Amyris, Inc. (NASDAQ:AMRS) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Welcome to the Amyris First Quarter 2023 Financial Results Conference Call. This call is being webcast live on the Events page of the Investors section of the Amyris website at amyris.com. As a reminder, today’s call is being recorded. You may listen to the webcast replay of this call by going to the Investors section of Amyris website. I would now like to turn the call over to Han Kieftenbeld, Chief Financial Officer of Amyris. Please go ahead.

Han Kieftenbeld: Good afternoon, everyone, and thank you for joining us today. With me on today’s call is John Melo, President and Chief Executive Officer, as well as Eduardo Alvarez, Chief Operating Officer, who will participate in the Q&A session today. We issued our results today in a press release. The current report on Form 8-K furnished with respect to our press release is available on our website, amyris.com in the Investors sections as well as on the SEC’s website. The slides accompanying this presentation can also be found on the website and were posted today for your convenience. Please note that on this call, you will hear discussions of non-GAAP financial measures including but not limited to core revenue, gross profit, cash operating expense, and adjusted EBITDA.

Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measure are contained in the financial summary section slides of the presentation and the press release distributed today. During this call, we will make forward-looking statements about future events and circumstances, including Amyris’ outlook for 2023 and beyond, Amyris’ goals and strategic priorities, anticipated transactions and other future milestones, as well as market opportunities, growth prospects and Fit-to-Win actions. 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 our filings with the Securities and Exchange Commission, including our 10-K for the fiscal year 2022.

Amyris disclaims any obligation to update further — to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. I’ll now turn the call over to John.

John Melo: Thanks, Han. Good afternoon, everyone. Thank you for joining us today. I’ll provide an update on our business performance and our key priorities for this year. Han will provide an update on our financial performance and I’ll recap before we turn to Q&A, which is why I hope we spend most of our time during this call. We delivered a solid first quarter with revenue of $56 million, well ahead of our guidance of $50 million. We also delivered an $18 million or 29 percentage-point improvement in gross profit and a $36 million or a 24% improvement in operating expenses versus the fourth quarter of 2022. Our return on marketing dollar invested was around $10 of revenue for $1 of media spend. This compared to our target of $3 of revenue for every media dollar invested.

In absolute terms, media spend in the first quarter of 2023 was about 25% of media spend in the prior year quarter. This was our best progress versus prior quarters. And our choices were driven with focus on efficiency and effectiveness of spend, as well as by our liquidity constraints. Our non-GAAP Consumer gross margin as a percentage of revenue was 56%, which compared to 60% in the prior year quarter due to product and channel mix. Our non-GAAP Technology Access as gross margin as a percentage of revenue was 24%, which is compared to 27% in the first quarter of 2022 and was a significant improvement sequentially of about 72 percentage points due to higher collaboration revenue. We plan to turn the various lessons we’ve learned from operating with a tight budget and lower media services into much more efficient media spend opposite the Consumer revenue generated.

Besides media spend, we also significantly reduced inbound freight expense, including air freight to $2.4 million from $8.5 million in the first quarter of 2022. We are focused on making our business Fit-to-Win, which is really our path to operating profitability. Fit-to-Win includes a competitive cost base, delivering the most efficient and effective marketing and ensuring we have the lowest cost to produce and serve across our Consumer business. Fit-to-Win also includes delivering the strongest revenue growth of our peers, having a focused and well-performing portfolio of assets, and having the right capability and culture to enable us to make the planet healthier while operating a sustainable company that is here for many generations to come.

We are making good progress and we are clear that we need to do more. We are in the process of completing a strategic review of our cost base and liquidity, including the effectiveness of our operating model. We are focused on getting to the right balance of cost and growth performance, while at the same time reducing our overhead and aligning our investment in technology and consumer capability to execute on our advantage to offer and meet the critical needs of consumers and our partners. On April 3rd, we closed the Givaudan transaction and received $200 million in upfront proceeds. This is our fourth strategic transaction since the start of 2020. These transactions represent a strong track record of execution of our go-to-market strategy for our ingredients and core technology.

We are world leaders in developing, scaling and producing clean sustainable chemistry through biofermentation. The molecules we produce are the science inside thousands of consumer products impacting millions of consumers daily and making our planet healthier. We are the science and production of this chemistry. And our partners are the market leaders in formulating with and selling to companies that need our differentiated molecules and chemistry. Our Technology Access business is focused on generating income from the development of molecules, from the licensing of the marketing rights and from the long-term manufacturing, leveraging our biofermentation capability. From the start of 2020, our four transactions for nine molecules have generated in excess of $800 million of value from upfront cash and earn-out payments, not including margin contribution from long-term manufacturing.

This represents an average of nearly $90 million of licensing value per molecule. The Givaudan transaction is the most valuable molecule deal we have completed. The strategic transactions are for focused marketing rights, like the sale of Squalane for use in the cosmetics in markets or farnesene for the use of a specific molecule like vitamin E. However, each molecule can serve additional applications and in markets. And we have retained the rights for all the markets outside the specific license that was contracted. We expect to continue to build on this business model, and we continue to scale and commercialize new molecules. We have over 30 molecules in our current pipeline when including the various farnesene molecules and in markets we are currently testing and developing.

Ectoine and HDF, also known as hydrogenated difarnesene are two great examples. Ectoine is an excellent molecule that has been around in very limited quantity and at high costs. Like many of our molecules, we are able to make this molecule abundantly available directly from fermentation. This is a molecule that delivers great performance in skincare. It helps the skin retain moisture. It is one of the hero ingredients in our Stripes brand and is starting to get attention from consumers. We are starting to see European brands promote the use and performance of Ectoine as a key ingredient. Even more interesting is our latest breakthrough innovation from our farnesene building block, HDF, or hydrogenated difarnesene. It’s expected to be a game changer for skin care, hair care, color cosmetics and personal care markets.

It has almost 3 times the viscosity of Squalane at about the same weight. It is the perfect combination of moisture retention, gloss and cushion. It is a great replacement for some of the palm oil alternatives in the market. Initial feedback from formulators and some of the leading beauty companies is that it could potentially outperform Squalane. See, it’s a molecule that makes formulas perform better. And because of its weight, it can deliver a formula for a lower cost than is currently being formulated. These are great examples of what’s in our pipeline and good evidence of our focus on markets, where we can really win, while delivering the best science and chemistry for a healthier planet. Beyond our existing pipeline and process of commercialization, we are engaged with some of the world’s leading companies in beauty and personal care that are committed to clean sustainable chemistry in their products.

Many companies have public commitments to sustainable chemistry and sourcing and Lab-to-Market technology can help them achieve their goals, which we expect to manifest itself in growth in growth in our collaboration programs and revenue. We leverage our Lab-to-Market technology across three dimensions. Innovation, we develop scale and produce some of the world’s leading molecules sustainably. As said earlier, HDF is a perfect example of a molecule that we are in the process of commercializing within the next 12 months. Then our Consumer, we market our brands to demonstrate efficacy and stimulate Consumer demand through tangible product solutions and a superior consumer experience. Thirdly, our Technology Access, where we partner where the world’s leading suppliers to formulate with and sell our ingredients into thousands of products.

Our Consumer brands, our Technology Access activity and our innovation and support infrastructure all play a role in Amyris’ business model. We are striving to optimize each of these activities in terms of operating and financial performance by way of benchmarking into a line on our investments with the affordability threshold. Our liquidity constraints are very much in focus. And we have three key activities that are in process. First, we are establishing a biomanufacturing JV that would provide Amyris an estimated $50 million to $100 million in proceeds and support the working capital needs of ingredient manufacturing as well as provide the necessary CapEx to build our next fermentation plant. We are in active negotiation. The long-term objective is to design the joint venture to provide a more scalable capital structure with access to working capital to sustain the demand for more biomanufacturing capacity.

Secondly, we are in the process of the sale of non-core assets. This relates to certain Consumer brands and is expected to generate up to $100 million in proceeds. This will result in a focused Consumer portfolio of five to six Consumer brands that have an attractive growth and margin profile and are leaders in their respective categories. Our third activity is advancing the proceeds of up to $350 million from future performance-based earn-outs and milestone payments related to our strategic transactions. These are the transactions that are already complete. Each of these are in process and are critical components of our plan to self fund our business. So in summary, the first quarter demonstrated our changed approach to balanced revenue delivery with a lower cost profile, resulting in sequentially improved gross profit, operating expense and adjusted EBITDA.

We clearly have much more to do to make this sustainable and ensure that our business model can successfully operate as a result of a much improved cash conversion cycle and lower operating costs. Our Consumer demand remains very strong. As we transition to stable operations at Barra Bonita. We have a very strong year of ingredients, product supply and revenue ahead of us. We basically are contracted to sell all that we have capacity to produce this year for our ingredients business. We continue to create the world’s leading sustainable chemistry from biofermentation. Our Lab-to-Market technology platform is leading in its ability to develop, scale and produce clean, sustainable chemistry. We have great commercial partners that are leaders in their sectors.

They recognize the value Amyris brings now and well into the future. Our Fit-to-Win agenda, the strategic review and our business plan are focused on setting a clear path to self funding our business, while executing on our strategy of continued strong growth in our chosen end markets. To do so, we are working on a multifaceted agenda, including completing the manufacturing JV, the divestment of noncore assets and the realization of earn-outs of our various completed strategic partnerships. We are focused on delivering further cost reductions and aligning our overhead with the needs of our operating business to accelerate our path to positive adjusted EBITDA. Our outlook and guidance for the year remains unchanged. Let me now turn the call to Han.

Han?

Han Kieftenbeld: Thanks, John. Let me proceed with discussing the quarter’s financials starting with revenue. Core revenue, which includes Consumer and Technology Access revenue, and excludes strategic transactions and other decreased 3% to $56.1 million. When compared to the first quarter of 2022 revenue. Our Consumer business declined 1% to $34.2 million. The decrease in Consumer revenue was primarily driven by lower Biossance revenue due to lower marketing and media spend and out of stock product, offset in part by the launch of our 4U by Tia brand at Walmart, as well as increased MenoLabs direct-to-consumer revenue. Our Consumer business in Q1 2023 was about 48% direct-to-consumer and 52% with retail partners. The split one year ago was 57% direct-to-consumer and 43% with retail partners.

We believe the shift away from DTC was driven by lower Q1 2023 marketing and media spend due to certain liquidity constraints. Technology Access revenue of $21.9 million decreased 5%. Technology Access revenue included ingredient product revenue of $8.9 million, which decreased 18% compared to Q1 2022, reflecting continuing supply and working capital constraints as the business transitioned from higher costs toll manufacturing to lower cost internal sourcing from our new fermentation plant in Barra Bonita, Brazil. R&D collaboration revenue of $3.6 million increase relative to the prior year with growth driven by several new contract research programs. Technology license revenue from earn-outs totaled $9.5 million, which included a $3.4 million favorable true-up related to 2022 activity.

This brings me to gross profit. As I mentioned during our fourth quarter earnings call, we are introducing non-GAAP gross profit, which more completely presents our margin performance, considering all aspects of cost of goods sold. A reconciliation of this non-GAAP measure is included in the tables to our earnings release. Non-GAAP gross profit was $11.6 million or 21% of revenue, compared to $10.6 million or 18% of revenue in Q1 of 2022. Non-GAAP gross profit increased by $1 million and were 300 basis points higher as a percent of revenue than in the prior year. This was primarily due to lower freight expense as well as favorable mix of higher margin revenue. We experienced significantly higher freight spending in 2022, particularly due to increased inbound effort, rates and volume to support our growing consumer brand revenue, as well as the importation of ingredients intermediate product.

We were very pleased with our progress to reduce costs in these areas, yielding a reduction in inbound freight from about — from $8.5 million in Q1 ‘22 to $2.4 million in the first quarter of ‘23. We expect most of these freight and logistics expenses to operate at a lower level compared to 2022 due to the commissioning of the new Brazil fermentation plant, and our plan to transition to bazillion sourced components and manufacturing for our largest Consumer brands. Before I move to discussing operating expense, I want to spend a moment on our consumer portfolio. In the first quarter of ‘23, we entered into a JV and brand collaboration agreement with Tia Mowry, launching for 4U by Tia in January, a new clean hairline — a new clean hair care brand.

The brand collaboration agreement with actors and celebrity Tia Mowry will market this new hair care line to women of color using clean ingredients. In connection with our Fit-to-Win strategy, the Company decided to exit the EcoFabulous brand and reorganize the Beauty Labs business during the first quarter of ‘23. Accordingly, we booked a $28.5 million favorable noncash change in the fair value of acquisition-related contingent consideration as well as asset impairments totaling $95.4 million. We also incurred a $4.2 million inventory write-off related to the EcoFabulous brand, which was adjusted out when calculating gross profit. Next, I’d like to touch on operating expense. Non-GAAP cash operating expense of $112.8 million was 4% lower than Q1 2022 and 24% lower than the fourth quarter of 2022.

This was primarily due to lower marketing and media spend related to working capital constraints. In Q1 ‘23, more than $1 million of cost savings resulted from headcount reduction initiatives, and approximately $14 million resulted from lower consumer marketing expenses versus the previous round rate. This was mostly related to spend on paid media such as Google and Meta and related agencies. We started the quarter with a cash balance of $71 million and raised $42 million, primarily through a bridge loan to fund the purchase of Aprinnova assets in April 2023. We used $101 million during the quarter in operational adjusted EBITDA offset in part by favorable working capital leverage of $70 million driven by action taken with suppliers to improve terms and our cash conversion cycle.

We closed out the quarter with $17 million of cash on hand. Before I discuss our quarter-on-quarter progress, in connection with our ongoing strategic review as previously communicated on April 24th, we are focused on cost efficiency, capital structure and liquidity required to fund the business. We updated our going concern disclosure, as you will see in our quarterly report on Form 10-Q and we have signed forbearance agreements with the Company’s lenders. Foris Ventures, LLC, Perrara Ventures, LLC and DSM Finance B.V. related to the maturity of an aggregate $92.5 million of debt principal. The lenders have agreed to forbear from exercising any rights and remedies with respect to certain payment defaults until June 23, 2023. As described in our 10-Q, our current cash position, as well as short-term debt payments due, raises substantial doubt about our ability to continue as a going concern within the one year period.

As referenced earlier, we are actively working on plans that are intended to address this going concern. As it relates to our Q1 performance, we have sequentially reduced cash use for operating and investing activities, beginning with $199.7 million in Q1 2022 through $94.8 million in the first quarter of ‘23 as a result of a focused effort on cost containment and the need to navigate liquidity constraints. We used a total of $90 million for operating activities, which includes all our cost of goods sold, operating expense and working capital needs. We used a total of $5 million for investing activities, all of which was related to capital expenditures for R&D facilities as well as the construction of our Barra Bonita fermentation plant. We have worked hard on reducing our use of cash by taking various steps, including bringing in proceeds from a strategic transaction.

Let me summarize and John referenced this earlier, the two transactions that we have recently completed in early April given their importance to cash flow. We completed the acquisition of an additional 49% of our JV in Aprinnova on April 3rd. We paid $49 million to bring our ownership percentage in Aprinnova up to 99%. Also, on April 3rd, we closed on our transaction with Givaudan to license certain cosmetic ingredients business and received $200 million upfront cash and expect to receive up to $150 million in performance-based earn-out payments over the three-year period. We are delivering on our strategy to provide Technology Access in a meaningful way to partners that are sector leaders and to bring in meaningful cash. Also, John described three activities with a view to bring in funding.

Each of these are in process and are critical components of our plan to fund the business. With that, let me turn the call back to John.

John Melo: Thanks, Han. Before we move to Q&A, let me confirm that our current outlook for the full year including revenue guidance provided on March 15, 2023, remains unchanged. We are focused on and committed to improving our cost structure, making strategic portfolio choices, improving our cash conversion cycle and delivering on the transactions that self fund our business. With that, Kate, can you please help us go to Q&A?

Q&A Session

Operator: The first question is from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson: Hi. Good evening. Thanks for taking my questions. I was wondering if you can maybe talk about Fit-to-Win savings. I guess, did you get any in quarter? And are you still expecting the $150 million annualized savings to flow through this year? And if so, how should we expect that to kind of flow through throughout the year?

John Melo: Susan, thank you for being on. This is, John. I’ll start answering that. We did see a few of the activities in Fit-to-Win flow through in the quarter. We saw some of the improvements in our cost of goods, especially as Barra Bonita continued to come on line. We saw a significant reduction in our shipping costs, specifically the inbound shipping costs and air shipping. And we still expect that for the full year, we’ll realize $150 million of savings in our baseline of 2022, which was the basis of the $150 million. And I’ll let Han add — if you have anything else on this.

Han Kieftenbeld: Yes, two things. One is what I said in my remarks just a moment ago is the — we saw the initial savings from reducing some of the headcount, particularly as it relates to the simplified leadership structure. I mentioned $1 million there. And then also, as it relates to some of the media spent, as we said, part of the driver was our liquidity constraints and part of the driver was certainly some of the choices we made in terms of where to spend the investments opposite the revenue opportunity.

Susan Anderson: And then, just on the top-line for this year, you talked about reiterating the guide. I guess, for the core top-line, I think that would imply sales growing in the low to mid-20% range, I guess. Can you talk about the difference between the Consumer and Tech Access growth for the year? And should we expect that to ramp back up to double-digit for Consumer as we go through the year or should the quarters be pretty equal? Thanks.

John Melo: I’ll let start and then let Han talk about the quarterly cadence. I can tell you what we’re seeing already in the second quarter, which is double-digit growth in our biggest brands, as we really learned a lot in the first quarter about which one of our media investments worked best, and how we got the best return for the media dollar spend that — limited media dollar spend that we did in the first quarter. So from those learnings, we scaled and we’ve activated our most effective channels. And I can tell you just on a week to week basis, as we’ve looked at May versus April versus March, we’re up 17% across several of our channels for our two biggest brands. And we’re also seeing a significant impact in retail, as we’ve increased some of the channel investment of for media, which is what we expected.

We expect as we invest marketing online, we expect to see an impact in retail. We’ve had several of our brands, including our biggest brand that have had some of their second and third biggest weeks in history during the month of April. And we’re seeing Pipette actually at retail, especially at Target. It’s almost like every week, we’re setting a new record at Target for Pipette sales, and it’s also performing extremely well with Walmart as a retail partner. So, back to the question, we see top-line being in the double-digit growth back to where we’d expect and really in line with the guidance we’ve given. I think our focus this year is doing what we did in the first quarter and hitting, repeating our guidance as we go through the year.

So in a good place on consumer. As it relates to the ingredients side, the ingredients side is all about the uptime and the effectiveness of Barra Bonita. I can tell you since the beginning of this quarter Barra Bonita has been operating very well, been stable and we expect to hit our guidance. And that really is based on selling out all that we make out of Barra Bonita this year. So, on track for both on the top line. Consumer definitely on the double-digit growth track and hitting the numbers that we’d expect. And the same thing on the ingredient side. Han anything about the cadence that you’d like…?

Han Kieftenbeld: First off on the magnitude, I think, you asked about the year. And that’s kind of what we said last time was between 95% to 100% on the full year, that obviously included the strategic transaction that we now — at the time was in progress we now have completed. Obviously, we can confirm that, that $200 million is revenue that will be recognized in the second quarter, given that that is now complete. The other thing I would say, excluding that, you mentioned somewhat low-20s as a percent for the core business, we have not specifically broken out in our guidance, Consumer versus Tech Access, but it’s in that range that we that we previously talked about.

Susan Anderson: And then if I could just add one more follow-up on Barra Bonita. I guess, where are you at with moving your production there? How many lines are up and running now? And then, how much of your production have you been able to shift out of third parties into the plant so far?

John Melo: Thanks, Susan. Look, we have five lines in total of Barra Bonita, three of which are what I’d call large scale lines, 200 cubic meter tanks. Those three lines represent, for those of you who were around during Brotas, the equivalent of Brotas capacity. And all three of those lines are up and running. We have moved, I would say about 90% of our production with the exception of farnesene out of contract sites into Barra Bonita this year. Farnesene is still being produced at Brotas. And we’re still purchasing quite a bit of farnesene out of our DSM partnership. So, if you think about where we are, a very small footprint, one or two molecules at our Spain contract facility that we still will need some production this year.

The majority of all of our other molecules at Barra Bonita and then some farnesene, probably around 50%, 60% of our farnesene coming out of the Brotas facility with DSM. I hope that helps answer the question about where our production is coming from this year.

Operator: The next question is from Korinne Wolfmeyer of Piper Sandler.

Korinne Wolfmeyer: So first, I’d like to touch a little bit more on what went on the Biossance in the quarter. And I know you — in last question, you talked about what you pulled back a little bit of marketing spend. Could you just dive into what was the driver behind that? Was it just kind of a trial out and see how much you really were requiring to keep the brand afloat? And now, as you go forward, how are you thinking about the marketing spend for all the other brands? And then, additionally, on the Biossance, I think you mentioned some out of stock product. Can you just expand on what was going on there as well? Thank you.

John Melo: Sure. And thank you for being on Korinne. A couple of points. First regarding media spend — and you know the industry very well. Regarding media spend, we went almost completely dark with media spend for Biossance in the first quarter. And that obviously had a significant impact on growth. The good news is even with that media spend turned off, we actually really delivered quite a bit of revenue from our whole brand portfolio. And that is across all the portfolio by the way. I think in total we spent $3 million. And I can tell you that that was spread and I can tell you that Biossance got a very small piece of that. So again, call it almost completely dark for the quarter in media spend. And it was a combination of things.

First, we were not — we didn’t have the liquidity that we could actually allocate the investment across the brand. So, we had to make some hard choices. But secondly, as we were making those choices, we were very focused on what is the impact by channel and then we tested performance across various different channels. And by channels, I mean marketing channels. I mean, what we did in paid search, what we didn’t paid social, what we did in affiliates, what we did with e-mail, what we did with text, and what we did with any other online media investment that we were making during the quarter. So, we now have a very good sense of the impact of dollars spent by channel. Again, we delivered $10 for every spent in the quarter. We are now very confident that our target of $3 of revenue for every dollar of spend is absolutely in line for our portfolio knowing that a brand like Biossance actually has the potential for a lot more than that, as much as $5 to $6 of revenue for every dollar invested.

I think the second factor, which we may have not talked about much was really out of stocks. And out of stocks had a significant impact on revenue across our brands. The issue was really that quite a few of our brands, Pipette, Costa Brazil, JVN, Biossance, just to name a few and then Rose Inc. actually was out of stock in several of their top 10 sellers. So, combination of out of stock and what we saw in paid media. And we can verify that as we put product back in stock during the beginning of the second quarter, we’ve seen the consumer come right back to the product. And as we started activating the channels where actually I could tell you in the first couple of weeks or the first — really call it the first 5, 6 days of May, we could see all the marketing channels starting to perform at levels that were equivalent to when we shut them down during the first quarter.

So, I hope that helps give you some color as to what happened across the brands, what happened in the channels and then what happened with out of stocks.

Korinne Wolfmeyer: Yes. That’s very helpful. And then just to follow-up on that. What was the reasoning behind the out of stocks? And then, just quickly on gross margin, can you just touch a little bit on what caused that big decrease this quarter, and what’s kind of like the proper run rate to think about going forward? Thank you.

John Melo: Sure. The majority of the out of stocks were again delayed payments or liquidity, where we had the product produced, but the vendors were waiting for payment. So, that’s why when we received our funding from the Givaudan transaction at the beginning of the second quarter, we were able to immediately get the product out and ship. So, it wasn’t that the product wasn’t made, in many cases, the product was actually made and waiting to be shipped from the supplier side on a lot of the CMOs that we operate. So, that’s the product out of stock side. I think regarding your — the second part of your question, you want to repeat it for me, Korinne?

Korinne Wolfmeyer: Yes. Just on gross margin.

John Melo: Yes. I could tell you, part of the gross margin mix is how the brands performed. Several of our brands, Pipette being one of them, actually had very strong performance during the quarter and is continuing very strong. So, when Pipette performs this way, and several of our other brands that have a lower margin profile, and our higher margin brands don’t contribute at the level that we’d expect, we see that kind of shift in margin. Again, I can tell you, where we are in April and what I’d expect for the rest of the year is for us to operate at the level we expect for Consumer gross margin, especially with a Fit-to-Win activities. And what we see there is somewhere around the 63% to 65% gross margin for — and this is the adjusted gross margin number we’ve tracked at the consumer operating level, is what we’d expect for the rest of the year in Consumer.

Han Kieftenbeld: So, let me add to that a little bit Korinne. So channel, I made a comment I think in the analysis that we have more on the retail side than — compare the year ago quarter on the DTC side. So that plays into the margin profile too. And then, as John said, it’s really the brand mix, where we have Pipette step up for an example relative to the rest of the portfolio, but also the new brand for 4U by Tia that is in — placed in Walmart. There’s a slightly different margin profile compared to some of the other brands.

Operator: The next question is from Colin Rusch of Oppenheimer. Please go ahead.

Colin Rusch: Thanks so much, guys. And I appreciate the detail on the channel. If you look at the pricing strategy, as you have more product, could you talk a little bit about the potential to be a little bit more aggressive around pricing, as you have a little bit more profitability?

John Melo: Colin, thank you for being on. Just to clarify, when you say be a bit more aggressive on pricing, you mean…

Colin Rusch: Yes. Pricing to consumers on some of these products. Obviously, it looks like there’s a fairly resilient level of demand. Just want to see if there’s a way for you guys to start raising prices and driving a little bit more cash flow through the channel?

John Melo: Yes. No. Thank you for the question, Colin. We have put through some price increases that I think have gone very well. And we are currently and actually pretty consistently looking at elasticity. And what kind of pricing opportunity we have. So, I would say the answer is, yes, we’ve already done some of that. And you wouldn’t be surprised if we would do more in the future. And we see resilience in the brands as we’ve been able to push pricing increases through.

Colin Rusch: That’s super helpful. And then just with the Fit-to-Win program, you guys have really built, the best team in the space around synthetic biology, and certainly have the leading platform here. I’m curious how you think about editing the organization and how to optimize cash flow while maintaining the technology leadership?

John Melo: Look, I think, as part of the review that we’re doing, we’re looking at costs, obviously, across our entire business. And without question, there are places in our business that aren’t as competitive as we think they need to be. So, you can imagine we are going to be optimizing or continuously optimizing costs across the business. But we’re also very conscious that some of the innovation, especially our technology leadership and how we’ve organized how we do the bio engineering, we think is deeply strategic. We think it’s one of the most productive, if not the most productive bioengineering platform in the world. And I would tell you, some of the early information we’re seeing in the assessments we’ve done is indicating that.

So I think what you can expect is that where we go for continued cost improvement and cost cuts will be very focused on where we’re not competitive and where we have significant opportunity. And I can tell you that on the R&D side, I see us as very competitive, especially on productivity. And we have significant demand that we’re dealing with there, especially as we expand the number of collaborations we do, as more and more global companies are approaching us to develop and scale molecules for them as they try to meet their objectives around sustainable chemistry. So I hope that helps kind of share how we’re looking at the cost base.

Operator: The next question is from Amit Dayal of H.C. Wainwright. Please go ahead.

Amit Dayal: John, .

John Melo: Hey Amit, your line is not coming through very well. Can you perhaps start your question again?

Amit Dayal:

John Melo: No, you’re not coming through.

Operator: The next question is from Rachel Vatnsdal of JP Morgan. Please go ahead.

Rachel Vatnsdal: So, my main question is just around some of this cash balance and cash burn guidance for the year. You guys exited the quarter with $17 million of cash and equivalents. So, can you just walk us through what are the incremental puts and takes for cash use for the rest of the year in terms of some of these upcoming loans that you have? Also the commentary on the forbearance. Can you just walk us through kind of what that means on a more granular level? Are you just pushing out payments towards that June timeframe that you’ve flagged? And then, what are your updated expectations in terms of total cash burn for the year?

John Melo: Yes. I’ll give you a high-level answer. And then, I’ll let Han chip in. I think in general, we’ve got quite a bit of work going on and really planning out our cash uses for the year. So, it’s probably something we’re not prepared to go into a lot of detail on. But at a high level, think of it as again, at the beginning of the quarter of — the second quarter, we brought in $200 million from the transaction. Han talked through in detail some of the uses of that, which was really the large — or the buyout of Aprinnova, the 49%. And then, paying down some of the past dues we had and then operating. And with all that, we’re very focused on continuing to support our operations and execute on our strategy. And then, as we look ahead, we’ve talked about some of the big buckets that we see as sources of cash coming in, the sale of the noncore assets, the manufacturing JV that we said would generate $50 million to $100 million in proceeds to us.

And then, we also talked about what we’re doing in advancing earn-outs from our three major transactions, the Givaudan transaction, the DSM transaction and the Ingredion transaction, which is actually a milestone payment or milestone payments. So, those are really where we’re going for our sources of cash. We talked about some of the big infusion that came in at the beginning of the quarter. And then, we’re obviously working very hard with Fit-to-Win. And the review we’re doing now to ensure we’re really getting our cost base right and looking for as much improvement as we can out of our operations to really minimize our cash outflow. And that’s really about the way I would think through the year at this point for cash. You asked about the debt.

Look, I know we announced the forbearance, the forbearance is with too long-term shareholders that have been very supportive of the Company. And our focus for the forbearance is to really provide the — provide adequate time to really negotiate that debt for a longer-term structure that works in line with our cash flow and our capital needs. So, that’s the way you should think it. We are working through that in detail. We are working through it with partners that have been long-term shareholders of the Company. And we expect to get that resolved during the forbearance period. And in addition to that, we are executing the transactions we’ve said as a way to really support our liquidity needs, and ensure that we could self fund our business as we go forward.

Han, anything you want to throw?

Han Kieftenbeld: No, I think that’s right. So, the two parts really to how we are thinking about it. I won’t repeat what John said as it relates to the more strategic, bigger initiatives. What shouldn’t be overlooked is the other part, which is the day-to-day tackling and blocking that we do. That’s just managing liquidity on a daily basis. We are also continuing to make operational improvements. We are talking about working capital. For example, looking at inventory, of course how we engage with vendors, also just good practices as it relates to collections on the receivable side. So, there is a lot of the — I wouldn’t call them a low-hanging fruit because some of them are certainly work, but things that we are focused on all around.

So, a 360-degree on all the things that we do every day and that’s part the review that John has referenced earlier. It’s an extension of Fit-to-Win and doing more of that. And that’s really what we’re focused on. So, both the day to day as well as some of the bigger things that will help us to fund the Company.

Rachel Vatnsdal: Great. And then, as a follow-up just on some of your comments around licensing, and some of the pull forward that you are trying to do there. So, it looks like licensing revenue was almost $10 million in the quarter. You noted that about a third of that was related to a true-up from the prior period. So, can you walk us through what you are assuming for licensing revenues heading into the later half of the year? And then what level of visibility do you have, and should we expect any more true-ups like you had this quarter? Thank you.

John Melo: Yes. Again, I’ll give a high level view and Han can add. We have not disclosed the specific cadence of how the licensing revenue comes in. What I can do is point to what to expect based on what’s been announced, right? So, we know we have quarterly revenue coming in from the DSM earn-out. And based on our production plan for the year, you can expect that to continue quarter-on-quarter, assuming keeping with our production plan. I think secondly, there is an add for the second quarter that will actually apply for the next three quarters, for the rest of the year and for the next few years, which is effective the second quarter, we also have now the earn-out for the Givaudan transaction. So, you could think about those two, the DSM transaction, which is what’s been driving that licensing revenue and it’s specifically around the earn-out in the DSM transaction and now starting this quarter in the second quarter, we are adding the Givaudan earn-out to that flow.

And then there are from time-to-time, any milestone payments or any new transactions that are in process that we might — that might actually contribute to licensing. And those are really the three buckets. It’s DSM, which you’ve been seeing, Givaudan, which is new starting in the second quarter and then the third bucket is any milestone payments or any new deals we might do for molecules that will contribute to licensing revenue as we go through the rest of the year. Han?

Han Kieftenbeld: Now let me add just kind of perhaps one mechanical comment for the benefit of everybody, as I know you are thinking about modeling and whatnot. As John said, DSM, we’ve obviously had that for the full year 2022. It’s a three-year arrangement that means we have this current year ‘23 and then next year ‘24 in terms of generating that earn-out income. You referenced the true-up. The true-up is really nothing more than to say as we progress through a given year, like we did last year. We do that based on sell through estimates that we share in this case with DSM. And that’s on to the best of our abilities, because it’s based on sell through. So we were a little bit on the conservative side, and we had a bit of an adjustment on the year that we did in — that we accounted for in Q1.

That’s that piece. As it relates to new Givaudan, the transaction that we just completed, that will start this quarter, it’s on a 12 months, so it’s not quite on the calendar year, it’s on a 12-month cycle. We get — start May 1st. So basically, we get two months in this current quarter, and then every quarter a full quarter going forward. The way that will work is as I said on a 12-month cycle instead of a calendar year. So, a little different cadence with quarter-to-quarter. Again, we will do our best estimates on the sell through and how we recognize revenue.

Operator: The next question is from Chad Wiatrowski of TD Cowen. Please go ahead.

Chad Wiatrowski: I’m Chad Wiatrowski on for Steven Mah. On the biomanufacturing JV, could you just maybe assign any expected timeline around when you think those negotiations would be completed? And what type of additional revenue capacity would that provide?

John Melo: I think we’ve learnt our lesson from the Givaudan transaction. And I think it’s good that we don’t put any specific timeline. I think we said that we’re in the middle of negotiation. That’s the other lesson is it’s not healthy, especially in a competitive process to really put out specific timelines, so we won’t do that. But what I will tell you is from a P&L impact, the way the current discussions are going. We would continue to — we would consolidate and therefore continue to report the revenue and the financials from our biomanufacturing, as a result of the JV, so that I can share with you. But timing, we’ll leave off the table for now.

Chad Wiatrowski : And on the just advanced proceeds with the three strategic transactions. Could you sort of speak to what gives you conviction of being able to bring those payments forward for the respective partners?

John Melo: We are, again, in active discussions for multiple sources, one of them actually with a partner directly. And the other — actually, with two of them, with the partners directly and the other alternative sources that provide that kind of financial instrument. And without getting into detail, my reason for confidence is that the performance so far on our earn-outs have worked pretty well with our expectation. I think, as Han just referenced regarding ‘22, we actually earned a bit more than what we thought based on truing up the year. So, we have a lot of confidence in the earn-outs themselves and our performance against the earn-outs. There were three partners that are well respected companies and we understand the relationship and can talk to the contracts quite clearly.

And again, based on where we are in discussions, we have a good level of confidence that this is something we can pull forward and execute on. That being said it’s not done until it’s done. So, we have work to do to get it done. But it is a substantial amount of cash to bring forward and something that we think can be quite a good contribution to our year’s cash needs.

Operator: We have time for one more question from Graham Tanaka of Tanaka Capital Management. Please go ahead.

Graham Tanaka: Just on the out of stock and the inability to ship what you wanted to in the first quarter, could you just estimate how much revenues you lost from being out of stock or having shortages? And if that — how much of that might continue for the second quarter?

John Melo: Hey Graham, nice to have you on the call. And just to be clear that the out of stocks were either POs we had received or demand from consumers for products that we didn’t have available to sell. So, I wanted to clarify what we mean by auto stocks. And when we look across the brand portfolio, I can tell you, the brands have quantified somewhere in the magnitude of about $10 million revenue equivalent in the first quarter. Again, we’ve brought back quite a few of those products, it is not all back in stock, there are still some brands that have some of their key products out of stock. And I really don’t want to provide a view or guidance on that issue. Specifically, I think we’ve given what we will on guidance, which is expect us to deliver on what we’ve said, for the following quarters based on what we gave you back in March for guidance.

And we believe we can do that even in managing with some of the out of stock issues we have faced just like we demonstrated in the first quarter.

Graham Tanaka: So changing subject real quickly on the true-ups and the earn-outs. Did you fully capture what you expected from last — in the first quarter? Are there more to be falling into benefit the second quarter because in the Q4 conference call, you suggested it might take a couple to get the true-ups?

John Melo: Yes. Two different issues. I think what we captured in the first quarter was true-up around the DSM earn-out. And I think Han explained that quite well. I think we’ve been conservative in what we take in for revenue. And annually, we look back based on information from the partner. And then, if there is a true-up, it gets recognized. And I think Han has captured that in the first quarter. I think beyond that we didn’t reference a milestone that was outstanding. That milestone remains outstanding. It is not part of the earn-out structure that Han has talked to, and it is not part of the DSM piece. So I just want to leave that aside and keep the earn-out clean and the true-up the way it occurred, Graham.

Graham Tanaka: Okay. So, just a feeling, so people can — there’s a lot of confusion about how much the earn-outs might be going forward, even longer term. And there — because you’ve got it, you’ve got at least three contracts or agreements. And it’s hard for investors to understand. What is kind of a range of expectations of earn-outs that you could achieve minimum, maximum this year versus last year and maybe even next year. Thank you.

John Melo: Yes. I’m not going to speculate and break that down by year. What I’ll tell you is contractually what is outstanding in earnouts and milestones for the period. And that number is about $294 million over the next, call it two to three years. That is outstanding and earn-out payments. And again, that’s the max earn-out. As you know, there’s always risk on earn-outs because they’re performance based. We’ve been very good so far realizing what we expect. But again, there’s always risk because it’s based on how well we perform. But $294 million is what is currently outstanding in earn-outs and milestones over the next two to three years.

Graham Tanaka: Great. And sort of related to that, investors or analysts are trying to understand or project what your gross margin might be targeted longer-term for consumer and ingredients, including earn-outs. Thank you. And manufacturing margins. Thank you.

John Melo: Yes. I’m going to — you asked me both questions, ingredients and consumer. I’ll give you the consumer. The fact that we are in the middle of a negotiation for manufacturing JV, I’d rather not put out numbers without that JV being complete, because obviously that JV has a big impact on our manufacturing footprint and how it operates. We think positive, but it needs to get done, right? So from a consumer perspective, I would say, the midpoint of where we expect to be is right around 65% on the consumer gross profit side. And I’d expect again that there is upside based on how well we execute Fit-to-Win and our Interfaces manufacturing and that is in process. So, think about 65% as midpoint. It could be better, slightly less.

And we are focused on executing that by really implementing Fit-to-Win and moving what will be about 60% or so of our consumer goods to Interfaces around middle of the year third quarter and by the end of the year hopefully be at about 80% of our consumer manufacturing down in Brazil. And that has a significant impact. I think we’ve quoted before, at least a 50% improvement just in Biossance cost of goods. And then we obviously expect to see gains across other products that we move to Brazil.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Melo for closing remarks.

John Melo: Thank you, Kate. And I didn’t get to say thanks to Graham for his last question, so. And I appreciate everybody being on. And sorry, Amit, that we did not get to hear your. So hopefully in a one-on-one, we can follow-up with you. I really appreciate everybody being on. Really thank you for joining us today and for your continued interest and support. If we didn’t get to your question, please follow up with our Investor Relations team, which Han or one of us can make sure we get to you, and we’ll get back to you with a response. Again, we really are happy to see the traction in our business, but most importantly to see our costs get under control, to be more disciplined with the investments we make, and to really see Fit-to-Win come through and get complete with our strategic review to ensure that our cost base is competitive and we really have a self-funded business that can execute and achieve our overall objectives.

With that, I’ll close out and thank everybody and wish everybody a good evening.

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