Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) of Danimer Scientific, Inc. contains forward-looking statements. 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 the Business Combination, which may be affected by, among other things, competition, and our ability to grow and manage growth profitably following the closing of the Business Combination;
costs related to the Business Combination;
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 Securities and Exchange Commission (“SEC”). 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 and as a wholly owned subsidiary of Live Oak, and changed its name from Live Oak Acquisition Corp. to Danimer Scientific, Inc. (“Danimer”).
16
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 originally acquired the technology to produce PHA from Procter & Gamble in 2007. 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.
Having successfully scaled up PHA production from the laboratories to a contract manufacturer and later to our own commercial development plant, 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 June 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 believe that the capacity of the plant can be expanded by another 45 million pounds of finished product, bringing total plant capacity up to 65 million pounds per year, by investing an estimated $114 million (plus or minus 4%) for the Phase II expansion, excluding capitalized interest and internal labor. We have commenced Phase II construction and expect to complete the buildout during the second quarter of 2022. We have invested $61.6 million in the Phase II expansion through June 30, 2021, excluding capitalized interest and internal labor.
PLA-Based Resins
Since 2004, we have been producing proprietary plastics using a natural plastic called polylactic acid (“PLA”) as a base resin. While PLA is produced by other biopolymer manufacturers, PLA has limited functionality in its unformulated (“neat”) form. 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.
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 with Live Oak.
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.
17
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. Revenue from product sales is generally recognized when the finished products are shipped to customers. Due to the highly specialized nature of our products, returns are infrequent and we do not offer rebates or volume discounts that would impact selling prices.
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 and may involve single or multiple performance obligations with the transaction price being allocated to each performance obligation based on the standalone selling prices of the performance obligations. 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 performance obligation within the 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 Operating 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.
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.
18
Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees and our supply chain. We have endeavored to follow actions recommended by governments and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and laboratory facilities. We have been able to broadly maintain our operations, and we intend to continue to work with our stakeholders (including customers, employees, suppliers and local communities) to responsibly address this global pandemic. However, uncertainty resulting from the global pandemic could result in an unforeseen disruption to our supply chain (for example a closure of a key manufacturing or distribution facility or the inability of a key material or transportation supplier to source and transport materials) that could impact our operations.
Although our revenue has continued to grow during the 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. During this period and especially prior to the Business Combination, we have delayed certain capital expenditures in order to conserve financial resources, resulting in a slower than expected scale up of the Kentucky Facility. We have not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” located elsewhere in this Report.
Current Developments
During the second 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 just over seven months ago. In the second quarter alone:
Virtually all of our outstanding public warrants were exercised, providing funding to propel exciting new growth initiatives,
We made further progress on the construction of our Phase II Kentucky Facility expansion, and
We successfully completed the previously announced debottlenecking initiative at Phase I of our Kentucky Facility to increase efficiencies and in turn, increase our overall output of Nodax based resins at the facility.
In August 2021, we closed on the acquisition of Novomer, Inc., 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 $152 million, 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.
To meet the growing demand for our resins, we regularly evaluate our manufacturing capacity to pursue the most effective and efficient way to produce materials. In March 2021, we announced our plan to construct a greenfield 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 $826 million (+/- 25%) 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 in the near term, compared to the six fermenters that we had previously stated, while retaining the same amount of extrusion capacity included in the initial plan. Based on this updated three-fermenter design, we’ve updated our engineering estimate for the Bainbridge greenfield plant to $493 million (+/- 25%). We currently anticipate spending between $100 million to $180 million on the Rinnovo plant. We anticipate producing at least as much finished product as previously planned by incorporating Rinnovo into our finished products while maintaining the extrusion capacity contemplated in the original greenfield development plan. The Company anticipates adding the additional fermentation and downstream processing models to the greenfield at a future date.
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.
19
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 utilizing an input method 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 with either service-based conditions only or market-based and service-based conditions that affect vesting. We recognize expense for these awards based on their grant date fair values on a straight-line basis over the requisite service period, or, in the case of awards with both market-based and service-based vesting conditions, over the longest of the explicit, implicit or derived service period of the award. We determine grant date fair values using a Black-Scholes option pricing model for service-based only option awards and a Monte Carlo simulation for market-based and service-based awards.
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 and report mark-to-market changes in their fair value in current income.
20
Condensed Consolidated Results of Operations for the Three Months Ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
11,294
|
|
|
$
|
10,576
|
|
|
$
|
718
|
|
Services
|
|
|
3,177
|
|
|
|
1,297
|
|
|
|
1,880
|
|
Total revenue
|
|
|
14,471
|
|
|
|
11,873
|
|
|
|
2,598
|
|
Cost of revenue
|
|
|
12,460
|
|
|
|
8,441
|
|
|
|
4,019
|
|
Gross profit
|
|
|
2,011
|
|
|
|
3,432
|
|
|
|
(1,421
|
)
|
Gross profit percentage
|
|
|
13.9
|
%
|
|
|
28.9
|
%
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
19,079
|
|
|
|
2,828
|
|
|
|
16,251
|
|
Research and development
|
|
|
3,975
|
|
|
|
2,128
|
|
|
|
1,847
|
|
(Gain) loss on sale of assets
|
|
|
33
|
|
|
|
(9
|
)
|
|
|
42
|
|
Total operating expenses
|
|
|
23,087
|
|
|
|
4,947
|
|
|
|
18,140
|
|
Loss from operations
|
|
|
(21,076
|
)
|
|
|
(1,515
|
)
|
|
|
(19,561
|
)
|
Nonoperating expense:
|
|
|
|
|
|
|
|
|
|
Gain on measurement of private warrants
|
|
|
58,740
|
|
|
|
-
|
|
|
|
58,740
|
|
Interest expense, net
|
|
|
(222
|
)
|
|
|
(384
|
)
|
|
|
162
|
|
Gain on forgiveness of debt
|
|
|
1,776
|
|
|
|
-
|
|
|
|
1,776
|
|
Other income, net
|
|
|
30
|
|
|
|
99
|
|
|
|
(69
|
)
|
Total nonoperating expenses
|
|
|
60,324
|
|
|
|
(285
|
)
|
|
|
60,609
|
|
Net income (loss)
|
|
$
|
39,248
|
|
|
$
|
(1,800
|
)
|
|
$
|
41,048
|
|
Revenue
The increase in product revenue was driven by an approximately 8% increase in our weighted average selling price, which was partially offset by a 2% decrease in pounds sold. In the second quarter of 2021, PHA-based products represented 29% of our total revenue compared to only 7% during the same period in the prior year. PHA-based product sales increased $3.3 million due to production capacity ramp-up in our Kentucky Facility. PLA-based product sales decreased $2.6 million primarily due to 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 their higher inventory levels were achieved in late 2020, certain of these customers slowed their orders for the first half of 2021.
The increase in services revenue relates primarily to a $1.8 million increase in revenue from research and development contracts, which was driven primarily by signing additional partners to research and development contracts since the end of the prior year period.
We have four customers that accounted for 53% of the total revenue for the three months ended June 30, 2021 which compares with three customers that accounted for 64% of the total revenue during the three months ended June 30, 2020.
Cost of revenue and gross profit
Cost of revenue increased 48% for the three months ended June 30, 2021 as compared with the three months ended June 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 second quarter of 2021 compared to the second 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 elevated fixed-cost absorption at our Kentucky Facility. Included in the increase in cost of revenue was a $1.2 million increase in depreciation expense primarily relating to our Kentucky Facility as we continue to place production assets in service. The average cost per pound of PHA-based products sold in the second quarter of 2021 was significantly higher than our PLA-based products due to elevated fixed-cost absorption at our Kentucky Facility. Gross margin percentage decreased to 14% for the three months ended June 30, 2021 from 29% for the three months ended June 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.
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 this 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 by the end of 2021.
21
Operating expenses
The increase in selling, general and administrative expense was due primarily to an increase in stock-based compensation expense of $12.2 million primarily related to equity awards that were granted in conjunction with the Business Combination, an increase of $1.6 million in legal costs incurred to support our transition to becoming a publicly traded company as well as to defend against ongoing litigation, a $0.5 million increase in property and other insurance costs and increased accrued property taxes associated with our growing asset base, and increased compensation and benefits related to hiring additional finance and administrative staff. The increase in research and development expense period over period was primarily due to an increase in stock-based compensation expense of $1.7 million primarily related to equity awards that were granted in conjunction with the Business Combination 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 June 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 the fourth quarter of 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 June 30, 2021 from $1.1 million for the three months ended June 30, 2020. Interest capitalization declined despite continued capital investment due to lower debt levels.
Other income
On April 12, 2021, we received notice that our Paycheck Protection Plan Loan had been forgiven by the Small Business Administration. As a result, we recognized a $1.8 million gain on forgiveness of debt and collected this amount from escrow during the quarter ended June 30, 2021.
Income tax expense
For the three months ended June 30, 2021 and 2020, we had no income tax expense or benefit. Our effective tax rate differed from the federal statutory rate of 21% due to our taxable loss position and maintaining a full valuation allowance. At June 30, 2021, we continued to maintain a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding realization of such assets.
Net income (loss)
The change in net income (loss) in 2021 compared with 2020 was primarily attributable to the gain on remeasurement of private warrants, partially offset by the increase in operating expenses as discussed in the sections above.
22
Condensed Consolidated Results of Operations for the six months ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
22,318
|
|
|
$
|
19,755
|
|
|
$
|
2,563
|
|
Services
|
|
|
5,334
|
|
|
|
2,716
|
|
|
|
2,618
|
|
Total revenue
|
|
|
27,652
|
|
|
|
22,471
|
|
|
|
5,181
|
|
Cost of revenue
|
|
|
24,185
|
|
|
|
15,870
|
|
|
|
8,315
|
|
Gross profit
|
|
|
3,467
|
|
|
|
6,601
|
|
|
|
(3,134
|
)
|
Gross profit percentage
|
|
|
12.5
|
%
|
|
|
29.4
|
%
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
29,199
|
|
|
|
5,808
|
|
|
|
23,391
|
|
Research and development
|
|
|
6,594
|
|
|
|
3,375
|
|
|
|
3,219
|
|
(Gain) loss on sale of assets
|
|
|
33
|
|
|
|
(9
|
)
|
|
|
42
|
|
Total operating expenses
|
|
|
35,826
|
|
|
|
9,174
|
|
|
|
26,652
|
|
Loss from operations
|
|
|
(32,359
|
)
|
|
|
(2,573
|
)
|
|
|
(29,786
|
)
|
Nonoperating expense:
|
|
|
|
|
|
|
|
|
|
Loss on remeasurement of private warrants
|
|
|
(21,957
|
)
|
|
|
-
|
|
|
|
(21,957
|
)
|
Interest expense, net
|
|
|
(422
|
)
|
|
|
(1,097
|
)
|
|
|
675
|
|
Gain on forgiveness of debt
|
|
|
1,776
|
|
|
|
-
|
|
|
|
1,776
|
|
Loss on loan extinguishment
|
|
|
(2,604
|
)
|
|
|
-
|
|
|
|
(2,604
|
)
|
Other income, net
|
|
|
80
|
|
|
|
189
|
|
|
|
(109
|
)
|
Total nonoperating expenses
|
|
|
(23,127
|
)
|
|
|
(908
|
)
|
|
|
(22,219
|
)
|
Net loss
|
|
$
|
(55,486
|
)
|
|
$
|
(3,481
|
)
|
|
$
|
(52,005
|
)
|
Revenue
In the first six months of 2021, PHA-based products represented 29% of our total revenue compared to only 5% during the same period in the prior year. Driving this increase in product revenue was a 3% increase in pounds sold and an approximately 9% increase in our weighted average selling price. The $2.6 million increase in product revenue was primarily attributable to increases in PHA-based product sales of $6.9 million offset by a decrease in PLA-based product sales of $4.2 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 their higher inventory levels were achieved in late 2020, certain of these customers slowed their orders in early 2021.
The increase in services revenue relates primarily to a $2.6 million increase in revenue from research and development contracts. We have four customers that accounted for 57% of the total revenue for the six months ended June 30, 2021, which compares with three customers that accounted for 60% of the total revenue during the six months ended June 30, 2020.
Cost of revenue and gross profit
Cost of revenue for the six months ended June 30, 2021 increased 52% as compared with the six months ended June 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 first 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 $2.4 million increase in depreciation expense and a $0.2 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 13% for the six months ended June 30, 2021 from 29% for the six months ended June 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.
23
Operating expenses
The increase in selling, general and administrative expense was due primarily to an increase in stock-based compensation expense of $17.9 million primarily related to equity awards that were granted in conjunction with the Business Combination, an increase of $1.7 million in legal fees incurred to support our transition to becoming a publicly-traded company as well as to defend against ongoing litigation, an increase of $1.0 million in accounting and auditing fees representing costs incurred to address the financial reporting requirements of becoming a public company, a $0.9 million increase in property and other insurance costs and increased accrued property taxes associated with our growing asset base, and increases in compensation and benefits related to hiring additional finance and administrative staff. The increase in research and development expense period over period was primarily attributed to increases in stock-based compensation expense of $2.5 million primarily related to equity awards that were granted in conjunction with the Business Combination and increased compensation and benefits costs of $0.8 million related to additional headcount in the research and development areas.
Loss on remeasurement of private warrants
The loss on our Private Warrants represents an increase in the fair value of each of the 3.9 million outstanding Private Warrants due primarily to an increase in the market price of our common stock during the six months ended June 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 the fourth year to date period of 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 six months ended June 30, 2021 from $1.8 million for the six months ended June 30, 2020. The interest capitalization primarily relates to the purchase, modification and installation of machinery and equipment at the Kentucky Facility.
Gain (loss) on loan extinguishment and other income
During the year to date period ended June 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 six months ended June 30, 2021 and 2020, we had no income tax expense or benefit. Our effective tax rate differed from the federal statutory rate of 21% due to our net loss position and maintaining a full valuation allowance. At June 30, 2021, we continued to maintain a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding realization of such assets.
Net loss
The increase in net loss was primarily attributable to the increase in operating expenses and the loss on remeasurement of private warrants as discussed in the sections above.
Liquidity and capital resources
Our primary sources of liquidity are currently equity issuances and debt financings. We had accumulated deficit of $114.3 million and $58.8 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, we had $416.4 million in cash and cash equivalents and working capital of $422.7 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. We believe we have adequate liquidity to fund our operations for the next twelve months.
At June 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, through a subsidiary, entered into a subordinated second 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 (adjusted each calendar quarter; 3.25% and 3.25% at June 30, 2021 and December 31, 2020 respectively) 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 DSH has 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.
24
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) 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) 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.
Cash flows for the six months ended June 30, 2021 and 2020
The following table summarizes our cash flows from operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
Ended June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(22,641
|
)
|
|
$
|
(10,389
|
)
|
Net cash (used in) investing activities
|
|
$
|
(51,566
|
)
|
|
$
|
(19,070
|
)
|
Net cash provided by financing activities
|
|
$
|
111,189
|
|
|
$
|
28,193
|
|
Cash flows from operating activities
Net cash used in operating activities was $22.6 million during the six months ended June 30, 2021 and was $10.4 million during the comparable period for 2020. The period-to-period change was primarily attributable to additional personnel-related expenditures associated with headcount increases building our capabilities to operate as a public company and for operating expenses in our Kentucky Facility as well as a $3.2 million increase in cash used to fund changes in working capital.
Cash flows from investing activities
For the six months ended June 30, 2021, we used $51.9 million for the purchase of property, plant and equipment which compares to $19.1 million for the purchase of property, plant and equipment for six months ended June 30, 2020. During 2021, we commenced a further expansion of the production capacity of our Kentucky Facility (Phase II). Through June 30, 2021, we have invested approximately $61.6 million, excluding capitalized interest for the Phase II expansion project.
Cash flows from financing activities
For the six months ended June 30, 2021, net cash provided by financing activities was $111.2 million which consisted of:
|
|
|
|
·
|
Net proceeds from warrant exercises of $138.2 million
|
|
·
|
Proceeds from the exercise of stock options of $2.4 million
|
This compares to net cash provided by financing activities of $28.2 million for the six months ended June 30, 2020 which consisted of:
|
|
|
|
·
|
Proceeds of $24.9 million from the issuance of common stock, net of issuance costs
|
|
·
|
Proceeds from issuance of long term debt of $4.0 million
|
Off-balance sheet arrangements
At June 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.
25
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.