CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") of
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; ? 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
filings with the
Introductory Note
The following discussion and analysis of our financial condition and results of
operations describes the business historically operated by
On
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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.
PHA-Based Resins
We are a leading producer of polyhydroxyalkanoate ("PHA"), a new, 100% biodegradable plastic feedstock alternative sold under the proprietary Nodax® brand name, for usage in a wide variety of plastic applications including water bottles, straws, food containers, among other things. We originally acquired the technology to produce PHA from Procter & Gamble in 2007. PHA is made 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 have
begun making PHA on a commercial scale. In
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 merger, we are an
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.
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Factors Impacting Our Revenue
We derive our revenue from product sales of PLA- and PHA-based resins as well as from services such as R&D and tolling.
Our product revenue is significantly impacted by our ability to successfully scale the Kentucky Facility for commercial production of PHA. The completion of Phase I and 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 our PHAs as 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 grow 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, as this represents the transfer of control of the product. 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 price of the performance obligation. Service revenues are recognized over time with progress measured using an input method 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 our ability to effectively transition those customer 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 projects. Costs of goods sold consists of raw materials and ingredients, labor costs including stock-based compensation 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 the specific service contract.
Selling, general and administrative expense
Selling, general and administrative expense consists of salaries, marketing expense, corporate administration expenses, stock-based compensation not allocated to research and development or costs of revenue personnel, and elements of depreciation, rent and facility expenses that are not directly attributable to direct costs of production or associated with research and development activities.
Research and development expense
Research and development expense include salaries, stock-based compensation, 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 projects.
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Impacts Related to the COVID-19 Pandemic
In
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 merger, 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
On
Critical Accounting Policies
The preparation of financial statements in conformity with
Revenue recognition
We recognize revenue from product sales and services in accordance with
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 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 discounts, 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.
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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
Awards to employees have been granted with either service-based conditions only or market-based and service-based conditions that affect vesting. Service-based condition only awards have graded vesting features, usually over three-year periods. Expense associated with service-based only condition awards with graded vesting features is recognized on a straight-line basis over the requisite service period. Expense associated with market-based and service-based vesting conditions is recognized on a straight-line basis over the longest of the explicit, implicit or derived service period of the award.
Stock-based compensation awards have a contractual life that ranges from less than one year to ten years and are recognized in the Condensed Consolidated Financial Statements based on their grant date fair value. The fair value of each stock option award is estimated using an appropriate valuation method. We use a Black-Scholes option pricing model to value service-based only option awards and a Monte Carlo simulation to value market-based and service-based option awards. The resulting value for the employee options is used for financial reporting purposes.
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 it 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. Expense 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
Condensed Consolidated Results of Operations for the three months endedMarch 31, 2021 and 2020: (in thousands) Three Months Ended March 31, 2021 2020 Change Revenue: Products$ 11,024 $ 9,179 $ 1,845 Services 2,157 1,419 738 Total revenue 13,181 10,598 2,583 Cost of revenue 11,725 7,429 4,296 Gross profit 1,456 3,169 (1,713 ) Gross profit percentage 11.05 % 29.90 % Operating expense: Selling, general and 10,120 2,980 7,140 administrative Research and development 2,619 1,247 1,372 Total operating expenses 12,739 4,227 8,512 Loss from operations (11,283 ) (1,058 ) (10,225 ) Nonoperating expense: Loss on remeasurement of private (80,697 ) - (80,697 ) warrants Interest expense, net (200 ) (713 ) 513 Loss on debt extinguishment (2,604 ) - (2,604 ) Other income, net 50 90 (40 ) Total nonoperating expenses (83,451 ) (623 ) (82,828 ) Net loss$ (94,734 ) $ (1,681 ) $ (93,053 ) Revenue 18
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Total revenue for the three months ended
Cost of revenue and gross profit
Cost of revenue for the three months ended
Operating expenses
Operating expense for the three months ended
Loss on remeasurement of private warrants
During the quarter ended
Interest expense
Interest expense for the three months ended
Loss on loan extinguishment 19
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During the quarter ended
Income tax expense
For the three months ended
On
Net loss
The net loss was
Liquidity and capital resources
Our primary sources of liquidity are currently equity issuances and debt
financings. We had accumulated deficit of
At
Subordinated Term Loan
In
On
Cash flows for the three months ended
The following table summarizes our cash flows from operating, investing and financing activities: For the Three Months Ended March 31, (in thousands) 2021 2020 Net cash (used in) operating activities$ (14,208 ) $ (5,615 ) Net cash (used in) investing activities$ (23,893 ) $ (15,340 )
Net cash (used in) provided by financing activities
Cash flows from operating activities
Net cash used in operating activities was
Cash flows from investing activities
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For the three months ended
Cash flows from financing activities
For the three months ended
· Principal payment of long-term debt of
· Proceeds from the exercise of stock options of
This compares to net cash provided by financing activities of
· Proceeds of$24.9 million from the issuance of common stock, net of issuance costs · Proceeds from issuance of long term debt of$2.4 million
Off-balance sheet arrangements
At
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. The JOBS Act permits companies with EGC status to take advantage of an extended transition period to comply with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting standards as of public company effective dates.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an EGC, we intend to rely on such exemptions, we are not required to, among other things: (i) provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (iii) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer's compensation to median employee compensation.
We will remain an EGC under the JOBS Act until the earliest of (i) the last day
of our first fiscal year following the fifth anniversary of the closing of Live
Oak's initial public offering, (ii) the last date of our fiscal year in which we
have total annual gross revenue of at least
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