DNMR - Danimer Scientific: It's Not Time To Buy

2023-09-05 06:59:55 ET

Summary

• Danimer has dipped 55% over the last year as continued losses and a lack of traction on sales weigh down on sentiment.
• The company is burning through its cash pile and has been heavily dependent on debt to remain a going concern.
• Gross profit margins are negative and its cash runway sits at around 6 quarters against fiscal 2023 second-quarter cash burn.

Danimer Scientific's (DNMR) pullback has been sobering, down 55% over the last 1-year to swap hands for just under $2 per share, and with a current market cap of $193 million that is at an 80% difference from its $890 million go-public SPAC equity value. The current macroeconomic backdrop has formed a graveyard for a plethora of deSPACs from EV upstarts like Proterra (PTRAQ) to digital health service providers like Babylon Health (BBLNF). This Darwinian backdrop has presented headwinds for Danimer whose cash and equivalents of $90.8 million as of the end of its fiscal 2023 second quarter fell 35% over its year-ago comp. The company also realized a trailing 12-month cash outflow from operations of $45.6 million in the second quarter. Fundamentally, cash is king and its preservation against a Fed funds rate sitting at a 22-year high is crucial in the current zeitgeist.

Danimer held a long-term debt position of $376 million as of the end of the second quarter, up from $286.4 million in its year-ago comp. Around 64% of this debt is unsecured 3.25% convertible senior notes maturing on December 15, 2026. Danimer should be able to convert these to common shares from December 19, 2024, assuming it trades at the $10.79 per share conversion rate. This rate is subject to change and Danimer was able to lock in a low interest rate convertible as this was debt issued before the Fed funds rate began its ascent. It's also a comparatively lower-risk debt for Danimer to hold on its balance sheet.

The Fiscal 2023 Second-Quarter Earnings

To be clear, its unsecured creditor would be much more likely to negotiate a lower conversion rate if they were faced with the binary option of Danimer filing for Chapter 11 bankruptcy. This comes against a $130 million senior secured term loan issued in the first quarter of 2023 on March 17, 2023, and is secured on the bulk of Danimer's assets. Its maturity is not until September 15, 2026, at the earliest. Critically, the term loan accrues interest at a markedly higher coupon of 14.4%, payable monthly, and Danimer is required to hold $12.5 million in an interest-payment reserve account which is reported as restricted cash.

Danimer's long-term debt works out to be nearly 2x its market cap. It also meant a $9.2 million interest expense bill for Danimer's second quarter. The March issue of the term loan also only left Danimer with net proceeds of $98.6 million after the subtraction of its lender's expenses, including the first three years of premiums for a collateral protection insurance policy taken out by the lender. This was an extremely expensive debt to take on but was likely crucial for Danimer to remain a going concern as its cash position sat at $62.8 million going into the first quarter of 2023. The company recorded second-quarter revenue of $12.9 million , a 1.6% increase from its year-ago comp and a miss by $1 million on consensus estimates. Product revenue actually advanced by 5% year-over-year to $12.2 million from $11.6 million with PHA-based resin sales up 10% versus 2022.

However, the company is still recording negative gross margins with cost of sales at $19.4 million during the second quarter, up from $14.9 million in the year-ago comp. Danimer reported a second-quarter non-GAAP adjusted gross profit margin that was much more improved at negative $1.6 million . It was a deterioration from a loss of $500,000 in the year-ago period and meant the company recorded a loss of $39.2 million during the quarter, up from $30.4 million in its year-ago comp.

Higher For Longer And Shareholder Sentiment

Danimer is making progress with its application for a Department of Energy loan guarantee that could see some funding provided for its planned bioplastics manufacturing facility to be built in Georgia. This comes as a Fed funds rate at 5.25% to 5.50% is set to remain higher for longer with the July CPI hike likely set to be the final in a tightening cycle that has been the most aggressive in decades. Whilst Danimer's price-to-sales multiple at 3.82x sits close to its 3-year lows, it's still comparatively quite high against a stock market backdrop where deSPACs are trading hands at fractions of their annual sales. Indeed, Danimer's multiple is 226.95% higher than its specialty chemicals peer group's median.

Hence, there could be more downside if there is a further deterioration of the company's balance sheet. The company recorded a cash burn from operations of $15.3 million , down from $19.8 million in its year-ago quarter, but still at a level that if repeated for the next 6 quarters would exhaust its current cash position. Danimer will need to raise more external capital before the end of 2024 and its current debt balance heightens the likelihood of this being a dilutive funding event. I remain neutral on taking a position.

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