DNMR - Danimer Scientific Is In Trouble

2023-11-17 16:26:12 ET

Summary

• Danimer's operating performance has been poor, with low revenues, negative gross profits, and high cash burn.
• The company's current financials suggest a steep drop in its liquidity balance through calendar 2024.
• Despite declining revenues and worsening profit margins, Danimer's stock is still trading at a high price-to-sales multiple.

Whilst Danimer Scientific ( DNMR ) held great promise when it went public, but operating performance since 2020 has been punctuated by fledgling revenues, negative gross profits, and free cash burn that has continually tapered the company's liquidity base in an age where the Fed has made capital flows to loss-making companies scarce. Danimer is in trouble, down 19% year-to-date, the extremely bearish base case is for it to hit the same wall as other deSPACs who chased different parts of the environmental sustainability dream. From indoor farmer AppHarvest ( APPHQ ) to frozen plant-based food company Tattooed Chef ( TTCFQ ) and a plethora of EV tickers, 2023 has seen the bankruptcies of a vast range of companies that held great ESG promise. Critically, Danimer's current financials imply continued liquidity headwinds as the Fed funds rate is set to remain higher for longer. I last covered Danimer in September , it has since updated the market on fiscal 2023 third-quarter earnings.

This is a solvency play by the bulls with a Danimer long position a bet that losses won't be as intense as they have historically been and that the company's effort to reduce its cash burn can extend its cash runway just long enough that a revival of risk-on sentiment allows the common shares to catch a bid. Danimer reported third-quarter revenue of $10.9 million , up 4.3% over its year-ago comp and a miss by $3.84 million on consensus estimates. Critically, the company's trailing 12-month revenue at $51 million compares quite favorably to a current market cap of $152 million. Danimer is still trading for a nearly 3x price-to-sales multiple despite revenues in decline, a liquidity base that's falling, and gross profit margins that are worsening quarter-over-quarter.

Gross Profit Margins, Free Cash Burn, And The Cash Runway

Danimer's business model is built around the rise of the sustainable consumer. This was meant to boost demand for products built around biodegradable plastics. Hence, the ticker was initially a straight play on what was meant to be the rising volume growth of PHA-based resins as consumers became increasingly inclined to pay a premium for products that did not spend hundreds of years in landfills or polluting the natural environment. Danimer has recorded an increase in negative gross margins for three consecutive quarters with quarterly revenues peaking in the fourth quarter of its fiscal 2021 and in decline since then.

Revenue was eclipsed by a $18.7 million cost of revenue for a negative gross profit of $7.7 million. This was a deterioration from a negative gross profit of $4 million in the year-ago period. Danimer is becoming less profitable every quarter with gross profit margins of -70.67% being the worst since it started production. The operating figures point to continued headwinds with interest expenses for the third quarter at $8.6 million up from $553,000 in the year-ago comp to offset gains from a $2.86 million reduction in selling, general, and administrative expenses to $16.5 million.

The company's third-quarter GAAP net loss of $40.2 million declined from $94.9 million in the year-ago period. However, this was only due to the recognition of a $62.7 million non-recurring, non-cash goodwill impairment charge. Adjusting year-ago net loss for this would mean the company's net loss increased by 28%. Free cash burn at $13 million for the third quarter was a moderation from the second quarter when the company realized a burn of $22 million, but it's at a level that when annualized would mean Danimer's current cash position would be cut by two-thirds a year from now.

A Mixed Backdrop For 2024

Demand for biodegradable plastics was meant to be driven by increasing customer calls for sustainability from products they purchase. Sustainable consumption seems to have been peeled away from the harsh reality of a stock market besieged by a Fed funds rate at a 22-year high. Danimer's PHA-based resins might be significantly better for the world oceans, but it's become a fundamentally uninvestable business model that faces near-term headwinds from a declining liquidity balance and ramping losses.

However, bulls can hold on to what could be a near-term salvo from the Fed pivoting towards a full dovish stance next year as inflation continues to get pulled down towards their 2% target. This would help reignite risk-on sentiment for the common shares. Danimer is also working with the Department of Energy loans program office to secure financing for expansion. This comes against a total debt balance of $379.9 million at the end of the third quarter. Whilst success with the DOE loan would serve as a catalyst for the common shares and raise the specter of risks for bears, the continued deterioration of Danimer's financials renders it hard to not rate this as a sell.

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