Zymergen: Humiliated company with company on the ropes (NASDAQ: ZY)

We do not foresee any specific time frame. As I have said publicly before, we struggled last year to predict where we were going. So we’re going to announce things once we’ve done them rather than predict when we are going to do them.

Jay Flatley – interim CEO, first quarter 2022 results – Revenue Call Transcript

Zymergen inc. (NASDAQ:ZY) has been a humble company since its epic disaster last August. At that point, I concluded that the stocks were risk-free and concocted a potential upside narrative. For an exchange, the time had come. ZY rebounded the same day by 75% (I had to scramble to buy stocks soon after the open). Even after pulling back, ZY mounted another 45% rally before overtaking for good. I never took profits on my small handful of stocks as I was looking long term. Now ZY is almost all at risk. The company is on the ropes and may not be able to see the other side of the horizon.

cash countdown

we believe we have sufficient liquidity to fund operations until mid-2023.

Almost nothing else matters to Zymergen except its ability to survive long enough to commercialize even a single research and development project. In the first quarter, Zymergen had $337 million in cash and cash equivalents and an additional $11.5 million in restricted cash. With an expected operational burn rate of $70-75 million, Zymergen’s best-case scenario is another 5 quarters of viability. Additional funding options will be quite limited. The market capitalization of $136 million is equivalent to two quarters of life. The company will not be able to dilute existing shareholders enough to generate a meaningful lifeline. With last year’s disaster that undermined confidence in the business and the absence of significant revenue streams, Zymergen has no credible asset to leverage in a line of credit. (Zymergen’s first quarter revenue of $4.8 million from R&D services agreements and collaboration is a pittance and not a source of growth.) The company’s main hope is to convince a partner to accept the pledge with a joint venture or similar type of cash injection agreement.

One of the most notable sustainability issues for Zymergen is its high labor cost. The company has downsized to save capital, but that lower base still accounts for a large portion of cost growth. From the earnings call transcript (emphasis mine):

Cost of services revenue for the first quarter of 2022 was $12.5 million, down 41% from $21.1 million in the same prior year period. The decrease compared to the same period of the previous year is mainly explained by the decrease in the workforce due to our workforce reductions. Cost of services revenue increased 30% compared to the fourth quarter of 2021, primarily due to annual salary increases that took effect in the first quarter of 2022 and additional equity compensation costs.

In other words, not only is the company desperate to prove the commercial viability of one of its breakthrough technologies, but Zymergen is also working to retain its most valuable talent. The effort to retain valuable employees also shows up in general and administrative (G&A) expense reports. Again, from the transcript (emphasis mine):

General and administrative expenses for the first quarter of 2022 were $23.7 million, up 23% from $19.3 million in the first quarter of 2021 and up 7% from $22.1 million in the fourth quarter of 2021. The increase over the prior year is primarily due to an increase in stock compensation costs related to our employee retention efforts.

Zymergen goes up.

Where is the sense of urgency?

A Career Interview with a Zymergen Research Associate offered a small insight into the company’s day-to-day work. I was encouraged to learn that this associate was working on four different projects, each with its own director. However, I was quite surprised to hear this employee report a regular 9am to 5pm workday. Certainly, a research associate is a junior position. Still, I wanted to learn more about a comprehensive court press to achieve ambitious goals given the company’s dire straits.

No Cathie Wood Boost

Cathie Wood of Ark Invest is now well known for embracing the hopes and dreams of the most promising innovators. The ARK Genomic Revolution Multi-Sector ETF (ARKG) team stocked up on ZY shares shortly after the IPO and dived back in for more shares right after last August’s disaster (data according to “Cathie’s Ark“).

Wood and his team are also now well known for racking up more and more shares of their high-conviction names along the way. This kind of persistent doubling in the middle of a hard sell (almost like a martingale strategy) reduces the cost base enough to shorten the time horizon to at least break even. Notably, ARKW has not bought any ZY shares since last August. Assuming money talks, ARKW has essentially given up on Zymergen.

The ARK Genomic Revolution Multi-Sector ETF still has largest ZY stock allocation among ETFs invested by an order of magnitude.

So what’s there to love?

Interim CEO Jay Flatley elaborated on four key areas of business that hold hope for the company:

• 3D printing
• Nitrogen fixation program
• Water repellent program
• Reconfigurable Automation Carts (RAC)

The 3D printing application is the repurposing of Hyaline thin film technology that was at the center of last year’s disaster. Flatley could only promise upcoming polymer data and future trade shows with a few clients.

The nitrogen fixation program does not appear to be commercially viable next year. Flatley said Zymergen is delivering engineered microbes to a partner to replace nitrogen fertilizers. He did not provide any payment numbers or timelines for escalating efforts. The most promising “Gen 3” microbes will not be judged until 2023.

The waterproof program works on “coated straws that improve mouthfeel and key performance characteristics over paper.” I’m definitely not excited about the prospects of revolutionizing the market for straws, even with a forecast of $18.1 billion in global sales in 2022 and brought in $1.8 billion in reusable straw sales last year.

Reconfigurable Automation Carts (RAC) are part of Zymergen’s laboratory automation solution. RACs seem to be the closest to commercial viability as Flatley provided specific numbers:

Our pipeline of approximately 30 leads has given us confidence that our products can meet real market needs that are not unique to Zymergen…a typical 10-RAC system would cost $1-2.5 million, depending on the combination of instruments with approximately $400,000 in annual revenue. software and support costs. I would add that this prospect list was generated purely by word of mouth as we did not do any promotions or hire a sales team…

The scale of systems covers a fairly wide range from prototype systems of a few RACs up to potentially those with 50 RACs in them. So very large potential installations. And they range from government sites to biopharmaceutical labs.

Flatley did not explicitly name RACs as the source of expected “hardware” product revenue for 2023. However, these numbers suggest that RACs are that source. If so, the company probably won’t scale it in time to generate cash to fund the business, but it might be able to demonstrate its commercial viability to a partner who injects the business with the cash. which she so desperately needs. Such a move would be an 11th hour stoppage in every sense of the word! Flatley reported that Zymergen is sticking to its goal of signing a partnership this year, but he had no new information to report.

Will the new CEO arrive too late?

Flatley aims to have a new CEO “in place by mid to late summer”. This new CEO will have his hands full. I’m looking for someone with Flatley’s kind of experience in transforming a biotech company into a major growth engine. This person must be operational from the moment he signs the contract. Hurry up. There must be a sense of urgency.

The exchange

Buying shares of ZY under these conditions would be extremely speculative, the classic boom or bust move. Like Wood and the ARKW team, I haven’t been interested in adding to my position yet. The announcement of a new CEO could be the next opportunity to reconsider my positioning. Until then, there’s almost nothing to do but wait and watch this company work its way off the ropes.

Be careful there!