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OFFON

DANIMER SCIENTIFIC, INC.

(DNMR)
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DANIMER SCIENTIFIC, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/15/2021 | 05:27pm EST

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:


?
our ability to recognize the anticipated benefits of business combinations,
which may be affected by, among other things, competition, and our ability to
grow and manage growth profitably following business combinations;
?
costs related to business combinations;
?
changes in applicable laws or regulations;
?
the outcome of any legal proceedings against us;
?
the effect of the COVID-19 pandemic on our business;
?
our ability to execute our business model, including, among other things, market
acceptance of our products and services and construction delays in connection
with the expansion of our facilities;
?
our ability to raise capital;
?
the possibility that we may be adversely affected by other economic, business,
and/or competitive factors;
?
our ability to timely and effectively remediate material weaknesses and maintain
effective internal control over financial reporting and disclosure and
procedures; and
?
other risks and uncertainties set forth in the section entitled "Risk Factors"
of this Report, which is incorporated herein by reference

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this Report, specifically the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other risks and uncertainties are and will be disclosed in our prior and future SEC filings. The following information should be read in conjunction with the Condensed Consolidated Financial Statements and related notes appearing in Part I, Item 1 of this Report.

Introductory Note

The following discussion and analysis of our financial condition and results of operations describes the business historically operated by Meredian Holdings Group and its subsidiaries ("Legacy Danimer") under the "Danimer Scientific" name as an independent enterprise prior to December 29, 2020.

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:


?
acquired and integrated Novomer,
?
increased our PHA production capacity,
?
made additional progress in negotiating development and supply agreements with
our blue-chip customers, and
?
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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