Danimer Scientific (NYSE:DNMR) is pioneering the creation of sustainable and more natural ways to make plastic products. The Bainbridge, Georgia-based company produces biopolymers that have helped create plastic products that are biodegradable and compostable. This mission drove a significant level of investor enthusiasm when the company was listed on the NYSE via a blank check firm back in the winter of 2020. The next few months after this would come to be characterized by excessive animal spirits and unfettered expectations on the seemingly large total addressable market being pursued by Danimer. Indeed, the company had guided for revenue to reach $193 million in the current fiscal 2022, rising further to reach $513 million in fiscal 2025 with a 5-year compound annual growth rate of around 59% from fiscal 2020.
Growth was meant to be bountiful and would be driven by the greater permeability of ESG in corporate America. This would drive firms to pay more attention to the great call of sustainability being demanded by their customers and would see many corporate sustainability commitments dealing with packaging enacted. Numerous sustainability-minded consumer packaged goods companies have looked at packaging improvements as a key way to meet these internal goals. Danimer has signed numerous partnerships with a broad range of companies including Nestle (OTCPK:NSRGY) and Bacardi on the back of this. Most recently, this will see the company partner with Mars Wrigley for two years to create biodegradable candy wrappers. Mars Wrigley, like many of its CPG peers, is looking to make 100% of its packaging reusable, recyclable or compostable by 2025.
Hence, against a positive macro context, the retracement of Danimer's common shares has become an incredibly tragic outcome. It mirrors the fate of many growth stocks that went public on the hype of the now-dead SPAC boom. Their futures have seemingly been dashed by the total collapse of the stock market over the last year as a hawkish Fed raises rates to historic highs to try to fight of a multi-layered and relentless bout of inflation. The ensuing drawdown of liquidity has wreaked havoc on capital market-funded growth plans and has meant that Danimer, in just a few years after going public, has slid into relative obscurity and declined to levels that would seem alien to its initial investors back in the winter of 2020.
The company last reported earnings for its fiscal 2022 second quarter, which saw revenue come in at $12.7 million. This was a decrease of 12.2% from the year-ago quarter and a $2.66 million miss on consensus estimates. The company attributed the decline to lower PLA sales and lower R&D revenue. This was partially offset by an increase in Nodax PHA sales. Nodax is Danimer's biodegradable and sustainable plastic that is made through a natural fermentation process using plant oils, including soy and canola as feedstock. PHA-based resin sales were up 84.5% to $7.7 million, representing 61% of total revenues compared to 29% in the year-ago quarter.
Gross profit was negative at $2.2 million versus a profit of $2 million in the comparable year-ago period, with the decline in higher margin R&D revenues contributing to this inversion.
The quarter was not great. Cash burn from operations came in at $19.8 million as net loss reached $30.4 million. With capital expenditure of $50 million during the quarter, Danimer's cash and equivalents positions fell to $140 million from $210 million in the first quarter of fiscal 2022. As the company expects to spend a further $66 million to $76 million this year, its cash position stands to fall to a record public low against what remains anemic revenue growth and negative gross profits. Post-period end, Danimer embarked on a $100 million mixed securities offering to expand out a runway that looked set to end by the first half of fiscal 2023. Whilst it will significantly dilute current shareholders as it amounts to just over one-third of Danimer's current $293 million market cap, it is a necessary act by management to keep Danimer as a going concern.
With only around 10% of plastics being recycled, Danimer's management still thinks they are chasing a large TAM. However, bears have argued that biodegradable plastics which aim to solve the single-use plastic dilemma are not the right solution and represent a more expensive over-engineering of the problem.
Most of the plastic pollution that flows into riverways and Earth's oceans are not coming from the US or other developed countries but from low and middle-income countries with inadequate waste management infrastructure. This inherently creates an alternative reality where a more outsized impact can be made on global plastic pollution using funds raised by Danimer to upgrade the plastic recycling and waste management infrastructure of nations like Guatemala, whose Rio Motagua drives 2% of global plastic emissions into the oceans.
Danimer's negative gross profit and declining revenue growth make its stock one to avoid for now. Hopefully, the company turns this around in the quarters coming.
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