On January 16, renewable oils innovator Solazyme (SZYM) released two press releases as seen in my other article found here. The following morning, share prices dropped over 9% in response to the dilution to follow on news of an offering of Convertible Senior Subordinated Notes due in 2018. The market's fear was due to the concept of shareholder dilution. Since then, the terms have been set in the follow-up press release announced today. Those terms are summarized here:
- The conversion price is set at $8.256.
- The Convertible Notes will mature on February 1, 2018.
- Solazyme expects to receive $109.8 million after discounts and estimated offering expenses.
- The Convertible Notes will bear a fixed interest rate of 6% annually
- There is an early redemption incentive built in for an additional $83.33 for every $1000 in principal redeemed if the notes are converted prior to November 1, 2016.
- The company intends to use the net proceeds of the offering to fund project related costs and capital expenditures and for general corporate purposes.
Cash is King
With the conversion terms stated, investors should now expect Solazyme to gravitate toward the conversion price of $8.26 in the short term. Anything below this would suggest the company just received additional value upfront that the market is failing to take into consideration. According to Yahoo! Finance, this will bring the outstanding shares to roughly 76 million shares by 2018. The built-in incentive to get note holders to convert early (in order to save on interest payments) suggests that the largest part of this dilution is most likely not to go into effect until 2018. As a result, this delayed dilution keeps the share structure tight around the rough 61 million shares according to Yahoo! Finance. This is important for the most critical years of operation as the company approaches profitability.
The new infusion of cash now invigorates the company with the ability to expand its operations in a timely fashion. Previously, the company had $167 million in cash and short-term equivalents as of September 2012. The addition of $110 million now brings this total up to roughly $277 million. After taking into consideration the additional news of the $120 million loan from BNDES as seen in my other article found here, the $60 million in liquidity savings now essentially gives the company a higher liquidity balance than its initial IPO back in 2011.
Why this matters in particular is that the company now retains one of the most liquid balance sheets in their industry. After their own respective cash infusions, the perceived peers of Gevo (GEVO), Amyris (AMRS) and KiOR (KIOR) all pale in comparison while still having ongoing cash concerns of their own. In September 2012, Gevo had roughly $92 million, Amyris had roughly $44 million, and KiOR had approximately $74 million on their respective balance sheets. Unlike Solazyme, Gevo and Amyris directly diluted shareholders. KiOR received a $75 million loan from existing investing firms.
Typically in most industries, balance sheets would not play as big a role as here. Yet each of these new companies are in the development phase in which the pursuit of additional manufacturing capacity is the sole pathway to profitability. The race is on for liquidity leadership in an industry with a dire need for capital as described in my other article found here.
Development As A Priority
While Solazyme has always been viewed as the inherent cash leader, it was clear that at best the company was only going to make it past its first large-scale plant with partner Bunge (BG) before a low cash balance became an issue of consideration. While the need for a scale-up period for the Brazilian plant would slow down initial cash flows, the approval of the BNDES loan would have likely ensured the company had enough liquidity until becoming cash flow positive. But Solazyme has a much more rapid pace of development in mind rather than waiting for the first plant to fund the further expansions. Through its joint venture partnerships, the company expects to have 550,000 metric tons of capacity online by the end of 2015. Currently, the company has roughly 2,100 metric tons at its disposal between its plant at Peoria, Illinois, and its joint venture partnership with Roquette Freres.
Solazyme has already lined up another relationship with Archer Daniels Midland Company (ADM) to operate out of its large commercial scale facility in Clinton, Iowa. Although the arrangement was conducted in a cash-efficient means of obtaining a new facility, even this location will require ongoing working expenses in order for large-scale production to take place. The additional expansion efforts of both Bunge and Solazyme to scale up their joint venture production to 300,000 metric tons would also require that Solazyme have a larger balance sheet than the company currently did.
Depending on the ability for the company to attract large amounts of secured debt on the additional joint-venture facilities, Solazyme may now have fully addressed its need for cash in the years to come. This is of course dependent on the ability to secure debt, the amount of cash coming in from operations, and the pace at which the company is comfortable expanding. The larger balance sheet will serve for an increased ability to obtain debt and at more attractive rates. Admittedly, it remains a bit disappointing that the company took its time in tapping the markets for additional liquidity. Yet faced with a lack of respect on the market as indicated by the share price declines over its public life even in the face of positive news releases, the timing appears somewhat understandable.
The Growth Around The Corner
Going forward, investors should not forget the rapid pace of revenue growth to be expected. This is a measure that Wall Street respects. As it stands, there are now nearly 7 million shorted shares (or 20% of the float) as of December 31, 2012. The majority of the investing community likely has little understanding of the expected revenue to come. New production capability isn't something that can easily be scanned over on a company's income statement.
In 2010 and 2011, Solazyme reported $38 million and $39 million respectively. 2012 will likely range in the upper $40 millions. With an approximate ASP of $3000/MT, the joint-venture plant with Bunge is capable of $300 million in a given year. By early 2014, ADM's additional 20,000 MT of capacity will be initiated. Upon scale-up the plant could generate $60 million in a given year assuming an ASP of $3000/MT, all of which goes to Solazyme.
Solazyme's ability to tap into niche high-margin, oil-related industries remains a unique advantage that is shared by few. Most importantly, its ability to design new tailored oils that can be found no where else in the world remains a comparative advantage thus far believed to be rivaled by none. As the investing world begins to witness the unlocked earnings power of the new facilities coming online this year and the one to follow, the tight share structure of the present is likely to remain a silent momentum-building tool. The financing of today has secured ongoing growth for tomorrow. There appears to be few, if any, hurdles that stand in the way now.
