for technology scale-up of this type, that's pretty darn good. But nonetheless, it missed our fourth quarter expectation.

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Operator [12]

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(Operator Instructions) Our next question or comment comes from the line of Scott Buck from B. Riley FBR.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [13]

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First, congrats on finalizing the CBD partnership today. I was curious though, could you provide some color on the cadence of how the R&D expenses are kind of layered in to the P&L over the coming quarters? I know you have the $10 million upfront here at the end of the month. But how should we think about the expense side of that over the next 2 or 3 quarters?

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John G. Melo, Amyris, Inc. - President, CEO & Director [14]

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Yes. First of all, Scott, welcome to the call. Thank you for taking the time with us. I'll let Kathy talk to the specific cadence of it. And I think the main point, I'm not sure how clear that came across in our release, which is we have the costs in place today to support the agreement and actually a lot of the upfront deals with most of the development costs through this year. So I think with that, Kathy can talk to the cadence and how it shows up.

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Kathleen Valiasek, Amyris, Inc. - CFO [15]

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Yes. So really, at the end of the day, to bring this program to market as it's designed, we won't see an increase in our R&D headcount. It's all about re-prioritizing the programs and the projects that we're working on and just reallocating resources. And as more and more time goes by, the R&D team gets more and more efficient at bringing products to market. As we had said over the past couple of years, we bring at least 2 to 3 -- commercialize 2 to 3 new products a year, but that we're just getting better and better and more efficient at it. So it's a really nice add that we can do this program without an increase in R&D headcount or costs.

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John G. Melo, Amyris, Inc. - President, CEO & Director [16]

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And one final point, Scott, that's important. It's not that this is a light program. There's actually a lot of resource going on it. But the reason why it's not actually changing our R&D base is we're actually shifting a lot of our resources from a couple of the programs that have winded down, a couple of major programs and putting all of that resource on this program. So it's actually a shift of a couple of programs going away and this one picking up all the resources to take it forward. It's also important to note that the development around the strains for this program are actually very well advanced, right? This is not a program where we're starting a pathway that needs to be built from scratch. So very well advanced, we have a pretty clear path to the first commercialization milestone and are just focused on execution right now.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [17]

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That's very helpful. Curious what it does to capacity, if you were to go look at another partnership. Does this put those conversations on the back burner for quite some time or is that something that you would consider and be able to be hire for, I guess?

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John G. Melo, Amyris, Inc. - President, CEO & Director [18]

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Yes. On the R&D front, and I assume when you're talking about another partnership, you're talking about a completely different program, if we wanted to add a pharmaceutical intermediate as an example, right?

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [19]

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Yes. That's right.

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John G. Melo, Amyris, Inc. - President, CEO & Director [20]

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Yes. Now for us, there's 2 parts of capacity, physical space and then people. And I would tell you, we have space for another program. I wouldn't say a major program of the size of CBD at all. And then the question would be the number of people. Because on the people side, we are fully allocated post this program. So we don't have any capacity at all people-wise. We would be able to fit something in physically if the program made sense. We are not currently pursuing another program because what this program enables us to do is really get back to where we expected of a $60 million or more in collaboration revenue annually from delivering the milestones and being effective with this program, plus the rest of the collaboration portfolio we have. The activity on HMOs with DSM, the vitamin activity with Yifan and then the F&F activity.

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Operator [21]

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Our next question or comment comes from the line of David Schneider.

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David Schneider, [22]

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I got a couple of questions. The CBD partner, does the agreement include geographies outside the United States and Canada or just the U.S. and Canada?

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John G. Melo, Amyris, Inc. - President, CEO & Director [23]

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It includes geographies outside U.S. and Canada. And in some of those geographies or specific segments, we will be, Amyris will be marketing some of those products. So the agreement actually provides flexibility for who markets by geography and which segments.

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David Schneider, [24]

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Okay. So are you precluded from doing a CBD agreement with some other entity or do they have the exclusive with you?

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John G. Melo, Amyris, Inc. - President, CEO & Director [25]

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Yes. The overall structure is for exclusivity. There are some triggers or performance criteria that are required to maintain exclusivity. As you can imagine, one of our lessons has been that we need a partner that performs to maintain exclusivity. And when that happens, life is good. So there are performance criteria and triggers for the exclusivity to be maintained between the 2 parties.

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David Schneider, [26]

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Okay. So it sounds like they can go after putting the cannabis extracts or derivatives or cannabinols in lots of different things other than, let's say, beverages or candies. They can go in lots of different ways. I guess that would be the correct assumption?

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John G. Melo, Amyris, Inc. - President, CEO & Director [27]

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That is a correct assumption. And a couple of markets that are very interesting for us, obviously, skin care. And in that market, as you can imagine, we are moving very quickly to introduce a skin care-based product specifically for the California market where it's legal. And then secondly, a lot of the beverage customers, if you look at our pipeline in beverage, a pretty significant number of our pipeline in beverage for the sweetener are companies who are also looking at and some actually well along developing CBD-based products. So we've actually seen quite a bit of synergy between our CBD path forward and our sweetener and are working very tightly with LAVVAN for how we actually leverage our access and their focus to be able to execute on some of these opportunities.

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David Schneider, [28]

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Okay. I believe it's 1 to 3 new chemicals or molecules you hope to introduce each year. My work tells me and I could be wrong, that the CBD deal was, they went after you, more so than you reaching outward. So if I'm correct, and I don't need to know if I'm correct, is it safe to assume that there could be a new molecule introduced this year that is unannounced?

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John G. Melo, Amyris, Inc. - President, CEO & Director [29]

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Everything is always possible, David. But at this point, we're just staying with a very simple set of expectations. And I think your assumption is correct. This is not an opportunity we went pursuing. We can say that once we were engaged in it, it seemed like a very attractive opportunity where we got very focused on making it real for both us and the partner. And you can also assume that because of that, when we had guided before to 2 to 3 new products a year that we did not have CBD in that mix, right? So I think that what this does is enable us to be on the upper end of what we said would be new products every year to market.

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David Schneider, [30]

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Yes. Yes. So that's good. Something that you did have a press release, I forgot exactly the date, about the vaccine adjuvant. And I realize people didn't care at the time. But has that project with, I think it's a British university, has it actually started yet?

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John G. Melo, Amyris, Inc. - President, CEO & Director [31]

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It has. It is progressing well. And we think of it as an interesting opportunity, but it's long term. It's not -- as far as market impact and having something available, it's not in the foreseeable couple of years.

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Operator [32]

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Our next question or comment comes from the line of Graham Tanaka from Tanaka Capital.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [33]

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Congratulations on the CBD signing. Just a few questions on CBD first. How many partners or separate corporate partners are involved? And how many different verticals are covered in the agreement so far?

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John G. Melo, Amyris, Inc. - President, CEO & Director [34]

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Thanks, Graham. I would tell you that all the major verticals, there's about 5 major verticals that CBD is targeted at, 5 or 6. And then secondly, we're not disclosing who they are, but we can tell you it's multiple, 3 to 4 partners. And they have representative activity in the verticals.

And by the way, I think it's also important, Graham, that for us, it's one entity that we're partnered with, and one entity that has the responsibility around the obligations in our development agreement and all the terms of it. That particular entity has multiple partners in it. I just want to make sure that we're not confusing the market with how many entities are actually associated with us. It's one.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [35]

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Okay. So just to understand how significant or how large this potential partnership could be, did that partnership, LAVVAN, formed solely for the purpose of partnering with Amyris or somebody like Amyris or had it been in existence and up and running already.

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John G. Melo, Amyris, Inc. - President, CEO & Director [36]

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Solely for the purpose of building one of the world's leading cannabinoid businesses.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [37]

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And did they investigate other companies that might potentially provide molecules for this purpose?

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John G. Melo, Amyris, Inc. - President, CEO & Director [38]

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They did. I mean, they had spoken to and did some diligence on just about every company we're aware of.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [39]

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Great. And the other thing that Kathy referred to as being perhaps more significant longer term is the royalty relationship. Is that something where you could share with us either a percent or share -- either a share of revenues or share of profits?

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John G. Melo, Amyris, Inc. - President, CEO & Director [40]

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Look, in line with a significant change to my DNA, I'm not actually going to talk about that until we have our first commercialization, which we expect to be early next year. What I can tell you is, you won't be disappointed.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [41]

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Okay. Maybe shifting away from the financials and getting to really the science. Our understanding that CBD can have a disagreeable taste, in some cases, we've read. We're wondering if there's going to be taste masking or is this where the stevia sweetener could come into play or other types of molecules that Amyris might develop?

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John G. Melo, Amyris, Inc. - President, CEO & Director [42]

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All 3 points you just made are accurate and something that's very interesting to us. One of the things we haven't spoken a lot about is a big part of our acceleration to market around the sweetener has been our partnership with Givaudan and how effective they've been at developing sweetener formulations and helping brands adopt our product. Another great success in the recent months has been, we now have what is perceived to be one of the leading culinary products. So a sweetener to cook with that's been developed by us and Givaudan, predominantly by Givaudan, using our sweetener. And we think, and Givaudan has actually been discussing this with us, that we believe that jointly, using the sweetener, especially in beverage, and working with Givaudan, we'll actually be able to make some significant breakthroughs in the taste aspects of CBD. So that is absolutely on our radar and something we are partnering with Givaudan on to solve.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [43]

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One of the aspects of our understanding of the stevia sweetener product is that the purity is really critical to having a less bitter aftertaste for the sweetener. And we're wondering if the same characteristics apply to CBD. In other words, and then therefore, what kind of purity might you achieve in the CBD molecule?

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John G. Melo, Amyris, Inc. - President, CEO & Director [44]

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Yes. As far as we know today, we will have the highest purity of any CBD molecule available for our first target. We think that will continue just based on the science behind it. And it's too early. And I don't think enough data to make the claim, but I think folks are giving us some feedback that the purer the CBD is, the better the taste profile. So we think it may be in line, but we don't have enough data to make that claim. And we definitely do see the highest purity CBD available from our technology.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [45]

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Great. That's great to hear. The other thing I want to segue into is the manufacturing cost. And I imagine, I mean, you've already demonstrated in the past, I believe, you do things faster, better, cheaper with new revisions or updates to the molecules and the manufacturing process. Where are you in both -- and that is sort of addressing the 2 major new verticals in stevia and in the CBD in terms of what your expectations are for cost versus alternative competitors?

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John G. Melo, Amyris, Inc. - President, CEO & Director [46]

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Yes. On the sweetener, we're currently operating at about parity or equivalence to sugar sweetness, which was one of our initial targets. And we believe there's more to go. And obviously, we continue to work through evolving our strains to be able to do that. And that is based on the 2019 production. I think regarding CBD, you're absolutely right. It's one of our critical advantages. And we expect to be there also. We expect to be low cost. We are not communicating what that looks like yet. We'll do that again when we go to commercial production at the beginning of next year, but we do expect to be the low-cost, high-purity leader in the market.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [47]

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Okay. And what were the reasons that this partner, who must have done a very thorough job of analyzing the marketplace, potential providers like Amyris or your competitors, what were the most important determinants? Was it cost or purity or being able to scale or anything else that their science or whatever?

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John G. Melo, Amyris, Inc. - President, CEO & Director [48]

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Yes. Thanks for that, Graham. I'll tell you. There are 3 main reasons. First is our proven capability on scale-up. They had seen other companies that had interesting technology, but scale-up was one of the major negatives because they had no track record of scaling major new products. I think secondly, it's the manufacturing skill and the ability to make highly engineered strains operate at scale in a large production facility. It's important to them that they have flexibility regarding where the manufacturing occurs, but they wanted us to actually help that manufacturing start-up, run and stabilize. And then last but not least, it's because of where we were in the science, how far we had developed the pathway and our time to market. So time to market, operating capability for highly engineered strains and scale-up capability and performance.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [49]

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Great. That's terrific to hear. And the other thing that was mentioned very briefly was the HMO opportunity as being one that you are pursuing. Just wondering where you are in that timing.

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John G. Melo, Amyris, Inc. - President, CEO & Director [50]

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Thanks, Graham. Yes, the HMOs, we have the first HMO fairly close to commercialization. We're working very closely with our partner. It's close to commercialization from a strain stability and performance standpoint. We have to work through regulatory and market acceptance. And we're partnered, again, with DSM to achieve that. And it's been very surprising to DSM how fast we've been able to develop and be ready to move forward with the HMO molecule. And it's again the first one. HMO is actually a family of sugars from mother's milk. And so I expect we'll have more. I know we'll have more than the first one to commercialize. There's actually about 6 total right now in active development.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [51]

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And when might you reach the marketplace for commercial sales for, let's say, the first few?

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John G. Melo, Amyris, Inc. - President, CEO & Director [52]

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Again, it's a regulatory and market acceptance standpoint. I would say probably no later than 12 months and maybe earlier than that.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [53]

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Okay. And that would be for sale in the U.S. or China or Europe or where might that be?

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John G. Melo, Amyris, Inc. - President, CEO & Director [54]

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Yes. I don't want to disclose because it's actually -- as you can imagine, the customers for this product. You got to think of DSM as a partner of ours, and we're both or they are selling into some large brands. And I don't want to disclose where we're going to be launching because it's not something large brands have given us authorization to talk about.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [55]

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Great. Okay. I couldn't help but notice that there was a reference to beverages a few times already, and I'm just wondering to what extent the beverage manufacturers, not for CBD, but for beverages -- mainline beverages globally might be working closer with you now that you have a conduct on the market for sweetener.

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John G. Melo, Amyris, Inc. - President, CEO & Director [56]

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You can imagine, we probably have had a lot of conversations. And again, confidentiality is critical to our partner, especially in this space, so I'm not able to say whom and when, but I am able to tell you that there are several very deep discussions happening with several of the beverage companies.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [57]

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Any maybe I should ask it more specifically. I'm wondering if that timing has possibly accelerated versus your sweetener launch a few months ago and expectations in the marketplace as to whether stevia might be in mainline beverages because most people we have spoken with have been very cautious about that.

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John G. Melo, Amyris, Inc. - President, CEO & Director [58]

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Yes. What I would say is, there's 2 class of companies, small to medium-sized enterprises and sometimes, call it, innovative brands. And those are actually moving very rapidly. I think we have the first that's already committed to formulating with our product. And I believe there will be more quickly. Then there are the big brands, big global brands. And I think those are the same kind of timing I've spoken about. I mean, if any happens quicker, that'll be great. But I don't really want to set an expectation that's different than we have before about how long it will take for the big brands to convert. I can tell you that the pipeline of smaller brands has been surprising and is moving very rapidly. They're the innovators.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [59]

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Yes, yes. That's great. Now I do have to get to the subject of getting from here to there financially. You have a lot on your plate. And we appreciate that you're focusing on a few very key large markets that are growing rapidly. What is the outlook for being able to meet the requirement for the maturation of the convertible, of the second convertible? I believe your first convertible is now taken care of totally, right? So your second convertible, any other financial needs in terms of what your cash flow might be for 2019, positive or negative?

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John G. Melo, Amyris, Inc. - President, CEO & Director [60]

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Yes. I'll let Kathy speak to the overall debt stack and our approach. I'll only say 2 things. Again, we've not disclosed or guided cash flow for the year. And I think again being conservative, I think what we have guided on the slides was gross margin range and revenue range from the financial perspective. And then regarding the debt, I think we've got a pretty clear path based on the conversations we've been having and the execution of the activity in the first quarter. And I know there's work to do to get from here to full clarity. But Kathy, anything to add?

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Kathleen Valiasek, Amyris, Inc. - CFO [61]

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Yes. Obviously, Graham, the debt stack is always something that's in the forefront of our mind, but I would just really reiterate John's comments. And we have a plan in place and just getting ready to execute on it. We've been pretty busy over the past couple of weeks finalizing the CBD agreement, as you can envision. And so it's great to get that done and move forward onto other things such as tackling the debt.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [62]

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I guess I might as well sort of not dodge on this and be more direct. So you have several balls in the air and you've done a great job, I think, of juggling them. But it looks like, to us, that you moved away from a sure $50 million payment to something where it's a little more uncertain because you expect higher revenues and earnings from a new vitamin E agreement. Is that new vitamin E agreement going to help directly provide cash for the convertible? I'll be direct about that.

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John G. Melo, Amyris, Inc. - President, CEO & Director [63]

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Yes. No, no. Graham, I appreciate your directness, and it's actually helpful because you're clarifying some things that we didn't intend, right? So I was very careful not to say it was a new vitamin E-specific agreement. I didn't say that it was a new agreement with DSM. I think, secondly, what I will tell you is that the agreement includes a significant part of value, cash value, that is actually greater than the initial value that we had in the Yifan agreement. So there's nothing here that moves us backwards from a cash flow perspective than we expected with Yifan. And it's actually, again, the uncertainty, I would say, is related to 2 well-known companies, us and DSM, getting internal approvals and obviously going through their due process.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [64]

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Okay. I'm sorry. So in other words, the upfront payment from a new DSM agreement of a general kind, not specific, just Vitamin E, a new agreement, will provide enough cash that will be greater than the $50 million you expected from the Yifan deal to pay for the second convertible?

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John G. Melo, Amyris, Inc. - President, CEO & Director [65]

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That's correct.

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Operator [66]

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(Operator Instructions) Our next question or comment comes from the line of Randy Baron from Pinnacle Associates.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [67]

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I think Graham covered a lot of questions so I just have a few housekeeping ones. I understand there are limitations to what you can say about LAVVAN. But since you talked about the various partners that are involved, I want to just ask it bluntly. Does Amyris have an ownership stake in LAVVAN?

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John G. Melo, Amyris, Inc. - President, CEO & Director [68]

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We do not.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [69]

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Okay. And you also said that exclusivity is part of this, subject to performance triggers. Is that exclusivity into perpetuity or is it for a set amount of time and can you quantify?

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John G. Melo, Amyris, Inc. - President, CEO & Director [70]

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Set amount of time. And again, I don't really -- yes, I have my General Counsel whispering or telling me stuff across the table. And what she's saying is that, there's actually different time windows for maintaining the exclusivity based on whether it's a single molecule or full field. Again, we're not disclosing the times or what the triggers are, but there are different layers of triggers, and it also applies to what's already commercial versus what's not. So that's how I would describe it. What's commercial versus what's not has a certain level of trigger. And then obviously, the field has a certain level of triggers. The triggers are not ends. You can actually trip them one or the other in how the agreement is structured.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [71]

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Okay. And then, I guess, for Kathy, you guys talked about $10 million lower cost this year. Is that fixed or variable, which is to say, if revenue ends up coming above $150 million, does the expense side scale back up?

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Kathleen Valiasek, Amyris, Inc. - CFO [72]

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No. It's OpEx-related. So yes, it's OpEx-related.

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John G. Melo, Amyris, Inc. - President, CEO & Director [73]

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It's OpEx. And it's not -- I mean, we obviously put that out in a view that said, we're expecting more -- well, the $150 million is a conservative number we are guiding that we are committed to hitting. If we do more than that, we're not looking at taking the cost up. And we are committed to the $10 million in savings.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [74]

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Okay. And then just 2 more. Vitamin E, is there any vitamin E revenue in the 2019 guidance?

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John G. Melo, Amyris, Inc. - President, CEO & Director [75]

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There was 0 in the 2019 guidance. I don't know whether or not this was part of my script. But just to be clear, on how these agreements get finalized, we have not worked through how the accounting will actually work for these agreements. So rather than risk anything, we just said, it's all out. If anything comes out of these agreements and ends up being revenue, that will be upside. It's not something we're counting in the base at all.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [76]

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Okay. And then I just want to make sure I totally understand the last thing that Graham asked about, which is the Yifan payment versus DSM. DSM stand-alone is greater than Yifan. So any CBD is in excess to that or is it DSM plus CBD is greater than Yifan?

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John G. Melo, Amyris, Inc. - President, CEO & Director [77]

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No. The question was directly related to Yifan. And it was related to whatever we end up doing with DSM, not related to anything in the CBD agreement. The CBD agreement, I believe Kathy had mentioned, we're expecting north of $20 million or $30 million in 2019 from the CBD. That includes the $10 million upfront.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [78]

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Okay. Great. And Kathy, just in the sense of your timing, Graham asked about the, I guess, the May cliff. Is it a May payback or is there a chance that we could pay it back earlier?

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Kathleen Valiasek, Amyris, Inc. - CFO [79]

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So we likely will not pay it down earlier, yes. Let me just come back to a statement that John made about the CBD agreement. It was originally structured that there was an upfront payment. We've shifted it into a milestone. The payment receipt will be the same time frame.

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Operator [80]

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Our next question or comment comes from the line of Phillip Schaeffer from Scott's Cove.

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Phillip Scott Schaeffer, Scott's Cove Management LLC - Managing Member, Chief Compliance Officer and Senior Portfolio Manager [81]

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I think earlier in the call, John had alluded to the DSM payment relating to the substitution of the agreement for vitamin E. And I think you said that it was more than the $50 million that was originally with Yifan. And then I thought you said it was double or slightly more than double. Could you just let me know if I heard you correctly? So the $50 million, that would mean it would be then $100 million?

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John G. Melo, Amyris, Inc. - President, CEO & Director [82]

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Yes. And I think to be clear, it's around double. I wouldn't call it exactly double because we want a little flexibility here, but yes.

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Phillip Scott Schaeffer, Scott's Cove Management LLC - Managing Member, Chief Compliance Officer and Senior Portfolio Manager [83]

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And that would be just -- and assuming that you come to terms, what you would be talking about is a payment -- an upfront payment and then you'd walk away from vitamin E?

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John G. Melo, Amyris, Inc. - President, CEO & Director [84]

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Well, again, I've really stayed away from connecting it to very specific terms, not intentionally, number one. Number two, I had made 2 comments. So part was how much of the economics would be upfront versus how much would be total value of how this all gets worked out. And the upfront will be slightly more than what we were getting from Yifan, and the total value will be somewhere significantly greater than what we're getting from Yifan. I just want to use those 2 reference points.

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Operator [85]

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Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

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John G. Melo, Amyris, Inc. - President, CEO & Director [86]

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Great, Howard. Thank you. Thank you, everyone, for joining our call today.

We're in a great position to really leverage our technology platform to continue disrupting markets and obviously, supporting our partners' growth. We've got great evidence of this in the leading companies that are currently working with us, our current traction in the products that are growing and how well they're doing. And I think with all of this, our focus is to continue executing on our core products, markets and pipeline and really adopt this new shareholder-friendly set of initiatives, which are around how we make our balance sheet clear, simple and ensure that we're fully funded for the next 2 years without looming debt payments in front of us, increasing transparency for our operations and providing a little more detail around past operations and doing that while being conscious that our markets have a very competitive nature to them and there's a lot of confidentiality requirements we have for our partners, so we have to respect that.

And then the most important aspect of these changes is really providing better guidance or estimates of our future operations, not only including what's contracted and committed versus what we expect. I think expectations always have many ways to go, and I think it's better not to have them out there and let us do what we do well, which is execute operationally and then let the results deliver as they do. This also includes announcing any pre-announcement of collaborations that aren't signed. We want to get into a mode of announce what's done, only talk about what's cemented and then let everything else play to potential upside for our business.

So in closing, I'd like to note that Amyris will be presenting at the ROTH Conference in Dana Point, California tomorrow and the H.C. Wainwright Global Life Sciences Conference in London, April 6 through 9. And we'll be hosting our annual BioDisrupt Investor Day on May 16 here in California. That will be an interesting conference. We'll have experts in each one of our core markets. We'll have some of our customers. And I'm pushing the organization to maybe even have some CBD product to try, but no promises yet. Thank you and have a great afternoon.

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Operator [87]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.