CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") of Danimer Scientific, Inc.
contains forward-looking statements. 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.
(formerly known as Live Oak Acquisition Corp.) 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.
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, 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 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.
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 (the "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 Acquisition Corp. ("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.
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On August 11, 2021, we closed the acquisition of Novomer, Inc. ("Novomer") in
exchange for $153.9 million in cash, gross of cash acquired, subject to certain
customary adjustments as set forth in the merger agreement. Novomer's financial
results are included in those of the Company from that date forward. In 2020,
Novomer generated no revenue and incurred a net loss of $9.1 million. Novomer
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.
Company Overview
We are a performance polymer company specializing in bioplastic replacement for
traditional petroleum-based plastics. We bring together innovative technologies
to deliver renewable, environmentally friendly 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 new, 100%
biodegradable plastic feedstock alternative, which we sell under the proprietary
Nodax® brand name, for use in a wide variety of plastic applications including
water bottles, 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 membranes as energy reserves. We harvest the PHA from the
bacteria, then purify and filter the bioplastic before extruding the PHA into
pellets, which we sell to converters. 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. We
commenced scale-up fermentation runs in December 2019 and completed several
components of the Phase I improvements by the end of 2020. Through September 30,
2021, we have invested $57 million for Phase I and related projects, excluding
capitalized interest. Once Phase I is producing at full capacity, we expect to
produce approximately 20 million pounds of finished product per year. We plan to
expand the capacity of the plant by 45 million pounds of finished product,
bringing total plant capacity up to 65 million pounds per year, by investing
approximately $119 million to $121 million, excluding capitalized interest and
internal labor, for the Phase II expansion. Phase II construction is underway
with production expected to commence in the second quarter of 2022. We have
invested $95.4 million in the Phase II expansion through September 30, 2021,
excluding capitalized interest and internal labor.
In March 2021, we announced our plan to construct a six-fermenter PHA plant in
Bainbridge, Georgia that would require a capital investment of approximately
$700 million with a planned annual production capacity of approximately 250
million pounds of finished product. In July, we received an updated engineering
estimated for the greenfield plant of $619 million to $1,033 million based on
continued inflation in construction materials throughout 2021. Considering the
recent acquisition of Novomer, we have modified our plans to include Novomer's
expansion through the construction of a commercial Rinnovo plant. In turn, we
are modifying the plans for our Bainbridge greenfield facility to include three
fermenters instead of the six fermenters included in the original plan, leaving
space on the site for future expansion. Based on this updated three-fermenter
design, we have made corresponding reductions in the downstream processing and
extrusion areas and updated our engineering estimate for the Bainbridge
greenfield plant to $390 million to $590 million. Through September 30, 2021, we
have invested $11.5 million in the greenfield facility, excluding capitalized
interest and internal labor. We may add additional fermentation, downstream
processing, and extrusion modules to the Bainbridge facility at a future date.
We currently anticipate spending between $100 million to $180 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. We purchase neat PLA and
formulate it into bioplastic applications 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 have expanded our
product portfolio and now supply customers globally.
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Research and Development ("R&D") 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 Novomer.
As a result of the Business Combination, we are an SEC-registered and
NYSE-listed company, which will require us to continue to hire additional
personnel and implement procedures and processes to address public company
regulatory requirements and customary practices. We expect to continue to incur
additional expenses as a public company for, among other things, directors' and
officers' liability insurance, director fees and additional internal and
external accounting and legal and administrative resources, including increased
audit and legal fees.
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 contracts. Costs of goods sold consists of
raw materials and ingredients, labor costs 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 specific
service contracts.
Selling, general and administrative expense
Selling, general and administrative expense consists of labor costs, marketing
expense, corporate administration expenses, stock-based compensation not
allocated to research and development or production personnel, and elements of
depreciation, rent and facility expenses that are not directly attributable to
costs of production or associated with research and development activities.
Research and development expense
Research and development expense includes labor costs, 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 contracts.
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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 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. In 2020, we extended our previous
timetable for the scale up of the Kentucky Facility in order to conserve
financial resources. 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 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 late last year. In the third quarter, we:
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acquired and integrated Novomer,
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increased our PHA production capacity,
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made additional progress in negotiating development and supply agreements with
our blue-chip customers, and
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remained on schedule with the construction of our Phase II Kentucky Facility
expansion.
As noted above, in August 2021, we closed on the acquisition of Novomer, a
leading developer of conversion technology providing transformable, functional
and low net carbon inputs into the production of PHA-based resins and other
biodegradable materials, in a cash transaction valued at $153.9 million, gross
of cash acquired and subject to customary adjustments. Novomer develops
high-performing, carbon-efficient, cost-effective polymers and chemicals,
including poly(3-hydroxypropionate) ("p(3HP)"), a type of PHA under its brand
name, Rinnovo. We believe that Novomer's technology will enhance the strength of
product applications we develop due to the complementary nature of Novomer's
polymers when combined with Nodax and enable us to increase the expected overall
volume of finished product we will be able to deliver, all while significantly
lowering our production costs and capital expenditure per pound produced.
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. The more
critical accounting estimates include estimates related to revenue recognition,
stock-based compensation, leases and derivatives. We also have other key
accounting policies, which involve the use of estimates, judgments and
assumptions that are significant to understanding our results, which are set
forth in our Annual Report on Form 10-K/A for the year ended December 31, 2020.
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Revenue recognition
We recognize revenue from product sales and services in accordance with
Financial Accounting Standards Board ASC ("ASC") Topic 606, Revenue from
Contracts with Customers.
We derive our revenues from: 1) product sales of developed compostable resins
based on PLA, PHA, and other renewable materials; and 2) research and
development (R&D) services related to developing customized formulations of
biodegradable resins based on PHA, PLA and other biopolymers, as well as tolling
revenues.
We generally produce and sell resin pellets, for which we typically recognize
revenue 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 rebates or volume discounts.
R&D service revenues generally involve milestone-based contracts under which we
work with a customer to develop a PHA-based 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 measured 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 options and restricted shares to our employees, including
some with market-based or performance-based factors that affect vesting. We
recognize expense for these awards based on a straight-line basis over the over
the longest of the explicit, implicit or derived service period of the award, as
applicable. Most of our awards qualify for equity accounting, meaning the
expense recognized is based on grant date fair value. However, some awards
granted during the quarter ended September 30, 2021 have cash-settlement
features that require application of the liability method of accounting, under
which the instruments are re-valued at each reporting date and the expense
recognized is cumulatively trued-up. We recognize a liability for such awards.
We determine fair values for most of our stock options using a Black-Scholes
option pricing model and for most of restricted shares using the trading price
of our common stock, but the awards with market-based conditions required the
use of Monte Carlo simulations for valuation.
Leases
We account for leases in accordance with ASC 842, Leases and we determine if an
arrangement is a lease at inception. We use our incremental borrowing rate based
on the information available at lease commencement dates, such as rates recently
offered to us by lenders on proposed borrowings, in determining the present
values of future payments. Our incremental borrowing rate for a lease is the
rate of interest we would have to pay on a collateralized basis to borrow an
amount equal to the lease payments under similar terms. 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.
Lease costs associated with operating leases consist of both fixed and variable
components. Expenses related to fixed lease payments are recognized on a
straight-line basis over the lease term. Variable payments, such as insurance
and property taxes, are recorded as incurred and are not included in the initial
lease liability.
Derivatives
We account for outstanding privately-held warrants to purchase our common stock
for $11.50 per share as derivatives under ASC 815, Derivatives and Hedging and
therefore we report these warrants as a liability at their fair value, which we
determine using the Black Scholes model, and we report mark-to-market changes in
their fair value in condensed consolidated statement of operations.
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Condensed Consolidated Results of Operations for the Three Months Ended
September 30, 2021 and 2020:
Three Months Ended September 30,
(in thousands) 2021 2020 Change
Revenue:
Products $ 12,397 $ 11,249 $ 1,148
Services 972 1,586 (614 )
Total revenue 13,369 12,835 534
Cost of revenue 13,601 9,188 4,413
Gross profit (232 ) 3,647 (3,879 )
Gross profit percentage -1.7 % 28.4 %
Operating expense:
Selling, general and administrative 26,592 3,370 23,222
Research and development 5,010 2,190 2,820
Total operating expenses 31,602 5,560 26,042
Loss from operations (31,834 ) (1,913 ) (29,921 )
Nonoperating expense:
Gain on measurement of private warrants 28,392 - 28,392
Interest expense, net (246 ) (334 ) 88
Other income, net 90 108 (18 )
Total nonoperating expenses 28,236 (226 ) 28,462
Loss before income taxes (3,598 ) (2,139 ) (1,459 )
Income taxes 11,423 - 11,423
Net income (loss) $ 7,825 $ (2,139 ) $ 9,964
Revenue
The increase in product revenue was driven by a 7.6% increase in pounds sold and
a 1.4% increase in our weighted average selling price. In the third quarter of
2021, PHA-based products represented 32% and only represented 12% of total sales
during the same period in the prior year. PHA-based product sales increased $2.7
million due to production capacity ramp-up in our Kentucky Facility. PLA-based
product sales decreased $1.6 million compared to the prior year period primarily
due abnormally large volumes sold during the same period in 2020. We believe
some of our PLA customers increased their inventory levels in 2020 to protect
against potential supply chain disruptions related to the COVID-19 virus. Once
these higher inventory levels were achieved, certain of these customers slowed
their orders beginning in the fourth quarter of 2020.
The decrease in services revenue relates primarily to a $0.6 million decrease in
revenue from research and development contracts. Certain deliverables under our
R&D contracts such as customer acceptance testing have been delayed by COVID and
customer supply chain matters, resulting in less work being done on these
projects currently and extended project timelines.
Four of our customers accounted for 60% and 80% of total revenue for the three
months ended September 30, 2021 and 2020, respectively.
Cost of revenue and gross profit
Cost of revenue increased 48% for the three months ended September 30, 2021 as
compared with the three months ended September 30, 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 revenue during the third quarter of
2021 compared to the third quarter of 2020, as described above. The average cost
per pound of PHA-based products sold in the quarter was significantly higher
than our PLA-based products due to increasing depreciation costs as we place
additional production capacity in service and elevated per-unit fixed-cost
absorption at our Kentucky Facility as we run these new assets at less than full
capacity. Gross margin percentage decreased to negative 2% for the three months
ended September 30, 2021 from 28% for the three months ended September 30, 2020.
The decline in our gross profit margin was primarily the result of these fixed
costs at the Kentucky Facility. We anticipate that fixed costs, including rent
and depreciation, will become a smaller portion of our cost of revenue as we
scale up production. We believe Kentucky Facility Phase I will reach its annual
run rate capacity of 20 million pounds by the end of 2021.
Operating expenses
The increase in selling, general and administrative expense was due primarily to
an increase in stock-based compensation expense of $13.6 million primarily
related to equity awards that were granted in conjunction with the Business
Combination and thereafter, as well as $2.3 million in Novomer
acquisition-related expenses, an increase of $1.1 million in legal costs
incurred to support our transition to becoming a publicly traded company and the
completion of the Novomer acquisition, and an $0.8 million increase in property
and other insurance costs and increased accrued property taxes associated with
our growing asset base. The increase in research and development
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expense period over period was primarily due to an increase in stock-based
compensation expense of $1.4 million primarily related to equity awards granted
in conjunction with the Business Combination, $1.3 million of R&D expense of
Novomer (inclusive of depreciation and amortization), and increased compensation
and benefits costs related to additional headcount in the research and
development areas.
Gain on remeasurement of private warrants
The 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 three months ended September 30,
2021.
Interest expense
The decrease in interest expense primarily resulted from the payoff the 2019
Term Loan in January 2021, the settlement of convertible notes into equity in
December 2020 and the extinguishment of certain loans issued in connection with
the New Markets Tax Credit program. This decrease was offset by capitalized
interest, associated primarily with capital expenditures at our Kentucky
Facility, declining to $0.1 million for the three months ended September 30,
2021 from $1.3 million for the three months ended September 30, 2020. Interest
capitalization declined despite continued capital investment due to lower debt
levels.
Income tax expense
For the three months ended September 30, 2021 we recorded significant deferred
tax liabilities in connection with the acquisition of Novomer. As a result, we
expect to realize certain of our deferred tax assets to offset these liabilities
and we have released the valuation allowance associated with these deferred tax
assets. This release of valuation allowance has been recorded as a tax benefit
in the current period. For the three months ended September 30, 2020, we had no
income tax expense or benefit since we were maintaining a full valuation
allowance against our net deferred tax asset. Our effective tax rates differed
from the federal statutory rate of 21% due to our net loss position and
maintaining a full valuation allowance, other than as noted in connection with
the acquisition of Novomer in the current period.
Net income (loss)
We reported net income in the three months ended September 30, 2021 due to an
income tax benefit associated with the acquisition of Novomer. The increase in
loss before income taxes for the three months ended September 30, 2021 compared
with 2020 was primarily attributable to increased selling, general and
administrative expenses, partially offset by the gain on remeasurement of
private warrants, as discussed in the sections above.
Condensed Consolidated Results of Operations for the Nine months ended September
30, 2021 and 2020:
Nine Months Ended September 30,
(in thousands) 2021 2020 Change
Revenue:
Products $ 34,715 $ 31,004 $ 3,711
Services 6,306 4,302 2,004
Total revenue 41,021 35,306 5,715
Cost of revenue 37,786 25,058 12,728
Gross profit 3,235 10,248 (7,013 )
Gross profit percentage 7.9 % 29.0 %
Operating expense:
Selling, general and administrative 55,791 9,178 46,613
Research and development 11,604 5,565 6,039
(Gain) loss on sale of assets 33 (9 ) 42
Total operating expenses 67,428 14,734 52,694
Loss from operations (64,193 ) (4,486 ) (59,707 )
Nonoperating expense:
Gain on remeasurement of private warrants 6,435 - 6,435
Interest expense, net (668 ) (1,431 ) 763
Gain on forgiveness of debt 1,776 - 1,776
Loss on loan extinguishment (2,604 ) - (2,604 )
Other income, net 170 297 (127 )
Total nonoperating expenses 5,109 (1,134 ) 6,243
Loss before income taxes (59,084 ) (5,620 ) (53,464 )
Income taxes 11,423 - 11,423
Net loss $ (47,661 ) $ (5,620 ) $ (42,041 )
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Revenue
In the first nine months of 2021, PHA-based products represented 29.9% of our
total revenue compared to only 7% during the same period in the prior year.
Driving this increase in product revenue was a 4.5% increase in pounds sold and
an approximately 6.7% increase in our weighted average selling price. The $3.7
million increase in product revenue was primarily attributable to increases in
PHA-based product sales of $9.7 million offset by a decrease in PLA-based
product sales of $5.9 million. The increase in PHA-based product sales was the
result of the continued increase of production capacity at our Kentucky
Facility. The decrease in PLA-based product sales was primarily the result of
some of our PLA customers deciding to increase their inventory levels in 2020 to
protect against potential supply chain disruptions that might have arisen due to
the spread of the COVID-19 virus. Once these higher inventory levels were
achieved, certain of these customers slowed their orders beginning in the fourth
quarter of 2020.
The increase in services revenue relates primarily to a $1.9 million increase in
revenue from research and development contracts.
We have four customers that accounted for 60% and 74% of total revenue for the
nine months ended September 30, 2021 and 2020, respectively.
Cost of revenue and gross profit
Cost of revenue for the nine months ended September 30, 2021 increased 51% as
compared with the nine months ended September 30, 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 the 2021 year
to date period compared to the 2020 year to date period. The average cost per
pound of PHA-based products sold in the year to date period of 2021 was
significantly higher than our PLA-based products due to elevated fixed-cost
absorption at our Kentucky Facility. We expect our average cost per unit sold to
improve as the Kentucky Facility continues to scale up production. Included in
the increase in cost of revenue was a $3.8 million increase in depreciation
expense and a $0.6 million increase in rent expense primarily related to having
completed the installation of certain assets at the Kentucky Facility and
commencing production. We anticipate that rent and depreciation will become a
smaller portion of our cost of revenue as we continue to scale up PHA production
at the Kentucky Facility. Gross margin percentage decreased to 8% for the nine
months ended September 30, 2021 from 29% for the nine months ended September 30,
2020. The decline in our gross profit margin was primarily the result of
commencing limited PHA manufacturing activities in early 2020 at the Kentucky
Facility and the incurrence of associated incremental ramp-up costs, including
increased depreciation expense.. In the second quarter of 2021, we completed the
debottlenecking of the Kentucky Facility and expect that these efforts will
allow us to significantly scale production from previous levels, further
reducing manufacturing costs of PHA based resins on a per pound basis. We
believe the debottlenecking also positions us to accelerate production of
PHA-based resins towards reaching 100% of the facility's current annual run rate
capacity of 20 million pounds of PHA-based resins by the end of 2021.
Operating expenses
The increase in selling, general and administrative expense was due primarily to
an increase in stock-based compensation expense of $31.4 million primarily
related to equity awards that were granted in conjunction with the Business
Combination. Also contributing to the increase were $2.8 million in legal fees
incurred to support our transition to becoming a publicly-traded company, our
acquisition of Novomer in August 2021 and our defense against ongoing
litigation; $2.6 million other Novomer deal related expenses; an increase of
$1.7 million in accounting and auditing fees representing costs incurred to
address the financial reporting requirements of becoming a public company; a
$1.7 million increase in property and other insurance costs and increased
accrued property taxes associated with our growing asset base; increases in
compensation and benefits related to hiring additional finance and
administrative staff; and incremental operating expenses arising from the
inclusion of Novomer in our condensed financials starting in mid-August 2021.
The increase in research and development expense period over period was
primarily attributed to increases in stock-based compensation expense of $3.9
million primarily related to equity awards granted in conjunction with the
Business Combination, $1.3 million of R&D expense of Novomer (inclusive of
depreciation and amortization), and increased compensation and benefits costs of
$1.3 million related to additional headcount in the research and development
areas.
Gain on remeasurement of private warrants
The gain on remeasurement of 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 nine months
ended September 30, 2021.
Interest expense
Interest expense decreased primarily due to the payoff of the 2019 Term Loan in
January 2021, the settlement of convertible notes into equity in December 2020,
and the extinguishment of certain loans issued in connection with the New Market
Tax Credit program. This decrease was partially offset by capitalized interest
declining to $0.3 million for the nine months ended September 30, 2021 from $1.8
million for the nine months ended September 30, 2020. The interest
capitalization primarily relates to the purchase, modification and installation
of machinery and equipment at the Kentucky Facility and declined due to a
reduction in debt balances when comparing the year-to-date periods.
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Gain (loss) on loan extinguishment and other income
During the year to date period ended September 30, 2021, we voluntarily paid off
our 2019 Term Loan balance of $27.0 million. We recognized a loss of $2.6
million upon this extinguishment due to the write-off of unamortized debt
issuance costs and prepayment and other fees.
On April 12, 2021, we received notice that our PPP Loan had been forgiven by the
Small Business Administration. As a result we have recognized a $1.8 million
gain on forgiveness of debt, representing principal and interest earned on the
balance in escrow, and net of associated fees. This amount was released from
escrow during the quarter ended June 30, 2021.
Income tax expense
For the nine months ended September 30, 2021, we recorded significant deferred
tax liabilities in connection with the acquisition of Novomer. As a result, we
expect to realize certain of our deferred tax assets to offset these liabilities
and have released the valuation allowance associated with these deferred tax
assets. This release of valuation allowance has been recorded as a tax benefit
in the current period. For the nine months ended September 30, 2020, we had no
income tax expense or benefit since we were maintaining a full valuation
allowance against our net deferred tax asset. Our effective tax rate of 14.6%
differed from the federal statutory rate of 21% due to our net loss position and
maintaining a full valuation allowance, other than as noted in connection with
the acquisition of Novomer in August 2021.
Net loss
The increase in net loss was primarily attributable to the increase in operating
expenses discussed above.
Liquidity and Capital Resources
Our primary sources of liquidity are currently equity issuances, warrant
redemptions and debt financings. We had accumulated deficits of $106.4 million
and $58.8 million as of September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, we had $194.2 million in cash and cash equivalents and
working capital of $206.4 million. While we believe we have established an
ongoing source of revenue that will be sufficient to cover our ongoing operating
costs, we are currently experiencing a period of significant capital
expenditures resulting from the ongoing expansion and construction of our
manufacturing and production facilities. Excluding capitalized interest and
labor, we have invested $95.4 million in the Phase II expansion through
September 30, 2021. In total, we expect to invest $119 million to $121 million
in the Kentucky Facility by the time it is completed. We plan to break ground on
our Bainbridge, Georgia plant construction ahead of schedule in November 2021
and we have started placing orders for long-lead time equipment items to
mitigate the impacts of ongoing inflation and delivery delays that could result
from global supply chain challenges. As of September 30, 2021, we have invested
$11.5 million of capital for the Bainbridge plant, and we expect to invest
another $56 million by the end of 2021. Completion of the Bainbridge facility is
contingent upon receiving additional financing. We believe we have adequate
liquidity to fund our operations for the next twelve months.
At September 30, 2021, our most significant borrowing facilities are our
Subordinated Term Loan and Asset-based Lending Arrangement described below.
Subordinated Term Loan
In March 2019, we entered into a subordinated 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. After an amendment on March 18, 2021, the base interest
rate is the LIBOR plus 2%. The Subordinated Term Loan provides for "springing"
financial covenants including leverage ratio, fixed charge coverage ratio and
adjusted EBITDA covenants that apply only if Danimer Scientific Holdings, LLC
and its subsidiaries have less than $10 million of unrestricted cash on deposits
and imposes a maximum capital expenditures limit. Our ability to prepay the loan
is restricted until after July 1, 2022.
Asset-based Lending Arrangement
On April 29, 2021, we entered into a credit facility with Truist Bank that
includes a $20.0 million variable interest rate asset-based lending arrangement
and a $1.0 million capital expenditure line of credit with customary terms and
conditions. These arrangements mature on April 29, 2026. Interest on any
borrowings is payable monthly and is calculated, at our election, using either a
base rate (as defined in the credit agreement) plus an applicable margin of
1.50% for revolving loans and 1.75% for equipment loans, or a LIBOR market index
rate ("LMIR") (as defined in the credit agreement) plus an applicable margin of
2.50% for revolving loans and 2.75% for equipment loans. If we maintain a
trailing twelve month consolidated fixed charge coverage ratio (as defined in
the credit agreement) of 1.1:1.0 or better and no event of default exists, then
the applicable margins for base rate revolving loans and LMIR rate loans are
1.00% and 2.00%, respectively. At September 30, 2021, we had no borrowings
outstanding under the Asset-based Lending Arrangement. We estimate that out
total availability under this arrangement is $14.7 million at September 30,
2021. Through October 29, 2023, as long as we maintain undrawn availability of
at least $4 million, certain covenant ratio restrictions in the credit agreement
do not apply.
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Cash Flows for the Nine months ended September 30, 2021 and 2020:
The following table summarizes our cash flows from operating, investing and
financing activities:
For the Nine Months
Ended September 30,
(in thousands) 2021 2020
Net cash used in operating activities $ (47,441 ) $ (10,415 )
Net cash used in investing activities $ (247,637 ) $ (25,169 )
Net cash provided by financing activities $ 111,478 $ 32,456
Cash flows from operating activities
Net cash used in operating activities was $47.4 million during the nine months
ended September 30, 2021 and was $10.4 million during the comparable period for
2020. The period-to-period change was primarily attributable to a $21.5 million
net loss after adjustments for non-cash items as well as well as a $15.3 million
increase in cash used to fund changes in working capital.
Cash flows from investing activities
For the nine months ended September 30, 2021, we used $96.8 million for the
purchase of property, plant and equipment which compares to $25.2 million for
the purchase of property, plant and equipment for the nine months ended
September 30, 2020. During 2021, we commenced a further expansion of the
production capacity of our Kentucky Facility (Phase II) as well as procurement
and construction for the greenfield facility in Georgia. We also had a net cash
expenditure of $151.2 million for the acquisition of Novomer, as described
above.
Cash flows from financing activities
For the nine months ended September 30, 2021, net cash provided by financing
activities was $111.5 million which consisted primarily of:
?
Net proceeds from warrant exercises of $138.2 million,
?
Repayments of debt of $27.1 million, and
?
Proceeds from the exercise of stock options of $2.7 million.
This compares to net cash provided by financing activities of $32.5 million for
the nine months ended September 30, 2020 which consisted of:
?
Proceeds of $29 million from the issuance of common stock, net of issuance
costs, and
?
Proceeds from issuance of long term debt of $4.4 million.
Off-balance Sheet Arrangements
At September 30, 2021, 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. The term "off-balance sheet arrangement" generally
means any transaction, agreement, or other contractual arrangement to which an
unconsolidated entity is a party, under which we have any obligation arising
under a guarantee contract, derivative instrument, or variable interest or a
retained or contingent interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity, or market risk support for such
assets.
Currently we do not engage in off-balance sheet financing arrangements.
Emerging Growth Company Status
We are an emerging growth company ("EGC"), as defined in the JOBS Act, which
currently exempts us from the requirement to receive an auditor's report over
our internal controls over financial reporting in our Annual Reports on Form
10-K as well as from certain disclosures in our Definitive Proxy Statements on
Form DEF14A.
Since the market value of our outstanding securities held by non-affiliates on
June 30, 2021 exceeded $700 million, we expect to be deemed a "large accelerated
filer," as defined by the SEC, on January 1, 2022. As a result, our Form 10-K
for the year ending December 31, 2021 will be subject to auditor attestation
over our internal controls over financial reporting as required by Section
404(b) of the Sarbanes-Oxley Act. Compliance with Section 404(b) will require a
significant amount of management's time, and we plan to make material
expenditures on information technology, process improvement, headcount
additions, and consulting expense in order to comply by the end of this year.
There can be no assurance that we will succeed in these efforts, and if we do
not, the disclosure of one or more material weaknesses is possible. In such a
case, the market value of our common stock could be negatively affected.
As a large accelerated filer, we will also have to file a more expansive
Definitive Proxy Statement on Form DEF14A, which will require additional time
and expense as well.
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