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Operator
Greetings. Welcome to the Danimer Scientific 2023 Third Quarter Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Please be advised that this call is being recorded today, November 14, 2023. I would now like to turn the presentation over to Mr. James Polzinski, the company's investor relations representative.
James Polzinski
Thank you, operator. Good afternoon to everyone, and thank you for joining us today for Danimer Scientific's 2023 third quarter earnings call. Leading the call today is Steve Crossgree, chairman and chief executive officer, and Mike Hajost, chief financial officer. I'd like to note that there is a slide deck that accompanies today's discussion, which is available on the investor relations section of our website at danimerscientific.com. As we begin, I'll call your attention to the company's safe harbor language, which is published in our SEC filings and on slide two of the presentation I just referenced. On today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Forward-looking statements include, among other things, statements regarding future results of operations, including margins, profitability, capacity, production, customer programs, and market demand levels. Actual results could differ materially from what is expressed or implied in our forward-looking statements. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date hereof, except as required by law. Today's presentation also includes references to non-GAAP financial measures within the meaning of SEC Regulation G. We believe these non-GAAP measures have analytical value, but note that they should be taken as supplementary measures of performance and not as alternatives to GAAP results. We have provided reconciliations for non-GAAP financial measures to the most comparable GAAP financial measures in our earnings release and our presentation. Thank you, and it's now my pleasure to turn the call over to Steve Crossgree, Chairman and Chief Executive Officer at Bannemer Scientific.
Steve Crossgree
Good afternoon, and thank you for joining us. We recently received notification that a very large quick-service restaurant program for biodegradable cutlery, specifying our NODEC-based resins, has now been awarded. We have anticipated this notification for some time. Five of our converter partners have each been granted awards and will participate in that program. We will supply each of them with the resin they need, and in total, the program will require us to deliver approximately 20 million pounds annually. We expect to begin making first shipments in the second half of next year and for the program to hit full run rate as we approach the midpoint of 2025. This is an unprecedented award that serves as tremendous validation of our PHA-based materials, which are the first to truly help to reduce plastic pollution through a seamless material replacement strategy. This is critical because changing consumer behavior to completely solve the pollution problem is infinitely more difficult and problematic for businesses. Our materials enable brands to differentiate, to extend their environmental leadership, and to enhance their reputation for sustainability. They immediately become part of the solution. We're exceptionally pleased and excited by this new program. While our PHA-based product revenues grew by 58% over the same quarter last year, we had expected more. We are currently in the late stages of commercialization with a number of customers, including major brands, some of which I'll discuss further in a moment. These launches incorporate rigorous final qualification and testing, frequently involving a number of partners in addition to Danimer, and will need some additional time to complete their final steps than we previously anticipated. We certainly appreciate that our customers are generally adopting our resins with the intent of permanently converting away from petroleum-based plastics and the long-term pollution they cause. especially given that there are often several years of research and development already invested prior to commercial launch, we understand that the launch itself should be an unqualified success across the board. In some cases, we underestimated the time required for final testing and qualification, particularly for novel end-use applications where we were asked to make adjustments that then we needed to retest and requalify, sometimes adding months to the process. We're confident that each of these launches will be successful and, just as we have been increasingly able to leverage our prior R&D work to move more quickly on new development projects, we'll be able to drive process efficiency into this last stage before commercial launch and avoid some sources of delay in future programs. I'd like to now give you some specifics about the brands and programs we're currently launching. First, I'll focus on Bacardi, a prototypical example of a great partner. Bacardi is a 161-year-old family-owned company with an ambitious goal to be 100% plastic-free by 2030. They knew three years ago when we began to work together that success would require breakthrough advances in engineered materials and packaging design. We began our work with a focus on pioneering the development of a compostable spirits bottle, one of, if not the single most technically challenging initiatives we have ever undertaken. That work continues, and the progress we've made is encouraging. Both we and Bacardi remain focused on bringing that success home as soon as possible. That said, along the way, Dannemere and Bacardi have identified additional, more rapidly implementable development initiatives to eliminate plastic waste elsewhere in their supply chain. These are also very powerful and exciting, and we will be sharing more at the earliest opportunity. As you may recall, last quarter we talked about a number of new NODAC-based film resins. One new film resin application is for home compostable retail packaging for vegetables and fruit. The development partnership for this application began in 2020 with Biola, a division of CPG, or Columbia Packaging Group, one of our converter partners. Bolthouse Farms, a care producer, is their launch customer, and at retail, the product will be offered first by Meyers Grocery and 240 large format grocery stores. The first end use will be bags for one-pound earthbound farm organic mini-peeled carrots. The bags are Hump Compost certified by TUV Austria, the globally recognized leader in independent testing, inspection, and certification for biodegradability. This is a difficult certification to meet, and we're very pleased to have qualified. CPG intends to develop and market compostable bags, film, and roll stock for packaging needs across not just produce, but a wide variety of consumer goods. While this initial launch is modest, the category presents a huge opportunity. TPG is intently focused on the growth opportunity they believe accompanies a value-added product and are working towards next steps in their go-to-market strategy. I'll now turn to our work with Delta Coffees, a coffee roasting and packaging company that has led the Portuguese coffee market since 1961. We've developed compostable single-use capsules for their Delta Q line of ground espresso, which we believe will be the first product on the market in full compliance with proposed new EU regulations requiring any coffee pods sold in the EU to meet new compost standards. The capsules degrade completely inside industrial composting environments, leaving no microplastics or other residues that would harm natural ecosystems. We've developed these pods in partnership with Total Energy's Corbion, who will supply the PLA that is also a key ingredient in the PHA-based resin used for the pods. Our engagement with other major disposable coffee pot producers is ongoing. We view this category as an important one for us, regardless of the passage of proposed legislation. Finally, I'll return to the QSR space. In addition to the 20 million pound cutlery program, we are still engaged in field trials for NODAC space straws in advance of a planned nationwide rollout by another major QSR customer. Our development efforts for the QSR channel remain a focus, and we're excited to have just executed a joint development agreement with a large QSR to develop packaging materials that are specific to their menu. Additionally, we're getting closer to commercialization of biodegradable cups using resins for both extruded coatings and in partnership with Chimera Aqueous Coatings. Our partnership with Chimera has been especially important in this effort. These are the key technologies for not only disposable cups, but for all coated paper materials used in food service. We expect to have more to say about the coatings work we're doing over the next couple of quarters. For now, I'll just say that we are confident we are emerging as a leading source for alternative materials in the QSR channel. As I look across these partnerships, even those that have modest initial volume associated with them, they are each opening doors to a new category or a new range of customers. They each diversify our business and add to our addressable market opportunity. The importance of these launches has been underlined by the recent dramatic increase in engagement opportunities with new potential end-use customers that they have generated. Our recent developments and product launches have triggered discussions with potential partners across multiple industries, major customers seeking long-term solutions to plastic waste. While we continue to work through near-term challenges and launch delays, we have great conviction that we are on the right path toward filling our existing capacity in Kentucky and continue to make progress on our plant footprint expansion strategy. Our work with the Department of Energy Loans Program Office to complete due diligence is proceeding as planned as we continue to look forward to the terms negotiation phase. We are now making significant progress toward full capacity utilization in Kentucky and believe that there is more than enough specifically identifiable demand to make our Greenfield project a success. The partnerships we have been talking about today illustrate the way forward, showing that it is possible to disrupt petroleum plastics, address the global pollution problem, and building enduring business category by category, customer by customer, and in market by in market. I'm now trying to call over to Mike Ajost, our Chief Financial Officer, to update you on the numbers for the quarter and on our outlook for the rest of the year.
Bacardi
Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on slide seven of our presentation for those of you following along. Third quarter total revenue was $10.9 million compared to $10.4 million as growth in product revenue was mostly offset by a reduction in service revenue. Third quarter product revenue was $10.5 million, up 14.9% compared to the prior year level of $9.1 million. This growth was entirely attributable to PHA-based resin sales, which grew 58% compared to last year. PLA based resin sales were down 51% or 1.8 million versus prior year due to the ongoing issues associated with the Ukraine conflict. Third quarter service revenue was approximately 500,000. This is about 800,000 lower than last year's third quarter. This is consistent with the recent trends and was expected as funded R&D projects for certain customers moved to commercialization. We reported a third quarter 2023 gross loss of $7.7 million, which was an increase compared to the prior year's quarter's gross loss of $4.1 million. The year-over-year increase primarily reflects higher depreciation and amortization expenses, as well as higher raw material costs related to our product mix. After adjusting for depreciation and stock-based compensation, we reported an adjusted gross loss of $2.6 million. as compared to an adjusted gross loss of $1.5 million in the third quarter of 2022, primarily due to other increased fixed production costs. R&D and SGA expenses, excluding depreciation, amortization, stock-based compensation, and certain non-recurring items, totaled $6.6 million in the third quarter, a significant improvement relative to the $11.5 million of expenses for those categories in the third quarter of last year. The improved efficiency across many areas of the business through broad-based cost control initiatives continues to drive this improvement. Lower R&D expenses also reflect the conclusion of certain development projects. Adjusted EBITDA loss for the third quarter improved to $9.3 million compared to an adjusted EBITDA loss of $12.9 million in the third quarter of 2022. Adjusted EBITDA excludes stock-based compensation, other income, and other add-backs as reconciled in the appendix. Cash and cash equivalents at the end of the third quarter was $77.4 million, as compared to $62.8 million at the end of 2022. Restricted cash was $14.5 million, including $12.5 million for expected interest payments pursuant to our recent loan agreement. Capital expenditures in the third quarter were $2.7 million, and year-to-date have been $25.7 million. We have tightened our range of expected full-year CapEx spend to be between $27 and $29 million, toward the more favorable end of our prior range of $26 to $31 million. We ended the third quarter with a total debt balance of $379.8 million, comprised mainly of our convertible senior notes the senior secure term loan we closed during the first quarter, and our new market tax credit loans, which we expect will be forgiven starting in 2026. We continue to view the magnitude and timing of the customer ramp for PHA-based resins and our increased utilization to serve that demand for our Kentucky operations as the largest factors for variability in our short-term financial results. As Steve discussed, the timing of certain expected customer programs has moved further out than we had expected. And as a consequence, both this quarter and next quarter do not have the benefit of the previously expected initial shipments from new launches. Our full year 2023 guidance for adjusted EBITDA is now a range of between negative 40 million and negative 37 million.
Steve
I'll now hand the call back to Steve for his closing remarks.
Steve Crossgree
Thank you for your attention this afternoon. The cutlery program awards we've announced today constitute a watershed event for Dannemer in many ways. They are a seal of approval and open the door for us to capture additional volume in the QSR channel and other categories. In addition, this program gives five of our converter partners a critical mass of revenues and the incentive to look for ways to grow their NODAC-based business. These awards also carry a major positive impact on our future financial performance. One of the most powerful aspects of our business is how longevity is built into every program when we capture. Our customers are seeking permanent solutions to the problem of plastic pollution, a problem so large and damaging that only permanent solutions matter, solutions that we have. We expect that once our capacity is spoken for, because our customers are large, enduring businesses with stable demand for consumables, that capacity is essentially permanently absorbed. We have a tremendous opportunity that we believe is ours and ours alone. Thank you, and operator, we're now ready for questions.
Operator
Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from John Tawantang with CGS Securities. Please go ahead.
John Tawantang
Hi, good afternoon. Thank you for taking my question.
Bacardi
Yeah, hi, John.
John Tawantang
Hi, Steve. Hi, Mike. I was wondering what programs pushed out. What was the scale of them that you expected, number one? And number two, does that delay you getting to the relatively full utilization of Kentucky by the end of next year?
Steve Crossgree
Hey, John, thanks for the question. This is Steve. Well, this cutlery program that we just announced as an example is roughly six months behind where we initially expected it to be. We originally thought we would be able to get some shipments in this Q4, but that's been pushed out now probably into Q2 of next year. And as far as the utilization rates with this program and the other programs that we've discussed and the programs that are currently being launched, we will hit that utilization rate. It will depend on how fast those things scale, whether or not we'll hit it by the end of the year. And we'll update you on that further next quarter.
John Tawantang
Okay, great. Thanks. Mike, I was wondering where do operating expenses go from here? Do you expect any meaningful change either up or down?
Bacardi
You know, I think we're very proud of how we did cut operating costs year over year. And, you know, there's certainly some things that won't repeat. There are some things that had a positive influence on our operating expense year over year, you know, such as reduction in our AR reserves. You know, a year ago, we were increasing that reserve. This year, we're actually reducing that reserve. So you kind of get the year-over-year effect that's exaggerated a little bit because of going in two different directions there. We do believe that there are opportunities, as we kind of are putting together our budget right now, to look for additional cost savings opportunities. So we do think they're there. Then there's going to be other things, though, that are going to be some headwinds in terms of overcoming some of the benefits we had this year versus last year. But Net our expectation is that they will either be flat to down from where we are this year.
John Tawantang
Okay, great. And then where are you in the DOE loan process? Help us understand what the DOE is saying to you and kind of when you expect that to play out.
Bacardi
Sure. Yeah, I think overall, there's still tremendous enthusiasm between both parties working together. As you know, we announced we're going into the due diligence phase, which we're in the thick of right now, working with their partners. They bring in experts on their side, you know, manufacturing, technical, financial, and they're kind of now scouring through with our teams. There's been meetings on site, and again, a lot of collaboration and still a lot of enthusiasm for the project going through. The timing of this is, again, probably taking a little longer than what we had previously expected. And, you know, as we kind of learn more about the program and the time frame of what they have to do, I think we're now expecting that the funding probably wouldn't come through until, you know, maybe early Q3 of next year. And it's not that there's any concerns on our part with that. It's just a process that's going to be a little bit longer and more than we had expected there. But again, everyone's feeling very good about it so far.
Steve Crossgree
And I would just add to that, that whatever our chances were of getting that accomplished have now improved significantly with this cutlery award.
Kevin
Your next question comes from Thomas Boyes with .
Operator
Please go ahead.
Thomas
Thanks for taking the questions. You know, when speaking with customers that have delayed their launches, is there a common theme around that they're maybe slowing down? Is it related to kind of the macroeconomic backdrop, or is it really just around, you know, validation periods taking longer to get through?
Steve Crossgree
Hey, Thomas, thanks for the question. I would say that there's a wide range of reasons, but most of them are focused on the technical challenges of getting the product finalized. As an example, sometimes, and this was the case with the cutlery program, the R&D work is a lot of trial and error. And when you start to get confidence as you optimize production performance, that you've got something that's going to work for the converter, we can start doing the end-of-life trials, the end-of-life certification tests to qualify the material. What happened in this case is the product that we started with became apparent during the course of the testing that it was not going to pass in a timely manner. And so we had to readjust and kind of refine the formulation to allow it to pass in the appropriate timeframe. So that was the specific cause of delay in that case. And that's a pretty typical type of a thing that has happened.
Thomas
Got it. And my sense is obviously there hasn't been any cancellations. So just to, you know, kind of put a finer point on it, you know, all of these are just really launch pushouts, correct? Yes, that's correct. Great. And then my last one, and then I'll hop in queue, would just be I would love to drill down on the relationship with Chevron-Phillips Chemicals that you had announced for the dynamo or catalytic business. Could you talk about your efforts there and maybe discuss some of the long-term opportunities of the business, you know, as it relates to the acrylic acids and things like that?
Steve Crossgree
Yeah. Unfortunately, we can't talk too much about the specifics of those programs because, you know, of confidentiality. But I can tell you that both teams are very excited, and it's a great opportunity for us to, you know, get close to a major chemical company like that who could potentially be a tremendous partner in the future.
Steve
Got it. I appreciate it. Thanks again.
Kevin
Your next question comes from Charles Nievert with Piper Sandler. Please go ahead.
Charles Nievert
Afternoon, guys. A quick thing on the ramp up of production for the cutlery. When do you anticipate having to start building some inventory or anything like that for delivery of that product? So if it's going to go off in third quarter, start ramping in third quarter of next year, when do you guys have to start ramping up production to get to set up for that and delivery?
Steve Crossgree
Yeah, we'll start building inventory probably in early Q2. anticipating at this point that we expect some orders in Q2 at this point.
Charles Nievert
Got it. Okay. And then you said it'll take round numbers. It sounds like you said about a year to go from zero to full bore, the 20 million you were talking about. Is that sort of even or is that a slow ramp building speed? You know, how does it look to go out? You know, how are they distributing the product? I mean, you know, When should we expect this chunk of it?
Steve Crossgree
Yeah, I can tell you what we know now is our expectation would be that by the end of next year, we will be at a run rate above 5 million pounds. And then it will kind of close quickly from there to sometime in like middle of early to middle of Q2 of 24 to be a full run rate. 25, I'm sorry, yeah, 25 to be a full run rate.
Charles Nievert
Right. And then last question for now. Is there a length for this contract? Does it have an end to it or is it, you know, five years, three years? Is there anything on that or is it just sort of we'll play it by ear and see how it goes from there?
Steve Crossgree
Yeah, it'll just be ongoing business unless, you know, the customer decides to move in another direction. But one of the beauties of this segment is it is so difficult – to ever change out a material like we've done or that we're doing, that there's just not a lot of motivation on anybody's part to go through the process to change to something else then again. And these companies have other priorities and things they would focus on before they would do that. So unless somehow we were just to fall on our face, that's certainly not something we would expect to have happen.
Charles Nievert
Is there any... Possibly, again, is the deal for this 20 million, is that sort of the end of that particular thing, or can that even grow from that point, assuming all goes well, specific to that deal?
Steve Crossgree
Well, obviously, it will grow with the customer, but this is only for North America. So there are other opportunities in other parts of the world, but also with other applications in the QSR space.
Steve
Got it. Okay. Thanks very much. All right. Thanks, Shirley.
Operator
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Lawrence Alexander with Jefferies. Please go ahead.
Lawrence Alexander
Hi, this is actually Kevin Estak on for Lawrence. So my first question, I just wanted to touch back on the Nodex-based resin for single-use coffee pods. So you obviously touched on the Portuguese company. I guess I was just wondering if there were any other customers maybe with initial trials, and I just want to get some updates there. And then maybe in the same vein, I guess, any other regulatory updates in markets that you operate that could provide some sort of tailwind for the next several years?
Steve Crossgree
Kevin, I'll answer the first part of the question and I'll ask you to repeat that second part. It blurped out a little bit on me. But as far as the coffee pods go, we are working with all of the major coffee pod producers or companies in Europe. Because of the expected legislation there, they're hot to use. to solve for this. So, you know, that's why this is a very important announcement for us as it's just going to accelerate adoption in Europe. And could you go ahead and repeat the second part of your question, Kevin?
Lawrence Alexander
Sure. Yeah. Yeah. I was just wondering if there were any other, you know, regulatory updates that were, you know, sort of in the pipeline that, you know, you expect could, you know, provide a tailwind in the near medium term in the markets that you operate.
Steve Crossgree
Off the top of my head, Kevin, I can't think of anything in particular that we have not discussed in the past. But if I come up with something, we'll get back to you on that.
Lawrence Alexander
Okay, great. Thanks. And I'm not sure if this has been brought up yet, but any progress on what you've seen in the aqueous coatings for cups?
Steve Crossgree
Yes. It's going very well. We are expecting to have cups in stores for trials by Q1. There's actually a push to see if that can be done sooner, but I think that Q1 is a good expectation for trials.
Steve
Okay, great. Thank you very much. All right. Thanks, Kevin.
Kevin
I will now turn the call over to Stephen Cross-Cree. Please go ahead.
Steve Crossgree
Thank you, Operator. Before we end the call, I'd like to stress the importance of this cutlery program that's now been awarded. This is a major change in our business. When we are able to talk about who the QSR customer is, this will also send a powerful message to the market. We are approaching a tipping point where decades of investment and work are about to deliver tangible benefits and not just for our shareholders. The world desperately needs engineered material solutions like ours to address the growing problem of plastic pollution. Thanks again for your time and attention, and we look forward to speaking with you again on our next quarterly call. Thanks.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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