Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) of Danimer Scientific, Inc. contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Except where the context otherwise requires or where otherwise indicated, the terms the “Company,” “Danimer,” “we,” “us,” and “our,” refer to the consolidated business of Danimer Scientific, Inc. and its consolidated subsidiaries. All statements in this Report, other than statements of historical fact, are forward-looking statements These forward-looking statements are based on management’s current expectations, assumptions, hopes, beliefs, intentions, and strategies regarding future events and are based on currently available information as to the outcome and timing of future events. Forward-looking statements may contain words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “could,” “plan,” “predict,” “potential,” “seem,” “seek,” “future,” “outlook,” the negative of such terms and other similar expressions which are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. The Company cautions you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of the Company, incident to its business. Actual results and timing of selected events may differ materially from those anticipated in the forward-looking statements as a result of various factors, including those set forth under the section entitled “Risk Factors” or elsewhere in this Report.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, if any, as of the date of the applicable filed document), and any accompanying supplement, and current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing the Company’s views as of any subsequent date, and the Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
•our ability to recognize the anticipated benefits of business combinations, which may be affected by, among other things, competition, and our ability to grow and manage growth profitably following business combinations;
•costs related to business combinations;
•changes in applicable laws or regulations;
•the outcome of any legal proceedings against us;
•the effect of the COVID-19 pandemic on our business;
•our ability to execute our business model, including, among other things, market acceptance of our products and services and construction delays in connection with the expansion of our facilities;
•our ability to raise capital;
•the ongoing conflict in Ukraine;
•the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
•our ability to timely and effectively remediate material weaknesses and maintain effective internal control over financial reporting and disclosure and procedures; and
•other risks and uncertainties set forth in the section entitled “Risk Factors” of this Report, which is incorporated herein by reference.
Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this Report, specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Other risks and uncertainties are and will be disclosed in our prior and future SEC filings. The following information should be read in conjunction with the Condensed Consolidated Financial Statements and related notes appearing in Part I, Item 1 of this Report.
Introductory Note
The following discussion and analysis of our financial condition and results of operations describes the business historically operated by Meredian Holdings Group and its subsidiaries (“Legacy Danimer”) under the “Danimer Scientific” name as an independent enterprise prior to December 29, 2020.
21
On December 29, 2020, the registrant, Live Oak Acquisition Corp. (“Live Oak”), merged with and into Legacy Danimer, with Legacy Danimer surviving as the surviving company (“Business Combination”) and as a wholly owned subsidiary of Live Oak, and changed its name from Live Oak Acquisition Corp. to Danimer Scientific, Inc. (“Danimer”). Live Oak was incorporated in the State of Delaware on May 24, 2019 as a special purpose acquisition company formed for the purpose of effecting a business combination with one or more businesses. Live Oak completed its initial public offering in May 2020.
On August 11, 2021, we closed the acquisition of Novomer, Inc. (“Danimer Catalytic Technologies”) in exchange for $153.9 million in cash, gross of cash acquired, subject to certain customary adjustments as set forth in the merger agreement. Danimer Catalytic Technologies' financial results are included in those of the Company from that date forward. Danimer Catalytic Technologies utilizes feedstocks as an input into its proprietary thermal catalytic conversion process to produce a unique type of PHA or p(3HP) or otherwise referred to under its brand name as Rinnovo.
Overview
We are a performance polymer company specializing in bioplastic replacement for traditional petroleum-based plastics. We bring together innovative technologies to deliver biodegradable bioplastic materials to global consumer product companies. We believe that we are the only commercial company in the bioplastics market to combine the production of a base polymer along with the reactive extrusion capacity in order to give customers a “drop-in” replacement for a wide variety of petroleum-based plastics. We derive our revenue primarily from sales of custom-formulated bioplastic resins, most of which are based on polyhydroxyalkanoate (“PHA”) or polylactic acid (“PLA”), as well as from services such as R&D and tolling.
PHA-Based Resins
We are a leading producer of PHA, a biodegradable plastic alternative, which we sell under the proprietary Nodax brand name, for use in a wide variety of plastic applications including straws and food containers, among other things. We make Nodax through a fermentation process where bacteria consume vegetable oil and make PHA within their cell walls as energy reserves. We harvest the PHA from the bacteria, then purify and filter the bioplastic before forming the PHA into pellets, which we combine with other inputs using a reactive extrusion process to manufacture formulated finished product. PHAs are a complete replacement for petroleum-based plastics where the convertors do not have to purchase new equipment to switch to the new biodegradable plastic. Utilizing PHA as a base resin significantly expands the number of potential applications for bioplastics in the industry and enables us to produce resin that is not just compostable, but also fully biodegradable.
We recently began making PHA on a commercial scale. In December 2018, we acquired a fermentation facility in Winchester, Kentucky (“Kentucky Facility”). We embarked on a two-phase commissioning strategy for the Kentucky Facility. Phase II construction, which continued commissioning during the third quarter of 2022, will expand the capacity of the plant by 45 million pounds to an annual plant capacity of 65 million pounds of finished product depending on final formulations and product mix.
In November 2021, we broke ground for the construction of a PHA plant in Bainbridge, Georgia (“Greenfield Facility”) that would require a capital investment of approximately $500 million to $612 million with a planned annual production capacity of approximately 125 million pounds of finished product depending on final formulations and product mix. Through September 30, 2022, we have invested approximately $151.3 million in the Greenfield Facility, excluding capitalized interest and internal labor and overhead. We may add additional capacity to the Greenfield Facility at a future date.
We currently anticipate spending between $140 million to $220 million on the construction of a plant to produce Rinnovo, a form of PHA produced through catalysis. Once the Rinnovo plant is completed and after making some additional investments in extrusion capacity, the Danimer network is expected to have production capacity of approximately 330 million pounds of PHA-based finished product resins when blended with other inputs depending on final formulations and product mix. Danimer also expects to have approximately 60 million pounds of Rinnovo remaining to sell on a standalone basis or in formulations that do not include Nodax.
The completion of the Greenfield Facility and the Rinnovo plant is dependent upon us obtaining additional financing.
PLA-Based Resins
Since 2004, we have been producing proprietary plastics using PLA, a natural plastic, as a base resin. PLA has limited functionality in its unformulated, or “neat,” form. We purchase PLA and formulate it into bioplastic resins by leveraging the expertise of our chemists and our proprietary reactive extrusion process. Our formulated PLA products allow many companies to begin to use renewable and compostable plastics to meet their customers’ growing sustainability needs. We were the first company in the world to create a bioplastic suitable for coating disposable paper cups to withstand the temperatures of hot liquids such as coffee. We have expanded our product portfolio and now supply customers globally.
Research and Development and Tolling
Our technology team partners with global consumer product companies to develop custom biopolymer formulations for specific applications. R&D contracts are designed to develop a formulated resin using PHA, PLA and other biopolymers that can be run efficiently on existing conversion equipment. We expect successful R&D contracts to culminate in supply agreements with the customers. Our R&D services not only provide revenue but also a pipeline of future products.
22
In addition to producing our own products, we also toll manufacture for customers that need the unique extruder or reactor setup we employ for new or scale-up production. Our specialty tolling services primarily involve processing customer-owned raw materials to assist them in addressing their extrusion capacity constraints or manufacturing challenges.
Comparability of Financial Information
Our results of operations may not be comparable between periods as a result of the Business Combination, the acquisition of Danimer Catalytic Technologies and the impairment of goodwill during the current quarter.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below.
Factors Impacting Our Revenue
Our product revenue is significantly impacted by our ability to successfully scale the Kentucky Facility for commercial production of PHA. The completion of Phase II of the Kentucky Facility will significantly increase our capacity to produce and sell PHA, which is in high demand by our customers. Using Nodax as a base resin significantly expands the number of potential applications for bioplastics and also enables us to produce a resin that is not just compostable, but also fully biodegradable. Since we just recently introduced our PHA on a commercial scale, our product revenues are also impacted by the timing and success of customer trials as well as product degradation testing and certifications. Our product revenue from PLA-based resins is primarily impacted by the effective launch of new product offerings in new markets by our customers as well as the ability of our suppliers to continue to increase their production capacity of neat PLA. Finally, our product revenue is impacted by our ability to deliver biopolymer formulations that can be efficiently run on customer conversion equipment and meet customer application specifications and requirements.
Our services revenue is primarily impacted by the timing of, and execution against, customer contracts. Research and development services generally involve milestone-based contracts to develop PHA-based solutions designed to a customer’s specifications. Service revenues are recognized over time with progress measured based on personnel hours incurred to date as a percentage of total estimated personnel hours for each contract. Upon the completion of research and development contracts, customers generally have the option to enter into long-term supply agreements with us for the developed product solutions. Our ability to grow our services revenue depends on our ability to develop a track record of developing successful biopolymer formulations for our customers and effectively transitioning those formulations to commercial scale production.
Factors Impacting Our Expenses
Costs of revenue
Cost of revenue is comprised of costs of goods sold and direct costs associated with research and development service projects. Costs of goods sold consists of raw materials and ingredients, labor costs including stock-based compensation for production staff, related production overhead, rent and depreciation costs. Costs associated with research and development service contracts include labor costs, related overhead costs and outside consulting and testing fees incurred in direct relation to the specific service contract.
Selling, general and administrative expense
Selling, general and administrative expense consists of salaries, marketing expense, corporate administration expenses, stock-based compensation not allocated to research and development or costs of revenue personnel, and elements of depreciation, rent and facility expenses that are not directly attributable to direct costs of production or associated with research and development activities.
Research and development expense
Research and development expense includes salaries, stock-based compensation, third-party consulting and testing fees, and rent and related facility expenses directly attributable to research and development activities not associated with revenue generating service projects. Unfortunately, COVID-related shutdowns caused significant delays in production trials and material testing at outside laboratories, which resulted in missing our partner's timeline for a contract R&D arrangement. Our partner in this project elected to cancel it, according to the terms of the contract, due to these delays. As a result, we recorded a reserve, which we included in research and development expense, for the related $1.2 million contract asset. We believe our relationship with this partner is good and we are working on other projects together. We also expect to complete the project internally within the next 6 months.
23
Impacts Related to the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel and avoid physical interaction. These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions. Government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy. Certain regions of the world have experienced increasing numbers of COVID-19 cases, however, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted and economic conditions could weaken.
Our ability to continue to operate without any significant additional negative impacts will in part depend on our ability to protect our employees and our supply chain. We have endeavored to follow actions recommended by governments and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and laboratory facilities. We have been able to broadly maintain our operations, and we intend to continue to work with our stakeholders (including customers, employees, suppliers and local communities) to responsibly address this global pandemic. However, uncertainty resulting from the global pandemic could result in an unforeseen disruption to our supply chain (for example a closure of a key manufacturing or distribution facility or the inability of a key supplier or transportation partner to source and transport materials and equipment) that could impact our operations and capital projects.
Although our PHA product revenue has continued to grow during the continuing global pandemic, we believe that some of our customers have deferred decision making and commitments regarding future orders and new contracts. The global pandemic has also resulted in delays in performing trials with new customers and obtaining certification for new products.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” located elsewhere in this Report.
Current Developments
During the third quarter, we made further inroads in our mission to create biodegradable consumer packaging and other products which address the global plastics waste crisis, building on our team’s many accomplishments since we became a public company in late 2020 by:
•signing distribution agreement with Formerra (formerly Avient Biosciences);
•increasing our PHA production capacity and continuing the commissioning of our Phase II Kentucky facility; and
•making additional progress in negotiating development and supply agreements with our blue-chip customers.
Russia & Ukraine Conflict
With respect to the war in the Ukraine, our business and operational environment is impacted by, among other things, responsive governmental actions including sanctions imposed by the U.S. and other governments.
While we do not have operations in either Russia or Ukraine, we have experienced a decline in sales due to the conflict, specifically some of our PLA products. We are unsure if this business will return in whole or in part in the future. We have also experienced supply chain challenges and increased logistics and raw material costs which we believe may be due in part to the negative impact on the global economy from the ongoing war in Ukraine, including but not limited to canola oil, which our PHA production currently uses as a feedstock. Prior to the Russian invasion, Ukraine was a significant producer of canola, though we do not source from Ukraine, and we have already placed orders to reduce our exposure to shortages or inflation.
The extent to which the conflict may continue to impact Danimer in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, and the extent of supply chain disruptions. We will continue to monitor the conflict and assess the related sanctions and other effects and may take further actions if necessary.
Critical Accounting Policies
Impairment of Goodwill and Long-Lived Assets
We test goodwill for impairment annually as of November 1 or more frequently if events or circumstances indicate possible impairment. Other long-lived assets, such as property, plant and equipment and finite-lived intangible assets, are amortized over their respective estimated useful lives and reviewed for impairment if events or circumstances indicate possible impairment.
We may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of our finite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment.
24
As of September 30, 2022, as a result of the continuation of a sustained decline in our market capitalization level below our book equity value and other macroeconomic factors, we noted that there were indicators that an impairment loss may have occurred. Accordingly, we performed an interim quantitative impairment assessment related to the aforementioned triggering event noted and determined that an impairment existed. We recorded a goodwill impairment charge of $62.7 million during the period. Additionally, we performed an interim triggering event impairment assessment related to our long-lived tangible and intangible assets and determined no impairment existed.
Convertible Debt and Capped Call
We elected the early adoption of Accounting Standards Update 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)(“ASU 2020-06”) effective January 1, 2021. This adoption had no impact on our consolidated financial statements prior to the issuance of our convertible debt on December 21, 2021.
We reviewed the applicable models under the simplified guidance and determined that this borrowing should be accounted for as debt and should be presented at stated carrying value, net of issuance costs. Additionally, we determined that since the conversion feature in the Notes is indexed solely in our own common stock, and since we retain the option to settle the Notes in shares, the conversion feature qualified for a “scope exception” to treatment as a derivative since the conversion feature qualifies as “fixed for fixed”, meaning the settlement is equal to the difference between a fixed monetary amount of convertible notes and the fair value of a fixed number of our shares. Therefore, we did not separately account for the conversion feature as a derivative.
While the Notes are subject to redemption at the option of the Noteholder in certain situations, we concluded that the risks associated with the redemption provisions are clearly and closely associated with the risks associated with the Notes themselves since the Notes were not issued at a “substantial discount or premium”, and since the redemption provisions include only principal and accrued interest and are not adjusted based on any index other than our common stock.
In conjunction with the convertible debt, we entered into capped call transactions in which we purchased a call option to receive shares of our common stock. The capped call options are legally separate from the convertible debt, and we accounted for the capped call options separately from the convertible debt. The capped call options are indexed solely to our own common stock and classified in stockholders’ equity since we retain the right to receive shares, at our option, if we exercise the capped call options. We recorded the premiums paid for the capped call options, equal to their fair value at inception, as a reduction to additional paid-in capital.
Condensed Consolidated Results of Operations for the Three Months Ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
Products |
|
$ |
9,099 |
|
|
$ |
12,397 |
|
|
$ |
(3,298 |
) |
Services |
|
|
1,349 |
|
|
|
972 |
|
|
|
377 |
|
Total revenue |
|
|
10,448 |
|
|
|
13,369 |
|
|
|
(2,921 |
) |
Cost of revenue |
|
|
14,503 |
|
|
|
13,601 |
|
|
|
902 |
|
Gross profit |
|
|
(4,055 |
) |
|
|
(232 |
) |
|
|
(3,823 |
) |
Gross profit percentage |
|
|
-38.8 |
% |
|
|
-1.7 |
% |
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
19,413 |
|
|
|
26,592 |
|
|
|
(7,179 |
) |
Research and development |
|
|
7,947 |
|
|
|
5,010 |
|
|
|
2,937 |
|
Loss on sale of assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Impairment of long-lived assets |
|
|
63,491 |
|
|
|
- |
|
|
|
63,491 |
|
Total operating expenses |
|
|
90,851 |
|
|
|
31,602 |
|
|
|
59,249 |
|
Loss from operations |
|
|
(94,906 |
) |
|
|
(31,834 |
) |
|
|
(63,072 |
) |
Nonoperating (expense) income: |
|
|
|
|
|
|
|
|
|
Gain on remeasurement of private warrants |
|
|
1,607 |
|
|
|
28,392 |
|
|
|
(26,785 |
) |
Interest, net |
|
|
(553 |
) |
|
|
(164 |
) |
|
|
(389 |
) |
Loss on loan extinguishment |
|
|
(1,500 |
) |
|
|
- |
|
|
|
(1,500 |
) |
Other, net |
|
|
240 |
|
|
|
8 |
|
|
|
232 |
|
Total nonoperating (expense) income |
|
|
(206 |
) |
|
|
28,236 |
|
|
|
(28,442 |
) |
Loss before income taxes |
|
|
(95,112 |
) |
|
|
(3,598 |
) |
|
|
(91,514 |
) |
Income taxes |
|
|
236 |
|
|
|
11,423 |
|
|
|
(11,187 |
) |
Net (loss) income |
|
$ |
(94,876 |
) |
|
$ |
7,825 |
|
|
$ |
(102,701 |
) |
25
Revenue
The decrease in product revenue was driven by 54% lower volumes in our PLA-based products, which were offset by a combined 0.6% increase in our weighted average selling prices and 21% volume increases of our PHA-based products. PHA-based products represented 51% of total revenue in the third quarter of 2022 and only represented 32% of total revenue during the same period in the prior year. PHA-based product sales increased $1.1 million due to increased customer orders. PLA-based product sales decreased $4.4 million compared to the prior year period primarily due to the conflict in Ukraine.
The increase in service revenue relates primarily to a $0.4 million increase in revenue from research and development contracts. We recognize revenue for these R&D services over time with progress measured based on personnel hours incurred to date as a percentage of total estimated personnel hours for each performance obligation identified within the contract, and we incurred an increase in such hours in the current year as certain projects near completion and new projects begin.
Our top three customers accounted for 58% of total revenue and our top four customers accounted for 57% of total revenue for the three months ended September 30, 2022 and 2021, respectively.
Cost of revenue and gross profit
Cost of revenue increased 7% for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021. The increase in cost of revenue primarily relates to relative mix between PHA-based product and PLA-based product sales. As noted above, PHA-based product sales increased significantly as a percentage of total product revenue this quarter as compared with the prior year quarter. Cost of revenue for the current quarter includes a $0.5 million increase in utility costs and $0.5 million in R&D project related expenses and repairs and maintenance. During the three month period, we observed instances of lower utilization and higher fixed cost absorption rates. As a result, the margin profile of the PHA-based products sold continues to be lower than that of our PLA-based products. We believe the margin profile of our PHA-based products will continue to improve after this older, higher-cost inventory works through the channel and Phase II of our Kentucky Facility expansion begins to operate at scale.
The decline in gross profit percentage in the current quarter as compared to the prior quarter was primarily due to lower volume, and thus higher per-unit costs, of PLA-based products.
Operating expenses
The decrease in selling, general and administrative expense was due primarily to decreases of $4.4 million in compensation, benefit, and stock compensation related expenses due to the impact of prior year equity awards related to the Business Combination and other compensation that did not recur in the current-year period. Additional decreases of $2.3 million were related to Novomer, Inc. acquisition costs and $1.1 million in legal and accounting expenses to support initial public company activities, neither of which recurred in the current-year period. The increase in research and development expense period over period was due to $0.9 million of depreciation and amortization primarily related to a full quarter of ownership of Danimer Catalytic Technologies in the current year compared to a partial quarter of ownership following the acquisition date in the prior year, an increase of $0.7 million due to compensation and benefits costs related to additional headcount in the research and development areas, an increase in stock-based compensation primarily related to equity awards granted since the prior year and increased R&D material costs of $0.5 million related to inventory adjustments.
Impairment of long-lived assets
The impairment of long-lived assets primarily relates to the goodwill impairment loss recorded during the current year period due to the continuation of a sustained decline in our market capitalization level below our book equity value and other macroeconomic factors as described above.
Gain on remeasurement of private warrants
The current quarter remeasurement gain on our Private Warrants represents a decrease in the fair value of each of the 3.9 million outstanding Private Warrants due primarily to a decrease in the market price of our common stock during the period. The prior year quarter remeasurement gain was also due to a decrease in the market price of our common stock during the period.
Interest expense
The increase in interest expense, net of capitalization, primarily resulted from the issuance of our $240 million principal amount 3.250% Convertible Senior Notes in December 2021.
Income taxes
For the current quarter, we had a tax benefit of $0.2 million as compared to a benefit of $11.4 million in the prior year quarter. The benefit in the prior period related to the release of our valuation allowance for certain deferred tax assets that we expect to realize as a result of the deferred tax liabilities that were recorded in connection with the acquisition of Novomer, Inc. Our effective tax rates differed from the federal statutory rate of 21% due to our substantial valuation allowance against our deferred tax assets in the current year and due to our net loss position and maintaining a full valuation allowance, other than as noted in connection with the acquisition of Novomer, Inc. in the prior period.
26
Net (loss) income
We reported a net loss in the three months ended September 30, 2022 of $94.9 million as compared with a net income of $7.8 million in the prior year period. The increase in net loss for the three months ended September 30, 2022 compared with 2021 was primarily attributable to the impairment of goodwill and a smaller gain on remeasurement of private warrants during the current year quarter and the favorable deferred tax benefit recognized in the prior year quarter associated with the Novomer, Inc. acquisition as discussed in the sections above.
Condensed Consolidated Results of Operations for the Nine Months Ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
Products |
|
$ |
33,890 |
|
|
$ |
34,715 |
|
|
$ |
(825 |
) |
Services |
|
|
4,004 |
|
|
|
6,306 |
|
|
|
(2,302 |
) |
Total revenue |
|
|
37,894 |
|
|
|
41,021 |
|
|
|
(3,127 |
) |
Cost of revenue |
|
|
45,606 |
|
|
|
37,786 |
|
|
|
7,820 |
|
Gross profit |
|
|
(7,712 |
) |
|
|
3,235 |
|
|
|
(10,947 |
) |
Gross profit percentage |
|
|
-20.4 |
% |
|
|
7.9 |
% |
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
62,042 |
|
|
|
55,791 |
|
|
|
6,251 |
|
Research and development |
|
|
24,469 |
|
|
|
11,604 |
|
|
|
12,865 |
|
Loss on sale of assets |
|
|
1 |
|
|
|
33 |
|
|
|
(32 |
) |
Impairment of long-lived assets |
|
|
63,491 |
|
|
|
- |
|
|
|
63,491 |
|
Total operating expenses |
|
|
150,003 |
|
|
|
67,428 |
|
|
|
82,575 |
|
Loss from operations |
|
|
(157,715 |
) |
|
|
(64,193 |
) |
|
|
(93,522 |
) |
Nonoperating (expense) income: |
|
|
|
|
|
|
|
|
|
Gain on remeasurement of private warrants |
|
|
8,614 |
|
|
|
6,435 |
|
|
|
2,179 |
|
Interest, net |
|
|
(2,197 |
) |
|
|
(516 |
) |
|
|
(1,681 |
) |
Gain on forgiveness of debt |
|
|
- |
|
|
|
1,776 |
|
|
|
(1,776 |
) |
Loss on loan extinguishment |
|
|
(1,500 |
) |
|
|
(2,604 |
) |
|
|
1,104 |
|
Other, net |
|
|
324 |
|
|
|
18 |
|
|
|
306 |
|
Total nonoperating (expense) income |
|
|
5,241 |
|
|
|
5,109 |
|
|
|
132 |
|
Loss before income taxes |
|
|
(152,474 |
) |
|
|
(59,084 |
) |
|
|
(93,390 |
) |
Income taxes |
|
|
767 |
|
|
|
11,423 |
|
|
|
(10,656 |
) |
Net loss |
|
$ |
(151,707 |
) |
|
$ |
(47,661 |
) |
|
$ |
(104,046 |
) |
Revenue
The decrease in product revenue was driven by a 4.7% decrease in pounds sold, offset by a 2.3% increase in our weighted average selling price. In the first nine months of 2022, PHA-based products represented 54% of total revenue and only represented 30% of total revenue during the same period in the prior year. PHA-based product sales increased $8.4 million due to production capacity ramp-up in our Kentucky Facility. PLA-based product sales decreased $9.4 million compared to the prior year period primarily due to the conflict in Ukraine.
The decrease in service revenue relates primarily to a $1.9 million decrease in revenue from research and development contracts. We recognize revenue for these R&D services over time with progress measured based on personnel hours incurred to date as a percentage of total estimated personnel hours for each performance obligation identified within the contract, and we incurred fewer such hours in the current year as certain projects near completion.
Our top three customers accounted for 51% of total revenue and our top four customers accounted for 60% of total revenue for the nine months ended September 30, 2022 and 2021, respectively.
Cost of revenue and gross profit
Cost of revenue increased 21% for the nine months ended September 30, 2022 as compared with the nine months ended September 30, 2021. The increase in cost of revenue for the nine-month period is related to the relative mix between PHA-based product and PLA-based product sales. Cost of revenue for the nine-month period includes a $1.8 million increase in direct labor costs due to headcount increases in Kentucky and Georgia for production and engineering, a $1.1 million increase in utilities primarily due to ramp up of Phase II in Kentucky, inventory valuation charges (including charges for some PLA inventory related to the war in Ukraine) of $0.6 million, a $0.5 million increase in shipping costs due to increased PHA volume along with inflation, and a $0.5 million increase in rent. As noted above, PHA sales increased significantly as a percentage of total product revenue during this nine months as compared with
27
the prior year nine-month period. During the nine-month period, we observed instances of lower utilization and higher fixed cost absorption rates. As a result, the margin profile of the PHA sold continues to be lower than that of our PLA products. We believe the margin profile of our PHA products will continue to improve after this older, higher-cost inventory works through the channel and Phase II of our Kentucky Facility expansion comes online and begins to operate at scale.
The decrease in gross profit percentage in the current period as compared to the prior period was primarily due to lower volumes, and thus higher per-unit costs, of PLA-based products.
Operating expenses
The increase in selling, general and administrative expense was due primarily to an increase in stock-based compensation expense of $5.3 million primarily related to equity awards granted since the prior year period, an increase of $1.6 million in office expenses (of which $0.3 million related to Danimer Catalytic Technologies), which primarily consisted of increases in recruiting costs, information technology expenses, and increased property taxes, a $1.0 million increase in property and other insurance costs and increased accrued property taxes associated with our growing asset base. These increases were offset by decreases of $1.0 million in compensation and benefits and $0.5 million in accounting expenses primarily related to the acquisition of Danimer Catalytic Technologies, which did not recur in the current-year period.
The increase in research and development expense period over period was primarily due to $7.8 million increase of R&D expense of Danimer Catalytic Technologies (including $5.0 million of depreciation and amortization), an increase in stock-based compensation of $1.4 million primarily related to equity awards granted since the prior year, an increase of $1.4 million due to compensation and benefits costs related to additional headcount in the research and development areas, $1.2 million related to a collectability reserve against an R&D contract asset and $0.5 million increase in legal expenses, primarily related to Danimer Catalytic Technologies and $0.5 million in consulting services and fees related to Danimer Catalytic Technologies and regulatory consulting.
Impairment of long-lived assets
The impairment of long-lived assets primarily relates to the goodwill impairment loss recorded during the current year period due to the continuation of a sustained decline in our market capitalization level below our book equity value and other macroeconomic factors as described above.
Gain on remeasurement of private warrants
The current nine-month period remeasurement gain on our Private Warrants represents a decrease in the fair value of each of the 3.9 million outstanding Private Warrants due primarily to a decrease in the market price of our common stock during the period. The prior year period remeasurement gain was also due to the common stock price decrease during that period.
Interest expense
The increase in interest expense primarily resulted from the issuance of our $240 million principal amount 3.250% Convertible Senior Notes in December 2021.
Income taxes
For the current nine-month period, we had a tax benefit of $0.8 million as compared to $11.4 million tax benefit in the prior year period. The benefit in the prior year related to the release of a portion of our valuation allowance for certain of our deferred tax assets that we expect to realize as a result of the deferred tax liabilities that were recorded in connection with the acquisition of Novomer, Inc. Our effective tax rates differed from the federal statutory rate of 21% due to our substantial valuation allowance against our deferred tax assets in the current year and due to our net loss position and maintaining a full valuation allowance, other than as noted in connection with the acquisition of Novomer, Inc. in the prior period.
Net loss
We reported a net loss in the nine months ended September 30, 2022 of $151.7 million as compared with a net loss of $47.7 million in the prior year nine-month period. The increase in net loss for the nine months ended September 30, 2022 compared to 2021 was primarily attributable to increases in operating expenses during the current nine-month period, as discussed in the sections above, as well as the impairment of goodwill.
Liquidity and Capital Resources
Our primary sources of liquidity are currently equity issuances and debt financings. As of September 30, 2022 we had $99.1 million in cash and cash equivalents. While we believe we have established a growing source of revenue that will be sufficient to cover our ongoing operating costs once our production reaches scale, we are currently experiencing a period of significant capital expenditures resulting from the ongoing expansion and construction of our manufacturing and production facilities.
Excluding pre-engineering costs, capitalized interest and internal labor and overhead, we have invested $130 million in the Phase II expansion through September 30, 2022. In total, we expect to invest $130.5 million in the Kentucky Facility by the time it is completed. We broke ground on our Greenfield Facility construction ahead of schedule in November 2021 and started placing orders for long-lead
28
time equipment items to mitigate the impacts of ongoing inflation and delivery delays that may result from global supply chain challenges. As of September 30, 2022, we have invested $151.3 million of capital for the Greenfield Facility, excluding capitalized interest, internal labor and overhead. The completion of the Greenfield Facility is contingent upon receiving additional financing. We believe we have adequate liquidity to fund our operations for the next twelve months.
We have open purchase orders related to our Kentucky Facility Phase II expansion and our Greenfield Facility construction totaling $62.5 million with anticipated delivery at various dates through December 2026.
During the three months ended September 30, 2022, we entered into an additional New Market Tax Credit (“NTMC”) agreement with various unrelated third-party financial institutions, which then invest in certain investment funds. The gross proceeds from the arrangement were $24.7 million. In conjunction with the financing arrangement, we loaned money to the investment funds in the amount of $18.0 million, which are recorded as leveraged loan receivables. Each investment fund then contributed the funds from our loan and the Investor’s investment to a special purpose entity, which then in turn loaned the contributed funds to a wholly owned subsidiary. We expect these borrowings, and our related leveraged loans to the Investment Funds, will be forgiven in 2029.
On September 7, 2022, we entered into an equity distribution agreement (“Equity Distribution Agreement”) with Citigroup Global Markets Inc. as (“Manager”), under which we may issue and sell shares of our Class A common stock “at the market” from time-to-time with an aggregate offering price of up to $100 million (collectively the “ATM Offering”). Under the Equity Distribution Agreement, the Manager may sell small volumes of our common stock at the prevailing market price, during such times and at such terms as we have predesignated. We have no obligation to sell any shares and may at any time suspend offers and sales that are part of the ATM Offering or terminate the Equity Distribution Agreement. During the three months ended September 30, 2022, we issued 212,604 shares at an average price of $4.15 per share resulting in proceeds of approximately $0.9 million. Additionally, we incurred issuance costs of $0.9 million, which were primarily one-time costs, but which also included less than $0.1 million in commissions to the Manager. As of September 30, 2022, $99.1 million remains available for distribution under the Equity Distribution Agreement.
As of September 30, 2022, our most significant borrowings are our 3.25% Convertible Senior Notes and our Subordinated Term Loan described below.
On August 5, 2022, we entered into an agreement with Truist Bank to pay off the Credit Agreement and terminate Truist’s lending obligations thereunder. Given the restrictive covenants contained in the Credit Agreement, this facility did not provide sufficient liquidity to justify the ongoing costs of maintaining it. We incurred a loss on early extinguishment of debt in the three months ended September 30, 2022 of $1.5 million in connection with this termination, including the write off of $1.4 million in unamortized debt issuance costs. In connection with such agreement, Truist also agreed to release all its liens on our assets that would have secured any borrowings under the Credit Agreement. We will evaluate other opportunities to provide liquidity with this collateral.
3.25% Convertible Senior Notes
On December 21, 2021, we issued $240 million principal amount of our 3.250% Convertible Senior Notes due 2026 (“Notes”), subject to an indenture (“Indenture”).
The Notes are our senior, unsecured obligations and accrue interest at a rate of 3.250% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2022. The terms of the Notes are complex and can be found in greater detail in our Annual Report for the year ended December 31, 2021. We will settle conversions by paying or delivering, as applicable, cash, shares of common stock or a combination of cash and shares, at our election. The initial conversion rate, which is subject to change, is approximately $10.79 per share of common stock. If certain liquidity conditions are met, we may redeem the Notes between December 19, 2024, and October 20, 2026. The Notes will mature on December 15, 2026.
Capped Calls
Also in December 2021, in connection with the Notes, we purchased capped calls (“Capped Calls”) with certain well-capitalized financial institutions for $35 million. The Capped Calls are call options that permit us, at our option, to require the counterparties to deliver to us shares of our common stock. We may also net-settle the Capped Calls and receive cash instead of shares. We have not exercised any of the Capped Calls at September 30, 2022, and the Capped Calls expire on April 12, 2027.
Subordinated Term Loan
In March 2019, we, through a subsidiary, entered into a subordinated second credit agreement (“Subordinated Term Loan”) for $10 million in term loans. The term loans mature on February 13, 2024 and require monthly interest only payments, with the outstanding principal balance due at maturity. The Subordinated Term Loan provides for “springing” financial covenants including a maximum capital expenditures limit, leverage ratio, fixed charge coverage ratio and adjusted EBITDA covenants, certain of which became more restrictive over time, and which do not apply as long as the borrowing subsidiary maintains an unrestricted cash deposit of at least $10 million.
The Subordinated Term Loan remains secured by all real and personal property of the borrowing subsidiary and its subsidiaries but is subordinated to all other existing lenders. At September 30, 2022, we were in compliance with all financial covenants.
29
Cash Flows for the Nine Months Ended September 30, 2022 and 2021:
The following table summarizes our cash flows from operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
Net cash used in operating activities |
|
$ |
(57,582 |
) |
|
$ |
(47,441 |
) |
Net cash used in investing activities |
|
$ |
(151,628 |
) |
|
$ |
(247,637 |
) |
Net cash provided by financing activities |
|
$ |
23,032 |
|
|
$ |
111,478 |
|
Cash flows from operating activities
Net cash used in operating activities was $57.6 million during the nine months ended September 30, 2022 and was $47.4 million during the comparable period for 2021. The period-to-period change was primarily attributable to increases in operating expenses and a decline in gross margin, which included a $2.7 million increase in working capital.
Cash flows from investing activities
For the nine months ended September 30, 2022 and 2021, we used $133.6 million and $96.8 million, respectively, for the purchase of property, plant and equipment as we continued construction of the Greenfield Facility and Phase II of our expansion of our Kentucky Facility. Additionally, we invested $18.0 million in leveraged loans receivable as part of our current period New Market Tax Credit (“NMTC”) transaction. In the prior year period, we spent $151.2 million on the acquisition of Novomer.
Cash flows from financing activities
For the nine months ended September 30, 2022, net cash provided by financing activities of $23.0 million consisted primarily of:
•Proceeds from long-term debt of $24.7 million;
•Proceeds from the exercise of stock options and ESPP awards of $0.7 million; net of
•Repayments of debt and issuance costs of $2.4 million.
For the nine-month period ended September 30, 2021, net cash provided by financing activities of $111.5 million consisted primarily of:
•Net proceeds from warrant exercises of $138.2 million; net of
•Repayments of debt of $27.1 million.
Off-balance Sheet Arrangements
At September 30, 2022, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
