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Edited Transcript of AMRS earnings conference call or presentation 2-Oct-19 8:30pm GMT

Q2 2019 Amyris Inc Earnings Call

EMERYVILLE Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Amyris Inc earnings conference call or presentation Wednesday, October 2, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Alvarez

Amyris, Inc. - COO

* John G. Melo

Amyris, Inc. - President, CEO & Director

* Jonathan R. Wolter

Amyris, Inc. - Interim 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

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Graham Yoshio Tanaka

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

* Randy Baron

Pinnacle Associates Ltd - Lead Portfolio Manager

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Presentation

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Operator [1]

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Welcome to the Amyris First Half 2019 Financial Results Conference Call. This call is being webcast live on the Events page of the Investors section of Amyris' website at amyris.com. This call is property of Amyris, and any recording, reproduction or transmission of this call without the express written consent of Amyris is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investors section website of Amyris' website.

I would like to now turn the conference over to Peter DeNardo, Director of Investor Relations and Corporate Communications.

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

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Thanks, Jake. Good afternoon, and thank you for joining us today. With me today are John Melo, our Chief Executive Officer; Eduardo Alvarez, Chief Operating Officer; and Jonathan Wolter, our interim 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 we will be reviewing today for the first and second quarters of 2019, the 10-Qs of which we expect to file shortly.

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 that 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, which includes reconciliations to the figures cited today.

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. After months of frustration regarding our inability to file our financials in a timely manner, I am pleased to finally have the opportunity to discuss our financial results openly and to also say that we are very close to putting this painful chapter in Amyris' history behind us. We have filed our 10-K for 2018 and are very close to filing our 10-Qs for the first and second quarters of 2019.

I want to thank our new auditors, our finance and legal teams for staying on task, working extremely long hours, often all day into the night and getting near us being fully compliant. We are going to share financial data on this call that will be reflected in our Qs, and we expect our Qs on file very shortly. We are in the final stage of review and signed off by all parties. We plan to have all of our filings complete by Monday. And with everyone working extensive hours and tired, we wanted to get this right.

As we've shared before, the many accounting adjustments for 2017 and 2018 were focused around a set of very complex transactions, mostly connected with DSM, a significant related party. These adjustments are accounting based regarding entries between the P&L and the balance sheet and do not reflect any change to the health of our business, have any impact on the cash we repaid during these periods or the quality of the business transactions during these periods. We are very pleased with the work of our 2 new audit firms. They did excellent work on auditing our business.

Joining me today to review business highlights are Eduardo Alvarez, our Chief Operating Officer, who will discuss operational highlights and also our operational focus for the second half toward meeting our production goals; and Jonathan Wolter, our interim CFO, who will review our financial results and summarize the adjustments to our historical financial results as outlined in our SEC filings.

Let me now start by saying that we are pleased with our first half 2019 results with revenue for the period at -- of $77.1 million compared with $32.9 million for the first half of 2018. This includes our doubling of recurring product revenue over the first half of 2018 to $24 million; collaborations, grants and royalty revenue of about $53 million; and non-GAAP gross margin for the first half of almost 62%, which is tracking well to the higher end of our guidance of 55% to 65% gross margin for the year.

Our revenue for the first half includes about $40 million in vitamin E revenue resulting from the sale of our vitamin E value share agreement to DSM in the second quarter of 2019 as a result of us exiting that business for which we received over $50 million in cash.

Product revenue continues to trend towards doubling or better with product revenue growth of about 103% for the first half of 2019 over the prior year's period. This excludes anything related to vitamin E and is consistent with our strategic plan to double our recurring revenue annually while maintaining a solid product pipeline funded through partner collaborations.

I can also confirm that our third quarter revenue has continued to perform very well. Recurring product sales in the quarter will likely be near the same as the sum of the first half. The first half was mostly Clean Beauty. In the third quarter, Clean Beauty has continued delivering very strong growth, and the ingredient business is also helping us set a product revenue record in the third quarter.

Our key growth drivers remain leadership in Clean Beauty and health and ingredients markets. The latter of which we group together vitamins, excluding vitamin E, flavors and fragrances and sweetener revenue to simplify the comparisons in our slide presentation for today's call.

Within Clean Beauty, our squalane ingredients business continues its healthy trend of almost doubling sales each year. As Eduardo will explain, Chuck Kraft, our Head of Manufacturing, our supply team and all of our staff at our Leland production facility have done a tremendous job in supporting needed volume production in squalane to deliver on the record demand from our customers. We believe Clean Beauty will finish the year with total sales between $50 million and $60 million. This is more than double that of 2018. And while it's too early to share with you sales data for Pipette, our new baby care brand that launched in September, we can confirm the brand already has more customers than Biossance had at the same stage of development.

We are starting sales through top e-commerce channels like Amazon and Walmart.com in the coming weeks and expect a strong revenue ramp through the rest of the year for all of our brands.

In health and ingredients, we are seeing very strong growth in flavors and fragrances demand for our natural, sustainably sourced ingredients. And as I shared with you on our last call, we expect that part of our business to post a record year at approximately double that of 2018 revenue.

We have scaled 2 new ingredients into this segment this year. One of these has already shipped, and the other will ship before year-end. Our products that have been selling for over a year in this segment are delivering over 50% annual growth. We have become the leading supplier of natural, sustainably sourced ingredients into the flavor and fragrances industry and are very pleased with the deeply strategic relationships we have with Firmenich and Givaudan, the 2 industry leaders, and also our ongoing relationships with Takasago and IFF. Our strategy of partnering with industry leaders and delivering on their strategy to source natural and sustainable ingredients has resulted in us becoming the leading supplier of these ingredients in the world.

With every ingredient we introduce, we see the same pattern: consumers drive the demand in the market and large global brands drive the volume. We're seeing the same result with our sweetener business, Purecane, which is fermented sugarcane RebM, a natural 0-calorie, 0-glycemic, non-GMO product that tastes great with no bitter aftertaste. We are on track to be the lowest-cost producer of the world's leading natural 0-calorie sweetener. This is similar to what we've achieved across the rest of our ingredient portfolio. Each time we apply our leading science platform, we create bigger, winning products that have the potential to solve some of the world's leading health issues.

We have focused our business development efforts during the first half of the year on bringing together the consumer packaged goods companies with our target consumers, the millennials. We've called this the sweet revolution tour, a series of events across the U.S., inviting entrepreneurs of breakout brands for healthy living, social media influencers in categories from foodies to fitness, traditional news media and, importantly, CEOs and R&D Heads of the well-known global consumer companies. We've engaged well-known Food Network personality, Simon Majumdar, who has partnered with us at restaurants curating multicourse meals using Purecane, alongside Michelin chefs and James Beard winners. Consumers want new options to reduce their sugar intake, including when they're eating out at restaurants, not just at home. The culinary teams we've worked with in New York, New Orleans, Austin and L.A. have not only enjoyed the challenge to work with our sweetener, they've delivered results that are so good, they're starting to drive these into their menu options.

Our sweetener has also attracted the attention of the American Diabetes Association. We introduced it at their annual Scientific Sessions event, a gathering of 15,000 researchers, clinicians and health care professionals in San Francisco this summer. Our sweetener that is already GRAS approved by the FDA has also now been approved by their scientific and medical department. I was honored to accept the American Diabetes Association's invitation to join the ADA's executive committee and also to be the executive chair of their premier event in Sonoma, the Wine Country Tour de Cure on May 3, 2020. I'm looking forward to continuing our efforts together. Together, we are committed to a healthier and more sustainable planet.

It's exciting to see the response from our business-to-business customers to all our 0-calorie sweetener. In less than a year, we have over 100 food and beverage companies actively formulating their products using Purecane inside. Companies in every category are looking to convert to our sweetener, beverage, baking, dairy, confectionery and nutrition products. We are selling our full 2019 production and have started taking orders for our 2020 capacity. We have a blockbuster ingredient for the sugar reduction the world is demanding, and we are ramping up production quickly.

We believe we are now selling more fermented 0-calorie natural sweetener than anyone else, and we are just starting. We are experiencing significant conversion from all other sources of stevia as our first wave of revenue. We are also experiencing significant momentum as a key solution for the sugar reduction strategy of large- and medium-sized brands.

Our ability to successfully scale sustainable ingredients and products that consumers love and that are healthier for them is becoming more noticeable to consumers and investors. We have been particularly encouraged by growing investor awareness and investment in synthetic biology. During this year, we saw successful IPOs like Beyond Meat with a reported first half margin that was about half of ours; Zymergen who in its last funding round in December of 2018 raised $400 million; and as reported by Forbes, a capital raise of $250 million by Ginkgo Bioworks with its valuation now topping $4 billion. This is good news for the future of our sector and the health of our planet and for our investors.

We are the most advanced company in the sector with better technology, 9 products commercialized and 3 new consumer brands that are tracking to be leaders in their categories. Not surprisingly, despite our prior nonfiling and noncompliance, Amyris has raised about $200 million this year. We've used these funds to help pay off over $90 million of debt to fund our growth and to continue our investment in our technology where we want to maintain our industry leadership. The business results speak for themselves. We are delivering the fastest-growing revenue, the largest absolute revenue and the biggest decline in operating losses within our sector.

Toward that end, on our last call, I mentioned that we continue to refine the business to focus it on what we do best. One area where we have invested about $15 million this year in direct cash costs on projects such as HMOs and vitamins where the technology is performing very well but the products no longer have a strong strategic fit in our long-term portfolio. Our goal is to monetize these programs. We are pulling in upfront royalties while trading off a longer-term opportunity on earning future royalties. We have agreed terms with Yifan on our vitamin development program and are in advanced discussions with DSM regarding the HMO development program. We expect to complete new agreements this year. These agreements will result in about $20 million of increased annual collaboration funding for the next several years and slightly more than $10 million of upfront cash to be received this year. We are trading more cash upfront for a reduction in long-term royalty down to about 10% of sales long term. These changes significantly reduce our cash burn and provide the support to increase our investment in our core flavor and fragrances ingredients, Clean Beauty and cannabinoid ingredient markets and our consumer businesses.

The combination of the restructuring of these collaboration agreements with our long-term partners, reduction in onetime expenses that are connected to our financings and our accounting issues and the actions Eduardo and his team have taken to reduce our cost of goods is resulting in a total of over $40 million reduction to our cash burn and improvement to our EBITDA at our current annual revenue level.

In summary, this is $20 million annually in reduced cash burn from the restructuring of the HMO and vitamin agreements, $12 million annually from the elimination of costs related to our onetime accounting and financing activity during 2019 and a $10 million improvement in cost of goods from the restructuring of our supply agreements with our Spanish facility and the DSM supply agreement for farnesene from the Brotas facility.

Our cannabinoids development progress has been exceeding our expectations, and we are now on track to commercialize 2 cannabinoids in 2020, subject to legal and regulatory requirements. This is significant progress from our initial expectation of 1 molecule in 2020, and we believe places us as the leaders in the production of high-value and highest purity and quality production of sustainably sourced cannabinoids.

We've also faced some significant challenges in the third quarter with one of our debt holders. Our challenges with this debt holder started when our S-3 became inactive as a result of our noncompliance with financial filings back in April. This challenge is related to the CVI/Heights convertible debt payment default that we disclosed in our 10-K. We've been actively working with a Board-affiliated insider to source some of the funds necessary to pay down this loan and also are talking to other parties. This process has taken longer than we expected since the insider has been conducting due diligence from Europe, which was slowed during the August holiday season.

At this point, we received cross-default waivers from mostly all of our other holders. It is unfortunate that we cannot avoid this default and have come to terms with CVI that would be fair to all our equity shareholders, but we expect to close and are committed to a solution soon.

Before I turn the call over to Eduardo, I'd like to note a couple of upcoming filings we plan to do over the next couple of weeks or so and to help answer in advance any questions you may have.

First, due to our lack of an effective registration statement resulting from our noncompliance, our employee stock option grants for 2019 have essentially been frozen for many months. So we'll be filing an S-8 registration statement covering employee options, RSUs and other employee stock purchase plan.

Second, we also plan to file an S-1 registration statement as required by the agreements associated with our recent financings. This will also give us the needed flexibility to fund business growth and continue cleaning up our balance sheet to remove onerous debt.

Let me now turn over to Eduardo for an operational update and outlook.

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Eduardo Alvarez, Amyris, Inc. - COO [4]

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Thank you, John, and good afternoon, everyone. Let me start with a summary for our production results for the first half of 2019. We delivered 9 sustainable fermentation products for a total product volume of 1,400 tons. This is the highest number of products we've ever made in our history, and I am pleased with the solid performance of our process development, supply chain, production teams and our CMOs. This is a testament to our ability to scale production of multiple fermentation-based products at commercial scale and to stay focused on execution despite the recent filing and funding challenges. These products included 4 flavor and fragrance ingredients, 4 products for our Clean Beauty sector and our 0-calorie sweetener. We fermented this product at 2 different contract manufacturing sites in Brazil and in Spain.

Let me also provide an update on our new products since our last call. We just delivered our first new product in 2019. This is a new fragrance called Firmenich. In fact, our first campaign for this product exceeded our production targets by 80%. We remain on track to deliver our second new product for the year for Givaudan during the fourth quarter, which will be leading natural flavor ingredient. This puts us on track with our stated goal of delivering 2 to 3 new products per year.

Looking at our second half of the year, we are on track to deliver over 3,400 tons of products, which is aligned with our $150 million revenue guidance for 2019. To put this into more context, this volume would represent about 80% growth over the volume we delivered in 2018. This volume represents more than doubling of revenue as a result of the higher-value product portfolio since 2018.

Now I would expand on our activities to deliver on our 2019 product commitments. Let's take a deeper look at the production plans for our largest sector, Clean Beauty. Our production facility in North Carolina delivered record volumes for squalane back -- in back-to-back quarters in Q1 and Q2 of 2019. During this time, our teams implemented process and capacity improvements that increased our squalane throughput by twofold from the 2018 levels. We are now completing a new set of improvements that will add another 30% productivity by the fourth quarter.

The impact of Hurricane Dorian and other factors did cause some production shortfalls in August, but our team remains confident that we would be on track to deliver a total annual squalane growth of 80% over 2018 by the end of 2019, as I shared with you before.

Let me also update you on the progress I noted before in both the second and third quarters for our sweetener production where we have been running our second production campaign of 2019. We are ahead of our technology road map. In the second half of 2019, we had expected a two- to threefold volume improvement. But now comparing our production from the first half to the second half of 2019, we can quantify that the actual improvement was actually fivefold. Our product is the only sugarcane-derived 0-calorie sweetener. And As John mentioned before, we have over 100 active formulations that confirm that the taste and performance of this product is truly unequal. We have delivered this growth while maintaining the best taste, purity and quality in the market.

Now let me switch over to cost performance. Our non-GAAP COGS, cost of goods sold, reported for the first half was $29 million. In our financial overview, we share that $8 million of these millions was caused by 2 extraordinary factors. About half of it was in higher upfront campaign investments for our first RebM campaign in 2019. These costs were charged to cost of goods sold. In addition, this work helped us improve and simplify the process, which is now resulting in the fivefold productivity improvement I mentioned before.

The second factor has to do with higher CMO costs. The higher CMO costs were the result of our higher-than-planned product volumes and CMO contract terms. For this reason, we implemented a new commercial contract with our largest CMO that better aligns our costs with quality and productivity results. We have now implemented this new model. And as a result, we expect to see a 30% unit cost improvement in 5 of our products by year-end. Our team is on track to deliver on both volume and quality while also ensuring our gross margin remains in the 55% to 65% level mentioned before. We are extremely proud of our operations team during this first half of the year, and we already are delivering on a record second half.

Finally, let me close with an update on our future production plans. We now have all the permits in place for our specialty ingredients plan and have broken ground in Q3. We expect the facility to be fully operational in Q1 of 2021. This facility will allow us to manufacture 5 products at once. This plant will be in Brazil at the world's second-largest mill in Barra Bonita, which is a Raízen-owned property. This plant will be 100% owned by Amyris and has been designed to meet our future production growth and supports most of our revenue for the next 3 years.

Second, as we noted in April, we entered a long-term strategic supply agreement for this plant with Raízen, the world's largest sugar producer, which will reduce our cost and ensure the highest quality of non-GMO feedstock.

And finally, Raízen and Amyris will evaluate production opportunities related to the 0-calorie sweetener. Such considerations are separate from the current specialty plant mentioned before.

Now I will turn the call over to Jonathan.

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Jonathan R. Wolter, Amyris, Inc. - Interim CFO [5]

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Thank you, Eduardo.

I'm happy to report that our 10-K is on file and that we're completing steps to regain filing compliance by filing our 2 delinquent forms 10-Q shortly. This was no easy task with 2 audit firms quickly engaging on both a set of complex business transactions and on the financial statements in a very short period of time. But with a lot of hard work and long hours by them and our team, we got it done. And I'd like to thank them each and all together as a team.

I will now summarize our preliminary financial results for the first half of 2019. And in my discussion, I will refer mostly to rounded millions of dollars.

GAAP revenue for the first half of 2019 was $77 million compared with $32 million for the same period in 2018.

Now for a summary of the first and second quarters of 2019. GAAP revenue for the first quarter was $14 million with product sales of $12 million, grants and collaboration revenue of $2 million and license and royalty revenue of $118,000. This compares with quarter 1 2018 GAAP revenue of $18 million with product sales of $5 million, grants and collaboration revenue of $5 million and license and royalty revenue of $8 million. The decline in total revenue from the year ago period was primarily the result of significant vitamin E royalties earned in the first quarter of 2018 compared with no such comparative revenue earned in the third quarter of 2019.

Non-GAAP gross profit, which was a loss of $4.8 million in the quarter compared with non-GAAP gross profit of $14 million for the first quarter of 2018. In addition to the $8 million onetime spend during 2019 that Eduardo referred to just moments earlier, 2018 benefited from significantly higher revenue and positive -- and the positive impact of royalties.

Sales, general and administrative expenses were $28 million compared with $18 million for the first quarter of 2018. This increase reflects higher head count to support our growth, our investment in the Biossance business and our onetime spend for professional fees due to expenditures related to resolving our noncompliance status. Research and development expenses of $18 million in the first quarter 2019 were consistent with that for 2018 same quarter.

Turning now to the second quarter of 2019. GAAP revenue was $63 million with product sales of $12 million, grants and collaboration revenue of $10 million and licenses and royalty revenue of $41 million. As John earlier mentioned, license and royalties benefited from the sale of our vitamin E royalty agreement to DSM this past April. These results compare with quarter 2 2018 GAAP revenues of $15 million, consisting of product sales of $7 million and grants and collaboration revenue of approximately $8 million.

Non-GAAP gross profit was $52.5 million compared with non-GAAP gross profit of $11 million for the second quarter of 2018. During the second quarter of 2019, we posted positive EBITDA of approximately $2 million. Consistent with that, we had previously noted us believing we may have positive EBITDA in a couple of quarters of fiscal 2019. Sales, general and administrative expenses were $31 million compared with $19 million for the same second quarter of 2018. Again, the increase reflects the continuation of the Q1 business drivers reflecting higher head count to support our growth, investment in our Biossance business, and the continued onetime spend for the professional fees necessary for resolving our noncompliance status.

Research and development expenses of $19 million for the quarter compared to $16 million for the same quarter of 2018. Subsequent to the second quarter close, we have successfully completed over $16 million of additional financing to support our continuing working capital needs. This has mostly been sourced from long-term investors who have been supporting the company and remain very committed to our continued growth. Having not been compliant with our SEC filings made it very challenging to continue to fund our business growth while maintaining our debt requirements. Becoming compliant will provide access to funding, better enabling us to manage our debt and invest in positioning Amyris to be a sustainable, profitable and growing company.

Now and momentarily before I do turn the discussion back to John, I will address what we think is the obvious question. We trust that investors will appreciate that we now have filed our 10-K for our 2017 and '18 financial statements and will shortly file our Forms 10-Q for 2019 Q1 and Q2. But to us, the imperative is to focus on what will we do to ensure this does not occur again. It is keenly in the forefront of our minds and we will engage you separately again soon for that discussion. At the moment, as I'd like to say, we're focused on first things first, and those are the remaining steps to complete and file our delinquent Forms 10-Q and prepare for our quarter 3 filing.

Thank you very much. And with that, I will turn the discussion back over to John.

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John G. Melo, Amyris, Inc. - President, CEO & Director [6]

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Thanks, Jonathan, and I really appreciate all the effort of you and your team and the sleepless nights you've all had. Much appreciated.

Our business operations are doing very well, and we are hitting our targets and executing on our commitment to double our recurring revenue while continuing to exceed expectations for our collaboration partners and overall technology performance. I'd like to now summarize what we've delivered so far and where we are headed. We are about to become compliant with all of our financial filings and plan to stay that way. We have a new auditor that understands our business and is doing a great job ensuring we have the right controls and are correctly accounting for our business transactions. We have this kind of quality of service with PwC for most years of our history and believe we are getting back to that way of operating. There is no change to our business quality, the cash we generated or the transactions we entered into during the last several years. There have been many adjustments to how these were accounted for between the entries to the P&L and the balance sheet for 2017 and 2018.

We are on track to exceed $150 million in revenue for 2019 or well over 130% growth over 2018, and we expect the recurring components of the revenue to maintain this level of growth for the next several years. We have already delivered much more recurring revenue year-to-date than all of last year and will more than double our recurring revenue for this year over 2018. We are on track to deliver more than 60% gross margin for the year on a guidance of 55% to 65%.

We have scale and our delivering 2 new molecules this year and continue on track for 2 to 3 new molecules a year. And if you go back to our history, we have not had a failed molecule launch since 2012. Every one of our molecules continues to grow at double digits and has a very strong and strategic position in the portfolio of our customers and/or the relationships we have with brands and our consumers.

We are on track to scale 2 new cannabinoid molecules in 2020, double what we said we would do. Our cannabinoids program is exceeding expectations. We are on track to be a leader in a growing industry that has the potential to transform over-the-counter treatments for pain management, anxiety and sleep support, all of which the aging population the world is needing and must have a replacement for opioids that is truly sustainable and safe.

We have taken actions to reduce our cash burn and improve our EBITDA by over $40 million annually based on our current revenue levels. We have closed over $200 million of new financing year-to-date and have the commitment of our long-term investors to continue for Amyris to be the leader in synthetic biology industry.

Biossance continues to deliver industry-leading growth, and we are introducing 2 new brands this year with Pipette already introduced in the month of September and Purecane coming very soon. We will announce before year-end another break-through brand in partnership with one of the leading models and entrepreneurs in the world to introduce clean ingredients to beauty more broadly. It's very exciting to see a lot of very accessible entrepreneurs, influencers and models wanting to partner with us to build brands that truly are making a difference. They're clean. They give the consumers what they want, and they make a positive difference. And last but not least, we've delivered one positive EBITDA quarter, and we have the possibility of a second positive EBITDA quarter this year.

So we expect recurring revenue growth to continue at current levels for the next few years while continuing to widen our gross margin and reduce our cash burn. We continue to expect positive EBITDA in 2020, building on the operational momentum we have in 2019. We have built one of the fastest growing brands in Clean Beauty and the fastest growing natural sweetener brand in the world. And we are the standard setter for the best performing and safest baby skin care products you can buy.

The combination of our relationships and partnerships with the world leaders in our target businesses, target markets, our world-leading synthetic biology platform and the leading brands that we're building and executing on and are -- is all delivering in our mission of making the world healthier one molecule at a time. I really appreciate you all participating in our call. And Jake, I'd now like to open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Amit Dayal with 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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John, just to begin with the compliance aspect, are we planning on becoming compliant by October 7 or on October 7?

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

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I expect us to be compliant before October 7.

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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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Got it. And in relation to the Heights debt situation, can you talk about what are the next steps in your negotiations or discussions with them?

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

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We are -- it is an active discussion, right? So I'm pretty sensitized to it. But I can tell you that we're -- we have access to the necessary funding, and we are in process of ensuring it's a good and safe funding for our company and the results the Heights needs.

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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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Understood. And would you mind sort of refreshing for everyone what qualifies under your recurring revenue products or product lines?

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John G. Melo, Amyris, Inc. - President, CEO & Director [7]

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It's everything we supply a product in that has a multi-year contract. So it's all of our ingredients. It's the brands. I think that's it really. All the ingredients and the brands would be in the recurring revenue. What's not in it are any of the collaborations or time-based contracts where the supply side or long-term contracts. Every one of our supply agreements in the ingredients side are typically 10-year long supply agreements that have a renew cycle automatically built in.

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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. Okay. And then just a question on what you think or what we should be sort of looking as drivers for products that could fill the gap from some of the $40 million that you received from the Vitamin E exit in the second quarter of this year. Going into next year, what would be some of the drivers that could come and sort of replace or even exceed that $40 million for us?

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

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Yes. We already have that in place because of the significant increase in the cannabinoid payments for next year. So we've already more than made up the difference on the Vitamin E going into next year. We're not in the world of providing guidance going into next year, but I would say at a minimum next year, we'll be well into the $200 million, and I'd love to get to the $0.25 billion mark in revenue next year and again, all of that from what we have in place. And that's what we're focused on really underpinning and more importantly or more -- most importantly, having the production capacity in 2020 to deliver that.

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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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Got it. And in the context of guidance, are we maintaining sort of the $150 million level for 2019 right now?

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

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We are. I think in my -- in the call, I was pretty explicit to have chosen the word exceeding because we are already tracking for well above that $150 million mark. So we're confident in shifting that to exceed it, but we don't want to put another number out there. So we'd like to keep the current number out there and know that we are already tracking well above the $150 million mark.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [12]

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Understood. And just one last question. On the outstanding share count, cash and debt, do you have more color on this after the filings are done? Or could you give us a sense of where we are on these metrics?

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John G. Melo, Amyris, Inc. - President, CEO & Director [13]

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Yes. We expect with our third quarter earnings call to be in a position to have a little more detail around that because I think, at that point, we'll have clarified kind of what I'd call the net debt for the year because, as you know, we've got some outstanding debt that is being used to convert warrants to equity. So once that's cleared up, which I expect to be again around the third quarter earnings call, we should be able to provide good guidance as to where we are in make transparent our outstanding and net debt for the year.

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Operator [14]

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The next question comes from Graham Tanaka with Tanaka Capital Management.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [15]

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Long time coming and good to hear. A lot of moving parts and I just was wondering if I could start with leveraging off what was just discussed about the balance sheet. Looking into next year or maybe longer term, what are your plans for net debt? And if you could incorporate your cash flow and CapEx needs for this -- next year versus this year, that would be helpful.

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

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Graham, as always, thank you for being on the call, and as always, you ask questions that make us go deeper than we'd like on the call, right? So thank you for that. Look, I think as we go into next year, we see the business generating cash to support itself. We obviously are investing in the technology. I think that changes we have made to the HMO and the vitamins agreement really shifts what we've been doing on the technology. I think the one thing to think about is we've investing about $70 million a year since 2010 on the technology, and that investment, that annual investment has very little to do with products that we make and ship every day. It really has to do with pipeline. And I think we're now at a point where, especially with the significant performance on cannabinoids and what's happened in the reset of the current agreements and then some expansion we're doing with our F&F partners, in a very focused way, really getting rid of that loss and that will have -- by loss, I mean the investment we've been making in the technology, and that'll have a material effect on our cash burn. That plus the continued growth going into next year really says the business is cash flow positive from an operating perspective. So the real cash need beyond that is CapEx, and the CapEx need is really connected to continuing to fund the new plant, right? We've been funding that plant out of our own capital, and we expect to continue that going into next year.

How much is that? That's probably somewhere around $60 million to $70 million of CapEx. And that CapEx, we actually have a couple of our partners who are deeply dependent on the ingredients we make that are in current discussions with us about actually funding the plant. We have other sources, but that's probably the more likely route that we take to enable us to fund the plants. So if we're successful with that and operationally we do what we plan on doing, I think we end up going into next year starting to generate cash for the business rather than putting it in.

And then for the rest of this year, we still have some cash to fund, right? So even though the fourth quarter is very strong, the third quarter was also very strong from a growth perspective. You could imagine that the working capital needed, as you're doubling your product production every quarter, is significant.

So I would say we still have cash needs to fund the growth ending this year. Going into next year, we should end in a positive position. And then during next year, the big real need for capital is really around CapEx for the plant. So I hope those moving parts are helpful.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [17]

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Yes. And I do think it's a great opportunity to talk about -- maybe a little bit about capital efficiency and what kind of revenues you can generate for, say, $50 million of CapEx or $60 million of CapEx. My understanding is you had hoped to go on higher value product -- or price per pound or per kilogram value products. And I'm just wondering if that means your CapEx needs will be lower per dollar of sales.

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

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Yes. I mean that's all connected to the gross margin. And I can tell you that based on the mix we have right now and our current cost of goods for the products in the portfolio, the return on that $70 million investment is about 12 to 18 months. And that's again really simple. The way we look at it is dollars generated per kilo of production. And then the revenue, the annual revenue from that plant -- and this is product revenue, not collaboration. A single plant, $70 million investment, has capacity to generate about $300 million of product revenue. So I think those are the 2 key metrics. What's the cash you generate? It's about a 12- to 18-month return. And then what is the revenue you generate? And revenue is about $300 million annual if the plant is fully sold out.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [19]

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Just big picture, what was the comparison versus the vitamin business and some of the more commodity-type business? What would that ratio have been?

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

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That's a great question. It's about a 5- to 6-year payback, which is pretty much what a typical chemical plant is, right? So call it 5- to 6-year payback and revenue, if you think about revenue 10 -- about $20 million to $30 million, call it $30 million on the high end annual revenue off of that, same investment, right? $70 million of investment, again, about $30 million -- could be higher. If you include value share in that, it could be as high as $40 million annually and again, about a 5- to 6-year payback on the plant.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [21]

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I think to shift real quickly to the CBD opportunity, does the doubling of the number of products to 2 products from 1 mean that you're a little more optimistic about the milestone payments that -- of the $300 million total for the 3-year project?

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John G. Melo, Amyris, Inc. - President, CEO & Director [22]

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We are. We're not changing guidance, right? I think we've said $50 million on the low end, $100 million on the high end for the cannabinoids milestone payments for next year. I think we feel very secure about the low end, and I think we could be somewhere between the low and the high, but we'll see how the years -- the year goes.

What we're very confident is now that we're actually making these molecules, it's really about ensuring we have the production capacity at the right location to make the kind of volume that we want to make. And with all the regulatory complexity, that's what the team is focused on. I think the other thing I'm very optimistic about is the fact that LAVVAN has brought in a really experienced team that really understands the market and were pioneers in the market, in the Canadian market. The nature of conversation and the depth of discussion and knowledge has changed dramatically. So they know which molecules they could sell at what value.

And what we're seeing is this new molecule is actually a breakthrough. It's one that's rarely available. We had a hard time finding samples just to be able to validate what we were making, and it's one that's much higher value than what we first started out with. And we said publicly our first target, which was CBDA, and again, we're not going to make public the second one. But that, for us, was a huge breakthrough that we had a second molecule. We're producing it now. It's a second molecule that's transformational for the cannabinoid sector and one that our partners are extremely familiar with.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [23]

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I just was -- on the -- did you just say that you are producing -- you have produced both molecules?

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John G. Melo, Amyris, Inc. - President, CEO & Director [24]

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We have produced both molecules, successfully produced both molecules. And we probably have done more than just that, but we're not going to -- and by the way, we're talking about, in the lab, right, we're now focused on where do we go and how do we scale it. But right now, we successfully produced and have demonstrated the full pathway to make exactly our targets at the level of purity that we need. We're very excited.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [25]

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So at the risk of putting a pressure on Chuck Kraft, how much of the effort has now been achieved relative to having a full production molecule in terms of what [products]?

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John G. Melo, Amyris, Inc. - President, CEO & Director [26]

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I think for the second one, I'd say over half the efforts done, and now the effort is really Chuck. But he's going to get a break on this molecule until the beginning of next year. And on the first molecule, I'd say probably 20% of the effort. So we have a ways to go in developing the pathway. It's pretty clear what we need to do, so we're not too worried about that. But in the second molecule, the break-through molecule, we're well to commercialization.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [27]

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Well to commercialization on the first -- on the second molecule and the first molecule, you're 80% there. Is that what you...

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John G. Melo, Amyris, Inc. - President, CEO & Director [28]

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No, the second one, which is really the first one we have made public, we're about 20% there. The second one that we're now producing is the one that we're well on our way.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [29]

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And on the time -- I'll leave some time for other people. I just want to know roughly when do you think you might be able to deliver commercial production for each of the 2 molecules.

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John G. Melo, Amyris, Inc. - President, CEO & Director [30]

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Both molecules, we'll be doing commercial production in 2020. And for one of them, we could be as early and plan on being as early as mid-year.

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Graham Yoshio Tanaka, Tanaka Capital Management, Inc. - President, CIO, Chief Economist and Director [31]

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That's the first one that you -- the CBDA, right?

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John G. Melo, Amyris, Inc. - President, CEO & Director [32]

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I'm not going to say that because, again, one of the things that happened is we were surprised by -- well, again, the value in great partners is they typically have insights on molecules more than we do. So the partner identified a molecule. It's a molecule that we quickly were able to make, and that molecule is significantly more valuable than CBDA. So it is likely. And we're performing better with that molecule than CBDA, so it is likely that'll be the first to market and again, all of that assuming that the legal and regulatory environment is safe and able to support us going to market.

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Operator [33]

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(Operator Instructions) The next question comes from Randy Baron with Pinnacle Associates.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [34]

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I think with all the focus on the delayed financing, I just want to start with you, Eduardo. I think the significance of your accomplishment of taking cost out is really kind of overlooked with everything else going on. So just congratulations to you and your team. I have a...

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Eduardo Alvarez, Amyris, Inc. - COO [35]

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Thank you very much.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [36]

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Yes, you're welcome. I have a few just administrative questions and then a broad one. Positive EBITDA on the second quarter just because we haven't seen the 10-Qs yet, does that include or exclude the onetime audit fee?

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John G. Melo, Amyris, Inc. - President, CEO & Director [37]

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It includes the onetime audit fee. It is adjusted EBITDA, so it does not include noncash like the stock comp component.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [38]

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Got it, which is I'm happy to hear that. Related to that audit, you mentioned kind of $12 million of costs year-over-year. For some reason, I thought that this audit was costing even more. What is the total that this audit has cost? And is it $12 million? And what do you expect your audit cost to be for calendar, call it, 2020 on a normal basis assuming no issues?

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John G. Melo, Amyris, Inc. - President, CEO & Director [39]

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Yes, I mean, Randy, I'll take a guess at the 2020 just because we haven't gotten into those discussions with the auditor, and my guess will be based on what our fees had been prior to this mess, okay? And I don't -- knowing the current audit firms, I don't expect it to be significantly greater than that.

Regarding the amount of cost, direct cost with the audit firms and firms because, obviously, we had KPMG, which became a disaster, and then the 2, it's probably indirect cash somewhere around $7 million. And the delta between the $7 million and the $12 million are all the legal fees and outside contractor and consulting fees we've had to pay for support and getting everything cleaned up, right? So I just wanted to make a distinction around those numbers. What do I see a normal year audit fee? Look, I think a normal year is around $1.5 million to $1.7 million. That's kind of what we've been incurring and what we expect to get back to.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [40]

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Got it. I noticed when you talked about financials expected in the next few weeks, the S-1, et cetera, you didn't mention the next 10-Q. When do you expect that to be filed? Would that be the normal, whatever, 45, 60 days after the quarter? Or what's your expectation?

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John G. Melo, Amyris, Inc. - President, CEO & Director [41]

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Yes. The third Q, we're going to be right back on normal schedule.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [42]

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Great. And then just one last high-level question. I believe the DARPA grant is expiring if it hasn't already. What's -- and this is not something you talked about on this call. But what is the outlook for the military and their interactions with Amyris?

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John G. Melo, Amyris, Inc. - President, CEO & Director [43]

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I'm actually at the White House on Monday having exactly that discussion. There's actually a strategic initiative that the White House and the military is very interested in around synthetic biology, which is built on the work they've been doing. So I'll have a better view after that. You're right. The current DARPA program is over this year. I think we still booked some revenue -- well, I know we booked some revenue year-to-date, and I think we have some left in the fourth quarter. I'm not really sure, but it is definitely over this year.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [44]

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Oh, and then just one last question. The $10 million of accelerated royalties that is shifting with DSM, was that -- how much of that was already included in the $150 million of guidance for this year?

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John G. Melo, Amyris, Inc. - President, CEO & Director [45]

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It was not. It was not actually. And by the way, I want to clarify. That $10 million, it's actually more than $10 million. I'm, again, guiding low because, until it's done, it's not done. And the $10 million is already related to another agreement, which is actually Yifan. So we're actually renegotiating with DSM. We've agreed on the basic terms, and now we're in process of getting agreements finalized. And then with Yifan, we've done a two-part deal. One was restructuring the old deal. The second is adding 2 new vitamins. The 2 new vitamins are in process. We'll have it complete by the end of the fourth quarter, and the restructuring of the old agreement is already complete. And if I were to tell you the real dollar realization, the front-end dollar realization of both of these is probably more around the $15 million level, could be $15 million to $20 million, but $10 million is already what's in place based on what we've already negotiated.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [46]

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And that's a 2020 -- would also be at calendar 2019 if it came to pass? Or is that spread over the next -- into 2020?

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John G. Melo, Amyris, Inc. - President, CEO & Director [47]

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Yes, I want to be careful, Randy. It's -- that will all be '20 -- I'm sorry, that'll all be 2019. But here's the issue, which is why I didn't include it, and we're not actually talking about as part of revenue. I don't know how it'll be recognized. So payment not a problem. Restructuring complete. We'll make all that transparent. But whether it goes to revenue or whether it's deferred, I don't know yet. That'll be part of what Jonathan and the accounting teams will figure out. So it's cash in. Don't know about revenue. And it wasn't in our revenue forecast.

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Randy Baron, Pinnacle Associates Ltd - Lead Portfolio Manager [48]

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Understood. And then Barra Bonita, the new Brazil plant, you mentioned you may fund it with your partner down there. Obviously, you broke ground already. When do you think you'll know? Is it imminent? Is it kind of as you're going or negotiating? When are we going to know how that's being financed?

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John G. Melo, Amyris, Inc. - President, CEO & Director [49]

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Yes. It's actually 2 different things. So Barra Bonita is the plant. Barra Bonita is owned by Raízen, a joint venture between Shell and Cosan. Barra Bonita and -- or Raízen has a very long-term strategic supply agreement with us to supply all of our utilities and cane syrup. The first plant is 100% ours. And when I said partner-funded, we're actually in discussions with a few of our flavor and fragrance partners that are interested in financing that plant so they can ensure security of supply.

There's a second path going on, which is actually related to a second factory, not in the short term but probably a 2021 factory connected to sweetener, and that is one where Raízen has an option to fund that plant as part of a joint venture with us for sweetener. So I just wanted to give you a bit of the detail. We've announced some of this stuff over the last 6 to 9 months, but it's kind of lost in all the clutter out there. And I just wanted to clarify it for you.

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Operator [50]

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The next question comes from Brett Hundley with Seaport Global.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [51]

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I appreciate you guys taking my question. My question just centers on cannabinoids. And you had mentioned the legal and the regulatory backdrop in an earlier answer. And I'll be honest with you. I don't quite understand the legal and the regulatory backdrop for biosynthetic CBD, so I was hoping you could educate me a little bit on that. And it's particularly -- particular against the language that we saw from Mitch McConnell recently where he seems to throw the word hemp in front of every type of communication on CBD and directing the FDA to get some guidelines in place. So are you guys confident the biosynthetic CBD could be produced and marketed across the U.S. at the federal level? Or will this be more of a state-by-state thing? If you can just give me some insight into that, it'd be really helpful.

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

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Yes. Great question. And by the way, I want to thank you for the efforts you've made to help us understand the industry more in all that you publish. I think you do a great job keeping the industry aware, so thank you for that.

Look, I put this out really as a cautionary note not because I see today any difference in the regulatory environment whether it's biosynthetic or plant. So I just want to first make that point. This is not about there's a different regulatory risk that I'm actually seeing. It's more about, as you've seen, like any interstate commerce other than topical for cosmetics, there's always questions about, right? So I just don't want to mislead and want to make sure people know that we have that in mind. We're focused on it.

We think of the market as global, and that's the other point. It's global. We have manufacturing actives and plant to make it outside the U.S., not just in the U.S. And then in the U.S., again, we don't see a separation, and we are very engaged, obviously, with policymakers just to ensure just like in all of our other businesses that there is a fair treatment and there is technology neutrality for what source and materials are out there and that the focus really needs to be safety of the consumer and availability of supply and a cost that makes sense for a world that needs it. And that's our focus. And it's not again driven by a difference in, today, seeing a regulatory approach that differentiates.

I think we're done with questions, right? So Jake, thanks so much. Thanks, everyone, for being on the call. I really appreciate it.

In closing, I'd like to thank everyone for the support during what has been the most difficult time in our history. We are pleased to putting this time behind us. We know that there is a lot of work to do. I respect all the folks who have been putting in the hours they have, and I'm also very committed to ensuring this is a nonrepeat for us and that we manage our business in a safe and healthy way and that we ensure that we're working closely with our accounting partners.

Tomorrow, we'll be presenting at the B. Riley FBR Consumer & Media Conference where we'll share more in our progress and share highlights on our Amyris-owned brand, so I hope you're able to be there with us. Thanks again and a great afternoon to everyone.

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Operator [53]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.