A quick take on Zymergen

Zymergen (NASDAQ:ZY) went public in April 2021, raising approximately $500 million in an expanded offering at a price of $31.00 per share.

The company develops advanced materials and other technologies that help manufacturers design and create better products.

While the company has made progress in its restructuring efforts, ZY will likely need to raise additional capital at a higher cost of capital, whether to dilute shareholders through a capital raise or to add debt.

ZY presents a worrying financial picture, so my outlook is Sell.

Zymergen Overview

Zymergen, based in Emeryville, Calif., was founded to develop optical films and other products using engineered microbes via biomanufacturing technologies with the promise of better manufacturing results at lower cost.

Management is led by Interim President and CEO Jay Flatley, who previously served as President and CEO of Illumina, where as CEO he grew the company from 1, $3 million in sales in 2000 to $2.2 billion in sales by 2015.

The company launched Hyaline in late 2020, an optical film used for display touch sensors that can enable manufacturers to create more durable “foldable touchscreens and high-density flexible printed circuit boards.”

However, Hyaline has since been a disappointment in the market.

ZY says it has many other products in development, in electronics, consumer care applications and agriculture.

Market & Competition

According to a 2019 market research report by MarketsandMarkets, the global optical film market was estimated at $21.5 billion in 2019 and is expected to exceed $30 billion by 2024.

This represents a projected CAGR of 7.0% from 2019 to 2024.

The main drivers of this expected growth are due to the growing demand from the TV, smartphone, tablet and large screen markets.

Also below is a graph showing the historical and projected Optical Films market by region of the world:

Major competitors or other industry participants include:

Electronic:

• Kolon Industries

• CCS

• Taimid Technology

Customer service :

• Traditional DEET products

Agriculture:

• Traditional synthetic nitrogen fertilizers

• Chemical herbicides for crop protection

ZymergenRecent financial performance of

• Total revenue per quarter has largely stagnated at a low level over the last 5 quarters:

• The gross margin per quarter remained very negative:

• Selling, G&A expenses as a percentage of total revenue per quarter were extremely high due to low revenues and high expenses:

• The operating result per quarter remained very negative:

• Earnings per share (diluted) also remained strongly negative:

(Source data for GAAP financial tables above)

Over the past 12 months, ZYThe share price fell 95.2% against the US S&P 500 indexdown 2.2%, as shown in the graph below:

Evaluation metrics for Zymergen

Below is a table of relevant capitalization and valuation figures for the company:

(Source: Search Alpha)

Comment on Zymergen

In its latest earnings call (transcript), covering the first quarter of 2022interim chairman and CEO Jay Flatley pointed to the restructuring of the company since its shock announcement in August 2021 of the absence of revenue expectations and the departure of its CEO.

Flatley also noted progress in his microbe development, with a nitrogen-fixing product being tested with a partner.

The company is also exploring a family of other uses for our water repellent technology in packaging applications as well as new market segments.

Regarding its financial results, revenue comes from R&D service agreements and collaborations, so no significant product revenue at this time.

Operating expenses fell 22% year-over-year to $68.4 million, with a 28% reduction in R&D due to reduced headcount from canceled programs.

Notably, G&A spending rose 23% in the quarter due to stock compensation costs for its employee retention activities.

Going forward, 2022 will have virtually no product revenue while operating expenses will remain elevated.

Notably, management says it expects to have cash available for operations until mid-2023, a year from now.

The main risk for ZYis that having a single year of operating cash flow for a zero-revenue business with heavy operating expenses is short-sighted.

While the company has made progress in its restructuring efforts, ZY will likely need to raise additional capital at a higher cost of capital, whether to dilute shareholders through a capital raise or to add debt.

ZY presents a worrying financial picture, so my outlook is a sell.