DANIMER SCIENTIFIC, INC. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") of
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:
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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;
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costs related to business combinations;
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changes in applicable laws or regulations;
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the outcome of any legal proceedings against us;
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the effect of the COVID-19 pandemic on our business;
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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;
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our ability to raise capital;
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the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
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our ability to timely and effectively remediate material weaknesses and maintain effective internal control over financial reporting and disclosure and procedures; and
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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
Introductory Note
The following discussion and analysis of our financial condition and results of
operations describes the business historically operated by
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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
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.
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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 Danimer Catalytic Technologies.
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.
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 supplier or transportation partner to source and transport materials and equipment) that could impact our operations and capital projects.
Although our 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. We have not observed any material impairments of, or other significant changes to, the fair value of our 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 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, building on our team's many accomplishments since we became a public company in late 2020 by:
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entering into a partnership agreement with Hyundai,
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increasing our PHA production capacity,
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making additional progress in negotiating development and supply agreements with our blue-chip customers, and
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remaining on schedule with the construction of our Phase II Kentucky Facility expansion.
Some of our PLA materials are used in products that are sold into
With respect to the war in the
While we do not have operations in either country, we have experienced a decline
in sales due to the conflict. 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
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
The preparation of financial statements in conformity with
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Condensed Consolidated Results of Operations for the Three Months EndedMarch 31, 2022 and 2021: Three Months Ended March 31, (in thousands) 2022 2021 Change Revenue: Products$ 13,216 $ 11,024 $ 2,192 Services 1,527 2,157 (630 ) Total revenue 14,743 13,181 1,562 Cost of revenue 16,065 11,725 4,340 Gross profit (1,322 ) 1,456 (2,778 ) Gross profit percentage -9.0 % 11.0 % Operating expense: Selling, general and administrative 22,236 10,120 12,116 Research and development 7,131 2,619 4,512 Total operating expenses 29,367 12,739 16,628 Loss from operations (30,689 ) (11,283 ) (19,406 )
Nonoperating income (expense): Gain (loss) on measurement of private warrants 4,995 (80,697 ) 85,692 Loss on loan extinguishment
- (2,604 ) 2,604
Interest, net (992 ) (148 ) (844 )
Other, net 9 (2 ) 11
Total nonoperating income (expense) 4,012 (83,451 ) 87,463
Loss before income taxes (26,677 ) (94,734 ) 68,057
Income taxes 291 - 291
Net loss $ (26,386 ) $ (94,734 ) $ 68,348
Revenue
The increase in product revenue was driven by a 15% increase in pounds sold and
a 4% increase in our weighted average selling price. In the first quarter of
2022, PHA-based products represented 52% of total revenue and only represented
29% of total revenue during the same period in the prior year. PHA-based product
sales increased
The decrease in service revenue relates primarily to a
Three of our customers accounted for 58% and 54% of total revenue for the three
months ended
Cost of revenue and gross profit
Cost of revenue increased 37% for the three months ended
The decline in gross profit percentage was primarily due to lower volumes of PLA
products that led to a lower margin for those products in the current quarter,
combined with lower R&D and tolling services revenue, partially offset by higher
PHA volumes at improved margins. Our gross profit percentage was also impacted
by
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Operating expenses
The increase in selling, general and administrative expense was due primarily to
an increase in stock-based compensation expense of
Gain (loss) 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 loss was, conversely, due to the common stock price increase during that period.
Interest expense
The increase in interest expense, net of capitalization, primarily resulted from
the issuance of our
Income taxes
For the current quarter, we had a tax benefit of
Net loss
We reported a net loss in the three months ended
Liquidity and Capital Resources
Our primary sources of liquidity are currently equity issuances and debt
financings. As of
Excluding pre-engineering costs, capitalized interest and internal labor and
overhead, we have invested
We have open purchase orders related to our Kentucky Facility Phase II expansion
and our Greenfield plant construction totaling
As of
3.25% Convertible Senior Notes
On
The Notes are our senior, unsecured obligations and accrue interest at a rate of
3.250% per annum, payable semi-annually in arrears on
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is approximately
Capped Calls
Also in
Subordinated Term Loan
In
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
Cash Flows for the Three Months Ended
The following table summarizes our cash flows from operating, investing and financing activities:
Three Months Ended March 31,
(in thousands) 2022 2021
Net cash used in operating activities $ (17,605 ) $ (14,208 )
Net cash used in investing activities $ (58,916 ) $ (23,893 )
Net cash provided by (used) in financing activities $ 78 $ (26,566 ) Cash flows from operating activities
Net cash used in operating activities was
Cash flows from investing activities
In the current quarter, we used
Cash flows from financing activities
For the current quarter, net cash provided by financing activities of
•
Proceeds from the exercise of stock options and ESPP units of
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Repayments of debt of
In the prior year quarter, net cash used in financing activities of
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Principal payments of long-term debt of
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Proceeds from the exercise of stock options of
Off-balance Sheet Arrangements
At
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