DANIMER SCIENTIFIC, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes appearing in Part II, Item 8 of this Report. The following discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. See the section entitled "Cautionary Note Regarding Forward-Looking Statements." 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. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we", "us", "our", "Danimer", "Danimer Scientific", and the "Company" are intended to mean the business and operations of Danimer and its consolidated subsidiaries.
Introductory Note
The following discussion and analysis of our financial condition and results of
operations describes the business historically operated by
On
On
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 from product sales of PLA- and PHA-based resins as well as from services such as R&D and tolling.
PHA-based Resins: We are a leading producer of polyhydroxyalkanoate ("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
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In
We currently anticipate spending between
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 and Other 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 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 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 and the acquisition of
As a result of the Business Combination, we are an
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 and in the section of this Report titled "Risk Factors."
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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.
Our product revenue is significantly impacted by our ability to continue 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 PHA, which is in high demand by our customers. Using our PHAs as 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 grow 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.
We have a fairly low number of customers. In 2021, we had two customers that each accounted for more than 10% of total revenue and collectively represented 35% of total revenue. In 2020, we had three such customers that collectively represented 58% of total revenue.
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 Operating 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.
Impacts Related to the COVID-19 Pandemic
In
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Our ability to continue to operate without any significant 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 material or transportation supplier to source and transport materials) that could impact our operations.
Although our revenue has continued to grow during the ongoing 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 elevated shipping costs as well as delays in performing trials with new customers and obtaining certification for new products. During this period and especially prior to the merger, we have delayed certain capital expenditures in order to conserve financial resources, resulting in a slower than expected scale up of the Kentucky Facility. We have not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic.
For additional information on risk factors that could impact our results, please refer to "Risk Factors" located elsewhere in this Report.
Current Developments
During our fiscal year, 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:
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Acquiring and integrating
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Continuing Phase II of the expansion of our Kentucky Facility on track for completion by Q2 2022;
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Negotiating development and supply agreements with Mars and Total Corbion PLA;
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Breaking ground on the Greenfield Facility; and
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Issuing
Critical Accounting Policies
The preparation of financial statements in conformity with
Revenue Recognition
We recognize revenue from product sales and services in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. At contract inception, we assess the goods or services promised within each contract and determine which are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
We derive our revenues from: 1) product sales of compostable resins; and 2) research and development (R&D) services related to developing customized formulations of biodegradable resins based on PHA as well as tolling revenues.
We generally produce and sell finished products and we typically recognize revenue for these sales upon shipment. Due to the highly specialized nature of our products, returns are infrequent, and therefore we do not estimate amounts for sales returns and allowances. We offer a standard quality assurance warranty related to the fitness of our finished goods. There are no forms of variable consideration such as discounts, rebates, or volume discounts that we estimate to reduce our transaction price.
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R&D service revenues generally involve milestone-based contracts under which we work with a customer to develop a PHA-based specific solution designed to the customer's specifications, which may involve a single or multiple performance obligations. When an R&D contract has multiple performance obligations, we allocate the transaction price to the performance obligations utilizing a cost-plus approach to estimate the stand-alone selling price, which contemplates the level of effort to satisfy the performance obligations, and then allocate the transaction price to each of the performance obligations based on the relative percentage of the stand-alone selling price. We recognize revenue for these R&D services over time with progress based on personnel hours incurred to date as a percentage of total estimated personnel hours for each performance obligation identified within the contract. Upon completion of the R&D services, the customers have an option to enter into long-term supply agreements with us for the product(s) that were developed within the respective contracts. We concluded these customer options were marketing offers, not separate performance obligations, since the options did not provide a material right to any of our customers.
Stock-based Compensation
We have granted stock-based awards to employees with vesting requirements based on duration of service only, a combination of market-based and service-based conditions, and a combination of performance-based and service-based conditions. We recognize expense associated with service-based only condition awards on a straight-line basis over the requisite service period. We recognize expense associated with awards with market-based or performance-based vesting conditions on a straight-line basis over the longest of the explicit, implicit or derived service period term of the award.
We use a Black-Scholes option pricing model to value stock option awards and we value for restricted stock awards without a market-based component at the price of our common stock. For awards with a market-based component, we use a Monte Carlo simulation. Instruments that may be settled in cash are recorded as liabilities and are revalued each period. All other instruments qualify as equity and are valued only at the grant date. For more information about our methods of valuation, see Note 3 to the Consolidated Financial Statements.
We record the effects of forfeitures as they occur.
Leases
We account for leases in accordance with ASC 842, Leases, and we determine if an arrangement is a lease at inception. We record right-of-use assets and lease liabilities for operating leases based on the present value of the future lease payments over the lease term at commencement date. As most of the leases do not provide a readily determinable rate implicit in the lease, we use our incremental borrowing rate based on the information available at commencement date, such as rates recently offered to us by lenders on proposed borrowings, in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease, typically at our own discretion. We evaluate the renewal options at commencement and if they are reasonably certain of exercise, we include the renewal period in the lease term.
Business Combinations
We recognize assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of purchase price over the estimated fair values of identifiable net assets recorded as goodwill. Assigning fair values may require us to make significant estimates and assumptions regarding the fair value of identifiable intangible assets, property, plant and equipment, or other assets or liabilities. We may refine these estimates if necessary over a period not to exceed one year by taking into consideration new information that, if known at the acquisition date, would have affected the fair values recognized for assets acquired and liabilities assumed.
Significant estimates and assumptions are used in estimating the value of acquired identifiable intangible assets, including estimating future cash flows based on forecasted revenues and EBITDA margins that we expect to generate following the acquisition and applying an appropriate discount rate to estimate a present value of those cash flows and determining their useful lives. These assumptions are forward-looking and their realization will be affected by future economic and market conditions.
Recent Accounting Pronouncements
A discussion of recently issued accounting standards applicable to us is included in Note 2 to our Consolidated Financial Statements.
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Consolidated Results of Operations for the Years EndedDecember 31, 2021 and 2020 Years Ended December 31, (in thousands) 2021 2020 Change Revenue: Products$ 50,769 $ 40,692 $ 10,077 Services 7,980 6,641 1,339 Total revenue 58,749 47,333 11,416 Cost of revenue 57,865 35,876 21,989 Gross profit 884 11,457 (10,573 ) Gross profit percentage 1.5 % 24.2 % Operating expense: Selling, general and administrative 80,004 19,343 60,661 Research and development 20,270 7,851 12,419 (Gain) loss on sale of assets 82 (9 ) 91 Total operating expense 100,356 27,185 73,171 Loss from operations (99,472 ) (15,728 ) (83,744 )
Nonoperating (expense) income: Gain on remeasurement of private warrants 27,767 3,720 24,047 Interest, net
(763 ) (2,080 ) 1,317
Gain on forgiveness of debt 1,776 5,266 (3,490 )
Loss on loan extinguishment (2,604 ) - (2,604 )
Other, net (44 ) (31 ) (13 )
Total nonoperating (expense) income: 26,132 6,875 19,257
Loss before income taxes (73,340 ) (8,853 ) (64,487 )
Income taxes 13,233 - 13,233
Net loss $ (60,107 ) $ (8,853 ) $ (51,254 )
Revenue
Revenue in 2021 increased 24% as compared to 2020, driven by a year-over-year
increase in product revenue of 25%. Shipment volume in 2021 as compared to 2020
increased 17% and our weighted average selling price increased 6% for the same
periods. This increase in product revenue was attributable to an increase in
PHA-based product sales of
We had two customers that accounted for 35% of total revenue during 2021, as compared to three customers that accounted for 58% of total revenue during 2020.
Cost of revenue and gross profit
Cost of revenue in 2021 increased 61% compared to 2020. The increase in cost of
revenue is primarily a result of the cost of PHA-based products representing a
significantly larger portion of our total cost of revenue during 2021 than in
2020. The average cost per pound of PHA-based products sold in 2021 was
significantly higher than that of PLA-based products due to (1) increasing
depreciation costs as we placed additional PHA production capacity in service
and (2) elevated per-unit fixed-cost absorption at our Kentucky Facility as we
ran these new assets at less than full capacity while scaling up production.
Included in the increase in cost of revenue was a
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Operating expense
The increase in selling, general and administrative expense in 2021 as compared
to 2020 was due primarily to an increase in stock-based compensation expense of
Gain on remeasurement of private warrants
The gains on remeasurement of private warrants primarily reflect
"mark-to-market" adjustments reflecting the change in the price of our common
stock during each year. The 2020 gain is based on the change in the price of our
common stock between the Business Combination date of
Interest, net
Net interest expense in 2021 decreased by
Gain on forgiveness of debt and loss on extinguishment of debt
During 2021, we recognized a loss of
Income taxes
In 2021, we recorded significant deferred tax liabilities in connection with the
acquisition of
Net loss
The increase in net loss in 2021 as compared to 2020 was primarily attributable
to the stock-based compensation expenses and the lower gross profit as discussed
above, partially offset by the larger gain on remeasurement of the private
warrants and the 2021 income tax benefit of
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Year Ended
Management's Discussion and Analysis comparing the results for the year ended
Liquidity and Capital Resources
Our primary sources of liquidity are equity issuances and debt financings. We
had accumulated deficits of
Excluding pre-engineering costs, capitalized interest and internal labor and
overhead, we have invested
2021 Debt Financings
3.25% Convertible Senior Notes
On
The Notes are our senior, unsecured obligations and are (i) equal in right of payment with our existing and future senior, unsecured indebtedness; (ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables.
The Notes accrue interest at a rate of 3.250% per annum, payable semi-annually
in arrears on
The Notes will be redeemable at our option between
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Capped Calls
Also in
The number of shares to be delivered upon such exercise is dependent on the
market value of our common stock at the time of exercise, subject to a cap
initially equal to
2020 Debt Financings
In January and August of 2020, we issued convertible notes for an aggregate
principal amount of
In
2019 Debt Financings
In
In
In April and
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2021 Equity Issuances
At
2020 Equity Issuances
During the year ended
Cash Flows for 2021 and 2020
The following table summarizes our cash flows from operating, investing and financing activities:
Years Ended December 31,
(in thousands) 2021 2020
Net cash used in operating activities
Cash flows from operating activities
Net cash used in operating activities was
Cash flows from investing activities
For the year ended
Cash flows from financing activities
For 2021, net cash provided by financing activities was
•
Proceeds of
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Proceeds of
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Principal payments on long-term debt of
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Payment of debt issuance costs, primarily related to the Notes, of
For 2020, net cash provided by financing activities was
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Proceeds of
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Proceeds of
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Proceeds from the exercise of stock options of
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Proceeds of
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Material Cash Requirements
We enter into a variety of contractual obligations in addition to capital
expenditures as part of our normal operations. As of
Off-balance Sheet Arrangements
At
Currently we do not engage in off-balance sheet financing arrangements.
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