UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38720
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
(800 ) 719-0671
(Registrant’s telephone number, including area code)
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Small reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of the Registrant’s common stock outstanding as of February , 2021, was 48,646,513 .
4
TWIST BIOSCIENCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
i
Forward-looking statements
This Quarterly Report on Form 10-Q for the Quarter ended December 31, 2020, or Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
These statements relate to, among other matters, plans for product development and licensing to third parties, plans and timeframe for commercial development of DNA data storage capabilities, expectations regarding market penetration, anticipated customer conversion to our products, plans to expand in international markets, identification and development of potential antibody candidates for treatment of COVID-19. Forward-looking statements are also identified by the
words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and variations of such words and similar expressions. You should not rely upon forward-looking statements as predictions of future events.
Such statement are based on management’s expectations as of the date of this filing and involve risks and uncertainties that could cause actual results, events or circumstances to differ materially from those expresed or implied in our forward-looking statements. Such risks and uncertainties include:
| • | our ability to increase our revenue and our revenue growth rate; |
| • | our ability to accurately estimate capital requirements and our needs for additional financing; our estimates of the size of our market opportunities; |
| • | our ability to increase DNA production, reduce turnaround times and drive cost reductions for our customers; |
| • | our ability to effectively manage our growth; |
| • | our ability to successfully enter new markets and manage our international expansion; |
| • | our ability to protect our intellectual property, including our proprietary DNA synthesis platform; |
| • | costs associated with defending intellectual property infringement and other claims; |
| • | the effects of increased competition in our business; |
| • | our ability to keep pace with changes in technology and our competitors; |
| • | our ability to successfully identify, evaluate and manage any future acquisitions of businesses, solutions or technologies; |
| • | the success of our marketing efforts; |
| • | a significant disruption in, or breach in security of our information technology systems and resultant interruptions in service and any related impact on our reputation; |
| • | our ability to attract and retain qualified employees and key personnel; |
| • | the effects of natural or man-made catastrophic events including those resulting from the novel strain of coronavirus that causes coronavirus disease 2019, or COVID-19, that was first identified in Wuhan, China; |
| • | the effectiveness of our internal controls; |
| • | changes in government regulation affecting our business; |
| • | uncertainty as to economic and market conditions and the impact of adverse economic conditions; and |
| • | other risk factors included under the section titled “Risk Factors.” |
Readers are urged to carefully review and consider all of the information in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or SEC. We undertake no obligation to update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this filing or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
When we use the terms “Twist,” “Twist Bioscience,” the “Company,” “we,” “us” or “our” in this report, we are referring to Twist Bioscience Corporation and its consolidated subsidiaries unless the context requires otherwise. Sequence space and the Twist logo are trademarks of Twist Bioscience Corporation. All other company and product names may be trademarks of the respective companies with which they are associated.
1
PART I. Financial information
Item 1. |
Financial statements |
Twist Bioscience Corporation
Condensed Consolidated Balance Sheets (unaudited)
(In thousands) |
December 31, 2020 |
September 30, 2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
Short-term investments |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
$ | $ | ||||||
Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Restricted cash, non-current |
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Other non-current assets |
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Total assets |
$ | $ | ||||||
Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
Accrued expenses |
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Accrued compensation |
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Current portion of operating lease liability |
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Current portion of long-term debt |
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Other current liabilities |
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Total current liabilities |
$ | $ | ||||||
Operating lease liability, net of current portion |
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Long-term debt, net of current portion |
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Other non-current liabilities |
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Total liabilities |
$ | |||||||
Commitments and contingencies (Note 6) |
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Stockholders’ equity |
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Common stock, $ 2020 and September 30, 2020, respectively |
$ | $ | |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Accumulated deficit |
( |
) | ( |
) | ||||
Total stockholders’ equity |
$ | $ | ||||||
Total liabilities and stockholders’ equity |
$ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Twist Bioscience Corporation
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three months ended December 31, |
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(In thousands, except per share data) |
2020 |
2019 |
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Revenues |
$ | $ | ||||||
Operating expenses: |
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Cost of revenues |
$ | $ | ||||||
Research and development |
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Selling, general and administrative |
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Litigation settlement |
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Total operating expenses |
$ | $ | ||||||
Loss from operations |
$ | ( |
) | $ | ( |
) | ||
Interest income |
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Interest expense |
( |
) | ( |
) | ||||
Other income (expense), net |
( |
) | ( |
) | ||||
Loss before income taxes |
$ | ( |
) | $ | ( |
) | ||
Provision for income taxes |
( |
) | ( |
) | ||||
Net loss attributable to common stockholders |
$ | ( |
) | $ | ( |
) | ||
Other comprehensive loss: |
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Change in unrealized income/( loss) on investments |
( |
) | ||||||
Foreign currency translation adjustment |
( |
) | ||||||
Comprehensive loss |
( |
) | ( |
) | ||||
Net loss per share attributable to common stockholders—basic and diluted |
$ | ( |
) | $ | ( |
) | ||
Weighted average shares used in computing net loss per share attributable to common stockholders—basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Twist Bioscience Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited)
Common stock |
Additional paid-in capital |
Accumulated other comprehensive income |
Accumulated deficit |
Total stockholders’ equity |
||||||||||||||||||||
| (In thousands) |
Shares |
Amount |
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| Balances as of September 30, 2020 |
$ | — | $ | $ | $ | ( |
) | $ | ||||||||||||||||
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| Issuance of common stock in public offering, net of underwriting discounts and commissions and offering expenses of $ |
— | — | — | |||||||||||||||||||||
| Vesting of restricted stock units |
— | — | — | — | — | |||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||
| Net exercise of stock warrants |
— | — | — | — | — | |||||||||||||||||||
| Repurchases of common stock for income tax withholding |
( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||
| Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | ||||||||||||||||||||
| Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| |
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| Balances as of December 31, 2020 |
$ | — | $ | $ | $ | ( |
) | $ | ||||||||||||||||
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Common stock |
Additional paid-in capital |
Accumulated other comprehensive income |
Accumulated deficit |
Total stockholders’ equity |
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| (In thousands) |
Shares |
Amount |
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| Balances as of September 30, 2019 |
$ | — | $ | $ | $ | ( |
) | $ | ||||||||||||||||
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| Issuance of common stock in public offering, net of underwriting discounts and commissions and offering expenses of $ |
— | — | — | |||||||||||||||||||||
| Vesting of restricted stock units |
— | — | — | — | — | |||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||
| Repurchases of early exercised stock options |
( |
) | — | — | — | — | — | |||||||||||||||||
| Repurchases of common stock for income tax withholding |
( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||
| Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | ||||||||||||||||||||
| Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
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| Balances as of December 31, 2019 |
$ | — | $ | $ | $ | ( |
) | $ | ||||||||||||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Twist Bioscience Corporation
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended December 31, |
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| (in thousands) |
2020 |
2019 |
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| Cash flows from operating activities |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities |
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| Depreciation and amortization |
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| Loss on disposal of property and equipment |
— | |||||||
| Non-cash lease expense |
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| Stock-based compensation |
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| Discount accretion on investment securities |
( |
) | ||||||
| Non-cash interest expense |
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| Amortization of debt discount |
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| Changes in assets and liabilities: |
||||||||
| Accounts receivable, net |
( |
) | ||||||
| Inventories |
( |
) | ( |
) | ||||
| Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Other non-current assets |
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| Accounts payable |
( |
) | ||||||
| Accrued expenses |
( |
) | ( |
) | ||||
| Accrued compensation |
( |
) | ( |
) | ||||
| Accrued litigation settlement |
— | |||||||
| Other liabilities |
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| |
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| Net cash used in operating activities |
( |
) | ( |
) | ||||
| |
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| Cash flows from investing activities |
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| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Purchases of investments |
( |
) | ( |
) | ||||
| Proceeds from maturity of investments |
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| Net cash (used in) / provided by investing activities |
( |
) | ||||||
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| Cash flows from financing activities |
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| Proceeds from exercise of stock options |
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| Proceeds from public offering, net of underwriting discounts and commissions and offering expenses |
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| Repayments of long-term debt |
( |
) | ( |
) | ||||
| Repurchases of common stock for income tax withholding |
( |
) | ( |
) | ||||
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| Net cash provided by financing activities |
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| Effect of exchange rates on cash, cash equivalents and restricted cash |
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| Net increase (decrease) in cash, cash equivalents, and restricted cash |
( |
) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period |
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| Cash, cash equivalents, and restricted cash at end of period |
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| Supplemental disclosure of cash flow information |
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| Interest paid |
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| Income taxes paid, net of refunds |
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| Non-cash investing and financing activities |
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| Property and equipment additions included in accounts payable and accrued expenses |
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| Operating lease right-of-use assets obtained in exchange for operating lease liabilities |
— | |||||||
| Deferred offering costs included in accounts payable and accrued expenses |
— | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Twist Bioscience Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. The Company
Twist Bioscience Corporation (the Company) was incorporated in the state of Delaware on February 4, 2013. The Company is a synthetic biology and genomics company that has developed a disruptive DNA synthesis platform. DNA is used in many applications across different industries: industrial chemicals, academic, healthcare and agriculture. The Company’s fiscal year ends on September 30.
The Company has generated net losses in all periods since its inception. As of December 31, 2020, the Company had an accumulated deficit of $491.4 million and has not generated positive cash flows from operations since inception. Losses are expected to continue as the Company continues to invest in product development, manufacturing, and sales and marketing.
The Company has raised multiple rounds of debt and equity financing since its inception. In October 2018, the Company completed an initial public offering (IPO) of its common stock which raised proceeds of $69.6 million, after deducting underwriting discounts and commissions and offering expenses. In May 2019, the Company completed an underwritten public offering of its common stock with proceeds of $84.3 million, after deducting underwriting discounts and commissions and offering expenses. In December 2019 and January 2020, the Company entered into a sales agreement with Cowen and Company, LLC for an at-the-market offering (ATM) to sell its common stock with net proceeds of $48.0 million, after deducting underwriting discounts and commissions and offering expenses. In February 2020, the Company completed an underwritten public offering of its common stock with net proceeds of $140.2 million, after deducting underwriting discounts and commissions and offering expenses. In June 2020, the Company completed an underwriting public offering of its common stock with net proceeds of $107.4 million, after deducting underwriting discounts and commissions and offering expenses. In December 2020, the Company completed an underwriting public offering of its common stock with net proceeds of $323.9 million, after deducting underwriting discounts and commissions and offering expenses. Management believes that these proceeds combined with existing cash balances on hand will be sufficient to fund operations for at least one year from the issuance of these consolidated financial statements. However, the Company may need to obtain additional financing to fund operations beyond this period, and there can be no assurance that it will be successful in raising additional financing on terms which are acceptable to the Company.
If the Company requires but is unable to obtain additional funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or
ability to achieve its intended expansion objectives or
the Company may be unable to continue operations. In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. During the three months ended December 31, 2020, financial results of the Company were not significantly affected by the COVID-19 outbreak. The Company has considered all information available as of the date of issuance of these financial statements and the Company is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision to the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. The extent to which the COVID-19 outbreak affects the Company’s future financial results and operations will depend on future developments which
continue to evolve
and are difficult to predict,
including new information concerning mutations in
the SARS-CoV-2 virus, which may make it more contagious,
and current or future domestic and international actions to contain it and treat it. 2. Summary of significant accounting policies
Basis of presentation and use of estimates
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (the Annual Report on Form 10-K) filed with the Securities and Exchange Commission on November 27, 2020. The condensed consolidated financial statements are unaudited and have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the condensed consolidated financial statements. The condensed consolidated balance sheet at September 30, 2020 is derived from audited consolidated financial statements but does not include all disclosures required by GAAP. The operating results for the three months ended December 31, 2020 are not necessarily indicative of the results expected for the full year ending September 30, 2021
or any interim period.
The presentation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s unaudited condensed consolidated financial statements include its wholly owned subsidiaries. All intercompany balances and accounts are eliminated in consolidation.
6
The following table provides a reconciliation of the Company’s cash and cash equivalents and non-current portion of restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company’s condensed consolidated statements of cash flows:
(in thousands) |
December 2020 |
September 30, 2020 |
||||||
Cash and cash equivalents |
$ | $ | ||||||
Restricted cash, non-current |
||||||||
Total cash, cash equivalents and restricted cash |
$ | $ | ||||||
Significant accounting policies
There have been no material changes in the accounting policies from those disclosed in the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K.
Recent accounting pronouncements
Recent adopted accounting pronouncements – Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued new lease accounting guidance in Accounting Standard Update (ASU) 2016-02, Leases, and in July 2018 issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements (the foregoing ASUs collectively referred to as “Topic 842”). Under the new guidance, lessees are required to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use or control the use of, a specified asset for the lease term.
On October 1, 2019, the Company adopted Topic 842 using the modified retrospective approach. The adoption had a material effect on the condensed consolidated balance sheets but did not have a material effect on the condensed consolidated statements of operations and comprehensive loss. Prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting under ASC 840, Leases. The Company elected the package of practical expedients permitted under the transition guidance which, among other things, allows carrying forward the historical classification of existing leases as of October 1, 2019.
As a result of electing the transition guidance as described above, on October 1, 2019, the Company recorded operating lease right-of-use assets of $35.8 million, including the derecognition of deferred rent of $0.1 million and prepaid rent of $1.6 million, with the corresponding lease liabilities totaling $34.3 million. There was no material effect to the Company’s statements of operations and comprehensive loss upon adoption.
Under Topic 842, the Company determines if an arrangement is a lease at inception primarily based on the determination of the party responsible for directing the use of an underlying asset within a contract. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of committed lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date which includes significant assumptions made including the Company’s estimated credit rating, annual percentage yields from corporate debt financings of companies of similar size and credit rating over a loan term approximating the remaining term of each lease, and government bond yields for terms approximating the remaining term of each lease in countries where the leased assets are located. Certain leases include payments of operating expenses that are dependent and may be revised based on the landlord’s estimate, and these variable payments are therefore excluded from the lease payments used to determine the operating lease right-of-use asset and lease liability. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.
The Company elected to not apply the recognition requirements of Topic 842 to short-term leases with terms of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For short-term leases, lease payments are recognized as operating expenses on a straight-line basis over the lease term. The Company elected to account for lease and non-lease components as a single lease component.
Additional information and disclosures required by Topic 842 are contained in Note 6.
7
In August 2018, the FASB issued ASU 2018-13,, which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this standard effective October 1, 2020. The adoption of ASU 2018-13 did not have an impact on the Company’s consolidated financial statements for either period presented.
Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In November 2018, the FASB is
s
ued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard effective October 1, 2020. The adoption of ASU 2017-09 did not have an impact on the Company’s consolidated financial statements for either period presented. Recently issued accounting pronouncement not yet adopted
In June 2016, the FASB issued ASU 2016-13,. The new standard requires entities to use the new “expected credit loss” impairment model for most financial assets measured at amortized cost, including trade and other receivables and held-to-maturity debt securities, and modifies the impairment model for available-for-sale debt securities. The standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In January 2017, the FASB issued ASU 2017-04, This ASU simplifies the subsequent measurement of goodwill. The ASU eliminates step 2 from the goodwill impairment test, including for reporting units with a zero or negative carrying amount that fail a qualitative test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU should be applied on a prospective basis. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of adoption on its disclosures.
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
In December 2019, the FASB issued ASU 2019-12,. The ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740,, related to the approach for allocating income tax expense or benefit for the year to continuing operations, discontinued operations, other comprehensive income, and other charges or credits recorded directly to shareholders’ equity; the methodology for calculating income taxes in an interim period; and the recognition of deferred tax liabilities for outside basis differences.
Simplifying the Accounting for Income Taxes
Income Taxes
The ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing the impact of adoption on its disclosures.
3. Fair value measurement
The Company assesses the fair value of financial instruments based on the provisions of ASC 820,. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Fair Value Measurements
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company short-term investments primarily utilize broker quotes in a non-active market for valuation of its short-term investments.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
December 31, 2020 |
||||||||||||||||
| (in thousands) |
Level 1 |
Level 2 |
Level 3 |
Fair value |
||||||||||||
| Assets |
||||||||||||||||
| Cash |
$ | $ | — | $ | — | $ | ||||||||||
| Money market funds |
— | — | ||||||||||||||
| Commercial paper |
— | — | ||||||||||||||
| U.S. government treasury bills |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | $ | $ | — | $ | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
8
September 30, 2020 |
||||||||||||||||
| (in thousands) |
Level 1 |
Level 2 |
Level 3 |
Fair value |
||||||||||||
| Assets |
||||||||||||||||
| Cash |
$ | $ | — | $ | — | $ | ||||||||||
| Money market funds |
— | — | ||||||||||||||
| Commercial paper |
— | — | ||||||||||||||
| U.S. government treasury bills |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | $ | $ | — | $ | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
As of December 31, 2020, and September 30, 2020, gross unrealized gains and unrealized losses for cash equivalents and short-term investments were not material, and the contractual maturities of all marketable securities were less than one year.
4. Balance sheet components
The Company’s accounts receivable, net balance consists of the following:
| (in thousands) |
December 31, 2020 |
September 30, 2020 |
||||||
| Trade Receivables |
$ | $ | ||||||
| Other Receivables |
||||||||
| Allowance for Doubtful Accounts |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Accounts Receivable, net |
$ | $ | ||||||
| |
|
|
|
|||||
Inventory consist of the following:
| (in thousands) |
December 31, 2020 |
September 30, 2020 |
||||||
| Raw Materials |
$ | $ | ||||||
| Work-in-process |
||||||||
| Finished Goods |
||||||||
| |
|
|
|
|||||
| $ | $ | |||||||
| |
|
|
|
|||||
5. Goodwill and intangible assets
There were no 0.1
9
The intangible assets balances are presented below:
December 31, 2020 |
||||||||||||||||
| (in thousands, except for years) |
Useful lives in years |
Gross carrying amount |
Accumulated amortization |
Net book value |
||||||||||||
| Developed Technology |
$ | $ |
( |
) | $ |
|||||||||||
| Tradenames & Trademarks |
( |
) | — | |||||||||||||
| |
|
|
|
|
|
|||||||||||
| Total indefinite-lived intangible assets |
$ | $ |
( |
) | $ |
|||||||||||
| |
|
|
|
|
|
|||||||||||
September 30, 2020 |
||||||||||||||||
| (in thousands, except for years) |
Useful lives in years |
Gross carrying amount |
Accumulated amortization |
Net book value |
||||||||||||
| Developed Technology |
$ | $ | ( |
) | $ | |||||||||||
| Tradenames & Trademarks |
( |
) | — | |||||||||||||
| |
|
|
|
|
|
|||||||||||
| Total indefinite-lived intangible assets |
$ | $ | ( |
) | $ | |||||||||||
| |
|
|
|
|
|
|||||||||||
6. |
Commitments and contingencies |
Indemnifications
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require it to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by corporate law. The Company also has directors’ and officers’ insurance.
Leases
The Company leases certain of its facilities under non-cancellable operating leases expiring at various dates through 2026. The Company is also responsible for utilities, maintenance, insurance, and property taxes under these leases.
Certain leases include options to renew or terminate at the Company’s discretion. The lease terms include periods covered by these options if it is reasonably certain the Company will renew or not terminate. The Company’s lease agreements do not contain any material residual value guarantees or restrictive covenants.
Supplemental balance sheet information related to the Company’s operating lease as of December 31, 2020, was the following:
| (in thousands) |
December 31, 2020 |
|||
| Assets: |
||||
| Operating lease right-of-use-asset |
$ | |||
| Current liabilities: |
||||
| Current portion of operating lease liabilities |
$ | |||
| Noncurrent liabilities: |
||||
| Operating lease liabilities, net of current portion |
$ | |||
| |
|
|||
10
Future minimum lease payments under all non-cancelable operating leases
that have commenced
as of December 31, 2020 are as follows: | (in thousands) |
Operating leases |
|||
| Years ending September 30: |
||||
| Remainder of 2021 |
$ | |||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| Thereafter |
||||
| |
|
|||
| Total minimum lease payments |
$ | |||
| Less: imputed interest |
( |
) | ||
| |
|
|||
| Total operating lease liabilities |
$ | |||
| Less: current portion |
( |
) | ||
| |
|
|||
| Operating lease liabilities, net of current portion |
$ | |||
| |
|
|||
Operating lease expense was $1.9 million and $2.0 million for the three months ended December 31, 2020 and 2019 respectively. Cash payments for amounts included in the measurement of operating lease liabilities were $1.7 million and $1.9 million for the three months ended December 31, 2020 and 2019 respectively. As of December 31, 2020, the weighted-average remaining lease term was 5.28 years and the weighted-average discount rate was 6.99 %.
In December 2020, the Company entered into a 12 -year operating lease for a 110,995 1.0 1.7 million, which is subject to scheduled 3 % annual increases, plus certain operating expenses. The Company has been provided a tenant improvement allowance of $13.3 million. The Company has the right to sublease the facility, subject to landlord consent. The Company also has the option to extend the lease for two terms of five years
-
square-
foot facility in Wilsonville, Oregon to further expand the Company operations. Upon execution of the lease agreement, the Company provided the landlord an approximately $. The lease commencement is contingent upon assuming control over the facility which is not expected to occur until the landlord completes their portion of the buildout which has not yet commenced as of December 31, 2020.
The future minimum lease payments under the agreement are $27.9 million.
7. |
Related party transactions |
8. |
Income taxes |
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date profit or loss, adjusted for discrete items arising in that quarter. The Company’s annual estimated effective tax rate differs from the U.S. federal statutory rate primarily as a result of state taxes, foreign taxes, and changes in the Company’s valuation allowance against its deferred tax assets. For each of the three months ended December 31, 2020 and 2019, the Company recorded an immaterial provision for income taxes.
9. |
Warrants |
In connection with its long-term debt agreements, the Company issued 18,854 and 7,531 warrants for its common stock 26,385 warrants outstanding. In October 2020, a total of 18,854 warrants with an exercise price of $14.85 per common share were net exercised for a net 16,051 7,531 warrants with an exercise price of $21.24 per common share were net exercised for a net 6,041 common shares issued by the Company. There are no outstanding warrants for the Company’s common stock as of December 31, 2020.
on December 22, 2015 and March 28, 2016, respectively
. As of December 31, 2019, there were 10. |
Common stock |
In December 2019, the Company entered into a sales agreement with Cowen and Company, LLC for an at-the-market offering (ATM) to offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time. The offering was completed during December 2019 and January 2020. During this period, the Company sold a total of 2,239,680 shares of its common stock at a weighted-average price of $22.32 per share and received total net proceeds of $48.0 million under the ATM, net of estimated underwriting discounts and commissions and offering expenses.
11
In February 2020, the Company completed an underwritten public offering of 4,642,857 shares of its common stock at a price to the public of $28.00 per share, including the full exercise of the underwriters’ option to purchase an additional 696,428 shares of common stock. The Company received total net proceeds from the offering of $140.2 million, net of estimated underwriting discounts and commissions and offering expenses.
In June 2020, the Company completed an underwriting public offering of 3,484,848 shares of its common stock at a price to the public of $33.00 per share, including the full exercise of underwriters’ option to purchase an additional 454,545 shares of common stock. The Company received total net proceeds from the offering of $107.4 million, net of estimated underwriting discounts and commissions and offering expenses.
In December 2020, the Company completed an underwriting public offering of 3,136,362 shares of its common stock at a price to the public of $110.00 per share, including the full exercise of underwriters’ option to purchase an additional 409,090 shares of common stock. The Company received total net proceeds from the offering of $323.9 million, net of estimated underwriting discounts and commissions and offering
expenses.
11. |
Stock-based compensation |
2018 Equity Incentive Plan
On September 26, 2018, the board of directors adopted the 2018 Equity Incentive Plan (the 2018 Plan) as a successor to the 2013 Stock Plan (the 2013 Plan). The number of shares reserved for issuance under the 2018 Plan upon approval of the plan was 5,856,505 shares of the Company’s common stock. The number of shares reserved for issuance under the 2018 Plan will increase automatically on the first day of each fiscal year, following the fiscal year in which the 2018 Plan became effective, by a number equal to the least of 999,900 shares, 4 % of the shares of common stock outstanding at that time, or such number of shares determined by the Company’s board of directors. The common shares issuable under the 2018 Plan were registered pursuant to a registration statement on Form S-8 on November 1, 2018.
On September 1, 2020, the board of directors approved the implementation of a revised annual equity award program for executive officers and senior level employees to be granted as performance-based stock units (PSUs) under the 2018 Plan. The number of PSUs ultimately earned under these awards is calculated based on the achievement of certain total revenue threshold during the fiscal year ending September 30, 2022. The percentage of 0 % to 150 % of the number of units granted. The provisions of the 245,913 shares are expected to vest 44.72 per share. As of December 31, 2020, the unrecognized compensation costs related to these awards were $9.4 million. The Company expects to recognize those costs over a weighted average period of 1.8 years.
PSUs
that vest will depend on the board of directors’ determination of total revenue at the end of the performance period and can range from PSUs
are considered a performance condition, and the effects of that performance condition are not reflected in the grant date fair value of the awards. The Company used the Black-Scholes method to calculate the fair value at the grant date without regard to the vesting condition and will recognize compensation cost for the units that are expected to vest. As of December 31, 2020, the
Company determined that
based on the probability of the performance condition that will be achieved
under this equity award program. The Company reassesses the probability of the performance condition at each reporting period and adjusts the compensation cost based on the probability assessment.
The weighted-average grant date fair value was determined to be $Any shares subject to outstanding awards under the 2013 Equi
t
y Incent
ive Plan that are canceled or repurchased subsequent to the 2018 Plan’s effective date are returned to the pool of shares reserved for issuance under the 2018 Plan. Awards granted under the 2018 Plan may be nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and performance units. Activity under the equity incentive plans during the three months
ended
December 31, 2020 is summarized below: (In thousands, except per share data) |
Shares available |
Options outstanding |
Weighted average exercise price per share |
Weighted average remaining contractual term (years) |
Aggregate intrinsic value |
|||||||||||||||
Outstanding at September 30, 2020 |
$ | $ | ||||||||||||||||||
Stock options granted |
( |
) | ||||||||||||||||||
Stock options exercised |
— | ( |
) | |||||||||||||||||
Stock options forfeited |
( |
) | ||||||||||||||||||
Restricted stock units granted |
( |
) | — | — | ||||||||||||||||
Forfeiture of restricted stock units |
— | — | ||||||||||||||||||
Shares withheld for payment of taxes |
— | — | ||||||||||||||||||
Outstanding at Decem b er 31, 2020 |
$ | $ | ||||||||||||||||||
Vested or expected to vest at December 31, 2020 |
$ | $ | ||||||||||||||||||
Vested and exercisable at December 31, 202 0 |
$ | $ | ||||||||||||||||||
12
Total stock-based compensation expense recognized was as follows:
Three months ended December 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
Cost of revenues |
$ | $ | ||||||
Research and development |
||||||||
Selling, general and administrative |
||||||||
Total stock-based compensation |
$ | $ | ||||||
As of December 31, 2020, there was $38.4 million of total unrecognized compensation cost related to non-vested stock options under the equity incentive plans that are expected to be recognized over a weighted average period of 2.3 years.
The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2020 was $63.28 per share.
Restricted Stock Units
Restricted stock primarily consists of restricted stock unit awards (RSUs) which have been granted to employees. The value of an RSU award is based on the Company’s stock price on the date of grant. The shares underlying the RSU awards are not issued until the RSUs vest. Upon vesting, each RSU converts into one share of the Company’s common stock.
Activity with respect to the Company’s
RSUs
during the three months ended December 31, 2020 was as follows: (in thousands, except per share data) |
Number of Shares |
Weighted average grant date fair value per share |
Weighted average remaining contractual term (years) |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at September 30, 2020 |
$ | $ | ||||||||||||||
Restricted stock units granted |
||||||||||||||||
Restricted stock units vested |
( |
) | ||||||||||||||
Restricted stock units forfeited |
( |
) | ||||||||||||||
Outstanding at December 31, 2020 |
$ | $ | ||||||||||||||
Expected to vest at December 31, 2020 |
$ | $ | ||||||||||||||
As of December 31, 2020, there was $43.8 million of total unrecognized compensation cost related to these issuances that is expected to be recognized over a weighted average period of 3.0 years.
2018 Employee Stock Purchase Plan
On September 26, 2018, the board of directors adopted the 2018 Employee Stock Purchase Plan (the 2018 ESPP). A total of 275,225 shares of the Company’s common stock have been reserved for issuance under the 2018 ESPP. The number of shares reserved for issuance under the 2018 ESPP will 249,470 shares, 1 % of the shares of common stock outstanding at that time, or such number of shares determined by the Company’s board of directors. The number of shares reserved for issuance as at December 31, 2020 is as follows:
increase
automatically on the first day of each fiscal year, following the fiscal year in which the 2018 ESPP becomes effective, by a number equal to the least of (In thousands) |
Shares available |
|||
Outstanding at September 30, 2020 |
||||
Additional shares authorized |
||||
Shares issued during the period |
||||
Outstanding at December 31, 2020 |
||||
Subject to any plan limitations, the 2018 ESPP allows eligible service providers (through qualified and non-qualified offerings) to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The offering periods
begin
in February and August of each year, except for
the initial offering period which commenced with the initial public offering in October 2018 and ended on August 20, 2019. The common shares issuable under the 2018 ESPP were registered pursuant to a registration statement on Form S-8 on November 26, 2018. 13
Unless otherwise determined by the board of directors, the Company’s common stock will be purchased for the accounts of employees participating in the 2018 ESPP at a price per share that is the lesser of 85 % of the fair market value of the Company’s common stock on the first trading day of the offering period
.
During the three months ended December 31, 2020 and 2019, activity under the 2018 ESPP was immaterial.12. Net loss per share attributable to common stockholders
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders:
Three months ended December 31, |
||||||||
| (in thousands, except per share data) |
2020 |
2019 |
||||||
| Numerator: |
||||||||
| Net loss attributable to common stockholders |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
| Denominator: |
||||||||
| Weighted average shares used in computing net loss per share, basic and diluted |
||||||||
| |
|
|
|
|||||
| Net loss per share attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
The potentially dilutive common shares that were excluded from the calculation of diluted net loss per share because their effect would have been anti- dilutive for the periods presented are as follows:
Three months ended December 31, |
||||||||
| (in thousands) |
2020 |
2019 |
||||||
| Shares subject to options to purchase common stock |
||||||||
| Shares subject to performance-based stock options |
|
|
|
|
|
|
— |
|
| Unvested restricted shares of common stock |
— | |||||||
| Unvested restricted stock unit s |
||||||||
| Unvested shares of common stock issued upon early exercise of stock options |
||||||||
| Shares subject to employee stock purchase plan |
||||||||
| Shares subject to warrants to purchase common stock |
||||||||
| |
|
|
|
|||||
| Total |
||||||||
| |
|
|
|
|||||
13. Geographic, product and industry information
The table below sets forth revenues by geographic region, based on ship-to destinations. Americas consists of Canada, Mexico, and South America; EMEA consists of Europe, the Middle East, and Africa; and APAC consists of Japan, China, South Korea, India, Singapore, Malaysia, and Australia.
Three months ended December 31, |
||||||||
| (in thousands) |
2020 |
2019 |
||||||
| United States |
$ | $ | ||||||
| EMEA |
||||||||
| APAC |
||||||||
| Americas |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
14
The table below sets forth revenues by products.
Three months ended December 31, |
||||||||
| (in thousands) |
2020 |
2019 |
||||||
| Synthetic genes |
$ | $ | ||||||
| Oligo pools |
||||||||
| DNA and Biopharma libraries |
||||||||
| NGS tools |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
The table below sets forth revenues by industry.
Three months ended December 31, |
||||||||
| (in thousands) |
2020 |
2019 |
||||||
| Industrial chemicals |
$ | $ | ||||||
| Academic research |
||||||||
| Healthcare |
||||||||
| Food/agricultural |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
* * * * *
15
Item 2. |
Management’s discussion and analysis of financial condition and results of operations |
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 filed with the U.S. Securities and Exchange Commission, or the SEC, on November 27, 2020, or our Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties including the effect of the COVID-19 pandemic and our response thereto. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.
Overview
We are an innovative synthetic biology and genomics company that has developed a disruptive DNA synthesis platform to industrialize the engineering of biology. The core of our platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have combined this technology with proprietary software, scalable commercial infrastructure, and an e-commerce platform to create an integrated technology platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We are leveraging our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next-generation sample preparation, and antibody libraries for drug discovery and development.
Additionally, we believe our platform will enable new value-add opportunities, such as discovery partnerships for biologic drugs, and will enable new applications for synthetic DNA, such as digital data storage. We sell our synthetic DNA and synthetic DNA-based products to a customer base of over
2,200 customers across a broad range of industries.
We launched the first application of our platform, synthetic genes and oligo pools, in April 2016 to disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete.
We generated revenues of $28.2 million and $17.1 million in the three months ended December 31, 2020 and 2019, while incurring net losses of $32.9 million and $55.6 million for the three months ended December 31, 2020 and 2019 respectively. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the success of our existing products and development and commercialization of additional products in the synthetic biology industry.
For the three months ended December 31, 2020 and 2019 we served approximately 1,500 and 1,000 customers, respectively, and revenue to one of our largest customers, Ginkgo Bioworks, Inc. which we believe is the largest global purchaser of synthetic DNA, was $1.4 million, and $2.1 million, respectively. Sales to Ginkgo Bioworks, Inc. has accounted for 5% and 12% of our total revenue for the three months ended December 31, 2020 and 2019 respectively.
Highlight from three months ended December 31, 2020 compared with three months ended December 2019 included:
| • | Revenue growth of 64% to $28.2 million from $17.2 million, primarily due to growth in NGS tools, DNA Libraries and Synthetic Genes. |
We have built a scalable commercial platform that enables us to reach a diverse customer base in a variety of industries including industrial chemicals, academic research, healthcare, food, agriculture and data storage. To address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force targeting synthetic DNA customers, international distributors, and an e-commerce platform. We launched our proprietary, innovative, and easy-to-use e-commerce platform in October 2017 to existing customers and expanded access to the general public in January 2018. Our platform allows customers to design, validate and place on-demand orders of customized DNA online. This is a key component of our strategy to address and support our diverse and growing customer base, as well as support commercial productivity, enhance the customer experience, and promote loyalty.
In the three months ended December 31, 2020, our net revenues declined to $28.2 million from net revenues of $32.4 million in the three months ended September 30, 2020. Our net revenues from NGS tools declined to $15.6 million in the three months ended December 31, 2020, from $20.2 million in the three months ended September 30, 2020, mainly due to a $9.0 million revenue from a single order of a large customer in the three months ended September 30, 2020 offset by a $4.6 million order from another large customer in the three months ended December 31, 2020. Our synthetic gene revenue attributable to Ginkgo Bioworks, our largest synthetic gene customer, was $1.4 million in the three months ended December 31, 2020, versus $1.8 million in the three months ended September 30, 2020. Our non-Ginkgo synthetic gene revenue of $7.4 million in the three months ended December 31, 2020 decreased from $ 9.2 million in the three months ended September 30, 2020. Our selling, general and administrative expenses, or SG&A, increased to $28.8 million in the three months ended December 31, 2020 from $27.2 million in the prior three months ended September 30, 2020, due to increases in professional services and outside services costs. Our R&D expenses increased from $11.6 million in the three months ended September 30, 2020 to $14.0 million in the three months ended December 31, 2020 due to increase in payroll expenses related to increased headcount, stock based compensation and outside services expenses.
16
COVID-19 considerations
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. During the three months ended December 31, 2020, our revenues were not significantly affected by the COVID-19 pandemic. However, the extent to which the COVID-19 pandemic affects our future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including the recurrence, severity and/or duration of the ongoing pandemic, and current or future domestic and international actions to contain and treat COVID-19.
We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the promotion of social distancing and work-from-home arrangements. We have taken and continue to take a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include increasing our inventory, requiring remote working arrangements for employees not integral in physically making and shipping our products or who need specialized equipment to perform their work, investing in personal protective equipment, and providing paid sick leave to affected employees.
Due to the speed with which the situation may change, we are not able at this time to estimate the effect of COVID-19 on our financial results and operations, but the effect could be material for the remainder of fiscal year 2021 and/or during any future period affected either directly or indirectly by this pandemic. For further discussion of the risks relating to COVID-19, see Part II, Item 1A. “Risk Factors—We are subject to risks associated with COVID-19.”
Financial overview
The following table summarizes certain selected historical financial results:
Three months ended December 31, |
||||||||
| (in thousands) |
2020 |
2019 |
||||||
| Revenues |
$ | 28,161 | $ | 17,164 | ||||
| Loss from operations |
(32,793 | ) | (55,830 | ) | ||||
| Net loss attributable to common stockholders |
(32,900 | ) | (55,638 | ) | ||||
Revenues
We generate revenue from sales of synthetic genes, oligo pools, NGS tools, DNA and Biopharma libraries. Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets, launch new products, generate sales through our direct sales force, and over time from our e-commerce platform.
Revenues by geography
We have one reportable segment from the sale of synthetic DNA products. The following table shows our revenues by geography, based on our customers’ shipping addresses. Americas consists of Canada, Mexico, and South America; EMEA consists of Europe, the Middle East, and Africa; and APAC consists of Japan, China, South Korea, India, Singapore, Malaysia, and Australia.
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
% |
2019 |
% |
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| United States |
$ | 17,034 | 61 | % | $ | 9,827 | 57 | % | ||||||||
| EMEA |
9,058 | 32 | % | 5,941 | 35 | % | ||||||||||
| APAC |
1,767 | 6 | % | 1,241 | 7 | % | ||||||||||
| Americas |
302 | 1 | % | 155 | 1 | % | ||||||||||
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| Total revenues |
$ | 28,161 | 100 | % | $ | 17,164 | 100 | % | ||||||||
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Revenues by product
The table below sets forth revenues by product:
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
% |
2019 |
% |
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| Synthetic genes |
$ | 8,874 | 32 | % | $ | 7,836 | 46 | % | ||||||||
| Oligo pools |
1,510 | 5 | % | 1,242 | 7 | % | ||||||||||
| DNA and Biopharma libraries |
2,205 | 8 | % | 1,057 | 6 | % | ||||||||||
| NGS tools |
15,572 | 55 | % | 7,029 | 41 | % | ||||||||||
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| Total revenues |
$ | 28,161 | 100 | % | $ | 17,164 | 100 | % | ||||||||
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Revenues by industry
The table below sets forth revenues by industry:
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
% |
2019 |
% |
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| Industrial chemicals |
$ | 7,132 | 25 | % | $ | 6,137 | 36 | % | ||||||||
| Academic research |
4,901 | 17 | % | 4,951 | 29 | % | ||||||||||
| Healthcare |
15,976 | 57 | % | 5,835 | 34 | % | ||||||||||
| Food/agriculture |
152 | 1 | % | 241 | 1 | % | ||||||||||
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| Total revenues |
$ | 28,161 | 100 | % | $ | 17,164 | 100 | % | ||||||||
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Product shipments including synthetic genes
Shipments of all products and number of genes shipped in the three months ended December 31, 2020, September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019 were as follows:
Three months ended |
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| (in thousands, except shipments) |
December 31, 2020 |
September 30, 2020 |
June 30, 2020 |
March 31, 2020 |
December 31, 2019 |
September 30, 2019 |
June 30, 2019 |
March 31, 2019 |
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| Number of genes shipped |
84,234 | 86,605 | 83,216 | 88,545 | 79,851 | 80,022 | 68,069 | 69,087 | ||||||||||||||||||||||||
| Number of shipments |
9,313 | 8,292 | 7,213 | 6,595 | 6,154 | 5,631 | 5,151 | 3,909 | ||||||||||||||||||||||||
Comparison of the three months ended December 31, 2020 and 2019
Revenues
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Revenues |
$ | 28,161 | $ | 17,164 | $ | 10,997 | 64 | % | ||||||||
Revenues increased from $17.2 million to $28.2 million in the three months ended December 31, 2020, which was an increase of $11.0 million, or 64%, over the three months ended December 31, 2019. The revenue increase reflects growth in synthetic genes revenue of $1.0 million and NGS tools revenue of $8.5 million. The increase in synthetic genes revenue was primarily due to our DNA preps launched in April 2020 and higher shipments of non-clonal genes. In the three months ended December 31, 2020, we shipped 84,234 genes compared to 79,851 genes in the three months ended December 31, 2019, an increase of 6%. Synthetic gene pricing to our customers was relatively constant period-over-period, but revenue increased due to maxiprep and non-clonal genes. The primary reason for NGS tools revenue growth was the adoption of our product by a larger customer base and a $4.6 million shipment to a liquid biopsy customer. We do not believe that pricing changes had a meaningful impact on the revenue changes for NGS tools period-over-period.
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Cost of revenues
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Cost of revenues |
$ | 18,162 | $ | 13,792 | $ | 4,370 | 32 | % | ||||||||
In the three months ended December 31, 2020, cost of revenue increased to $18.2 million from $13.8 million in the three months ended December 31, 2019. The increase was primarily due to the increase in the personnel costs of $1.0 million related to supporting new product portfolio launches and increase in volume of products shipped. Consumption of reagents and production materials and labor costs increased by $2.4 million associated with the increased product shipments and higher revenue. Information technology costs increased by $0.5 million. The Company’s cost of revenues was 65% and 80% of total revenues for the three months ended December 31, 2020 and 2019, respectively.
Research and development expenses
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Research and development |
$ | 14,000 | $ | 10,297 | $ | 3,703 | 36 | % | ||||||||
In the three months ended December 31, 2020, research and development expenses increased to $14.0 million from $10.3 million in the three months ended December 31, 2019. The increase was primarily due to expanding our DNA synthesis R&D capabilities which includes increase in payroll and stock compensation expense of $3.3 million and outside services of $0.4 million relating to increase in engineering services.
Selling, general and administrative
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Selling, general and administrative |
$ | 28,792 | $ | 26,405 | $ | 2,387 | 9 | % | ||||||||
In the three months ended December 31, 2020, selling, general and administrative expenses increased to $28.8 million from $26.4 million in the three months ended December 31, 2019, primarily due to increases in payroll expenses related to increased headcount and outside audit services,
Sarbanes-Oxley
compliance, and other professional services offset by a $6.0 million decrease in legal expenses. Salaries and related costs increased by $6.1 million, as a result of increased headcount, including $1.9 million higher stock-based compensation expense. Outside services costs increased by $2.0 million. The increase was offset by a decrease in travel expenses of $0.9 million, primarily due to COVID-19 travel restrictions. Litigation settlement
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Litigation settlement |
$ | — | $ | 22,500 | $ | 22,500 | 100 | % | ||||||||
On February 6, 2020, we, Dr. Leproust, Dr. Chen, Ms. Glaize, and Agilent agreed to the terms of the Settlement Agreement to pay Agilent $22.5 million within 14 days of the Settlement Agreement to resolve all claims and counterclaims initiated with the Complaint. This expense was accrued in the consolidated financial statements in the three months ended December 31, 2019 and paid on February 13, 2020.
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Interest, and other income (expense), net
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Interest income |
$ | 134 | $ | 564 | $ | (430 | ) | 76 | % | |||||||
| Interest expense |
(118 | ) | (248 | ) | 130 | 52 | % | |||||||||
| Other income (expense) |
(77 | ) | (87 | ) | 10 | 11 | % | |||||||||
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| Total interest and other income (expense), net |
(61 | ) | $ | 229 | (290 | ) | 140 | % | ||||||||
In the three months ended December 31, 2020, interest income was $0.1 million compared to $0.6 million in the three months ended December 31, 2019, resulting from our short-term investments. The decrease in interest expense was related to the amount of debt outstanding under our credit facility with Silicon Valley Bank.
Provision for income taxes
Three months ended December 31, |
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| (in thousands, except percentages) |
2020 |
2019 |
Change |
% |
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| Provision for income taxes |
$ | 46 | $ | 37 | $ | 9 | 24 | % | ||||||||
In the three months ended December 31, 2020 and 2019, we recorded income tax expense of less than $0.1 million.
Liquidity and capital resources
Sources of liquidity
To date, we have financed our operations principally through public equity raises, private placements of our convertible preferred stock, borrowings from credit facilities and revenue from our commercial operations.
Since our inception on February 4, 2013 and through December 31, 2020, we have received an aggregate of $1,063.9 million in net proceeds from the issuance of equity securities and an aggregate of $13.8 million from debt. As of December 31, 2020, we had a balance of $348.8 million of cash and cash equivalents and $238.5 million in short-term investments.
Loan and Security Agreement
In September 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Fourth Loan, with SVB, which allowed for borrowings aggregating up to $20.0 million in a series of three advances.
The first advance—which was effectuated in September 2017—provided a principal amount of $10.0 million, the second optional advance allowed for a principal amount of $5.0 million and the third optional advance allowed for a principal amount of $5.0 million during their respective drawdown periods; however, the draw periods for the second and third tranches under this agreement have expired as of January 31, 2018 and June 30, 2018, respectively.
In connection with the first advance, we issued warrants to purchase 64,127 shares of common stock at an exercise price of $6.24 per share. The Fourth Loan contains a subjective acceleration clause under which the Fourth Loan could become due and payable to SVB in the event of a material adverse change in our business. The term of the loan was 51 months with an interest rate of prime plus 3.00% and a final payment fee of $0.7 million.
In addition, we obtained a revolving facility from SVB in September 2017 as part of the Fourth Loan and the facility which allows us to borrow up to $10.0 million. The principal amount outstanding under the revolving line accrues interest at a floating per annum rate equal to one percentage point (1.00%) above the prime rate, which interest is payable monthly. The amounts available under the revolving line are limited by an advance rate which is a percentage of our account receivables balance. As of December 31, 2020, we have not borrowed against the $10.0 million revolving facility.
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Our credit facilities contain customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on changes in business, management, ownership or business locations, indebtedness, encumbrances, investments, mergers or acquisitions, dispositions, maintenance of collateral accounts, prepayment of other indebtedness, distributions and transactions with affiliates. The credit facilities contain customary events of default subject in certain cases to grace periods and notice requirements, including (a) failure to pay principal, interest and other obligations when due, (b) material misrepresentations, (c) breach of covenants, conditions or agreements in the credit facilities, (d) default under material indebtedness, (e) certain bankruptcy events, (f) a material adverse change; (g) attachment, levy or restraint on business, (h) default with respect to subordinated debt, (i) cross default under our credit facilities, and (j) government approvals being revoked. As part of the Fourth Loan, all rights, title and interest to our personal property with the exception of our intellectual property, have been pledged as collateral, including cash and cash equivalents, short-term investments, accounts receivable, contractual rights to payment, license agreements, general intangibles, inventory and equipment. We were in compliance with all covenants under the loan and security agreement as of December 31, 2020.
Future maturities of the loan as of December 31, 2020 are as follows:
| (in thousands), years ending September 30 |
Principal |
Interest |
Total |
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| Remainder of 2021 |
$ | 2,500 | $ | 106 | $ | 2,606 | ||||||
| 2022 |
833 | 9 | 842 | |||||||||
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| 3,333 | 115 | 3,448 | ||||||||||
| Less: Interest |
(115 | ) | ||||||||||
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| Total amount of loan principal |
3,333 | |||||||||||
| Less unamortized debt discount |
(55 | ) | ||||||||||
| Add accretion of final payment fee |
680 | |||||||||||
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| $ | 3,958 | |||||||||||
Capital resources
As of December 31, 2020, our principal sources of liquidity were $587.3 million of cash, cash equivalents and short-term investments, which primarily consist of short-term, investment-grade commercial paper and U.S. Treasury bills.
In October of 2018 in connection with our initial public offering, we sold a total of 5,750,000 shares at a price of $14.00 per share and received approximately $69.6 million in net proceeds, after deducting underwriting discounts and commissions of $5.6 million and offering expenses of $5.3 million payable by the Company.
In May 2019, we sold 4,312,500 shares in a public offering at a price of $21.00 per share, and received net proceeds of $84.3 million, after deducting an underwriting discount and commission totaling $5.4 million and offering expenses of $0.9 million. In December 2019 and January 2020, we completed an at-the-market offering of common stock selling a total of 2,239,680 shares with proceeds of $48.0 million, after deducting underwriting discounts of $1.5 million and commissions and offering expenses of $0.5 million. In February 2020, we completed an underwritten public offering of common stock selling a total of 5,339,285 shares with proceeds of $140.2 million, after deducting underwriting discounts of $9.0 million and commissions and offering expenses of $0.4 million. In June 2020, we completed an underwritten public offering of common stock selling a total of 3,484,848 shares with proceeds of $107.4 million, after deducting underwriting discounts of $6.9 million and commissions and offering expenses of $0.7 million. In December 2020, the Company completed an underwriting public offering of 3,136,362 shares of its common stock with proceeds of $323.9 million, after deducting underwriting discounts of $20.7 million and commissions and offering expenses of $0.4 million.
We believe that our existing cash, cash equivalents and short-term investments are sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least one year from the issuance of these consolidated financial statements. In the future, we may still need to obtain additional financing to fund operations beyond this period, and there can be no assurance that we will be successful in raising additional financing on terms which are acceptable to us. In addition, our operating plan may change as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Our future capital requirements will depend on many factors. See “Risk factors—We will require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product manufacturing and development and other operations.”
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
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Operating capital requirements
Our primary uses of capital are, and we expect will continue to be for the near future, working capital, compensation and related expenses, manufacturing costs, laboratory and related supplies, legal and other regulatory expenses and general overhead costs. As of December 31, 2020, we had $3.8 million in commitments for capital expenditures.
Cash flows
The following table summarizes our sources and uses of cash and cash equivalents:
Three months ended December 31, |
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| (in thousands) |
2020 |
2019 |
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| Net cash used in operating activities |
$ | (24,932 | ) | $ | (34,914 | ) | ||
| Net cash (used in) provided by investing activities |
(45,921 | ) | 12,405 | |||||
| Net cash provided by financing activities |
326,921 | 2,057 | ||||||
Operating activities
Net cash used in operating activities was $24.9 million in the three months ended December 31, 2020, and consisted primarily of a net loss of $32.9 million adjusted for non-cash items including depreciation and amortization expenses of $2.1 million, stock-based compensation expense of $7.0 million, and a change in operating assets and liabilities of $1.6 million. The change in operating assets and liabilities was mainly due to decrease in inventories of $1.2 million, prepaid expenses and other current assets of $2.0 million and accrued expenses of $3.4 million off set by increases in accounts receivable of $0.9 million, accounts payable of $3.5 million and other liabilities of $0.7 million.
Net cash used in operating activities was $34.9 million in the three months ended December 31, 2019, and consisted primarily of a net loss of $55.6 million adjusted for non-cash items including depreciation and amortization expenses of $1.5 million, stock-based compensation expense of $3.7 million, litigation settlement of $22.5 million and a change in operating assets and liabilities of $7.2 million.
Investing activities
In the three months ended December 31, 2020, our investing activities used net cash of $45.9 million. The use of net cash resulted primarily from the net purchases and maturity of investments of $42.3 million, and purchases of laboratory property, equipment, and computers of $3.6 million.
In the three months ended December 31, 2019, our investing activities provided net cash of $12.4 million. The net cash provided resulted primarily from the net impact of purchases and maturity of investments, and purchases of laboratory property, equipment, and computers.
Financing activities
Net cash provided by financing activities was $326.9 million in the three months ended December 31, 2020, which consisted of $324.1 million in proceeds from a public offering of our common stock, net of underwriting discounts and commissions and offering expenses, and $6.1 million from the exercise of stock options, offset by $0.8 million in principal payments on long term debt and $2.4 million in repurchases of common stock for income tax withholdings.
Net cash provided by financing activities was $2.1 million in the three months ended December 31, 2019, which consisted of $2.0 million in proceeds from an ATM offering, net of underwriting discounts and commissions and offering expenses, and $1.7 million from the exercise of stock options, offset by $0.8 million in principal payments on long term debt and $0.8 million in repurchases of common stock for income tax withholdings.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Contractual obligations and other commitments
Our contractual obligations have not materially changed from those reported in our Annual Report on Form 10-K.
In December 2020, we entered into a 12-year operating lease for a 110,995 square foot facility in Wilsonville, Oregon to further expand our operations. Subject to certain conditions pursuant to the lease, we expect monthly rent payments on the new facility to commence in the first quarter of 2022. We will pay an initial annual base rent of approximately $1.7 million, which is subject to scheduled 3% annual increases, plus certain operating expenses. We have been provided a tenant improvement allowance of $13.3 million. We have the right to sublease the facility, subject to landlord consent. We also have the option to extend the lease for two terms of five years. The lease has not commenced as of December 31, 2020. The lease commencement is contingent upon assuming control over the facility which is not expected to occur until the landlord completes their portion of the buildout which has not yet commenced as of December 31, 2020. The future minimum lease payments under the agreement are $27.9 million.
Critical accounting policies and significant management estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Changes in these estimates and assumptions or conditions could significantly affect our financial condition and results of operations.
We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.
22
Revenue recognition
Our revenue is generated through the sale of synthetic biology tools, such as synthetic genes, or clonal genes and fragments, oligonucleotide pools, or oligo pools, NGS tools and DNA libraries. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Contracts with customers are generally in the written form of a purchase order or a quotation, which outline the promised goods and the agreed upon price. Such orders are often accompanied by a Master Supply or Distribution Agreement that establishes the terms and conditions, rights of the parties, delivery terms, and pricing. We assess collectability based on a number of factors, including past transaction history and creditworthiness of the customer.
For all of our contracts to date, the customer orders a specified quantity of a synthetic DNA sequence; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation. Some contracts may contain prospective discounts when certain order quantities are exceeded; however, these future discounts are either not significant, not deemed to be incremental to the pricing offered to other customers, or not enforceable options to acquire additional goods. As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation. We do not offer retrospective discounts or rebates.
The transaction price is determined based on the agreed upon rates in the purchase order or master supply agreements applied to the quantity of synthetic DNA that was manufactured and shipped to the customer. Our contracts include only one performance obligation—the delivery of the product to the customer. Accordingly, all of the transaction price, net of any discounts, is allocated to the one performance obligation. Therefore, upon delivery of the product, there are no remaining performance obligations. Our shipping and handling activities are performed before the customer obtains control of the goods and therefore are considered a fulfillment cost. We have elected to exclude all sales and value added taxes from the measurement of the transaction price. We have not adjusted the transaction price for significant financing since the time period between the transfer of goods and payment is less than one year. We have elected the practical expedient of not disclosing the consideration allocated to remaining performance obligations and an explanation of when those amounts are expected to be recognized as revenue since the duration of our contracts is less than one year.
We recognize revenue at a point in time when control of the products is transferred to the customer. Management applies judgment in evaluating when a customer obtains control of the promised good which is generally when the product is delivered to the customer. Our customer contracts generally include a standard assurance warranty to guarantee that our products comply with agreed specifications. We reduce revenue by the amount of expected returns which have been insignificant.
We do not have any contract assets or contract liabilities as of December 31, 2020 and September 30, 2020. For all periods presented, we did not recognize revenue from amounts that were included in the contract liability balance at the beginning of each period. In addition, for all periods presented, there was no revenue recognized in a reporting period from performance obligations satisfied in previous periods.
Based on the nature of our contracts with customers which are recognized over a term of less than 12 months, we have elected to use the practical expedient whereby costs to obtain a contract are expensed as they are incurred.
We state our revenues net of any taxes collected from customers that are required to be remitted to various government agencies. The amount of taxes collected from customers and payable to governmental entities is included on the balance sheet as part of “Accrued expenses and other current liabilities.”
Stock-based compensation
We have granted stock-based awards, consisting of stock options and restricted stock, to our employees, certain non-employee consultants and certain members of our board of directors. We measure stock-based compensation expense for restricted stock and stock options granted to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We account for stock-based compensation arrangements with non-employee consultants using a fair value approach. The estimated fair value of unvested options granted to non-employee consultants is remeasured at each reporting date through the date of final vesting. As a result, the noncash charge to operations for nonemployee options with vesting conditions is affected in each reporting period by changes in the estimated fair value of our common stock. We adjust for actual forfeitures as they occur.
We have granted performance-based stock units (PSUs) to executive officers and senior level employees. The Company uses the Black-Scholes method to calculate the fair value at the grant date without regard to the vesting condition and will recognize compensation cost for the units that are expected to vest.
Recently issued accounting pronouncements
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” in Item 1 of Part I of this Quarterly Report on Form 10-Q for a full description of the recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.
23
Item 3.
Quantitative and qualitative disclosures about market risk
Interest rates sensitivity
We are exposed to market risk related to changes in interest rates. We had cash and cash equivalents totaling $384.8 million and $93.7 million as of December 31, 2020 and September 30, 2020, respectively. We had short-term investments of $238.5 million and $196.3 million as of December 31, 2019 and September 30, 2020, respectively. Our cash and cash equivalents consist of cash in bank accounts and money market funds, and short-term investments consist of U.S. government agency bonds, corporate bonds, and commercial paper.
The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality and short-term duration, according to our board-approved investment policy. Our investments are subject to interest rate risk and could fall in value if market interest rates increase. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.
Foreign currency sensitivity
The majority of our transactions occur in U.S. dollars. However, we do have certain transactions that are denominated in currencies other than the U.S. dollar, primarily the Euro, Chinese Yuan, and British Pound, and we therefore are subject to foreign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of expenses, assets and liabilities primarily associated with a limited number of manufacturing activities.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currency exchange rate exposure in a manner that entirely offsets the effects of changes in foreign currency exchange rates. The counterparties to these forward foreign currency exchange contracts are creditworthy multinational commercial banks, which minimizes the risk of counterparty nonperformance. We regularly review our hedging program and may, as part of this review, make changes to the program.
Item 4.
Controls and procedures
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020 as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by the Quarterly Report on Form 10-Q.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of such date due to the material weaknesses in our internal control over financial reporting described below.
Previously Identified Material Weaknesses
Refer to the management report on internal control over financial reporting disclosed in Part II—Item 9A of the Form 10-K for the year ended September 30, 2020 filed with SEC on November 27, 2020.
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Remediation Efforts
We have identified the following remediation efforts for the material weaknesses described above.
Journal Entries
We are designing and implementing a process and control whereby an individual without access to create and post journal entries independently reviews journal entries that are created and posted by the same individual or edited and posted by the same individual.
Revenue
We are designing and implementing processes and controls to ensure that any edits to customer order entry data, including price and quantity, are appropriately reviewed. We are also redesigning our segregation of duties framework within the revenue cycle to ensure appropriate segregation of duties throughout the order entry and revenue processes.
ITGCs
We are designing and implementing improved processes and controls for requesting, authorizing, and reviewing user access to key information systems which impact our financial reporting, including identifying access to roles where manual business process controls may be required. This implementation will include the addition of new preventative control activities associated with user access provisioning within our key applications which impact our financial reporting, as well as certain detective controls which review user access and activity logs.
Additional changes and improvements may be identified and adopted as we continue to evaluate and implement our remediation plans. These material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that the enhanced control is operating effectively.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Inherent limitations on effectiveness of controls
Our management, including the CEO and CFO, recognizes that our disclosure controls or our internal control over financial reporting cannot prevent or detect all possible instances of errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
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PART II. Other information
Item 1.
Legal proceedings
We are subject to various legal proceedings and claims arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, management believes that the final disposition of such matters will not have a material adverse effect on our business, financial position, results of operations or cash flows.
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Item 1A. |
Risk factors |
Risk Factor Summary
Investing in our common stock involves a high degree of risk. You should carefully consider all information in the Annual Report on Form 10-K prior to investing in our common stock. These risks are discussed more fully in the section titled “Risk Factors.” These risks and uncertainties include, but are not limited to, the following:
| • | We are subject to risks associated with COVID-19; |
| • | We have incurred net losses in every period to date, and we expect to continue to incur significant losses as we develop our business and may never achieve profitability; |
| • | We will require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product manufacturing and development and other operations; |
| • | If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business and growth prospects will be harmed; |
| • | Rapidly changing technology and extensive competition in synthetic biology could make the products we are developing and producing obsolete or non-competitive unless we continue to develop and manufacture new and improved products and pursue new market opportunities; |
| • | The continued success of our business relies heavily on our disruptive technologies and products and our position in the market as a leading provider or synthetic DNA using a silicon chip; |
| • | We depend on one single-source supplier for a critical component for our DNA synthesis process. The loss of this supplier or its failure to supply us with the necessary component on a timely basis, could cause delays in the future capacity of our DNA synthesis process and adversely affect our business; |
| • | We depend on the continuing efforts of our senior management team and other key personnel. If we lose members of our senior management team or other key personnel or are unable to successfully retain, recruit and train qualified researchers, engineering and other personnel, our ability to develop our products could be harmed, and we may be unable to achieve our goals; |
| • | We may engage in strategic transactions, including acquisitions that could disrupt our business, cause dilution to our stockholders, reduce our financial resources, or prove not to be successful; |
| • | Our products could in the future be subject to additional regulation by the U.S. Food and Drug Administration or other domestic and international regulatory agencies, which could increase our costs and delay our commercialization efforts, thereby materially and adversely affecting our business and results of operations; |
| • | If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business; |
| • | Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain; |
| • | If we are unable to obtain, maintain and enforce intellectual property protection, others may be able to make, use, or sell products and technologies substantially the same as ours, which could adversely affect our ability to compete in the market; |
| • | We have never paid dividends on our capital stock and we do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases; |
| • | Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock; |
| • | The market price of our common stock is likely to be volatile and could fluctuate or decline, resulting in a substantial loss of your investment; and |
| • | Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our common stock to decline. |
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Quarterly Report on Form 10-Q. The following information should be read in conjunction with Part 1, Item 2 “Management’s discussion and analysis of financial condition and results of operations” and our unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial statements” of this Form 10-Q . The risks and uncertainties described below are not the only ones we face. Additional risk and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occur, our business, operating results, financial condition, cash flows, and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.