Solazyme's (SZYM) CEO Jonathan Wolfson on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: TerraVia Holdings, (TVIA)

Solazyme, Inc. (SZYM) Q2 2014 Results Earnings Conference Call July 30, 2014 4:30 PM ET

Executives

Mike Smargiassi - Brainerd Communicators, Inc., IR

Tyler W. Painter - CFO

Jonathan S. Wolfson - CEO

David C. Cole - President

Analysts

Brian Lee - Goldman Sachs

Tyler Frank - Robert Baird

Robert Stone - Cowen & Company

Tyler Frank - Robert Baird

Laurence Alexander - Jefferies

Pavel Molchanov - Raymond James

Operator

Good day ladies and gentlemen, and welcome to the Solazyme Inc., Fiscal Quarter Two 2014 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). As a reminder this conference call is being recorded.

I would like to hand the conference over to your host for today Mr. Mike Smargiassi of Brainerd. Sir, you may begin.

Mike Smargiassi

Thank you, Ben. Good afternoon and thank you for joining us on today’s conference call to discuss Solazyme’s second quarter 2014 results. Leading today’s call are Jonathan Wolfson, Solazyme’s Chief Executive Officer; David Cole, President; and Tyler Painter, Chief Financial Officer and Chief Operating 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 would like to direct you to slide two; 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 changes 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 these contained in this presentation and encourages you to review these factors.

Also please note that certain financial measures that 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’ll now turn over the call to Jonathan.

Jonathan S. Wolfson

Thanks Mike and thanks for joining us today. We’ve reached the midway point of 2014 and I’m very pleased with where we are and what we’ve achieved. With the commencement of production at the new 100,000 metric ton Moema facility we’re now producing our products in three manufacturing facilities on two continents. This is a huge accomplishment for a young company and I’m proud of our team and grateful to our partners for their contributions to achieving this milestone.

As you know we remain in the early stages of ramping our two bigger facilities and we’re making good progress. The Clinton/Galva facilities in Iowa are functioning as expected. We increased total output by over 40% in the second quarter versus the first quarter though from a small base and we expect to begin accelerating production in the next few months. Commercially we continue to add new customers for products shipping from Clinton/Galva having increased to 15 customers, a 50% increase in the second quarter. At Moema we’ve made great progress addressing the utility issues. We’re almost finished with all of the commissioning. We’ve produced both oil and Encapso using post scale production lines and we’ve shipped initial volumes of commercial products.

We’re gaining traction in commercial sales as well highlighted by our newly announced expanded agreement with AkzoNobel and newly signed customers for Encapso, [all that] food ingredients and oil-based oleochemical ingredients. The Akzo agreement provides for funded product development and includes key terms for multiyear supply agreement targeting 10,000 metric ton per year supply. It’s a great example of how our strategic joint development partnerships can be extended into commercial relationships.

We also continue to see solid growth in sales and distribution of the Algenist brand including the launches in several new countries and new distribution relationships, including [Alta] and it’s approximately 700 stores in the U.S. Finally, we gain significant traction in our food ingredients business launching the AlgaVia brand and subsequently signing an important customer for the whole Alva flower ingredients signing two new distribution agreements and wining one of the food industry’s premiere innovation awards.

Of course we still have lot of hard work ahead, scaling our business will take time and strong execution and we building on the momentum required to get there. My remarks today will focus primarily on our progress at our large scale manufacturing facilities and on commercial sales. I’ve also asked our President, David Cole to join the call to update you on our progress in building out our operational infrastructure as we scale the company commercially. Tyler will then provide an update on our financial performance.

We’ll begin with an update on Clinton/Galva on the next slide. Over the next several months we expect to be transitioning from phase I to phase II of our scalar process at Clinton/Galva. We’re really pleased with our plant operations are coming along and how customers are responding to our products as demonstrated by not only growth in shipments but also reorders. As mentioned I’m happy to note that the total output from Clinton/Galva has increased by more than 40% from the first quarter to the second quarter. It’s important to note that this growth is against a small base given the early stage of operations. But it demonstrates on track performance and positive momentum.

We’ve also increased our customer base by 50% having now shipped commercial products to 15 customers, up from 10 customers we had shipped to as of our last earnings call. We’ve highlighted some recent activity on the slide you’re now viewing including shipments of solvents using our high stability Oleic oil and the shipment of Encapso to a leading multinational oil & gas company for use in an important new region.

In addition to this commercial activity we’re also shipping commercial quantities of products out of Clinton/Galva to Brazil for market development activities. Behind the increase in production and shipments is a significant pipeline of activity with prospective customers. The operating of the plant has been a strong catalyst for a number of companies interested in our oils. With production underway [Technical Difficulty] and begin their qualification processes for our products. We now have 75 companies in the industrial space, sampling products made at Clinton/Galva.

I’d also like to spend a few minutes on where we are in terms of production. We’re particularly excited about the High Oleics we’re making. We’ve produced and shipped what we believe of the highest monosaturated oils produced commercially and these hard healthy oils have also displayed stability far superior to anything previously available in the market place.

We’ve also achieved a high percentage of completion of successful production batches, with our completion rates approaching our final goals for the Clinton/Galva operation. At its current size Clinton/Galva is a smaller facility. So making the right decisions on which oils and products to make and striking the appropriate balance of market pull and ASP is a critical next step that we are working on right now. Overall we’re at an exciting stage in our ramp at Clinton/Galva and we’re making strong progress.

Now let’s move to an update on Moema with the next slide. As announced in May, we successfully produced our first commercially saleable product at Moema. This was a critical milestone for us particularly after the unexpected utility supply issues we faced in the spring. I’m pleased to say that the JV team and partners, Solazyme and Bunge worked diligently and quickly to address these issues and put backup systems in place to reduce the likelihood and potential impacts of future disruptions. At the same time we’ve made substantial progress commissioning the plant and are in the final stages. All equipment through the finishing process is now installed and commissioning is nearing completion.

As we entered this summer, we began turning our attention to the early stages of commercial production. We’ve produced both oil and the Encapso product; we’ve made these products using full scale production lines including multiple 625,000 liter fermentation vessels which we believe are among the largest aerobic fermentation tanks in the world. And I’m happy to say that we’ve shipped initial volumes of commercial product from Moema. Clearly it’s still early for us at Moema but we’re excited to have begun commercial production. Moema is a first of its kind facility and in the last couple of months we’ve started it up and are learning what it can do. We have work ahead with our current focus on establishing consistent production and reliable supply and from there we’ll turn to the ramp up process.

I’ll now move on to an update on our commercial activities beginning on the next slide. As we increased our production capabilities we’re simultaneously establishing a commercial foundation that demonstrates the value of our technology and its broad market potential across sectors and applications. This progress can be seen across each of our targeted vertical markets as I highlighted a few moments ago, with new customers, key prospects and distribution partners spanning industrials, Encapso, food and consumer products. I’ll focus on each of these commercial areas beginning with the next slide.

We’re proud to have signed an expanded agreement with AkzoNobel. This follows the agreement Solazyme and Akzo entered into in May of last year targeting the development of the advanced tailored oils for use in applications such as surfactants. Our expanded partnership has a few key components. The agreement includes Akzo funded joint product development in the area of surface chemistry. It also includes the key terms of a five year supply agreement for the oil we’re developing with an annual targeted supply up to 10,000 metric tons with pricing tied to the cost of manufacturing and the JDA will focus on development of an oil for use in a new and proprietary surfactant.

We’ve talked many times about the importance of partnerships for the Solazyme commercialization model. AkzoNobel is an another example of our strategy to build long term development relationships and partnerships that we can ultimately extend into commercial sales. In addition to the Akzo news I also want to mention that we continue to serve a number of industrial and [fields] customers and distributors in this market including Unilever, Goldstein, Blouser and the fuels customer we talked about last quarter. Metal working applications in particular have been a strong source of customer activity in the early going including the newly signed oleochemical agreement I mentioned a moment ago. Overall I’m really pleased with the continued customer traction we’re seeing in industrials.

Let’s turn to Encapso on the next slide. We’ve been making rapid progress on commercializing our Encapso encapsulated lubricant since announcing product this spring. We continue to trial Encapso in a growing number of basis and wells including four new wells in the Willingston, Endarko Permian basis. We also will be testing in two new wells soon in the Permian with a major North American operator and we recently shipped quantities to a leading multinational oil and gas company for use in a new and important region for Encapso.

We’re expanding our reach outside the U.S. as well, shipping samples for trials in Asia Pacific and the Middle East by major regional operators and drilling companies. These expanding set of trials and their positive outcomes are proving out the Encapso value propositions across multiple drilling environments and creating buzz in the oilfield services community. The next step for us is moving to substantive commercial supply agreement. We’re getting closer on that front with a number of good opportunities that we’re pursuing aggressively. I’ll provide a further update on our nutrition activities on the next slide.

During the second quarter we launched our AlgaVia food ingredients brand which included both our powdered food ingredients and food oils. We’ve been updating you regularly on market development and regulatory progress with these products and today I’m excited to report that all these efforts are now translating to initial and substantive commercial progress. We recently signed an important customer for our AlgaVia Whole Algal Flour product and have signed two new agreements with distributors. We’re now distributed across the U.S. by ET Horn and Univar and in Mexico by FX Moraelis. All of these companies have significant capabilities in selling specialty food ingredients and have ingredient portfolios that are synergistic with our ingredients. While it’s still early in the game having distribution relationships of this caliber is very important to building both market confidence and the pipeline for getting our products into the market place.

I mentioned earlier that our high stability high oleic oil was unanimous voted winner of 2014 Institute of Food Technologies Expo Innovation Award. This is a big win in the food industry. IFT is the world’s leading organization for food technology and it’s a major milestone for Solazyme that showcases our ability to deliver a valuable oil that demonstrates superior performance characteristics.

The IFT win has generated numerous new sales leads and has contributed to our continued positive engagement with multiple Tier 1 food company domestically and internationally. So with these significant developments we’re now building momentum in nutrition.

Let’s move on to Solazyme consumer products on the next slide. We continue to grow our branded consumer products business and have had a busy spring and summer with Algenist. We’ve launched in four new countries while expanding our distribution in markets like China and the Netherlands and in the U.S. we launched earlier this year with Nordstrom and now have a new agreement for a nationwide rollout to approximately 700 ULTA beauty stores later this year.

ULTA is a one stop shop beauty retailer with locations in 46 states and Algenist will be prominently displayed in a full multi-shelved [glandular] with customized merchandise. Expansion into ULTA broadens our retail door count by over 40%. By year end we expect to have Algenist in more than 2000 stores globally.

I’ll shift gears now and turn to an update on important internal development at Solazyme that add color to our commercialization efforts. Next slide, we like to spend a few minutes on our progress in building in operating leadership structure and platform to support our transition to broad commercialization. This was a key goal for 2014 as we outlined early in the year. I’ve asked David Cole, our President to update you on our progress. As you recall David joined us in January and has been instrumental in leveraging his expertise in helping disruptive technology companies commercialize their businesses.

David C. Cole

Thanks Jonathan. It’s great to be here with all of you today. Although I’m relatively new in my role as a Director and Executive I’ve been deeply engaged with Solazyme as an investor and advisor since 2010. The transition we’re undertaking from a development stage company to an operating company is a process I’ve led many times; a process that begins with matching executive talent to the company’s current forecasted needs while remaining true to our culture of purposeful, rapid and continuous innovation that is unique to Solazyme.

We have come a long way in the past few years in particular. As Jonathan has highlighted we are now operating three commercial facilities, two of which are large scale facilities with significant expansion potential. We’ve broadened our technology portfolio to accomplish a wide range of valuable tailored oil as well as introduced two new branded products family; Encapso, for powdered lubricants and AlgaVia for advanced nutrition, to bring these another products to market we’ve added dozens of sales, marketing and application specialists and several senior executive with background in industrial biotech, novel food ingredient and organizational development.

To weave all these commercial threads together with daily production planning fulfillments and financial operation we’ve added the duties of Chief Operating Officer to Tyler’s scope of responsibilities. This is an addition to his long standing role as Chief Financial Officer. This is a key move as it provides important financial oversight and continuity to assure delivery on near term commercial and financial goals while reinforcing the cultural attributes that are unique to Solazyme. Tyler and his team along with our leaders of business development and strategic accounts are streamlining sales processes and coordination across vertical. We’ve added technical services and application specialists to the sales team in each of our vertical such as mud engineers on the Encapso team and experts in metal working and functional fluids on the industrial oils team.

We’re now doing the same in Brazil as we establish our initial production volume out of Moema. These moves are behind the scenes but are really key to the organization moving forward. As you would expect with the opening of these plant, customer engagement has increased significantly as potential customers now see a sideline to products. As Jonathan mentioned we now have 75 customers currently qualifying our plants and products. We’re taking a two pronged approach to exercising our new capacity.

First, we are working to base load our plants through strategic accounts and partners and second what we’re entering new markets where we see a sustainable completive advantage and pricing power with both our current and next generation products. In short, we are very pleased with character and quality of our team and the sense of urgency and purpose they bring our collective work all at Solazyme everyday.

Thank you for your attention and now here is Tyler.

Tyler W. Painter

Thanks David. It’s truly an exciting time at Solazyme. We’ve accomplished some very important roles so far this year and we’re doing a tremendous mental work across the company and with our partners to support our commercial scale level.

Let’s turn to the results. Revenue of $15.9 million in the second quarter was up 43% from the second quarter of last year and excluding a license fee back in 2010 this was the highest revenue quarter in our history. R&D program revenue as expected was up modestly to $6.9 million. Product revenue was up 80% year-on-year to $9 million in the recent period, $6 million of which was Solazyme consumer products revenue. Solazyme consumer products revenues increased 23% during the quarter and we remain on track to achieve our full year target of 30% growth from this business.

Looking specifically at Algenist, we’re seeing benefits from our geographic expansion, particularly in Singapore and China. We’re also continuing to expand our Algenist footprint with new distribution partners. As we announced early in the second quarter we launched at Nordstrom and as Jonathan mentioned early on the call we’re planning continued expansion in the second half with the introduction of Algenist in approximately 700 Alta stores as well as new [inaudible] kiosks in Bloomingdale.

Turning to our ingredients and intermediates we generated $3 million in product revenue related to commercial activities. As a reminder we do not currently consolidate results from our Solazyme Bunge Renewable oils joint venture. Given the recent start-up of the plant we expect to begin consolidating the results from product revenue at Moema in 2015. For those maintaining your model this means their product revenue from Moema is not expected to impact our reported revenue in 2014.

Looking at our margins, gross margins on overall product revenue in the quarter were 50%. Solazyme consumer product margins within were in the high 60’s consisting with historical performance and our expectations. Gross margins from ingredients and intermediates comprise the other component of product gross margins. As we talked about previously current gross margins from this business line are not a good indicator of the performance we anticipate going forward.

Since initial operations began in Q1 a portion of production costs related to early scale-up of plan operations are recorded in R&D with the remainder of the cost reflected in cost of goods sold. In the immediate term we expect our overall product gross margins to decrease and we remain confident in our target to generate 30% plus gross margins when we reach name play capacity and optimize our product mix coming from the plants.

Total non-GAAP operating expenses including COGS were $42.4 million in the quarter versus $38.2 million in Q1. On increase SG&A specifically marketing expenses oil and skin care products, increased commercial activity and outside legal expenses. COGS increased on higher product revenue. As I just mentioned a portion of production cost are reflected in R&D and the balance in COG’s. This is expected to continue as we scale up the full capacity.

On balance our operating expenditures excluding the impact of production cost in R&D remain in line with our previous expectation. For the year we expect OpEx excluding the scale up costs to increase by approximately 15% over 2013. Total CapEx and capital contributions to our joint venture were $19.9 million in the quarter and approximately $30 million year-to-date.

Next slide, we further strengthened our financial position in the quarter. This included closing on over $203 million in new capital to the company in April through a $59 million equity offering and $143 million net convertible node. During the quarter, we also paid down over $10 million against our outstanding working capital line with HSBC and early converted approximately $17.5 million of our existing outstanding convertible note. We ended the quarter with over $285 million in cash and cash equivalents and are in a solid financial position with a path to profitability.

Next slide, overall I’m pleased with our execution through the first half of the year. Although there is a lot more to do we achieved the number of notable production and commercialization milestone during the quarter and the first half of the year. Before wrapping up the call I’d like to take a moment to summarize our key focus areas as we move through the second half of the year.

First, this continued progress on establishing and ramping production at our large scale manufacturing facilities. We are prudently managing the ramp at Clinton/Galva and now the commercial start up at Moema. We continue to expect the ramp to nameplate at both facilities to be a 12 to 18 month process that starts slowly and accelerate in the later stages. Our focus has been and will continue to be on establishing a baseline production capability that builds customer trust. With progress at Clinton/Galva customer engagement has already started to ramp and we look to continue this momentum as we establish consistent commercial production at our Moema facility.

The second focus area is commercial activity. The progress we’ve talked about today including Akzo, the ramp in shipments out of Clinton/Galva, a new important food ingredients customer and additional distribution partners, progress with Encapso and further expansion of the Algenist distribution. All said a solid foundation across our targeted verticals.

Our third area of focus continues to be on the expansion of our technology platform. This means new oils and new value proposition with both new and existing customers and partners. Finally, we’re all focused in the upcoming quarters on laying the ground work for future growth and expansion. Scaling a commercial enterprise like Solazyme unfolds a long concurrent path. The strong interest in our products across areas like industrials food and oil field services product is creating multiple opportunities to evaluate how can we allocate our current plants capacity and how and where we will future capacity.

We’re making good progress in our transition to commercialization. Now, it’s about execution that’s what we were focused in upcoming months and quarters. We appreciate you being on the call today. And we’d now like to open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Brian Lee of Goldman Sachs. Your line is open. Please go ahead.

Brian Lee - Goldman Sachs

Hey guys, thanks for taking my question. I have two. First, I know it’s early Jon but any metrics you can provide on the initial ramp in shipments out of Moema the way you gave us a bit of detail on the ramp out of Clinton/Galva, I guess anything in terms of volume, average pricing customer count, that will be helpful.

Jonathan S. Wolfson

Yeah, Brian that’s a good question I think that, my answer to that will be its too early for us with respect to Moema to do that. The distinction with Clinton/Galva was that we had actually been doing test runs in that plant for quite a while and the plant was already an existing facility at Clinton and existing facility at Galva with Moema as new fit for purpose facility. Yes, I mean as we pointed out we’ve done multiple production runs, we’ve made oil, we’ve made Encapso, we run it in multiple 625,000 liter fermenters. But I don’t think that --and we shipped initial volumes that commercial products but I just don’t think at this point we have anything specific with respect to metrics that’s useful.

I can ask David whose been working closely with the team at Moema highlight where the plant is.

David C. Cole

Hi, Brian all unit operations at this point are installed, feedstock prep, seed fermentation production tanks, sterilizers downstream drying and packaging all are aligned. As Jonathan mention we’re producing both oil and Encapso using full scale production lines and including multiple 625,000 liter fermentation tank. Today, we’re actively campaigning and we expect the commission of balance of our capacity beyond the three tanks we have now in the next several weeks.

Brian Lee - Goldman Sachs

Okay, great. Thanks for the color. Maybe along those lines and David mentioned this during his remarks, the 75 customers that you now have pre-qualifying out of the Clinton facility pretty impressive number, is Moema not quite on that same trajectory in terms of customers pre-qualifying products at this point and if that’s the case how many more months maybe before it be seeing that ramp up.

Jonathan S. Wolfson

So Brian you actually answer the question in your question which is that Moema is not there yet and we’re really in the early stages of ramping up Moema. We’re happy that we got it started. We’re a little bummed obviously then it took us longer to get it started, then we had hoped it would. That said it’s really nice fit and there are lot of potential customers interested in buying the product that we can produce in that plant, Unilever clearly being one of them. But I don’t think we are in a position yet to speculate on exactly how long it’s going to take us to get to the point where we have these kind of numbers of folks who were pre-qualifying product out of Moema. But as soon as we have something relevant there we will share.

Brian Lee - Goldman Sachs

Okay, fair enough. Last one from me on the update with AkzoNobel. What’s the timing on the five year supply agreement with that customer? Does that start immediately or what are some of the milestones I guess that still need to be meet? And how quickly do you think you can realistically ramp to the 10,000 metric tonnes? Thanks guys.

Jonathan S. Wolfson

So I think the quick answer to that is, there is actually two different agreements. There is one we signed last year and then there is one that we announced today and the agreement we announced today also includes funded joint development project for a very specific oil to make a unique products that AkzoNobel believes have a very large market opportunity and the gateway to really getting into that, that supply agreement is being able to produce that oil, and that oil is in development now. So I don't think that particular agreement is going to yield volumes in 2014.

I can't give a very specific timeline there but I can tell you that we believe that it's not going to be a super long time to get that oil prepared but it will take a bit. What I would say though is that the original agreement from last year also contemplates many other oils. I think it's very likely that we'll be shipping other oils that we already have. And the way I would look at this is I would look at this as a deepening and broadening of the relationship between Solazyme and AkzoNobel. We started with a broad agreement looking at a bunch of things and now we've actually come to conclusions of very significant value creators that we're developing together.

Brian Lee - Goldman Sachs

Okay. Thanks guys.

Operator

Thank you. Our next question comes from the line of Tyler Frank of Robert Baird. Your line is open. Please go ahead.

Tyler Frank - Robert Baird

Hi guys, thanks for taking the question. I was wondering if you just drill into the Encapso trials little bit and maybe comment on the criteria for full-scale rollout from the customers that you are currently working with.

Jonathan S. Wolfson

We're, I mean we've been in, I don't have an exact number of how many wells but it's certainly well over 20 wells and some of them trials and some of them repeat wells from the same operators. I think that what we're doing and what's been really critical for us is to establish a really deep array of positive data, because it's the data that ultimately will sell you across wells with particular operators and I may have said this before, but the performance in horizontal drilling in the curve, in vertical sections it varies from basin to basin and geography to geography. So part of your responsibility when you enter into a business like this is to make sure that you can prove out the value proposition in multiple basins. And you may recall David's remarks he talked about how much work we've been doing, in particular he’s undertaken in helping to build out real applications capability and hiring mud engineers.

And what I'll tell you is the data overall from well over 20 wells is we believe fantastic data that demonstrates that we increase the rate of penetration, meaning that we take days off of drilling, we decreased directional torque significantly and we decreased drag which saves the equipment when they are trying to remove it. One comment you may have picked up is that we also mentioned that we are shipping to one of the major multinational oil and gas companies now for completely new and important geographic region as well and we're also shipping product to Asia Pacific and to the Middle East.

So what we're really doing broadly is proving out the value proposition and we go from there to putting in place very significant supply agreements. We don't have any very significant supply agreements that I think are really relevant to talk about yet but I think we have incredibly positive data that demonstrates that this is really going to be an important ingredient in drilling.

Tyler Frank - Robert Baird

Great. Thanks. And then I just had a one more quick question. It looks like a 40% increase production at Clinton and obviously 75 customers that are potential customers that are evaluating products. Just wondering, is that the sort of progress that you are expecting to be at, at this point or you ahead of schedule and what would be the potential trigger for you to next and expand at Clinton?

Jonathan S. Wolfson

Yeah. So Tyler if you look at Clinton/Galva we're very pleased with the progress so that is inline in terms of the way we expected to bring on over that 12 to 18 month cycle. And so we've seen an increase of 40% from Q1 to Q2. We expect that, that will continue to you know as we move forward into the marketplace we are not giving specific guidance on the volumes. Obviously we're still in the earlier stage of the overall 12 to 18 months ramp. It’s a small base. So I don't want to put too much on that but again we're very pleased with what we're seeing at Clinton Global. It is on track and we expect that we'll see that going forward.

Tyler Frank - Robert Baird

Great, and then what would you need to see the consider expanding there?

Jonathan S. Wolfson

Well we're actually looking at both the balancing of the operations at the facility, the partnership that is there, we are seeing very positive progress of the ADM and this is an area where David has actually placing a lot of focus on the upstream piece of the business. So why don't I have him answer that question as well a little bit.

David C. Cole

Tyler we have fairly strong market signals indicating that demand and pricing is ahead of supply on our forecast horizon. We have an upstream team that's working very actively with several parties to look at plant expansion. We are not only looking at new plants in new geographies we are also looking at possibly expanding within the relationships we currently have including the Bunge relationship within the previously announced expansion framework that takes us up to 300,000 tonnes and our existing relationship with ADM where we set the potential to expand to a 100,000 tonnes per year in nameplate capacity.

Some of the factors that we weigh in terms of looking at what's next, are new geographies and our big customers want to derisk their supply chain and they like to have multiple points of production. The feedstock characteristics themselves and costing, availability and so forth; logistics inherent and servicing of plant of course servicing of customer and one of the most important dimensions is finding and satisfying based-load capable customers in terms of what their desires are. In terms of AlgaVia we see very strong demand from the production we're generating out of the [inaudible] now, extensive sampling which is suggesting that we will be placing AlgaVia production capacity at the top of the list. And you can expect that we will announce that capacity expansion in due course.

Tyler Frank - Robert Baird

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Rob Stone from Cowen and Company. Your line is open. Please go ahead.

Robert Stone - Cowen & Company

Hi guys. I wanted to start with a couple of P&L questions for Tyler please. First one is on operating expenses. It looks like excluding the things you back out in your adjusted numbers and the COGS, that expenses actually went down sequentially. Can you give us a little more help in terms of breaking out how much of the start-up cost is included in the numbers you just posted and is there anything in there? I know you are not consolidating the Moema but are you recognizing some extra R&D related to that activity also?

Tyler W. Painter

Thanks Rob. The, I 'll start from the back and go forward if you look at the way we are accounting on the joint venture, that's through an equity method and you see that loss coming through on a quarterly basis where 50% of the loss shows up on our P&L. So that's in another income on the face. So that does not -- any of the activities directly within the JV do not show up on our P&L other than in that line.

On the total R&D and SG&A, the OpEx side if you look at last year as we mentioned on an adjusted basis the total for the year at about $110 million. That's what we said we expect to grow that by up to 15%. That was a bit heavy weighted towards the first half of the year with the expectation that the OpEx growth will be lower in the second half of the year than it was in the first half of the year. We aren’t breaking out specifically the scalar piece of that but hopefully that could give enough characterization.

Robert Stone - Cowen & Company

Okay. And a follow up related to the other expense. So you guys two pieces in there if I'm not mistaken, one is the portion of the JV, the other is you got some expense related to fundraising you recently did. Can you give us a sense of what the run rate is going to be there on interest expense and whether any of that is non-cash?

Tyler W. Painter

Yeah. Portion is not non-cash. So if you look at the reconciliation we had on the bridge on the GAAP to non-GAAP financials, that breaks that out. So the interest, net interest expense for the quarter was $4.6 million and that's probably the right way to look at it going forward with the increased level of debt outstanding. It should come down a bit from there because we did retire a $17.5 million of the original really convert that original convertible notes.

The other portion is non-cash. So as you mentioned there is an embedded derivative feature on or convertible note and that feature is basically something we need to value on the P&L. That was $1.8 million non-cash expense that we reconciled between GAAP and non-GAAP.

Robert Stone - Cowen & Company

Okay, great. And one high level question for John if I may. We're all eagerly awaiting more specific supply agreements including in Encapso, so how much of factor is getting through a certain point where you have the capacity definitively on offer before you can sign these deals? I know it feels like it's not a demand question it's when you ready to offer supply. Am I right?

Jonathan S. Wolfson

To a large extent I would say that, to a large extent one the big concerns for us is making sure that we don't get ahead of our SKUs. You get one chance to prove to some customers that you're going to be an important supplier so that they can start to think about shifting some of their supply chain and sometimes all of their supply chain away from something that they use today.

And so for us, we're trying to be very, very measured about making commitments of what we would be able to deliver and some of that is because the start-up process as we said repeatedly isn't something in which we have a crystal ball on. We believe that these start-up processes are 12 to 18 months to get to nameplate but exactly what that looks like we don't know.

So, I would tell you that there is significant additional visibility that we ultimately will want to see before we start to make major commitments. With that said we have many customers receiving multi-tonne quantities that are really what you call market testing and validation today. So, we're getting stuff out there. We're getting it out there in reasonable quantities to lot folks making sure that it meets their needs and trying to line up the availability of capacity with the commitment of supply.

Robert Stone - Cowen & Company

Great. Thanks very much for taking my question.

Operator

Thank you. Our next question comes from the line of Laurence Alexander of Jefferies. Your line is open. Please go ahead.

Laurence Alexander - Jefferies

Good afternoon and I apologize for any background noise. Three questions, first, on the food applications can you give you sense for your competitive differentiation against other dairy and protein substitutes such as cheese and soybean? Secondly, and just to help people, when do you start disclosing more detail next year to better help benchmark expectations?

Year-to-date if your aggregate all of your commercial and non-commercial volume and I know that’s not the most precise metric for you but it helps measure a ramp up. Can you give the rough quarter of magnitude? It sounds if you're clearly in the tonnes for total production but are you in the hundreds of tonnes or have you reached a thousand tonnes? Can you give us a sense for just benchmarking just sort of you can measure how much progress you make?

And then lastly if you look at next year, should the cadence announcement or partnership be similar to cadence of announcement this year as you had a very successful rollout of partnership agreement. Should we expect that rhythm to continue or should there be a low as you think about the heights of relationships you're exploring?

Jonathan S. Wolfson

So I'll do my best Laurence and may turn some of this over as well. The first thing I would say on the food application side is, look I believe you specifically mentioned protein and differentiation versus pea and soy and I'll tell you that I believe that the AlgaVia protein product is a highly differentiated product. And one of the reason is because it doesn't have plant origins. It's a vegan protein and very importantly and this is really kind of inside baseball for formulators, it's non-reactive which means you can literally -- most proteins including pea and soy and the way that they delivered, they are reactive meaning that they’ll change their viscosity and react with other things in formulation.

Whereas the protein that we're making is an encapsulated protein that essentially doesn't react in formulations which means you can put it into beverages, you can put it into beverages low PH. Other things that are really hard to do with other proteins. And it doesn't affect the formulation but it's still completely digestible. So I think we have a really significant differentiation on the protein side. I think that will be borne out I think Laurence that we strongly believe that the demand for not animal protein is going to increase very, very substantially and we have a unique solution.

I also think you understand that right now we ultimately believe that we're going to need significantly more production capacity in order to fulfill that demand. On the aggregate volume side I'll direct you just to something I think we said on our Q1 call which is that in aggregate on the Q1 call up to that point that we had already produced in Clinton/Galva we already produced over 1,000 metric tonnes up to that point which include some that was produced in 2013.

And so what we're saying now is that we see significant growth above that on a quarter-to-quarter basis. We’ve seen growth above that in Q2 at Clinton/Galva. And the third one, I think you were asking about the pace of announcements of partnerships and I think that now it's hard to -- I mean we have a tonne of work going on there. Maybe I'll have David address his thoughts on that.

David C. Cole

Hi Laurence. It's good to hear you. As you look at pacing, market pacing by segment there are couple of factors that come in to play. So, if you look at the product side some have very large long adoption cycles and are tied to regulatory and product formulation cycles .So AlgaVia in particular maybe subject to different adoption cycle and enhanced pace of deployment and adoption than say another segment which is largely performance driven as Jonathan mentioned with what we're doing with Encapso where you can spread very rapidly through network of specialist and a rate of market penetration is less sensitive to regulatory hurdles.

As we see with oilfield operations for the Encapso application. So we'll see different rates of pacing in terms of our partnering work and our customer work and those are some of those factors for you to consider.

Jonathan S. Wolfson

I think the only other thing I would add to that Laurence I think you probably understand this but a fair number of our customer relationships are not announced at this point and I believe that as people get even more comfort that we’re going to be able to consistently over a period of time deliver them what they need and we have multiple manufacturing facilities I think what you'll see is that some of those customers that we’re even working with today that we have been able to announce are going to allow us to talk about them publicly. So I hope that we'll be able to continue a very healthy flow of news about what we're doing commercially. That helps the market and our investors evaluate our progress.

Laurence Alexander – Jefferies

If you can indulge me on one – clarification. I think one of the most important thing things in the Akzo announcement was their comments about being a lower cost solution as well, can you give any clarity around with that cost in use total cost? I think that's a little bit surprising that they actually had enough data to go with that and I think that's of credit to you but if you can help expand on that, that will be helpful.

Jonathan S. Wolfson

I think it's value based pricing, so I think that comment really based on overall value within the system. I don't know that's helpful Laurence but it's about creating products that have overall value proposition in which there is an economic advantage to using our material. That's the way I will think about it.

Laurence Alexander – Jefferies

Okay, that's very helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Edward Westlake of Credit Suisse. Your line is open. Please go ahead.

Unidentified Analyst

Hi. This is [Mahif] here on behalf of Ed Westlake. A quick question on Clinton/Galva you said output is up 40% this quarter but the revenues for the -- is just up 24% Is it little lower pricing or are building up inventory what could explain that?

Jonathan S. Wolfson

Yeah. So there are multiple pieces in that. Remember in Q1 there were some fuels blending activities which also we replicated in Q2 so that does impact it a bit. In addition we are running campaigns building up as we're sampling and getting more of these products. We've been producing four different products there to run the plant and establish consistent operations. We are running campaigns for each of those.

So from a timing perspective that can impact in terms of when things are actually shipped in the marketplace and versus when they are produced. Portion of that is well as again as we're building out this market presence and establishing the trust of customers, we are providing in certain cases level that free sampling or market kind of development types of quantities to them out of the plant.

Unidentified Analyst

That makes sense. And just on the total customers you assigned up including AkzoNobel today. How much would that represent of the total capacity from Clinton and Moema and they are fully operational?

Jonathan S. Wolfson

You know I don't think we're looking at the question that way. I mean if you took customers that we're shipping product too and you look at their demand for triglyceride would just customers were shipping today would dramatically outstrip every metric tonne of capacity between Clinton/Galva and Moema. I think part of this is about we are still determining what the right -- what the right I think we mentioned in the prepared remarks was that one of the challenges is optimizing the mix of products to optimize margins and also seed markets. And so part of what we're determining now is given the capacity that we have which are the customers and the products that we really need to emphasize on a go-forward basis to create values.

So I don't have an answer for you with respect to that. I can tell you that we certainly haven't committed the volumes of the -- we certainly don't have committed the volumes for Clinton/Galva and Moema in any broad and concrete way?

Unidentified Analyst

Okay. Thanks.

Operator

Thank you. Our next question of Pavel Molchanov from Raymond James. Your line is open. Please go ahead.

Pavel Molchanov - Raymond James

Thanks for taking my question guys. I appreciate the update on AkzoNobel. Can we get an update as well on Mitsui and [Statoil], other two collaborations you announced last year?

Jonathan S. Wolfson

You mean I think that yeah, it's certainly quick anyway, I mean the main point here is that -- I mean we don't have anything noteworthy to -- we don't have anything noteworthy to announce. We announced some additional expansion work with Mitsui relatively recently.

Tyler W. Painter

Again if we look at the number of, as a reminder they are funding a suite of oils through a development program with us. Those programs are all on track or in some cases ahead of track, and they have become a very important partner for us as we look at distribution particularly on Asia Pacific where we see them really stepping up as a partner, they've been a great partner today and we expect that will continue. The other one I would mention I think you asked about Unilever, no updates there with the exception of you know Unilever continue to be a very important anchor customer for us and partner.

Pavel Molchanov - Raymond James

Okay and then just some maybe accounting item. When you sell product from Moema over the next six months prior to 2015, where will that show up on year income statement, is that going to be part of R&D revenue?

Tyler W. Painter

No, that will just up as on the one line item that shows loss or gain from equity method investment until we consolidate. And so what we'll try to do, obviously we're at the very early stages of bringing the facility online as we ramp our production at the facility and shipping from the facility, we'll look to provide and try to give more transparency in the operation facility to show the momentum that we are building there. But in terms of the P&L I would expect to see one line item that comes through until we consolidate.

Pavel Molchanov - Raymond James

Okay. I appreciate it guys.

Operator

Thank you. And ladies and gentlemen that does conclude our Q&A session. I'd like to turn the conference back over to Jonathan Wolfson for any closing remarks.

Jonathan S. Wolfson

Thanks everyone for participating on our call today. We surely appreciate it. To sum up, while we have a lot of work ahead, we're making great progress on manufacturing and commercialization. We're in operation at our two large scale commercial manufacturing facilities. We're seeing early growth in shipments and new customer agreements across our verticals especially in industrials oilfield services and now nutrition. We're also seeing strong customer interest at Clinton/Galva where we're now able for the first time to showcase large scale manufacturing capability to prospective customers.

These are all good indicators for the future and we're working hard both internally and externally to continue expanding our commercial sales efforts. And as David highlighted we are putting the operational and leadership infrastructure in place to enable us to fully capitalize on the opportunities ahead. I believe that we finally have all the right pieces in place to accomplish our goals, to build a large highly profitable and highly meaningful company. We have the products, the operating plants, the capital and the team to execute. I want to thank our people across the organization for their continued hard work and enthusiasm, execution is a big focus in the second half of the year as we look to build momentum. I want to thank all of you for your continued interest in and support of Solazyme.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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Solazyme (NASDAQ:SZYM): Q2 EPS of -$0.43 misses by $0.06. Revenue of $15.9M (+42.2% Y/Y) misses by $1.23M. Shares +1.83% AH.