Solazyme Misses on Earnings, but Shows Steady Progress

Industrial biotechnology developer and renewable oils manufacturer Solazyme (TVIA) may be misunderstood by a large number of investors, but everyone understands how to evaluate the earnings numbers released yesterday. In that regards, the company missed on full-year EPS estimates by $0.04. While it is certainly not the end of the world, it may make investors a little worried about continued losses.

Well, in an SEC filing disclosing its recent debt offering, the company confessed that "annual operating losses will likely continue to increase in the short term." That answers that, but it shouldn't be much of a surprise with a developmental company in such a capital-intensive industry. All in all I thought the company did quite well in developing its platform, product lineup, and balance sheet in 2012. Let's take a closer look at what 2012 meant for investors and what they have to look forward to in 2013.

Financials
The company left 2012 with the following numbers compared to year ago periods:

Source: Solazyme. Note: condensed consolidated results

After successfully wrangling a $120 million loan from from the Brazilian Bank of Development and offering another $125 million in senior convertible notes, Solazyme ended 2012 with $149 million in cash and cash equivalents, although the current total is closer to $260 million. While that number is impressively high, investors need to remember that operating expenses will remain high in 2013 as the company continues developing its platform and products. The company expects operating expenses for the next year to fall between $115 million and $120 million. With little revenue to offset the costs the cash pile will drop quickly, but still remain sizable.

Outlook
Similar to Amyris (AMRS -33.33%), which released earnings this week and is focused on manufacturing renewable farnesene, Solazyme is expecting to be cash-flow positive in 2014. If I had to pick one of the two to actually make it happen I would bet on the latter. Solazyme boasts several advantages over Amyris.

For one, the company can produce test quantities of products at Peoria without interrupting its production ramp-up at any one of its three biorefineries under construction. Amyris has only one biorefinery in Paraiso, Brazil, to exhaust before it needs to turn to third-party manufacturers – something it wants to avoid. Second, the company's large cash position will likely aid its transitioning into new partnerships and help to absorb unforeseen costs that will undoubtedly arise. Amyris only has Paraiso to burn its cash, but the company's coffers only hold $45 million.

In all, Solazyme will have four biorefineries to use at varying degrees of capacity, which will greatly aid the company's cash flow outlook.

Source: Solazyme

It should be noted that the three facilities coming online by 2014 will not initially run at nameplate capacity. In other words, the company will need to gradually ramp up production to 125,000 metric tons (excluding Peoria) as 2013 and 2014 progress.

Until then Solazyme remains focused on developing new oils, adding or expanding production capacity, and commercializing the products in development (producing products at customer specifications at commercial scale). The company still needs to add strategic downstream refiners, such as previous partners Chevron or UOP Honeywell – which are reportedly being pursued by management at the moment.

Excluding the Bunge and Roquette facilities the company expects capital expenditures to fall between $20 million and $25 million. Leaving out the two biorefineries results in a big hole for projections, but management states that product revenues will grow faster than operating expenses. An encouraging sign, but an unknown nonetheless.

Products
Algenist sales grew 130% to $16.5 million in 2012 after adding seven new products to its lineup. The personal care brand is expected to grow sales 35% in 2013. Joint development agreement and commercial revenue is expected to grow 75% from its $13.2 million watermark set last year.

Looking ahead to other products in the lineup, the company reported developments for several of its prototype oils.

Source: Solazyme, LMC, ICIS, Bloomberg, Euromonitor, Freedonia

The recently announced Mitsui agreement will aid the development of myristic acid, which is one of the company's more exciting oil profiles in development. Its high selling price and ability to replace palm oils, the bane of environmentalists everywhere, makes it an attractive product. Solazyme announced that myristic acid levels in its oil have increased from just 30% nine months ago to 50% today – with further room for improvement with Mitsui.

Using the basic engineering principles I laid out for investors earlier this week, we can now say that before losses in displacement, yield, and downstream processing, one run of a 500,000 liter bioreactor will yield roughly 200,000 liters of myristic acid. Remember, the oil's high selling price will help make up for less than stellar yields.

Foolish bottom line
Solazyme demonstrated another solid quarter, and a year of progress and development, despite missing analyst expectations. Management stated that the company laid a strategic foundation in 2012 that will enable its future development into a global market disruptor. While investors will have trouble disputing that claim they may be left wondering: "What do we need to see in 2013?"

Investors will want to see steady progress in commissioning and production ramp-up, commercialization of high-value oils such as myristic acid, and for the company to use its new $269 million cash hoard at the negotiation table with new and potential partners. Bringing downstream partners to refine and tidy up fermentation products will be another key development for the company.

The developments are great news, but with losses set to continue through for the next several years there may still be too much risk for investors in early 2013. I am waiting for more de-risking to occur before I start to think about starting a position – even if it means I have to pay a higher price.