Solazyme Stock (SZYM) Crashes 45%: You Must Read This Before Buying or Selling
We find that Solazyme recovers roughly 60,000 liters to 70,000 liters of renewable oil in every batch at Clinton. Now, "recovers" means after all downstream processing is completed. It's also important to remember that although the tanks have a total volume of 500,000 liters, the maximum volume possible is significantly lower after accounting for working volume and total theoretical yields. Either way, there is plenty of work left to be done to improve the recoverable amounts of renewable oils.
Updates from Moema
Management stated that the100,000-metric ton per year Moema plant continues to face issues with consistent and reliable steam and power supply, in addition to issues in the downstream processing equipment, or the systems that capture and purify the oils produced during fermentation. Solazyme offered the following production updates:
- Moema is cleared to utilize three unique production strains.
- Successful fermentation runs have been conducted in all five 625,000-liter tanks.
- The facility is designed to operate four batches simultaneously (the other tank gets cleaned and loaded).
- Moema is not expected to be consolidated in 2015, which means management isn't expecting production levels to soar.
Noting the capabilities of Moema is one thing, but demonstrating results is another -- and I remain skeptical that fermentation issues aren't plaguing production. Although it was not available at the time of this writing, investors can use an investigative trick to gauge the real-world production of the facility. How?
In 2011 Solazyme signed an agreement with feedstock supplier and joint venture partner Bunge , which granted its partner the option to purchase 1 million shares of common stock that vested in three separate installments for hitting three separate milestones. The first milestone occurred when the agreement was signed and unlocked 25% of the shares. The second milestone occurred when construction began at Moema and unlocked 50% of the shares. The third milestone will occur when total aggregate output of renewable oils reaches 1,000 MT and unlocks the remaining 25% of shares.
While 1,000 MT is an incredibly low volume for a facility that should be producing over 8,300 MT of products every month at full capacity, Solazyme stated in its SEC filing for 2Q14 that only 750,000 shares (75%) in the agreement had vested as of the end of that quarter. Investors can read through the 10-Q for the most recent quarter when it is submitted to the SEC to learn if the remaining 25% of shares vested, which would also tell if total all-time production at Moema has crossed the 1,000 MT level. If it hasn't, then I would assume something has gone wrong with the fermentation process, especially considering that (1) the facility began operations at the end of May 2014, and (2) only about 13 fermentation runs are needed to produce 1,000 MT.
What should investors do?
Let's not sugarcoat recent events: Solazyme's prospects just took a pretty big hit. While management is making the correct move by going all-in on higher-value, higher-margin products, the company will have a massive amount of unfilled capacity weighing on the economics of its overall platform in 2015. Given management's admissions and the challenges I've heard from various other industrial biotech companies, I cannot be sure that Solazyme will reach the targeted production costs that will enable profitable (or closer to breakeven) production anytime soon.
Despite what management has said, investors should have concerns about the fermentation processes occurring at Clinton and Moema. The problem is that it's difficult to parse out how much of the lackluster capacity fulfillment is due to undeveloped markets and how much is due to technical hurdles. Solazyme will end the year with $200 million in cash, which will put some distance between investors and the next capital raise, but the day will come when the company must go back to the well -- and the terms will not be nearly as favorable as past raises.
I would feel very uncomfortable buying Solazyme shares until the company can demonstrate or disclose more information that removes any doubt that fermentation processes, the core technology, are potentially the/a culprit for the swift change in commercialization strategy. If you already own shares, then you have a much more difficult decision. You could hang on for the ride and hope Solazyme jumps back on track by the end of the decade or sell your position to offset gains from elsewhere in your portfolio with the losses. You might be tempted to add more shares at lowly numbers -- and that might not be a bad idea in the long run considering the market cap is headed to $300 million -- but be sure that you throw all prior expectations for market valuations, share prices, revenue growth, and earnings out the window.
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Maxx Chatsko has no position in any stocks mentioned. Check out hispersonal portfolio,CAPS page,previous writing for The Motley Fool, or his work withSynBioBeta to keep up with developments in the synthetic biology field. The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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