Muddy Waters is short DNMR. We conclude that DNMR has significantly misrepresented the state of its customer relationships, product development, readiness to scale, and TAM for PHAs. Both the money that DNMR spent buying Novomer and the cash it intends to spend on capacity expansion strike us as Hail Marys – spending money based on hope rather than on realism.
- Like numerous other SPACs, DNMR has greatly misrepresented the state of its business. DNMR makes highly misleading claims, such as having over $200 million of take or pay agreements just waiting for DNMR to add capacity; that DNMR can sell all the PHA it makes today; and that its PHA TAM is 500 billion pounds.
- What DNMR can produce seems to have limited demand, which is in stark contrast to CEO Stephen Croskrey’s pronouncement that DNMR can sell all the PHA it produces and the company’s claim that it is “fully sold-out of [2022E] Kentucky capacity from overwhelming customer demand”. Instead, DNMR seems unable to make PHA for the products for which there seems to be a significant potential market. DNMR has likely not produced PHA for products sold to end users, other than straws and possibly plastic shopping bags.
- Supporting our conclusion that demand for DNMR’s existing products seems quite weak are DNMR’s apparent significant (but below the radar) PHA production misses in each of Q1 and Q2 this year. Using company favorable assumptions, we estimate that DNMR has been operating at only approximately 28% of capacity, rather than the expected 50%. Less company favorable, but still reasonable, assumptions yield estimates as low as 18% of capacity. Moreover, DNMR’s slow-turning inventory (~3x) consistently shows zero to de minimis amounts of work in process while having material balances of both raw materials and finished goods, which we think shows that there is not much demand for what DNMR is capable of producing. A subset of this concern is that DNMR could be producing significant amounts of non-salable product due to production issues.
- The PHA products for which there could be significant demand, such as potato chip bags and candy wrappers, appear to be well beyond DNMR’s technical capabilities to produce at scale economically in the near future – regardless of whether it adds capacity. Management promotionally brags that DNMR has achieved “the Holy Grail” of plastics. Yet, DNMR seems not to have solved numerous technical challenges needed to commercialize PHA for a wide range of products. One has to wonder why so many established companies have eschewed acquiring this supposed Holy Grail prior to its having gone public during the Great SPAC Orgy of 2020.
- DNMR has greatly misled investors about its partnerships. When DNMR went public, Mr. Croskrey said on CNBC that the company was “sitting on over $200 million of take or pay offtake agreements, and we had customers like PepsiCo, Nestlé, Bacardi, you know, expecting us to be able to grow our capacity, so we had to find a way to find a lot of cash fast.” We believe that the products DNMR hopes to produce for these partners are in the very early stages of development, and that production capacity was not even close to being an issue for these products. These purported “take or pay” agreements reportedly have outs for the customers if DNMR has been unable to develop product that meets customer requirements. Moreover, we understand that the PepsiCo take or pay was for pilot plant scale, and that DNMR likely has not finalized a commercial-scale agreement with PepsiCo. We also understand that Mars Wrigley will likely not be using in scale a DNMR plastics wrapper before 2025 – if ever; and, that PepsiCo is probably many years away (if ever) from any sizable PHA compound purchases from DNMR.
- We consider DNMR amateurish when it comes to production. DNMR’s ever-shifting plans for capacity give us the impression that it’s throwing a Hail Mary – building expensive capacity to make products that DNMR has not even shown that it can produce economically. We count four iterations of DNMR’s expansion plans in eight months since it went public. This includes two versions of DNMR’s production plan for Novomer (on which we question DNMR’s due diligence). The latest iteration of DNMR’s plan appears to be greatly misleading, purportedly increasing planned capacity from the previous 315 million pounds per year to 390 million PPY, all for less money! Except DNMR seems to be comparing apples to oranges – under the new plan, its nameplate capacity only adds up to 250 million PPY. In other words, the new plan is less capacity for less money.
- DNMR’s misleading statements about production capacity are not just SPAC Orgy behavior – it was misstating capacity even in 2015. At that time, DNMR produced a video that prominently features its current CTO and COO, while the then-CEO made the claim that the Bainbridge, Georgia plant had a PHA nameplate capacity of 60 million PPY. DNMR now refers to Bainbridge as a “PHA demonstration plant.”
- DNMR seems to be glossing over the difficulties of bringing any new plant up to “commercial scale” (i.e., 75% of capacity). One bioplastics production veteran stated that it can take teams without commercial-scale production experience five to seven years to bring a PLA production facility to commercial scale. He opined that scaling PHA production is much more difficult than for PLA: that increased difficulty can potentially push out the timeframe. The challenge of scaling PHA production is apparently one of the reasons why Archer-Daniels-Midland and Metobolix ended up selling their PHA business for $10 million after having invested over $300 million in a production facility.
- The Novomer acquisition in no way alleviates our concerns about DNMR’s inexperienced and haphazard approach to production. Rather, the acquisition indicates DNMR is concerned that its fermentation technology will not scale or work as previously believed. Despite Novomer having been in operation for many years, its pilot plant reportedly produces only a few pounds per day. Novomer’s production facility is reportedly a small demonstration unit, and it has apparently not tested its production processes for a commercial-scale plant. We are under the impression that Novomer was on life support when DNMR acquired it.
- The Novomer acquisition seems more a lightly-diligenced Hail Mary to pump the narrative than a well-conceived strategic move. It is effectively a bet on a technology that has not been proven at scale. Novomer would make up 30% of product formulations at best, which seems to us to be just another change-up in a constantly shifting production plan. More problematically, Novomer appears to have been hollowed out of staff post-acquisition, while foundational patents in the portfolio have expired. A full-scale production facility likely needs to be located near a petroleum source, which would belie DNMR’s green narrative. In fact, renewable ethylene oxide and carbon monoxide feedstocks appear to be too scarce and expensive, and DNMR appears to have excluded them from the latest plan.
- Putting these company-specific issues aside, we believe DNMR’s claim that “500 billion pounds of plastic waste could be eliminated by DNMR” to be highly misleading. Bullish investors have taken this to mean that DNMR’s TAM is $1 trillion, which we find delusional. A much more realistic TAM for PHA-based packaging seems to be $4 billion to $5 billion. Recycling plastic and recapturing the stored energy from the hydrocarbons in the plastics is much closer to being a “Holy Grail” than PHAs are. Bioplastics cause negative externalities, such as increasing consumer littering and making recycling of blended plastics difficult. Instead, bioplastics seem best suited for targeted solutions, which likely fall far, far short of the 500 billion tons of plastic DNMR claims it can replace.
The reports on this website have been prepared by either Muddy Waters, LLC (“Muddy Waters Research”) or Muddy Waters Capital LLC (“Muddy Waters Capital”). We refer to Muddy Waters Research and Muddy Waters Capital collectively as “Muddy Waters” and individually these entities are referred to as a “Muddy Waters Entity”. Each report specifies the publisher and owner of that report. All reports are for informational purposes only. Under no circumstances should any of these reports or any information herein be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments.
Muddy Waters Research is an online research publication that produces due diligence-based reports on publicly traded securities, and Muddy Waters Capital LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. The reports are the property of the applicable Muddy Waters Entity that published that report. This website is owned by Muddy Waters Research. The opinions, information and reports set forth herein are solely attributable to the applicable Muddy Waters Entity and are not attributable to any Muddy Waters Related Person (defined below) (other than the applicable Muddy Waters Entity).
You should assume that, as of the publication date of a Muddy Waters report, Muddy Waters Related Persons (possibly along with or through its members, partners, affiliates, employees, and/or consultants), Muddy Waters Related Persons clients and/or investors and/or their clients and/or investors have a position (long or short) in one or more of the securities of a Covered Issuer (and/or options, swaps, and other derivatives related to one or more of these securities), and therefore stand to realize significant gains in the event that the prices of either equity or debt securities of a Covered Issuer decline or appreciate. Muddy Waters Research, Muddy Waters Capital and/or the Muddy Waters Related Persons intend to continue transacting in the securities of Covered Issuers for an indefinite period after an initial report on a Covered Person, and such person may be long, short, or neutral at any time hereafter regardless of their initial position and views as stated in the research report published by Muddy Waters Research or Muddy Waters Capital. Neither Muddy Waters Research nor Muddy Waters Capital will update any report or information on its website to reflect changes in positions that may be held by a Muddy Waters Related Person.
This is not an offer to sell or a solicitation of an offer to buy any security. Neither Muddy Waters Research nor any Muddy Waters Related Person (including Muddy Waters Capital) are offering, selling or buying any security to or from any person through this website or reports on this website. Muddy Waters Research is affiliated with Muddy Waters Capital. Muddy Waters Capital is an investment adviser with the U.S. Securities and Exchange Commission and is not registered as investment adviser in any other jurisdiction. Muddy Waters Capital does not render investment advice to anyone unless it has an investment adviser-client relationship with that person evidenced in writing. You understand and agree that Muddy Waters Capital does not have any investment advisory relationship with you or does not owe fiduciary duties to you. Giving investment advice requires knowledge of your financial situation, investment objectives, and risk tolerance, and Muddy Waters Capital has no such knowledge about you.
The research and reports presented on this website express the opinion of the applicable Muddy Waters Entity only. Reports are based on generally available information, field research, inferences and deductions through the applicable Muddy Waters Entity’s due diligence and analytical process. To the best of the applicable Muddy Waters Entity’s ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources that the applicable Muddy Waters Entity believe to be accurate and reliable, and who are not insiders or connected persons of the Covered Issuers or who may otherwise owe a fiduciary duty, duty of confidentiality or any other duty to the Covered Issuer (directly or indirectly). However, such information is presented “as is,” without warranty of any kind, whether express or implied. With respect to their respective research reports, Muddy Waters Research and Muddy Waters Capital makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Further, any report on this site contains a very large measure of analysis and opinion. All expressions of opinion are subject to change without notice, and neither Muddy Waters Research nor Muddy Waters Capital undertakes to update or supplement any reports or any of the information, analysis and opinion contained in them.
In no event shall Muddy Waters Research, Muddy Waters Capital or any Muddy Waters Related Persons be liable for any claims, losses, costs or damages of any kind, including direct, indirect, punitive, exemplary, incidental, special or, consequential damages, arising out of or in any way connected with any information on this website. This limitation of liability applies regardless of any negligence or gross negligence of Muddy Waters Research, Muddy Waters Capital or any Muddy Waters Related Persons. You accept all risks in relying on the information on this website.