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 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.
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; 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 Company (formerly Live Oak Acquisition Corp. (“Live Oak”)), was originally incorporated in the State of Delaware on May 24, 2019 as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization, or similar business combination with one or more businesses. Live Oak completed its initial public offering in May 2020. On December 29, 2020 (“Closing Date”), Live Oak consummated a business combination (“Business Combination”) with Meredian Holdings Group, Inc. (“MHG” or “Legacy Danimer”), with Legacy Danimer surviving the merger as a wholly owned subsidiary of Live Oak. The Business Combination was accounted for as a reverse recapitalization, meaning that Legacy Danimer was treated as the accounting acquirer and Live Oak was treated as the accounting acquiree. Effectively, the Business
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Combination was treated as the equivalent of Legacy Danimer issuing stock for the net assets of Live Oak, accompanied by a recapitalization. In connection with the Business Combination, Live Oak changed its name to Danimer Scientific, Inc. On August 11, 2021, we closed the acquisition of Novomer, Inc. (integrated into our business as “Danimer Catalytic Technologies”).
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 product sales of PHA- and PLA-based resins as well as from services such as contract research and development and tolling.
PHA-Based Resins: We are a leading producer of polyhydroxyalkanoate (“PHA”), a key biodegradable ingredient in a wide range of engineered materials that are plastic alternatives, 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 converters do not have to purchase new equipment to switch to our new biodegradable plastic. Utilizing PHA as a base resin for a wide variety of application-specific engineered materials 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, which expanded the capacity of the plant by 45 million pounds to a total plant capacity up to 65 million pounds of finished product per year. The capacity expansion was completed in 2022.
In November 2021, we broke ground on the construction of a PHA plant in Bainbridge, Georgia (“Greenfield Facility”). Through March 31, 2023, we have invested $183.4 million in the Greenfield Facility, excluding capitalized interest and internal labor. The Greenfield Facility has an engineering cost estimate ranging from $515 million to $665 million and it will have a planned annual production capacity of approximately 125 million pounds of finished product. We have suspended construction of the Greenfield Facility and completion of the facility is contingent upon receiving additional financing.
We currently anticipate spending between $140 million to $220 million on the Rinnovo plant. 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. Danimer also expects to have approximately 60 million pounds of Rinnovo remaining to sell on a standalone basis or in formulations that don't include Nodax.
PLA-Based Resins: Since 2004, we have been producing proprietary plastics using a natural plastic called polylactic acid (“PLA”) 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 (“R&D”) and Tolling Services: 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 thus not only provide revenue but also a pipeline of future products.
In addition to producing our own products, we also toll manufacture for customers that need our unique extruder or reactor setup 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.
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.
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Factors Impacting Our Revenue
We derive our revenue from product sales of PHA- and PLA-based resins as well as from services such as R&D and tolling.
Now that we have completed Phase II of the Kentucky Facility, the most significant driver of PHA-based revenue is the pace of adoption of our materials and our ability to bring additional production capacity online, such as our Greenfield Facility. 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 grow their production capacity of neat PLA. Finally, our product revenue is impacted in the longer run by our ability to deliver biopolymer formulations that can be efficiently run on customer conversion equipment and meet customer application specifications and requirements as well as PHA-related license sales agreements.
Our service 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. 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 service revenue depends on our ability to achieve a track record of developing successful biopolymer formulations for our customers and our ability to effectively transition those customer 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, related production overhead, rent, utilities and depreciation costs. Costs associated with research and development service contracts include labor costs, related overhead costs, rent, depreciation, amortization, and outside consulting and testing fees incurred in direct relation to specific service contracts.
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 and amortization, 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, depreciation, amortization, 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.
Current Developments
During the first quarter, we made further inroads in our mission to create biodegradable consumer packaging and other products which address the global plastics waste crisis by:
•entering into a $130 million senior secured term loan agreement (“Senior Secured Term Loan”) to strengthen our liquidity position, and
•making additional progress in negotiating development and supply agreements with our blue-chip customers.
Russia & Ukraine Conflict
With respect to the war in 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 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 oil, though we do not source from Ukraine, and we have 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.
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Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. Our disclosure of our key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, are set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
Condensed Consolidated Results of Operations for the Three Months Ended March 31, 2023 and 2022:
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
Products |
|
$ |
11,096 |
|
|
$ |
13,216 |
|
|
$ |
(2,120 |
) |
Services |
|
|
830 |
|
|
|
1,527 |
|
|
|
(697 |
) |
Total revenue |
|
|
11,926 |
|
|
|
14,743 |
|
|
|
(2,817 |
) |
Cost of revenue |
|
|
18,209 |
|
|
|
16,065 |
|
|
|
2,144 |
|
Gross profit |
|
|
(6,283 |
) |
|
|
(1,322 |
) |
|
|
(4,961 |
) |
Gross profit percentage |
|
|
-52.7 |
% |
|
|
-9.0 |
% |
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
18,699 |
|
|
|
22,236 |
|
|
|
(3,537 |
) |
Research and development |
|
|
7,075 |
|
|
|
7,131 |
|
|
|
(56 |
) |
Loss on sale of assets |
|
|
170 |
|
|
|
- |
|
|
|
170 |
|
Total operating expenses |
|
|
25,944 |
|
|
|
29,367 |
|
|
|
(3,423 |
) |
Loss from operations |
|
|
(32,227 |
) |
|
|
(30,689 |
) |
|
|
(1,538 |
) |
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
|
Gain (loss) on remeasurement of private warrants |
|
|
(1,116 |
) |
|
|
4,995 |
|
|
|
(6,111 |
) |
Interest, net |
|
|
(3,386 |
) |
|
|
(992 |
) |
|
|
(2,394 |
) |
Other, net |
|
|
- |
|
|
|
9 |
|
|
|
(9 |
) |
Total nonoperating income (expense): |
|
|
(4,502 |
) |
|
|
4,012 |
|
|
|
(8,514 |
) |
Loss before income taxes |
|
|
(36,729 |
) |
|
|
(26,677 |
) |
|
|
(10,052 |
) |
Income taxes |
|
|
90 |
|
|
|
291 |
|
|
|
(201 |
) |
Net loss |
|
$ |
(36,639 |
) |
|
$ |
(26,386 |
) |
|
$ |
(10,253 |
) |
Revenue
Current quarter revenue decreased as compared to the prior year quarter due to a 16% decrease in pounds sold that was partially offset by a 5% increase in our weighted average selling price, each as compared to the prior year quarter. In the first quarter of 2023, PHA-based products represented 42% of total revenue as compared to 52% of total revenue during the same period in the prior year. PHA-based product sales decreased $2.6 million due to lower volumes as compared to the prior year period. PLA-based product sales increased $0.7 million driven by a 7.5% increase in weighted average selling price along with a 6% increase in pounds sold as compared to the prior year period, which had been initially depressed by the conflict in Ukraine, but subsequently recovered.
The decrease in service revenue relates primarily to the completion of our portion of several R&D contracts.
During the current quarter, we had four customers that each individually accounted for 10% of revenue and collectively represented 72% of total revenue as compared to the prior year quarter which had three customers that each individually accounted for 10% of revenue accounted for 58% of total revenue.
Cost of revenue and gross profit
Cost of revenue increased 13% for the current quarter as compared with the prior year quarter. This is largely driven by an increase of $3.0 million in depreciation and $0.4 million increase in utilities as compared to prior year due to the completion of the Kentucky Facility later in the prior year. These increases were offset by the 16% decrease in pounds sold, which led to reductions in raw materials and ingredient costs of $1.0 million, direct labor costs of $0.4 million and shipping expenses of $0.4 million.
The decline in gross profit percentage was primarily due to the aforementioned lower volumes sold in the quarter as well as the overall increase in the fixed cost portion of our cost of goods sold.
23
Operating expenses
The quarter over quarter improvement in selling, general and administrative expense relates primarily to savings in legal costs incurred of $1.7 million and consulting expenses of $0.5 million. Additionally, we recorded a benefit of $0.5 million in the current quarter from reversals in our allowance for doubtful accounts, as opposed to expense of $0.6 million in the prior year quarter, which reflects improvements in our past due accounts receivable. Current period research and development expense included $0.5 million related to the write-off of our prepaid royalty asset due to the termination of the royalty agreement with Procter & Gamble. The overall cost decreases in both selling, general and administrative expenses and research and development expenses reflect our efforts to reduce excess expenditures company-wide.
Gain (loss) on remeasurement of private warrants
The current quarter remeasurement loss on our Private Warrants represents an increase in the fair value of each of the 3.9 million outstanding Private Warrants due primarily to an increase in the market price of our common stock during the period. The prior year quarter remeasurement gain was, conversely, due to the common stock price decrease during that period.
Interest expense
The increase in interest expense, net of capitalization, primarily resulted from the incurrence of the Senior Secured Term Loan in March 2023 and a reduction of capitalized interest in the current year period associated with the suspension construction of the Greenfield Facility as compared to the prior year period.
Income taxes
For the current quarter, we had a tax benefit of $0.1 million as compared to a benefit of $0.3 million in the prior year quarter. Our effective tax rates differed from the federal statutory rate of 21% due to our valuation allowances against substantially all of our net deferred tax assets.
Net loss
The increase in net loss in the current quarter compared with the prior year quarter was primarily attributable to loss on remeasurement of private warrants during the current year quarter as opposed to a gain in the prior year quarter, increased interest expense, and decreased gross profit. This increase was offset by decreases in operating expenses during the current quarter, as discussed in the sections above.
Liquidity and Capital Resources
Our primary sources of liquidity are equity issuances and debt financings. As of March 31, 2023, we had $102.0 million in cash and cash equivalents and working capital of $153.8 million. While we believe we have developed the capabilities to generate revenue that will eventually be sufficient to cover our ongoing operating costs, we are currently experiencing a period of low sales volume.
We broke ground on our Greenfield Facility construction ahead of schedule in November 2021 and started placing orders for long-lead time equipment items to mitigate the impacts of ongoing inflation and delivery delays that may result from global supply chain challenges. The Greenfield Facility has an engineering cost estimate ranging from $515 million to $665 million. As of March 31, 2023, we have invested $183.4 million of capital, excluding capitalized interest and internal labor, for the Greenfield Facility. We have currently suspended construction of the Greenfield Facility and completion of the facility is contingent upon receiving additional financing. We believe we have adequate liquidity to fund our operations for the next twelve months.
As of March 31, 2023, our most significant borrowing facilities are our 3.25% Convertible Senior Notes and our Senior Secured Term Loan described below.
3.25% Convertible Senior Notes
On December 21, 2021, we issued $240 million principal amount of our 3.250% Convertible Senior Notes due 2026 (“Convertible Notes”), subject to an indenture (“Indenture”).
The Convertible 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. 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 Convertible Notes between December 19, 2024, and October 20, 2026. The Convertible Notes will mature on December 15, 2026.
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Capped Calls
Also in December 2021, in connection with the Convertible 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 March 31, 2023, and the Capped Calls expire on April 12, 2027.
Senior Secured Term Loan
On March 17, 2023, we closed a $130 million principal amount Senior Secured Term Loan. The Senior Secured Term Loan matures on the earlier of March 17, 2027 or September 15, 2026 if more than $100 million of the existing Convertible Notes remains outstanding on that date. After payment of the lender’s expenses, including the first three years of premiums for a collateral protection insurance policy for the benefit of the lender, we received net proceeds of $98.6 million. The Senior Secured Term Loan accrues interest at a fixed annual rate of 14.4%. As part of the Senior Secured Term Loan agreement, we are required to hold certain interest payments in a restricted reserve account, which resulted in classification of $12.5 million of cash as restricted cash.
The Senior Secured Term Loan contains various customary covenants; none of which are expected to have material impact on our liquidity or capital resources.
In connection with the Senior Secured Term Loan, we also issued warrants with a five-year maturity to the lender to purchase 1.5 million shares of our common stock at an exercise price of $7.50 per share. We determined the fair value of these warrants as of the closing date was $0.5 million using the Black Scholes model and accounted these warrants as an equity arrangement and included in paid-in-capital at March 31, 2023.
The Senior Secured Term Loan required us to maintain a minimum cash balance of $45 million, including $12 million held in a restricted account, until we received a consent from a NMTC lender. Following the April 28, 2023 consent release from certain NMTC lenders, the Senior Secured Term Loan is secured by substantially all of our assets, other than the assets of Danimer Catalytic Technologies and assets associated with the Greenfield Facility in Bainbridge, Georgia, and the restrictions associated with the $45 million were released.
Cash Flows for the Three Months Ended March 31, 2023 and 2022:
The following table summarizes our cash flows from operating, investing and financing activities:
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|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Net cash used in operating activities |
|
$ |
(5,865 |
) |
|
$ |
(17,605 |
) |
Net cash used in investing activities |
|
$ |
(16,400 |
) |
|
$ |
(58,916 |
) |
Net cash provided by financing activities |
|
$ |
91,539 |
|
|
$ |
78 |
|
Cash flows from operating activities
Net cash used in operating activities was $5.9 million during the current quarter and was $17.6 million during the comparable period for 2022. The period-to-period change was primarily attributable to changes in working capital.
Cash flows from investing activities
In the current quarter, we used $16.4 million for the purchase of property, plant and equipment as compared to the $58.9 million for such purchases in the prior year quarter. During 2023, we took receipt of previously ordered materials that related to investments at our Greenfield Facility and continued construction of our Rinnovo pilot plant in Rochester, New York.
Cash flows from financing activities
In the current quarter, net cash provided by financing activities of $91.5 million consisted primarily of:
•Proceeds from our Senior Secured Term Loan of $130.0 million, less issuance costs of $33.0 million; and
•Repayments of debt of $5.5 million, including a portion of our previously existing Subordinated Term Loan.
In the prior year quarter, net cash provided by financing activities of $0.1 million consisted primarily of:
•Proceeds from the exercise of stock options and ESPP units of $0.4 million; and
•Repayments of debt of $0.2 million.
Off-balance Sheet Arrangements
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At March 31, 2023, 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.
