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Investment Management Firm Issues Cautionary Report on Danimer Scientific

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Spruce Point Capital Management is urging investors to hold Danimer Scientific accountable for peddling an inconsistent story involving its biodegradable polymer technology that “will likely fail to deliver on its promises.”

Danimer Scientific, formerly Meridian Holdings Group, has been in the spotlight of late, most recently in a Wall Street Journal article that featured Dr. Jason Locklin, a professor in the materials department at the University of Georgia (UGA), who was involved in a study of Danimer’s biodegradable PHA. Spruce Point Capital Management issued an investment research report at the end of last week, a copy of which was sent to PlasticsToday.

Spruce Point is urging investors to review key findings in its report and “hold [Danimer] management accountable for answers” to various issues. “For a business promoted as an Environmental, Social, and Governance (ESG) play, Spruce Point finds several corporate governance red flags at Danimer. Some of the executives in place appear to have, from Spruce Point’s report, a checkered past, including CEO Stephen Croskrey, who once served as president of Armor Holdings Product Division, which “admitted it knowingly manufactured and sold defective bulletproof vests and agreed to pay $40 million to resolve the allegations.”

Prior to going public via a “special purpose acquisition company (SPAC) in December 2020,” a move promoted by Gary Wunderlich, an SEC sanctioned individual, Danimer settled a “messy lawsuit with former CEO Paul Pereira who claimed that Danimer was controlled by insiders known as the ‘Bainbridge Five,’ who demanded Pereira enter into a side arrangement with a director serving on the board to share his compensation.”

Spruce Point is also concerned by “several educational inconsistencies in the biography of its Chief Technology Officer, Phil Van Trump. In the Wall Street Journal article, he said that “the claim by the Danimer chief wasn’t wholly accurate, saying Nodax products are unlikely to biodegrade in most modern landfills.”

Danimer’s ties to UGA includes being a financial backer of the lab that performed the testing of Danimer’s PHA and its professors who authored the paper Danimer uses to support its biodegradability claims. Spruce Point found that press releases announcing the funding of the UGA labs had been removed from the company’s website. “In addition, an academic paper, ‘Biodegradation of Wasted Bioplastics in Natural and Industrial Environments: A Review,’ contradicts UGA’s research and shows how polyhydroxyalkanoates (PHAs) — Danimer’s key product sold under the brand name Nodax and derived from plant-based feedstock — actually have limited benefits,” said the Spruce Point report.

Spruce Point’s investigation into Danimer has led it to believe that “Danimer is peddling an inconsistent, ever-changing story to investors which will likely fail to deliver on its promises.” Spruce Point noted that Danimer “walked back recently issued expectations for near-term profitability, missed its initial timeline for its Kentucky facility expansion,” and produced “multiple conflicting sources” of the plant’s size and production capacity.

Learning from the Metabolix failure

Additionally, said Spruce Point’s report, “Danimer is attempting something no one has been able to achieve at scale in commercializing PHA.” It pointed out that Metabolix (renamed Yield10 Bioscience) “tried and failed, even with the blue-chip S&P 500 partner Archer-Daniels-Midland, and a seasoned Pepsi director on its board.” In 2007, Metabolix promised 50,000 tons per year of PHA from its bioplastics facility. The “long-awaited” $400-million Mirel PHA plant opened in 2010 in Clinton, Iowa, after several delays over four years. However, by 2016, Metabolix sold its assets and ADM took a $339 million write-off. Spruce Point cautions investors that “placing hope that Danimer’s promoted partnerships with Pepsi and Nestlé will ensure success should review the Metabolix failure carefully.”

Spruce Point noted that Danimer’s 10-Q in April 2021 no longer listed Pepsi as a shareholder, and that the “equity securities were subsequently sold in the second quarter of 2021.”

Much of what I read in Spruce Point’s 63-page report sounded familiar. I’ve read similar accusations in another investor report focused on advanced chemical recycling company Loop Industries, and in news articles critical of other companies in the biodegradable/compostable polymer industry. It seems that some of the executives in Danimer padded their resumes, including former President of Meridian Holdings Group Paul Pereria, who, in a lawsuit, admitted he had no BS in mechanical engineering from Texas A&M, no master’s degree in international business and finance from the University of West Indies, and no BS in chemistry from McGill (Meridian Holdings v. Paul Pereria).

Van Trump’s educational qualifications also changed over time from 2015 to 2021, and were “altered to remove mention of post-graduate work at MIT and Georgia State.”

But the inconsistencies that Spruce Point took greater issue with are the various claims Danimer makes regarding its facilities and promised production capacities. Spruce Point noted four different square footages — 80k, 88k, 90k, 100k — reported for its Winchester, KY, plant.

Moreover, Spruce Point reports that its investigation shows there is no record of Danimer owning the property in Winchester that it purchased in December 2018. Danimer “entered into a sale and leaseback transaction with a large, diversified commercial property [real estate investment trust, or REIT] pursuant to which we sold the Kentucky facility and certain of our facilities located in Bainbridge to the REIT and leased-back the same properties from the REIT under a net-lease for an initial term of 20 years,” according to Danimer’s financial statements referenced in Spruce Point’s report.

Inconsistencies also abound when it comes to the amount of material Meridian, now Danimer, promised to produce, with expected production rates exceeding 300,000 tons per year in an announcement in October 2012. One year later, October 2013, Meridian announced it would produce over 30,000 tons per year at the Bainbridge facility. Was the company aware even eight years ago that this material was not scalable to any large commercial extent?

Danimer announces $700-million expansion

In the most recent press release from March 29, 2021, Danimer announced plans to invest $700 million in expanding its Bainbridge manufacturing operations, nearly quadrupling its workforce in Decatur County. Danimer said it expects to construct an additional 2,000,000-square-foot facility near its current 25-acre campus. The company will hire to fill technical positions and careers in production, maintenance, and management.

Part of the reason we study history is to learn from it. Evidently, Danimer thought it could do something that Metabolix and ADM couldn’t. Or maybe it is relying on investors to believe it can do what no company has done before. In December of last year, Danimer went public via a special purpose acquisition company (SPAC), known as a “blank-check” deal. SPACs have come under scrutiny of late.

The limitations of biodegradable PHAs, in addition to being nearly impossible to bring to scale to furnish major consumer brands with millions of bottles for water, soft drinks, and other beverages, is that they cannot be recycled. In a PlasticsToday article I wrote more than a year ago, I had asked Croskrey what he suggested consumers do with the bottles made from Nodax if they didn’t want to throw them into the environment and let them degrade. He suggested landfilling as the best option.   

The thing that I find quite interesting is that so many of the people who enter into this business of advanced chemical recycling, biodegradable materials, bio-based materials, compostable materials, and so forth more often than not are novices at best when it comes to polymer science. The big name chemical companies such as Dow and Eastman are just now beginning to realize some results from years of scientific R&D. So if those big chemicals companies haven’t yet found a way to create commercial levels of a material like PHA or to chemically recycle various polymers, what makes people think they can jump into this business and do it profitably?

Another question is why these big CPGs, who have been in business for decades focused on developing packaging for their products, do not see these schemes for what they are? Or are they so eager to appear to be “green” and “sustainable” that they grab hold of anything that comes along and buy into it without properly vetting the companies?

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