Solazyme's CEO Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: TerraVia Holdings, (TVIA)

Solazyme Inc. (SZYM) Q4 2013 Earnings Conference Call February 26, 2014 4:30 PM ET

Executives

Tyler Painter - CFO

Jonathan Wolfson - CEO

Analysts

Brian Lee - Goldman Sachs

Laurence Alexander - Jefferies

Charles Dan - Morgan Stanley

Robert Stone - Cowen & Company

Pavel Molchanov - Raymond James

Weston Twigg - Pacific Crest

Tyler Frank - Robert Baird

Operator

Good day ladies and gentlemen, and welcome to the Solazyme Fiscal Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. And as a reminder, this conference call is being recorded.

I would like to hand the conference over to Mr. Tyler Painter, Chief Financial Officer. Sir, please go ahead.

Tyler Painter

Good afternoon everyone, and thanks for being on the call today. Its an exciting day for a number of reasons, one of which impacts our call today. Jonathan's wife went into labor this morning, and we've decided to give him [indiscernible] for today's call. We've prerecorded our prepared remarks last night as a precaution, and so we will conduct the call in the usual format.

For the Q&A period, I will be joined by Charles Dimmler, who many of you know, is our Vice President of Corporate Development.

With that said, I'd like to now turn the call over to the operator to begin the call.

Unidentified Company Speaker

Thank you, operator. Good afternoon and thank you for joining us on today's conference call to discuss Solazyme's fourth quarter and full year 2013 results. Leading today's call are Jonathan Wolfson, Solazyme's Chief Executive Officer; and Tyler Painter, Chief Financial Officer. This call is being broadcast live over the web, and we have prepared a PowerPoint presentation to accompany this call. The release and presentation can be accessed at the Investor Relations portion of our website, www.solazyme.com.

I'd like to direct you to slide 2; it says, among other things, that some of the comments constitute forward-looking statements that reflect management's current views and estimates of future events and economic circumstances, industry conditions, company plans, performance and financial results. Statements are based on many assumptions and factors, including the completion and ramping up of production facilities, the availability and pricing of raw materials and equipment, operating efficiencies, new product developments, market conditions, product sales, access to capital and actions of government, partners and customers. Any change in such assumptions or factors can produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Solazyme has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.

Also please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in today's release.

With that, I now turn over the call to Jonathan.

Jonathan Wolfson

Thanks for joining us today. We made great progress in 2013 towards the broad commercialization of our technology, setting us up for an exciting and critical 2014. The first eight of Solazyme's 11 years in existence were focused on the development and expansion of our completely unique technology platform.

Over the last several years, we have lined up significant manufacturing and commercial partnerships, and built our first major capacity to make products in the U.S. and Brazil. We also successfully launched our first commercialization effort with Algenist. Now, in 2014, we began the big step of establishing and scaling up commercial production, and broadly selling our products across markets. We are off to a good start with the commencement of U.S. commercial production at Clinton/Galva, and we are getting close to begin an initial production in our state-of-the-art facility in Brazil as well.

I will update you on our progress at both facilities, and will provide additional perspective on how we are looking at the scale-up process. First though, I'd like to quickly recap 2013, since many of the accomplishments of the past year have helped set the stage for what's to come.

In 2013, we made key advances across our business, as we prepared to enter broad commercialization. We set a high bar, and to be fair, we did not accomplish everything we set out to do in 2013, including not hitting out revenue targets, and pushing up the Moema production timeline.

However in the big picture, which we look at as overall value creation, we had many key accomplishments across critical areas of our business, that set us up well as we enter broad scale-up in 2014.

On the production side, we readied the Clinton/Galva facilities to begin commercial operations on time in January, and neared completion of the 100,000 metric ton Moema plant. We also scaled the ability in Peoria to produce both our high lipid and high protein whole algal flavors in less than six months.

Commercially, we signed our first anchor customer, Unilever, as well as additional new customers and distributors. We also added two key joint development partners, Mitsui and AkzoNobel, while extending joint development agreements with two other vital partners, Bunge and Unilever. Also on the commercial front, we delivered another good year for Algenist, and launched a new brand, EverDeep.

Financially, we raised $125 million of capital for Solazyme, and together with Bunge, we raised over $100 million in attractive project financing for the Solazyme-Bunge renewable oils joint venture.

And finally, we continue to make great progress with our disruptive technology platform. We significantly advanced the development of our tailored oil profiles and products throughout the year. We hit all of our joint development targets, and we introduced four new oil families that we believe will further round out our product portfolio.

All in all, it has been a very good year, and we are looking to build on the momentum in 2014, as we move into broad commercialization.

Let's now turn the discussion to our 2014 objectives. Next slide; there are three primary areas that we are focused on this year, as we begin to scale the business. The first is production; as I have explained previously, we are carefully staging production ramp-up with a planned 12 to 18 month timeline to reach nameplate capacity, at both Clinton and Moema. That clock has started at Clinton with our successful initial commercial production of multiple distinct oils. The clock will start soon at Moema, with initial fermentation operations just getting underway.

Our second focus area in 2014 is commercial activity. At the plant level, we are focusing the early production process, on demonstrating our ability, to reliably meet customer's needs. At a strategic level, we are executing on a multi-tiered approach to our markets. We are building a customer pipeline that includes large anchor customers, varied additional customers, and a network of distributors that together provide the most efficient way to sell and distribute the different products we will be making.

The third area of focus is operations; we are further strengthening and broadening overall operational leadership in key areas. Our new President, David Cole, is now working closely with me and the team as we scale our operational infrastructure, to support the transition to be broadly commercial.

At a high level, we have a few key objectives; ensuring operating efficiency at both the plant and corporate levels; driving a customer centric culture and focus, emphasizing consistency in execution and delivery against our goals, and optimizing the value we derive from our technology platform, as we scale commercial production.

Let's move on to a more detailed update on Clinton/Galva and Moema. Next slide. As we reported in January, the Clinton/Galva Iowa facilities began producing and shipping commercial products in early Q1 as scheduled. I want to remind everyone, that in these early days of production, we are focused on the consistency and specifications of products that we are making as our key performance indicators. To be clear, that means we are not yet focusing on driving volumes or optimal plant economics.

That said, we are interested in helping investors understand the initial progress at Clinton/Galva. With these facilities only recently running, we cannot yet demonstrate progress in our preferred way, meaning standard financial metrics. So to provide initial Clinton/Galva startup context, we are going to share more operational details on this call, than we will moving forward.

The Clinton/Galva project is progressing well. We are really pleased with the early performance of both upstream operations at Clinton, and companion downstream operations at Galva. Since we announced the startup of commercial operations in January, we have produced about 500 tons of product, and if we include the commissioning phase in the back half of 2013, we produced more than 1,000 tons of product at Clinton/Galva. That total represents about 2.3 million pounds of product. We have produced three distinct oil-based products at scale, including our high stability, high oleic oil, which we think is the best in class high oleic available anywhere.

Fermentations for our fourth product are now underway. To-date, we have shipped over 30 truckloads from Clinton/Galva for sales and market development, for using applications including lubricants, metal working fluids, and personal care.

In addition to shipments under supply agreements and samples, we have also filled spot orders and reorders from certain customers and distributors. We have also filed or acquired notices of commencement with the EPA for initial products. Average selling prices for the products sold from Clinton/Galva, range up to $3,700 per metric ton, with an average ASP of about $2,600 per metric ton. Although we don't view these early average ASPs as a forecast, they do give us confidence in our ability to hit our margin targets over the longer term. Summarizing the Clinton/Galva activity, we are very pleased with the progress and the response to our products at this early stage.

Let's now move on to Moema, next slide. We are making strong and steady progress at Moema. We are currently deep into the commissioning process, to really understand the progress, its useful to break out the major unit operations in the facility. The plant requires infrastructure, including utility such as steam and power, and additional capabilities like cleaning and sterilization systems. Then the production chain begins, with what we call upstream operations, which include labs, [indiscernible] compliance monitoring, and other capabilities. The process then moves to fermentation, and following that, to recovery, both fairly self-explanatory.

Infrastructure and upstream, which together comprised a substantial percentage of the plant, are both currently online and everything is functioning as expected. Fermentation commissioning is well underway, and operations have begun with all stages of the seed fermentation system, up to 125,000 liter fermenters now running. We plan to bring full sized 625,000 liter production fermenters online in March.

On the recovery side, we are still finishing construction, and expect to be commissioning in March, and to bring recovery online in the March-April timeframe. At this point, we are still targeting production of our first commercially saleable product by the end of Q1, though with the moving parts I have outlined, it could move into Q2.

There have been two other recent important developments at Moema. On February 6, 2014, CTNBio, the Brazilian Biosafety Technical Committee, granted a CQB or a Certificate of Quality-Biosafety, to the Moema plant for our key production organisms. And on February 24, 2014, CETESB, The Sao Paulo State Environmental Department, granted the license to operate the Moema plant, allowing it to begin commercial operations.

We believe that the progress at Moema and its current schedule leaves us in good shape to bring full production online this spring, and with the anticipated 12 to 18 month scale-up process, this puts us on track to reach full nameplate capacity in the back half of 2015, as we suggested on the last call.

Let's move to the next slide; as we have noted before, our technology has been progressing rapidly, and beyond the bounds we planned for. As we have witnessed this first hand, we have made a conscious decision to follow the lead of the technology platform, and gradually shift our focus to becoming a multi-product specialty company, focusing on larger product opportunities, generally in excess of 100,000 metric tons per year.

This approach is designed to capture the value of our technology platform, through the production of a variety of targeted oils. The oils we are focusing on, offer enriched structured, and optimized fatty acid profiles, that are better performing than the previously available incumbent oils. These oils can also offer multiple additional customer benefits, including significantly enhanced sustainability, greater consistency, alternative commodity linkage and supply chain advantages.

In addition to these targeted oils, we have also developed and are developing whole algal sub-based products, which are high lipid and high protein whole algal flour ingredients are the first examples.

As we prepare to scale production, we have done a lot of work segmenting and valuing the markets, to best allocate our capacity. This is being done with an item in demand, and building a customer and distribution pipeline across the different markets that we want to serve.

Specifically, we are taking a multi-tiered market approach, in the primary industry verticals that we are targeting, our strategy is to identify and secure anchor customers that will take a significant amount of our supply. Our supply agreement with Unilever is the first example. On a side note with respect to Unilever, the supply agreement we entered into last fall, included a requirement for the completion of product validation trials, run by Unilever. I am pleased to report that those validation trials have now been successfully completed.

Combing back to our commercialization strategy, the second tier consists of direct customers like Goulston, who enable us to demonstrate more broadly, the applications of oils in our portfolio. This can both lead to increase business with existing customers and open doors to new ones. In the third tier, we are building a variety of distribution relationships, of which Koda is a good example, along with others that have been signed.

Finally, we are also building our food ingredient strategy into this model. We continue to make good progress here. Over the last six months, we have scaled the ability in Peoria to produce our high lipid and high protein whole algal flours. We shifted our 40% of the 160 requested samples we mentioned last quarter, and expect to move another of our oils through the grass process, in the first half of this year. We are also evaluating several opportunities available to us, as we consider putting large scale manufacturing capacity in place, for our whole algal flour products.

We will provide further depth, as the commercialization process and production scale-up unfolds. But again, our objectives are to allocate capacity effectively, while building a mix of strong strategic relationships and a pipeline of direct customers and distributor relationships, that enable us to target multiple market applications.

On the next slide, I will wrap up the commercial discussion, with an update on Solazyme Health Sciences. The Algenist line posted revenue growth of 21% for the year. We continue to be very enthusiastic about the brand and the product line and its market presence continues to expand. We are now up to 21 SKUs in the Algenist line, most recently including the first Genius product in Q4. Genius is an advanced anti-aging line extension, which, for the first time, combines our patented Alguronic Acid, with our breakthrough Microalgae Oil. Genius is performing well, both on QVC and at Sephora. The product was number one ranked in its category in Sephora's U.S. stores in the month of January.

We have also moved into new markets through our relationship with Sephora. We are off to a good start in Mexico, and in mid-January, we officially launched in China in 160 stores. We are now selling Algenist products in a total of 15 countries.

Our progress in 2013 was underscored last month, when Algenist won the Marie Claire Excellence in Beauty Award. This is a prestigious award given by a panel of international beauty experts. Algenist was a unanimous selection of the judges.

Next slide; to wrap up, Solazyme has finally reached the early stage of commercial operations beyond branded skin care. On the production front, our Clinton/Galva facilities began commercial operations on schedule. We are producing multiple oils, billing purchase orders, and making shipments. Even more important, we are carefully establishing consistent operations at the facility, gathering data and information that will help inform [ph] our ramp process at Clinton/Galva and also at Moema. At Moema, commissioning is well underway. A significant portion of the plant is already online, and we are getting close to producing our first commercially saleable product.

On the commercial side, our initial focus is on establishing reliable and consistent production, but with flowing customer orders today, and we are actively engaged with current and potential customers to service and build a pipeline, that includes multiple customers, distributors and applications, as we ramp production. Meanwhile, we are also very focused internally on building an efficient and scalable operating infrastructure, with an emphasis on execution and delivery for our customers. We are very encouraged by what we see at our current facilities, and especially, with both existing and potential new partners and customers. As such, while we are focused on successfully ramping Clinton/Galva and Moema, we are also very hard at work on projects for significant capacity expansion.

Finally, we expect to continue advancing, what we believe is a truly revolutionary technology platform. Our technology comprises the underlying value of Solazyme, and we believe it has the potential to disrupt multiple markets, with large and exciting opportunities to create volume. I have made these comments before, but now, as we enter 2014, I am able to say that we are beginning to produce the first of our tailored oils at scale, in commercial manufacturing facilities. We believe this is a critically inflection point in Solazyme's development.

Thank you, and now here's Tyler.

Tyler Painter

Thanks Jonathan and thank you all for joining the call today. In my comments, I will recap our fourth quarter and full year results, and provide some additional color around our thoughts for 2014.

As Jonathan highlighted, despite some challenges along the way, we made good progress throughout 2013, against our prime directives of continuing to expand our technology platform, establishing commercial production capacity, and building our commercial sales capabilities.

We delivered against every major milestone in funded programs with partners. We expanded our development programs with Unilever and Bunge, and added important new programs with partners like Mitsui, where they are funding the development of a suite of new tailored oils.

Most important, we established our commercial manufacturing capabilities in the U.S. and Brazil, that will enable us to broadly commercialize their technology, as we ramp our production volumes.

Next slide; turning to our financial results, our full year revenue totaled approximately $40 million. While our revenue came in under our overall prior expectations, we delivered 30% growth in full year revenues in 2013, excluding the impact of government revenues, which as expected, were minimal in 2013. This performance included 47% growth in funded programs revenues, and 21% growth in Algenist product revenues. Algenist results reflected strong North American performance, offset by softness in Europe. We saw good momentum in Algenist in Q4, and I will address that on the next slide.

Within Solazyme Health Sciences, we had solid Q4 performance with $6.3 million in revenue, primarily attributable to Algenist. This represents growth of 30% on a quarter-over-quarter basis, and 35% over the 2012 fourth quarter, and is our highest quarterly sales figure by a substantial margin since the brand is launched.

Algenist sales in North America continued to gain momentum, with strength at both QVC and Sephora U.S. I am also happy to report that Algenist delivered annual gross margins well in excess of 60%, and was profitable for the year.

In our funded programs, all of our signed and active agreements hit their revenue milestones throughout the year. JDA program revenues excluding government programs totaled $5 million in Q4, which is 100% growth compared to $2.5 million a year ago.

Our operating costs for the year totaled approximately $111 million. It was better than our guidance of up to $120 million, despite absorbing incremental expenses, as we brought many of our former joint ventures operations in-house.

So, overall, the team did a good job on the cost side this year. The result is that we successfully managed to a comparable overall cash burn relative to our initial expectations despite lower revenue.

Capital expenditures totaled $3.7 million in the quarter and $10.2 million for the year. In addition, our total equity investment in the Solazyme-Bunge renewable oils joint venture was approximately $12.3 million for the year.

We remain vigilant in managing all capital expenditures. 2013 benefited from efficient capital investments at the Clinton/Galva facilities, and lower than expected equity investments in our SB Oils joint venture for the year.

Our balance sheet remains strong. We ended the year with approximately $168 million in cash and cash equivalents. As a reminder, the majority of our Moema capital project is being financed through project financing with the Brazilian development bank, at an average interest rate of approximately 4%, well below Brazil's rate of inflation.

We remain well capitalized with strong financial commitments from our partners and customers. Looking to the future, we have a strong and a high degree of conviction in our technology platform, and our planned growth trajectory.

The next slide is one we shared with you on the Q3 call. As we have discussed, we do not expect a linear ramp in production, particularly in the first six months of commercial operations, as we focused initially on establishing consistent and reliable production of our products.

Depending on how the plants behave in the early stages, we remain focused on accelerating our ramp in the second half of this year. In the mean time, while we are pleased with the initial operations at Clinton/Galva and the average selling prices for our products, we do not expect plant operations to be profitable, until we are producing product on a continuous basis, and in sufficient volumes, as the chart here suggests. We will continue to update you on the ramp process, as we move through these important early stages of production.

Lets move on to our outlook for 2014 on the next slide. Ramping into broad commercial operations is a process that will unfold over this year, and well into 2015, as we approach nameplate production capacity at our Clinton/Galva and Moema facilities.

On our recent calls and again today, we've highlighted how difficult it is to predict how newly functioning plants will behave, as we initiate operations and ramp production. Given the early stage of plant operations, we are not providing product revenue or volume guidance at this time.

As Jonathan noted, our key performance indicators in these early months are focused on consistency and delivering on specifications of the products we are producing, rather than volumes and plant economics. So in these early quarters, we expect our disclosure to be more qualitative, becoming more quantitative and financially focused as we scale.

I will reiterate a few takeaways from what we covered today, and provide some forward-looking information that should be helpful. At this early stage, you should assume small volumes and modest product revenue. We anticipate that cost per metric ton of production will exceed initial average selling prices, prior to the acceleration of ramp up at both facilities.

In terms of our existing revenue streams, we expect Health Science's revenue to grow in the 30% range in 2014. We expect funded program revenue from industry partners to grow incrementally during the year, based primarily on current agreements in place, as well as incremental new JDA opportunities we expect to close.

Our operating expenditures for 2014 are expected to increase by up to 15% over 2013. This does not include the impact of consolidation of our Solazyme-Bunge renewable oil joint venture, which would be expected to lead to incremental growth in operating expenses, depending on timing.

We expect the 2014 CapEx relative to existing projects, including additional equity investments in Solazyme-Bunge renewable oils, will be in the neighborhood of $30 million to $40 million to, the largest piece of which will be accounted for by Solazyme-Bunge renewable oils.

I will wrap up the prepared comments on the next slide; 2013 was an important and overall, very successful year for us, in setting the stage for our commercial transition. We are excited to have begun commercial production at Clinton/Galva, and we are looking forward to doing the same at Moema in the near future. We truly appreciate your support, as we commercialize this disruptive technology across markets, and work through the non-linear production and commercialization process required to do so. We think Solazyme is very well positioned to realize its promise for customers, partners and shareholders in the quarters and years ahead.

This concludes our prepared remarks, and we will open the call now for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Brian Lee from Goldman Sachs.

Brian Lee - Goldman Sachs

Hey guys, thanks for taking my questions. I just had two, and I am not sure if you are going to get much into the specifics on this first one, but I will try to ask it. If I take your 500 metric ton stiller [ph] that you produced year-to-date out of the Clinton facility and your average ASPs, and then just think about that run rate staying flat through the rest of 2014, and also keeping the same ASP range, seems like you'd have over $10 million of revenue just from Clinton, and then if we assume Moema has a similar ramp, and maybe that doubles that number. And then it starts to look like your Algenist revenues; so just trying to understand how to reconcile that math with your outlook for just having modest revenues in 2014 for oils?

Tyler Painter

Hi Brian. Actually, what we talked about is modest revenues for the plant's in initial operation. So as we look at that 12 to 18 month ramp, our key focus initially is on establishing standard operations, so that S-curve we showed in terms of really consistent, reliable operations of the products, the foundations that we are really building on with our customers to be able to trust our ability to deliver those products. So that comment was really more in line with kind of the first six months, say of operations. As we establish that, we expect we will be able to ramp at both of the facilities, and as we talked about through the 12 to 18 months, that we'd be reaching nameplate capacity in back half of 2015.

Brian Lee - Goldman Sachs

Okay. Fair enough. Can you comment on how much revenue you've recognized, if any at all, in Q4 and Q1 on the Clinton/Galva facility?

Tyler Painter

No. we are not disclosing that today. I will just remind you that we did file our notice of commencement for commercial operations in Q1, and so from a revenue perspective, that's when you would start to see revenue from product side in Clinton/Galva. Prior to that, it was more market development types of activity.

Brian Lee - Goldman Sachs

Okay. So in Q1, fair enough. Last one for me and then I will pass it on. Just on ASPs and expectations in Brazil out of the Moema facility, how should we expect average ASPs to compare versus the $2,600 per metric ton that you're talking about -- that you've already seen out of Clinton?

Jonathan Wolfson

Yeah. So what we have talked about through -- kind of historically, as we are starting to bring these plants online, is that we are targeting to reach average selling prices of $2,000 and up. So the numbers initially that we are seeing out of Clinton, although we are very encouraged, because they give us obviously a lot of confidence as we look at our margin targets that we will be reaching, as we hit nameplate capacity at these facilities, I wouldn't actually plan in the average selling price we are targeting is above that $2,000 per metric ton that we have said [indiscernible].

Brian Lee - Goldman Sachs

Okay. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Laurence Alexander from Jefferies.

Laurence Alexander - Jefferies

Good afternoon.

Tyler Painter

Hey Laurence.

Laurence Alexander - Jefferies

Congratulations on getting the shipments out on time. I guess couple of just quick questions, first just to clarify, when you say nameplate, what do you think a full run rate utilization rate will be? I mean, some industries use 70%, 80% of their official capacity. Some actually go 100% plus because they de-bottleneck as they go. So, what do you think nameplate means as a target?

Jonathan Wolfson

Yeah, so when we look at both facilities, it’s the design of the facility and what we intended for standard operations at that facility to be able to generate. Again, we are running it with consistent operations. So the plant was designed at Moema to be 100,000 metric ton nameplate facility. To your point, quite often, you do see an industrial fermentation, where facilities that were designed for certain nameplate actually start to operate beyond that nameplate over time. So the nameplate we have given is really tied to how we expect to run the plant.

Laurence Alexander - Jefferies

So the goal here is really 100% in 24 months would be -- is the real target?

Jonathan Wolfson

Well, what we have said is, over 12 to 18 months, that in that window, we will hit, what is the 100% of what the plant was designed to run at.

Laurence Alexander - Jefferies

Perfect. Secondly, on the shipments to various customers, have you had any feedback from customers, as to what's the kind of cycle they may have, to actually have your products reaching their customers? Product is already commercial, are they still in testing but you are getting paid for shipments? Can you just walk us through that process a little bit?

Jonathan Wolfson

I think Laurence, what I would say, is there is a spectrum of customers there. Certainly, we are very encouraged by the initial feedback we are getting across the different markets that we have talked about, including on the industrial fluids, the metal working, personal care in terms of the work that's been done there as well. So we are encouraged. We have seen some repeat customers as well. I think its too early yet, to go much further than that.

Laurence Alexander - Jefferies

Then just lastly, I guess this is a hobby horse of mine is, what do you think you need to see in terms of either customer interest or economics to make a possible third project in, for example, Asia reasonable?

Jonathan Wolfson

I think, clearly our number one focus is on making Moema -- bringing Moema up and ramping operations there, and ramping and establishing our operations at Clinton and ramping there as well. So to start with, obviously that's our number one focus of the company, to start broadly commercializing the technology. That said, we do have an entire team internally, that's very focused on continuing to expand our capacity. So when we look at that kind of production capacity expansion, it includes both our existing partners, whether it be Bunge and ADM at either existing or different facilities, but also a number of other discussions that are underway. So we are very committed to it, but no news on it today.

Laurence Alexander - Jefferies

Thanks again. Thanks.

Operator

Thank you. And our next question comes from the line of Charles Dan from Morgan Stanley.

Charles Dan - Morgan Stanley

Good afternoon. I guess to start, can you remind us, what are exactly the trigger points that you are looking for when you will -- or things that you are considering, when you decide when to consolidate the Moema JV?

Jonathan Wolfson

Hey Charlie. There are a number of items from a technical accounting standpoint that support control. So we are working through that with Deloitte and Touché as our auditor, so its not actually just a company decision. But the way that our agreement was in place is really just bringing the plant online, establishing consistent operations and then starting to ramp, and there are a number of things that happen along the way, that would trigger that. At this point, we are not seeing exactly when do we think that will happen, its very likely that it is in the second half of the year.

Charles Dan - Morgan Stanley

Okay, great. Second, how should we think about how the devaluation of the Brazilian currency impacts any of the agreements that you have, either with Bunge or with the Brazilian Development Bank?

Jonathan Wolfson

Well there are a couple of questions in that, and from an overall management of our kind of expenses there, certain expenses are, obviously the employees and others are in local currency, so we look at everything from a U.S. dollar standpoint, so that makes some of that cost less expensive. When we look at our overall, we will try to tie on the commercial side, is in many cases, we will be selling oils in U.S. dollars, we will be trying to tie as much of our extreme costs as well as that of the U.S. dollars. We have a defined formulaic way in which the sugar is priced. As you know, we are not paying market price for sugar, but there is a defined formula that calculates in.

Charles Dan - Morgan Stanley

Is that formula specified in dollars?

Jonathan Wolfson

Its based on a dollar-based index.

Charles Dan - Morgan Stanley

Okay. And on the development loan?

Jonathan Wolfson

Yeah, the development loan was in reais, so that was BRL245 million that was awarded from BNDES, and much of that had gone directly against local and current expenses. So in many cases, not much of an FX impact. Clearly, some of that was for U.S. dollar based purchases, there is some impact to that.

Charles Dan - Morgan Stanley

Okay. And then, just lastly; I know I will get it in the K, but do you have the inventory number on the balance sheet?

Tyler Painter

You know, what I don't have that off the of my head. Its not a significant number as of year end; because again the activity of those happening at Clinton/Galva was primarily market development activity.

Charles Dan - Morgan Stanley

Thank you.

Operator

Thank you. And our next question comes form the line of Rob Stone from Cowen and Company.

Robert Stone - Cowen & Company

Hi guys. Thanks for taking my question. I am wondering Tyler about the run rate of the expenses, there was step-up in R&D in Q4, is that associated with commissioning at Clinton? Is that something that, maybe put something into COGS now that you're commercial? Any color you could provide on how to think about the linearity of expenses within the -- up 15% that you described? Thanks.

Jonathan Wolfson

Yeah, thanks Rob. On the R&D front, you're right. The Q4 numbers did include some of the scale up work that was happening at Clinton. Some of that actually will be ongoing as the plant is ramping up, so there is a mixture of commercial operations and other that are happening at the facility. So from an overall expense standpoint, if you look at our G&A and our R&D in 2013, approximately 60% came from R&D and about 40% from G&A. As we accelerate our commercialization activities, including building out supply chain, other types of things we are investing in; you will see the majority of our growth in our expense will be on the D&A front.

R&D, we do expect will be up modestly. But, if you look over the course of the year, the majority of the growth will happen in G&A.

Robert Stone - Cowen & Company

Okay. So run rate wise, was there anything unusual that might step down or is it just recharacterizing, as we think about Q1 for instance?

Jonathan Wolfson

What I would say is, we haven't given specific quarterly guidance. It can be a bit lumpy, if there are certain activities that come through and expense wise. You're right that, I would see that Q4 was probably a high point on the R&D side.

Robert Stone - Cowen & Company

Okay. And you noted that the joint development agreement revenue you're expecting up, mostly from existing partners, may be something on the incremental. Can you say under how many existing agreements you are going to run JDA revenues this year?

Jonathan Wolfson

I wouldn't want to break it down by specific JDAs. We have strong commitments that have been grown from the existing partners we have talked about, and we will add incremental. And when we add those, we will be able to talk about this.

Robert Stone - Cowen & Company

I am just thinking, in terms of rough number, are we talking half a dozen or --?

Jonathan Wolfson

No, it will be less than that.

Robert Stone - Cowen & Company

Okay. And any comment you can provide on just order of magnitude number of customers that are commercial so far?

Jonathan Wolfson

We have, again, what I would point back to, is what we have talked through on the call, the way we are looking at the marketplace. And so it includes a number of anchor customers that we are discussions with. Obviously the one we have talked about very publicly with, is Unilever, and then engage in a number of other kind of smaller or direct type customer relationships, and distributors on top of that. We are not providing a specific number on that today.

Robert Stone - Cowen & Company

Okay. And my final question is a follow-up on the approvals that you announced with CTM Bio and the other organization. Is that for one strains or more than over strain and would you need additional approvals, if you're going to broaden the product families down there? Thanks.

Jonathan Wolfson

Yeah. So one of the things that we did in enhancing the plant, was remember, to add a closed loop system, so it enables us to bring our most valuable strains in oil production into the plant, on a regular basis. So what we talked about, was the first strain, but also the ability to have the plant to be operational. So both of those were important steps, as we look to bringing the plant online. We do expect with that in place, that we will be able to bring other oils into the plant as it is.

Robert Stone - Cowen & Company

Excellent. Thank you.

Operator

Thank you. And our next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James

Thanks for taking the question guys. I know you are not giving formal guidance on ASPs. But relative to the ASP targets that you gave at the time of the IPO in 2011, would you say that your current expectations are higher, lower or about the same?

Jonathan Wolfson

I think what we have talked about, is the margin potential that -- if you go back and look a few years ago, the margins that we are targeting in every one of these industries is the same. So I can't remember specifically off the top of my head, what the ASPs at that point were, but I can say that the margin targets remain consistent. We are also, again, as we look into the marketplace seeing the right trajectory, the right response from customers, and what I would point to, is the expansion of our capabilities, in terms of what new oils are coming to place, exceed what we expected at that time.

Pavel Molchanov - Raymond James

Okay. This one is probably for Tyler, $168 million of cash during the year. You are obviously going to be burning in operations for the time being across the CapEx. Do you have enough liquidity currently to kind of extend across the bridge to positive cash flow in 2015, or would you need to potentially raise more capital?

Tyler Painter

I think we are, Pavel, we are in a strong financial position today. As you pointed out, we ended the year with $168 million in cash. We have strong partners, both financial and strategic, like BNDES, a number of industry partners that are financing and funding different activities. We have two plants coming online, we have a clear line of site to cash flow positive, and with that, capital requirements are going to EBITDA tied very quickly, to how fast we want to grow the o. Certain opportunistic types of things that we are looking at. So what I would say is, we are actually in a very good financial position today.

Pavel Molchanov - Raymond James

Okay. And then for the sales, we should expect this maybe go back to the currency question earlier. Is there a geographic mix of who is actually going to be taking the end products?

Tyler Painter

There is -- I don't think we are in a position today, just given these plants are just coming online to try to break out specifically for you, what the geographic breakout will look out. But that's one of those metrics that we will endeavor, to try to give you more visibility as the year unfolds.

Pavel Molchanov - Raymond James

All right. Fair enough. Appreciate it guys.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Weston Twigg from Pacific Crest.

Weston Twigg - Pacific Crest

Hi. I guess a couple of related questions. One, when you are saying you have reached full nameplate capacity in the second half of 2015 from Moema, that really implies the longer end of that 12 to 18 month period. Why not target the first half, or are you just being conservative?

Jonathan Wolfson

Well Wes, we didn't say when within the second half of the year. So the plant is just coming online very shortly, and we will target that 12 to 18 months and we will get it done as fast as we can. But I think to be prudent, when you look at that, it really takes you into the middle to the second half of 2015.

Weston Twigg - Pacific Crest

Sure. If you assume its going to be more than 12 months it does. But it sounds like you are just being conservative, but you could actually achieve that 12 month target?

Jonathan Wolfson

Yes.

Weston Twigg - Pacific Crest

Okay. And then on the gross margin side, you have been talking about targeting over 30% when you get the nameplate capacity. Now that you're starting to ship some product out of the ADM plant, is there any reason to think that that might be higher?

Jonathan Wolfson

At this point again, I think its too early to say that you should change your margin assumptions. We are committed and believe that it reinforces, based on the product mixes we see in the pipeline, that the target margins are in fact the appropriate margins to be targeting.

Weston Twigg - Pacific Crest

Okay. Fair enough. Thank you.

Operator

Thank you. And our next question comes from the line of Tyler Frank from Robert Baird.

Tyler Frank - Robert Baird

Hi guys, thanks for taking the question. Wanted to touch on gross margin a bit. How do you guys look at the ramp of gross margins going forward, but they are going to [indiscernible] over the next 12 months. Is that going to be more of a linear ramp, or do you see it as sort of being on the same curve as production?

Jonathan Wolfson

I think its appropriate probably to look on the same curve as production. So the first step you are producing on the plant, when you are very much as focused on again reliable operations and product specifications, is not tied or you are not focused on economics, you are focused on delivering consistent product. So I think falling in the same [indiscernible] is probably the right way to look at it?

Tyler Frank - Robert Baird

Great. And then can you tell us Jon, what you're seeing in the feedstock market right now, and how that may be impacting your business?

Jonathan Wolfson

Feedstock market meaning the sugar market?

Tyler Frank - Robert Baird

Right.

Jonathan Wolfson

Okay. In both plants, as a reminder, these are long term relationships, so we have formulaic pricing, that is different in both cases, one with ADM one with Bunge. There are a number of kind of movements that you see in the marketplace, that like I say, is long term trends we have seen actually sugar prices coming down. We have seen it come up a bit in the last week, but would not try to put out an estimate of what its going to do in the very near future.

I think the reality what I would point out is, again one of the reasons we partner with these very large companies in the space, is having a very predictable and consistent supply of that sugar into the fermentation process, and really, our key focus is on the margins, and looking at the spread between our cost to produce and what the oils that we are selling or generating from the average selling price.

Tyler Frank - Robert Baird

Okay, great. Thanks for taking the questions guys.

Operator

Thank you. And this concludes our question-and-answer session for today. I would like to turn the conference back to Mr. Tyler Painter for any concluding remarks.

Tyler Painter

Great. Well thank you all for joining the call. We appreciate your continued interest. Its an exciting time at Solazyme, and we look forward to continuing to update you on our progress, as we progress through 2014. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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