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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2022
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
Twist Bioscience Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-2058888
(I.R.S. Employer
Identification No.)
681 Gateway Blvd, South San Francisco, CA 94080
(Address of principal executive offices and zip code)
(800) 719-0671
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of each exchange on which registered
Common Stock
TWST
The Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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):
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Small reporting company
Emerging growth company
☐
☐
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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. ☐
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-
Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of March 31, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of common stock held by non-affiliates of the registrant was approximately
$2.39 billion based upon the closing sale price on the Nasdaq Global Select Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant’s common stock outstanding as of November 23, 2022, was 56,568,420.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed in connection with its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
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TWIST BIOSCIENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk factors
Unresolved staff comments
Properties
Legal proceedings
Mine safety disclosures
PART I
PART II
Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
[Reserved]
Management’s discussion and analysis of financial condition and results of operations
Quantitative and qualitative disclosures about market risk
Consolidated financial statements and supplementary data
Changes in and disagreements with accountants on accounting and financial disclosure
Controls and procedures
Other information
Disclosure regarding foreign jurisdiction that prevent inspections
PART III
Directors, executive officers and corporate governance
Executive compensation
Security ownership of certain beneficial owners and management and related stockholder matters
Certain relationships and related transactions, and director independence
Principal accounting fees and services
Item 15.
Item 16.
Exhibits, financial statement schedules
Form of 10-K summary
SIGNATURES
PART IV
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Forward-looking statements
This Annual Report on Form 10-K for the fiscal year ended September 30, 2022, or Form 10-K, 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 the
commercial development of DNA data storage capabilities, expectations regarding market penetration, anticipated customer conversions to our products,
plans to expand in the international markets, identification and development of potential antibody candidates for the treatment of COVID-19 and other
diseases, and the anticipated timeframe for remediating the material weakness in internal control over financial reporting. 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 statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual
results, events or circumstances to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties
include:
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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 such as the COVID-19 pandemic;
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.”
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You should not rely upon forward-looking statements as predictions of future events. Such statements are based on management’s expectations as of the
date of this filing and involve many risks and uncertainties that could cause our actual results, events or circumstances to differ materially from those
expressed or implied in our forward-looking statements.
Readers are urged to carefully review and consider all of the information in this Form 10-K 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-K 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.
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Item 1.
Business
PART I
At Twist Bioscience Corporation, we work in service of customers who are changing the world for the better. In fields such as health care, food/agriculture,
industrial chemicals/materials, academic research and data storage, by using our products, our customers are developing ways to better lives and improve
the sustainability of the planet. We believe Twist Bioscience is uniquely positioned to help accelerate their efforts and the faster our customers succeed, the
better for all of us.
We have developed a disruptive DNA synthesis platform to industrialize the engineering of biology that provides DNA for a wide range of uses and
markets. 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 miniaturized traditional chemical DNA synthesis reactions to write over one million short pieces of DNA on each silicon chip,
approximately the size of a large mobile phone, reducing by 99.8% the amount of chemicals we estimate would be used per gene as compared to plate-
based synthesis. We have combined our silicon-based DNA writing 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 have applied our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next
generation sequencing, or NGS, sample preparation, and antibody libraries for drug discovery and development, all designed to enable our customers to
conduct research more efficiently and effectively. Leveraging our same platform, we have expanded our footprint beyond DNA synthesis to manufacture
synthetic RNA as well as antibody proteins to disrupt and innovate within larger market opportunities, in addition to discovery partnerships for biologic
drugs and developing completely new applications for synthetic DNA, such as digital data storage. We sell our products to a global customer base of
approximately 3,300 customers across a broad range of industries.
We believe our products enable a broad range of applications that may ultimately improve health and the sustainability of the planet across multiple
industries, including:
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healthcare for the identification, prevention, diagnosis and treatment of disease (antibody discovery and optimization technology);
chemicals/materials for cost-effective and sustainable production of new and existing specialty chemicals and materials, such as spider silk, nylon,
rubber, fragrances, food flavors and food additives;
food/agriculture for more effective and sustainable crop production;
academic research for a broad range of education and discovery applications; and
technology for potential use as an alternative long-term data storage medium.
Background
We currently generate revenue through our synthetic biology and NGS tools product lines. In addition, we are leveraging our platform to expand our
portfolio to include other products and address additional market opportunities, including vertical market opportunities in biological drug discovery and
development and digital data storage.
As part of our synthetic biology continuum offering, we have commercialized a custom DNA library solution which we believe can be leveraged to
facilitate other proprietary tools to provide an end-to-end solution in biologics drug discovery and early development, from target to investigational new
drug, or IND, application, adding value as a partner to biotechnology and pharmaceutical companies. We are also leveraging this capability for our internal
antibody discovery efforts.
In fiscal year 2022 we served approximately 3,300 customers and reported $203.6 million in revenue, including $106.4 million in revenue from the
healthcare sector, $57.9 million in revenue from the chemicals/materials sector, $37.1 million in revenue from the academic research sector and $2.2
million in revenue from the food/agriculture sector.
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Our Markets
Synthetic Biology
Our synthetic biology products serve life sciences researchers across a variety of healthcare applications including drug discovery, disease detection,
enzyme engineering, gene editing and basic academic research. In addition, our synthetic biology products are used for chemical and materials applications
including development of synthetic spider silk, nylon, rubber, fragrances, flavors and food additives; for food and agricultural applications including
improving crop traits such as adding vitamins or improving drought tolerance, and engineering bacteria to deliver nitrogen at the root of plants.
Synthetic DNA is the fundamental building block that allows researchers to engineer biology. Researchers at a wide range of institutions can design
synthetic DNA to regulate the production of proteins and other molecules to achieve a specific functional purpose. While synthetic DNA has been
produced for more than 40 years, the complexities of biology and the production constraints inherent in legacy processes have historically limited the
applications and market opportunities for DNA synthesis.
Next-Generation Sequencing
Our NGS tools play an integral role in the way our customers prepare their patient samples to be sequenced. NGS has transformed many markets in recent
years by changing the landscape of diagnosing disease and disorders and offers a path to prevent or treat disease. Some of the markets impacted by NGS
include oncology, reproductive health, food/agriculture, consumer genomics, infectious disease research and drug discovery. As NGS technology improves
and the cost of sequencing declines, new emerging markets that were once considered impractical, such as population-scale sequencing, liquid biopsy (a
test that detects multiple types of cancer from a single blood sample), minimal residual disease testing and single cell sequencing, have become major areas
of interest and investment.
Historically, a significant constraint in many NGS applications has been the high cost and long turnaround time of oligonucleotide production. Highly
accurate and reproducible oligonucleotide production is required to produce high quality target enrichment data. Traditionally, the lack of options for
oligonucleotide production forced researchers to choose between using less precise methods or reducing the number of samples in their study.
The ability of the Twist DNA synthesis platform to precisely manufacture target enrichment probes at large scale has dramatically increased the types of
projects that can now be addressed using NGS technologies. Our platform has unlocked new applications, improved data quality, and dramatically
expanded the types of scientific questions that can be answered using NGS. In addition, the speed of our DNA synthesis platform enables customers to
quickly deploy NGS technologies to applications where the time to answer is critical.
Our Platform
We developed the Twist Bioscience DNA synthesis platform to address the limitations of throughput, scalability, and cost inherent in legacy DNA synthesis
methods. Our platform stems from extensive analyses and improvements to the existing gene synthesis and assembly workflows. Our core technologies
combine expertise in silicon, software, fluidics, chemistry, and motion and vision control to miniaturize thousands of parallel chemical reactions on silicon
and write thousands of strands of DNA in parallel.
Enzymatic Synthesis
Several companies are pursuing an emerging gene synthesis process that uses enzymatic chemistry rather than phosphoramidite chemistry. While the
promise of enzymatic synthesis to deliver longer genes in a shorter timeframe provides excitement for the industry, this technology is at the proof-of-
concept stage and has not yet been proven to be scalable or commercially viable. We have developed our own, differentiated approach for enzymatic
synthesis that we believe is scalable and commercially viable that we expect to implement for our enterprise DNA data storage solution.
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We have developed multiple products derived from synthetic DNA and our versatile DNA synthesis technology. Our current offering consists of two
primary product lines, synthetic biology tools and NGS tools, that address different needs of our customers across a variety of applications. In addition to
DNA, we now offer RNA and protein products.
Our Products
Synthetic Biology Products
Synthetic genes and gene fragments
Synthetic genes are manufactured strands of DNA. Customers (biotech, pharma, industrial chemical, agricultural companies as well as academic labs) order
our synthetic genes to conduct a wide range of research, including product development for therapeutics, diagnostics, chemicals/materials, food/agriculture,
data storage as well as a multitude of emerging applications within academic research. Virtually all research and development of this type requires trial and
error, and our customers require many variations of genes to find the DNA sequence that achieves their objectives.
We offer two primary categories of synthetic genes: genes of perfect quality, clonal genes, in a vehicle also called a vector to carry the DNA, and genes,
that customers can place in their own vector, such as near-perfect quality and non-clonal genes or fragments. Within these two categories, customers can
order different lengths of DNA depending on their required final gene construct. Customers can order longer genes or shorter genes and can stitch genes
together to create longer or shorter constructs if desired.
Currently, we manufacture genes of up to 5,000 base pairs in length, yielding a clonally perfect piece of DNA that our customers can immediately use for
their research. We offer non-clonal genes of up to 1,800 base pairs in length, which we believe addresses the vast majority of demand for non-clonal genes.
We also offer larger quantities of DNA for customers who require it for their development efforts.
Oligonucleotide, or Oligo pools
Oligo pools, or high diversity collections of oligonucleotides, are utilized in many applications, including targeted NGS, CRISPR gene editing, mutagenesis
experiments, DNA origami (the nanoscale folding of DNA to create two- and three-dimensional shapes at the nanoscale), DNA computing and data storage
in DNA, among others. Our oligo pools are also used for high-throughput reporter assays that are used to study cell signaling pathways, gene regulation,
and the structure of cell regulatory elements. For these applications, we provide customers with accurate and uniform synthetic oligos to precisely match
their required designs.
We sell a diverse, customizable set of oligo pools, ranging from a few hundred oligos to over one million, and offer oligonucleotides of up to 300
nucleotides in length, with an error rate of 1:2000 nucleotides.
IgG proteins
Pairing the automation in our synthetic biology platform along with our expertise in antibody discovery, we introduced an immunoglobulin G (IgG) protein
offering for our customers focused on the pursuit of drug discovery and development. In the process of antibody discovery, antibody fragments (Fab, small
chain fragment variable (scFv) or VHH) must be reformatted to full IgGs. Leveraging our silicon-based synthesis platform, we provide customers with a
high throughput IgG capability, removing this bottleneck from the antibody discovery process.
NGS tools
Building from our DNA synthesis platform, we have developed products to enable next-generation sequencing. In particular, we are focused on addressing
the demand for better sample preparation products that improve sequencing workflow, increase sequencing accuracy, and reduce downstream sequencing
costs. Using our silicon-based DNA synthesis platform, we are able to synthesize exact sequences of interest. In the target enrichment process, our
synthetic DNA probes bind to the sequence of interest within the sample, acting like a magnet to isolate and physically extract the targeted segment of
DNA.
Our NGS products are primarily used within diagnostic tests for various indications including rare disease, SARS-CoV-2 and cancer through liquid biopsy.
In addition, customers use our NGS tools for population genetics research and biomarker discovery, translational research, microbiology and applied
markets research. Our customers are primarily diagnostic companies and hospitals, research institutions, agricultural biotechnology companies, and
consumer genetics companies conducting diagnostic tests for a wide range of applications.
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We offer a wide variety of NGS tools for our customers including library preparation kits, human exome kits, fixed and custom panels as well as Alliance
panels. Alliance panels are customer-curated content sold through Twist. In addition, we offer specific workflow solutions including a methylation
detection kit for cancer, rare and inherited disease study, as well as a fast hybridization solution (FastHyb), which allows researchers to go from sample to
sequencer in a single day.
Synthetic viral controls, infectious disease research tools
Leveraging our DNA synthesis platform, we launched a new product line of synthetic viral controls in response to the rapid spread of COVID-19. We offer
fully synthetic SARS-CoV-2 RNA reference sequences as positive controls for the development of both NGS and reverse transcription-polymerase chain
reaction (RT-PCR) assays. Our SARS-CoV-2 controls are now included on the U.S. Food and Drug Administration website as reference materials.
In July, we launched synthetic monkeypox controls. In addition, we offer a wide range of respiratory viral controls, including for influenzas, respiratory
syncytial virus (RSV), rhinoviruses, SARS, MERS and coronaviruses. These controls can be used to provide quality control for the development,
verification and ongoing validation of diagnostic tests and allow researchers to develop tests safely and effectively, without working with live virus
samples.
We also offer SARS-CoV-2 Research Panels, the Twist Respiratory Virus Panel and the Pan-Viral Research Panel, for the detection of disease in a research
setting. All products can be used for environmental monitoring and surveillance testing, while also providing insight into the full sequence information to
monitor viral evolution and strain origin.
Drug and Target Discovery Solutions
Precision DNA libraries
Our platform allows customers to customize every antibody sequence variation and construct a precise library systematically to target the entire region of
interest. We can create single-site libraries in which we change a single amino acid (which is encoded by a group of three DNA nucleobases) within the
sequence or single-site saturation libraries in which we change every amino acid within the sequence for a more comprehensive approach. We can also
generate combinatorial libraries in which we introduce changes to multiple sites within the same gene in specific ratios and combinations. These libraries
can be used for antibody engineering, affinity maturation, and humanization, which simplifies downstream screening and identifies more lead molecules.
Our libraries are explicitly developed for a specific area of the genome or tailored to a specific disease, with antibody compounds evenly represented across
all desired areas of the genome.
We have also developed a comprehensive antibody optimization solution to enable simultaneous optimization of multiple characteristics of a given
antibody. We have developed custom software for the optimization of antibody hits, antibody compounds that meet pre-specified criteria for therapeutic
development. We have added our high throughput and hyper-variant antibody library capabilities to create a comprehensive antibody optimization solution
for potential partners. We are now using this solution to design, build and test hyper-variant, tightly controlled antibody libraries that follow the rules of the
human repertoire and mitigate the pitfalls associated with traditional optimization methods. By following the rules of the human repertoire, which means
including only DNA sequences known to occur in humans, we have created a “Library of Libraries” made up of many different individual libraries. These
libraries are natural in composition and are expected to generate better drug development candidates. The libraries also have a large degree of synthetic
variation, enabling simultaneous optimization of several antibody characteristics and the discovery of antibodies with high affinity and specificity to drug
targets.
Partnerships with leading companies
We believe we have several avenues available to monetize our antibody discovery program. In general, partnerships for our antibody development platform
require us to provide rapid, on-demand (high affinity) antibodies based on one or more targets provided by the customer. These agreements typically have
three elements with respect to the program:
• We license and also utilize our “Library of Libraries,” a panel of synthetic antibody phage display libraries derived only from sequences that exist
in the human body.
• We work to discover, validate and optimize new antibody candidates against a specific target.
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The customers pay Twist annual technology licensing fees, and increasingly, we expect to receive contractually obligated project milestones for
completion of various Twist activities and development milestones as our customers progress and commercialize the products. In many cases, we
may also receive royalties on any products coming out of the partnerships.
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Customers can design and purchase libraries, and we work with partners that bring us a target, to discover antibody leads against that target. These
partnerships generate revenue in up-front fees, through the license of libraries and service revenue. In addition, many of our partnerships include success-
based milestones for key clinical, regulatory and commercial achievements and/or royalties on any product sales resulting from our collaboration.
In addition, for our internal development efforts, we have selected several promising targets and have identified antibody leads to these targets. We intend
to out-license these compounds at later stages of preclinical development to optimize both the up-front revenue and potential success-based milestones and
royalties. By out-licensing antibody leads to experts in development and commercialization of biotechnology products, we can continue to focus on
improving health through our proprietary platform. To date, we have generated antibody leads to multiple biological targets and these antibody leads are in
various stages of early discovery and development.
As of September 30, 2022, we had signed 59 revenue-generating partnerships. Through these partnerships, we had 83 completed programs and 50 active
programs with 59 of the programs including milestones and/or royalties as of September 30, 2022. Some of our partners include Boehringer Ingelheim
GmbH, Takeda Pharmaceutical Company Limited, Adicet Bio, Kyowa Kirin, Invetx, Inc., Astellas Pharma Inc. and Neogene Therapeutics, Inc. In addition,
we collaborate with companies that bring complementary technologies to expand our opportunities and reach.
In vivo antibody discovery
Through our acquisition of Abveris in 2021, we added in vivo antibody discovery services to our capabilities. Our ability to induce an immune response in
our proprietary, genetically engineered hyperimmune DiversimAb™ mouse strains allows us to generate antibodies against desired targets of interest
previously unavailable through this discovery method. In addition, we have developed a specialized way to screen immune system B cells to enable the
discovery of large, diverse sets of monoclonal antibodies (mAbs) for our partners. As of September 30, 2022, the Boston team had 62 active programs
underway.
Our growth strategy
Our objective is to be the leading provider of synthetic DNA and DNA-based products worldwide and to leverage our platform to build a leadership
position in other life sciences markets in which we have a competitive advantage. We intend to accomplish this objective by executing on the following:
• maintain and expand our position as the provider of choice for high-quality, affordable synthetic genes and DNA, RNA and proteins to customers
across multiple industries;
become a leading supplier of NGS sample preparation products;
conduct antibody therapeutic discovery and optimization for our current customers and future partners;
continue to explore development of DNA as a digital data storage medium through internal research and government and industry partnerships;
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expand our global presence.
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Beyond these opportunities, we are working with industry partners to create new markets for our products by leveraging our platform.
Sales and marketing
We have built a versatile and scalable commercial platform that enables us to reach a diverse customer base that we estimate consists of over 100,000
synthetic DNA users, and many additional potential customers of our NGS library preparation products today. In order to address this diverse customer
base, we have employed a multi-channel strategy comprised of a direct sales force targeting synthetic DNA customers, a direct sales force focusing on the
NGS market and an e-commerce platform that serves both commercial channels. Our sales force is focused on customer acquisition, support, and
management across industries, and is highly trained on both the technical aspects of our platform and how synthetic DNA can be used in a wide range of
industries. Our easy-to-use e-commerce platform allows customers to design, validate, and place on-demand orders of customized DNA online, and enables
them to receive real-time customized quotes for their products and track their order status through the manufacturing and delivery process. This is a critical
part of our strategy to address our large market and diverse customer base, as well as drive commercial productivity, enhance the customer experience, and
promote loyalty. We target customers of our NGS products through a direct sales team focused on the NGS tools market, which is separate from our
synthetic DNA sales force. Our direct NGS sales representatives are focused on
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supporting our early adopters and providing a high level of service in order to familiarize customers with our product offerings.
We sell our products through a worldwide commercial organization that includes direct sales personnel, commercial consultants in Europe and Asia, an e-
commerce platform and distributors. As of September 30, 2022, we employed 224 people in sales, marketing and customer support.
We are engaged in ongoing research and development efforts focused on enhancements to existing products and the development of new products.
Currently, we are pursuing research and development projects with respect to the following:
Research and development
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process development for highest quality oligos;
optimizing our massively parallel fast turnaround time SynBio pipeline;
silicon process and chemistry development for our data storage initiative;
buildout of a massively parallel screening facility for our biopharma initiatives that allows us to screen thousands of antibodies per week;
expansion of our product offerings for oligo, gene, synthetic controls, NGS library preparation and target enrichment, and DNA Libraries
products; and,
develop new products including mRNA and proteins.
Research and development activities are conducted in collaboration with manufacturing activities to help expedite new products from the development
phase to manufacturing and to more quickly implement new process technologies. From time to time, our research and development efforts have included
participation in technology collaborations with universities and research institutions.
As of September 30, 2022, we employed 303 people in our research and development team.
Patents and other intellectual property rights
As of September 30, 2022, we owned 39 issued U.S. patents and 29 issued international patents; four in China, three in Europe, eight in South Korea, four
in Taiwan, five in Japan, one in Eurasia, one in Singapore, one in Israel, one in Hong Kong, and one in Australia. There are 342 pending patent
applications, including 103 in the United States, 216 international applications, and 23 applications filed under the Patent Cooperation Treaty. Additionally,
we have exclusively licensed a patent portfolio containing 12 issued patents, including one U.S. patent and 11 international patents, and 11 pending
applications, including three in the U.S. and eight international applications. We have also licensed a patent portfolio containing 11 pending applications,
including one in the U.S. and ten international applications. We have further licensed another patent portfolio containing two issued U.S. patents, four
international patents, and five pending applications (one in the U.S. and four international applications). Our policy is to file patent applications to protect
technology, inventions and improvements that are important to our business. Individual patent terms extend for varying periods of time, depending upon
the date of filing of the patent application, the date of patent issuance, and the legal term of patents in the countries in which they are obtained.
Manufacturing and facilities
The production of our products is a highly complex and precise process. We currently manufacture all of our products and multiple sub-assemblies at our
manufacturing facility in South San Francisco, California. We expect to begin manufacturing products for revenue generation in our Wilsonville facility as
of January 2023. We consider our long-lived assets to be ready for their intended use when they are first capable of producing a unit of product that is
saleable or internally usable, at which point depreciation of the asset commences. We also outsource some of our sub-assemblies to third party
manufacturers. All of our products originate from synthetic DNA obtained from nanostructured clusters fabricated on our proprietary silicon technology
platform. Due to its on-demand nature, the gene synthesis business requires manufacturing operations to be in operation 24 hours a day, seven days a week,
365 days per year. For synthetic genes, we have built a highly scalable gene production process with what we believe is industry-leading capacity to
address the growing demand of scalable, high-quality, affordable synthetic genes. As of September 30, 2022, we employed 331 people in our
manufacturing and operations team.
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In addition to synthetic genes, we manufacture oligo pools. The pooling process has been fully automated through a mixture of custom proprietary and
over-the-counter liquid handling equipment. We have the capacity to make many millions of high-quality oligos per month that can be used to make genes
and gene fragments of various lengths, oligo pools of various sizes, DNA libraries and NGS tools products. We intend to increase our shipments to leverage
our production capacity through our e-commerce platform, which we believe will expand both our market opportunity and our customer base.
The manufacturing process for our NGS tools is highly flexible given the efficiency of our production capability. We have automated the entire workflow
using proprietary and over-the-counter laboratory equipment. We have built dedicated production capabilities for our NGS products.
ISO certification
In 2018, we certified our Quality Management System (QMS) to the ISO 9001:2015 (Quality Management Systems—Requirements) standard and ISO
13485:2016 standard (Medical devices—Quality management systems—Requirements for regulatory purposes). ISO is a global network of national
standards with over 18,000 standards for nearly every aspect of technology and business. ISO has standard bodies in 163 countries. ISO Surveillance
Audits are carried out twice within a three-year period by the registrar (certification body) to ensure we maintain our system in compliance with ISO
standards. Recertification is required every three years and we have been successfully recertified since obtaining our original ISO certification. Most
recently, we were registered with the FDA as a manufacturer of “Reagents, 2019-novel coronavirus nucleic acid”.
In 2020, our quality management systems for manufacturing our NGS Target Enrichment Panels in our South San Francisco offices were certified to ISO
13485:2016.
We have historically purchased many of the components and raw materials used in our products from numerous suppliers worldwide. For reasons of quality
assurance, sole source availability or cost effectiveness, certain components and raw materials used in the manufacture of our products are available only
from one supplier. We have worked closely with our suppliers to develop contingency plans to assure continuity of supply while maintaining high quality
and reliability, and in some cases, we have established long-term supply contracts with our suppliers. In response to the COVID-19 pandemic, we increased
our supply of several materials and sourced additional suppliers for key materials to mitigate supply chain disruptions and ensure ongoing operations.
Supply chain
The synthetic biology industry is intensely competitive and is characterized by price competition, technological change, international competition, product
turnaround time and manufacturing yield problems. The competitive factors in the market for our products include:
Competition
•
•
•
•
•
•
price;
product quality, reliability and accuracy;
product offerings & complexity;
turnaround time;
breadth of product line;
design and introduction of new products;
• market acceptance of our products and those of our customers;
•
•
throughput and scale; and
technical support and service.
We face competition from a broad range of providers of core synthetic biology products such as GenScript Biotech Corporation, DNA Script, Inc.,
GENEWIZ (owned by Azenta), Integrated DNA Technologies, Inc. (owned by Danaher Corporation), DNA 2.0 Inc. d/b/a/ ATUM, GeneArt (owned by
Thermo Fisher Scientific Inc.), Eurofins Genomics LLC,
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Sigma-Aldrich Corporation (owned by Charles River Laboratories, Inc.) (an indirect wholly owned subsidiary of Merck & Company), Promega
Corporation, OriGene Technologies, Inc., Blue Heron Biotech, LLC and others. Additionally, we compete with both large and emerging providers in the
life sciences tools and diagnostics industries focused on sample preparation for NGS such as Thermo Fisher Scientific Inc., Illumina, Inc., Integrated DNA
Technologies, Inc., and Agilent. In the antibody discovery market, we compete with clinical research organizations, such as Curia, GenScript, and Genovac
(formerly part of Aldevron, LLC), and antibody discovery biotechnology companies, such as Fair Journey/Iontas, Adimab, Zymeworks, Distributed Bio
(owned by Charles River), Ablexis, Specifica, OmniAb and AbCellera Biologics Inc. In the emerging field of DNA digital data storage, we compete with
Catalog Technologies, Inc., Helixworks, Iridia, Inc., Roswell, Seagate, Microsoft, Genscript, Molecular Assemblies, Ansa Biotechnologies, various
academic institutions, and other emerging competitors.
Environmental, social, governance (ESG) and human capital
We are at the forefront of the synthetic biology revolution, and our products are increasingly being used to empower our customers, which consist of
diagnostic, therapeutic and healthcare companies, agricultural biotech companies, chemical companies, academic institutions and government entities,
around the world to address large societal challenges. All of our work supports our mission to provide synthetic DNA and DNA products to improve health
and sustainability.
Our employees are a key factor in our ability to serve our customers. The ability to hire and retain highly skilled professionals remains key to our success in
the marketplace. To attract develop and motivate our employees, we offer a challenging work environment, ongoing skills development initiatives,
attractive career advancement, opportunities and a culture that rewards entrepreneurial initiative and exceptional execution.
Guiding Principles and Business Ethics
Our guiding principles of grit, impact, service and trust serve as our guiding principles. Our guiding principles set the tone for how we work together,
provide a framework for giving feedback and increase the power of our brand. Service is at the core of our business and our interactions with one another.
We relentlessly focus on exceeding internal and external customer needs.
Diversity, equity, inclusion and belonging
Diversity is in our DNA all the way from the top of the organization down to the individual employee. Our board adopted a Board Diversity Statement in
January 2022 to provide informed decisions on diversity, equity and inclusion. Our employees come from numerous countries and bring diversity to our
workplace across many critical categories. We believe our company is stronger because of the variety of experiences and backgrounds our employees bring
to their work every day. 63% of our employees identify as people of color.
We are committed to creating and maintaining a diverse, inclusive and safe work environment where our employees can bring their best selves to work
each day. Our commitment to diversity extends through our recruitment, retention, learning and engagement and community partnerships. As part of our
diversity, equity, inclusion and belonging strategy, we made an active decision to pursue opportunities for learning and engagement that bring people from
different backgrounds together into conversation. We have initiated monthly Culture Conversations where we explore identities and systems of power using
an intersectional lens each month. Past topics include: disability, LGBTQIA+, ageism, Latin identity, and more. Our objective is to appreciate each other as
individuals with unique lived experiences, rather than define one another by a single trait such as race, sexual orientation or geographical location. To
assess our efforts toward building a diverse workforce, we have included questions in our engagement survey to measure employee perception of inclusive
culture.
In addition, we mandate training for all employees and managers to prevent workplace and sexual harassment. The course equips leaders and employees
with the tools they need to identify and address unwelcome conduct in non-adversarial, respectful terms.
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Recruiting
We believe that our employees are our most important asset. Beginning with the pre-recruitment process, we provide internship opportunities for students
interested in biotechnology and the science, technology, engineering and mathematics (STEM) fields in both scientific and non-scientific departments. We
engage with local communities to provide expert speakers sharing nontraditional career pathways for the biotechnology field. We partner with community
colleges, historically black colleges and universities and Hispanic-focused institutions to build our brand within diverse communities as a source of diverse,
high-quality candidates for every role with the goal of identifying the best possible candidate to fill open positions within the company. We implemented a
remote work policy which has resulted in a broader applicant pool because they aren’t limited to geographic location.
We actively engage with future scientists through organizations including the International Genetically Engineered Machine (iGEM), a non-profit
organization dedicated to furthering the field of synthetic biology. In addition, we have provided internships through the Gloucester Biotechnology
Academy, a hands-on training program prepares students for careers as entry-level technicians in cutting-edge laboratories; and Eastside Preparatory
Academy, a high school dedicated to serving students historically underrepresented in higher education. We have engaged with several organizations in the
Portland area including Portland Community College, Partnerships in Diversity, Oregon State University, Oregon Biosciences Association and others.
With an active program in place for our employees, we are striving to further support our female and underrepresented employees in advancing their
careers while continuing to focus on hiring diverse talent, particularly at more senior positions.
Compensation and benefits, health and wellness
We strive to provide pay, comprehensive benefits and services that help meet the varying needs of our employees. Our generous total rewards package
includes above-market pay; fully covered healthcare benefits for employees, with family member healthcare benefits covered at 90%; a health savings
account that is fully funded for individuals and their families; approximately four weeks of paid vacation; a minimum of sixteen weeks of parental leave for
all employees globally; flexible work schedules; and onsite services. In addition, we offer every full-time employee, both exempt and non-exempt, the
benefit of equity ownership in the company through stock option grants and our employee stock purchase plan.
We have an expert-built educational platform to assist employee’s fertility & family building needs with the help of treatment, fostering or adopting, plus
dedicated resources for egg freezers, egg donation, LGBTQIA+ families, and solo parents.
We have increased our well-being benefits, by offering programs that help workers monitor and reduce their stress levels, providing apps to support sleep
and relaxation. We have further addressed employees’ emotional health and well-being by providing meditation sessions and using telehealth programs to
offer mental health counseling.
COVID-19 employee safety and benefits
Many of our customers require our synthetic DNA products to provide critical tools for global health. Twist continues to take precautions to reduce the risk
of virus exposure for all employees. We require all U.S. employees to be vaccinated. As a benefit for all employees, we provide COVID and flu vaccines
for the employee and their family.
Employee health and safety
We remain steadfast in our commitment to promote the health and safety of our employees. We require annual workplace safety training to reinforce
workplace safety procedures that may be useful in the event of emergency situations and to assist our employees in helping to prevent workplace accidents.
Our Employee Safety Committee, which is comprised of numerous cross-departmental members meets on a regular basis (at least quarterly) to review
workplace safety and adherence to safety policies. As part of our efforts, all employees and managers complete workplace harassment and sexual
harassment training that includes details on how to report any violation of these policies.
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Conduct and ethics
Our Board of Directors adopted and regularly reviews the Code of Conduct, which applies to all of our employees, directors and officers. We believe it is
imperative that the board of directors and senior management strongly support a no-tolerance stance for workplace harassment, biases and unethical
behavior. All employees are required to abide by, review and confirm compliance to the company’s Code of Business Conduct and Ethics Policy, our Anti-
Money Laundering Policy, our Anti-Corruption Policy. We have established a reporting hotline and email address that enables employees to anonymously
report any suspected violations of the Code of Conduct.
In addition, because synthetic DNA is considered to be a dual use technology, we invest substantial financial and human resources in biosecurity to help
ensure that our products are used for responsible research. We endeavor to abide by all local, national and international regulations as well as trade
compliance requirements and are an active member of the International Gene Synthesis Consortium and the Australia Group. We maintain an active
relationship with the governing body for synthetic DNA within the U.S. Department of Homeland Security.
Growth and development
We invest significant financial and support resources to develop the talent we need to remain at the cutting edge of innovation to ensure Twist Bioscience is
an employer of choice. Our performance management system is aimed at supporting our culture, maintaining consistency with our guiding principles and to
focusing on continuous learning and development. Our success in the market depends on employees understanding and embracing how their job
contributes to the company’s overall strategy. We encourage cross team communication as well as integrated departmental communication. We believe this
broadens our employee’s skill set and provides opportunity for growth and advancement. We invest in our next generation of leaders through a one-year
leadership program for mid-level managers. In addition, we offer tuition reimbursement aimed at growth and career development.
We have made a significant investment in an online learning platform with on-demand, video-based content. Employees have the opportunity to refine or
develop professional skills, learn new software, and explore as they plan their career growth. The platform also offers tremendous potential for managers
and employees to create development plans as part of the performance review process.
Communications and engagement
We employ a variety of tools to facilitate open and direct communication including open forums with executives, employee surveys and engagement
through focus groups, forums and committees. We endeavor to further refine our employee programs through our employee engagement survey as well as
follow up quarterly pulse surveys. Based on the most recent survey conducted in May 2022 where 87% of our employees responded:
•
•
•
93% of employees understand Twist’s mission
92% understand how they contribute to the mission of the company
94% understand how their goals contribute to Twist
We hold All Hands meetings twice per month as well as a monthly managers meeting for all people managers.
In October 2022, we were named a Great Place to Work for the second year in a row in the United States, and for the first time in China, Germany,
Singapore and the UK.
Community engagement, social and relationship capital
We are endeavoring to develop relationships, give back to our communities and engage in corporate social responsibility and sustainability initiatives. We
provide all employees with eight fully paid hours each year to give back to the community at an organization of their choice. We are working to engage
with the local community organizations to provide volunteer opportunities for our employees. As we grow our employee base, we will extend our efforts in
these areas.
Employee population
As of September 30, 2022, we had 989 employees, which includes our team of 39 dedicated commercial consultants. Of these employees, 303 were
primarily engaged in engineering as well as research and development activities; 224 were primarily engaged in marketing, sales and customer support; 131
were primarily engaged in general and administrative activities; and 331 were primarily engaged in operations and manufacturing, of which there are 318
full-time employees
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dedicated to manufacturing our synthetic genes, oligo pools, NGS tools and DNA libraries. None of our employees is represented by a labor union, and we
consider our employee relations to be good.
Board of Directors
Board Member
Nicolas Barthelemy
Nelson C. Chan
Robert Chess
Keith Crandell
Jan Johannessen
Xiaoying Mai
Robert Ragusa
Melissa A. Starovasnik
Emily Leproust
William Banyai
Female
Male
Total
Executives
Executive Team Member
Emily Leproust
Jim Thorburn
Bill Banyai
Angela Bitting
Siyuan Chen
Dennis Cho
Patrick Finn
Paula Green
Steffen Hellmold
Tracey Mullen
Nimisha Srivastava
Aaron Sato
Erin Smith
Female
Male
Total
Gender
Male
Male
Male
Male
Male
Female
Male
Female
Female
Male
30 %
70 %
10
Gender
Female
Male
Male
Female
Male
Male
Male
Female
Male
Female
Female
Male
Female
46 %
54 %
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All Twisters (inclusive of executives)
Gender
Female
Male
Total
Region
Americas
EMEA
APAC
Total
Percent of all
Twisters
41 %
59 %
989
Percent of all
Twisters
85 %
10 %
5 %
989
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Environmental management
Many gene synthesis companies rely on oligonucleotide, or oligo (short pieces of DNA) synthesis on a plastic 96-well plate format. The 96-well plate
allows researchers to create 96 oligos in parallel, one in each well. While this process can successfully achieve DNA synthesis, it requires high volumes of
phosphoramidites, an expensive raw material, as well as other ancillary chemical reagents such as activator, wash, deblock, oxidizer and capping reagents,
many of which are toxic and environmentally harmful. The reagent consumption levels vary depending on the DNA synthesizer and its setup.
At Twist, we developed an ultra-high-throughput DNA synthesis platform to address the limitations of throughput, scalability, and cost inherent in legacy
DNA synthesis methods like that described above. With a footprint that is similar to the size of a 96-well plate that produces 96 oligos or 1 or 2 genes, we
are able to produce approximately 1,000,000 oligos or 9,600 genes in parallel.
With the Twist ultra-high-throughput DNA synthesizer, we believe we are able to achieve at least a 99.8% volume reduction (when compared to a standard
manufacturer of oligos) in chemical consumption compared to legacy oligo synthesis. For the more expensive chemical reagents (e.g., phosphoramidite and
activator reagents), we have achieved nearly a 1,000,000-fold volume reduction. This drastic volume reduction is achieved through various engineering
breakthroughs, including using of inkjet printing to deliver phosphoramidites and activator reagents (10 picoliter per droplet), and the development of
proprietary flow cell chambers and reagent recipes, among other proprietary developments.
In addition, the legacy oligo synthesis process often produces significantly more oligos than is typically required for most subsequent processes. In
contrast, the Twist system includes a fully-integrated and miniaturized molecular biology workflow to assemble genes using nearly 100% of the oligos we
produced, yielding nearly zero wasted synthesized oligos and reducing the usage of molecular biology reagents (e.g., polymerase and other enzymes, and
dNTP).
Overall, Twist’s process to synthesize DNA significantly reduces the quantity of chemicals used, overproduced product and waste, for a more sustainable
production process.
Government regulation
Our synthetic DNA products are intended for “Research Use Only” (RUO). We sell and promote these products for non-diagnostic and non-clinical
purposes to academic institutions, life sciences and research laboratories, and biopharmaceutical and biotechnology companies. Our products are intended
to be used as research tools that enable our customers to develop a wide spectrum of commercial products. However, in the future we may be subject to a
variety of specialized regulatory requirements, including potential regulation by the U.S. Food and Drug Administration, or the FDA. For example, in
December 2010, the Presidential Commission for the Study of Bioethical Issues recommended that the federal government oversee, but not regulate,
synthetic biology research. The Presidential Commission also recommended that the federal government lead an ongoing review of developments in the
synthetic biology field and that the federal government conduct a reasonable risk assessment before the field release of synthetic organisms.
Aside from certain labeling requirements, we believe that our products, as currently marketed, are largely unregulated by governmental bodies, including
the FDA. As we expand our product development to include products for clinical applications, we may be subject to a variety of specialized regulatory
requirements, including regulation by the FDA, any of which could have a material effect on the business.
RUO is a term applicable to our target enrichment products for the next-generation sequencing (NGS) market and is applied to kits sold to this market
segment. It is intended to restrict use of the kits to non-in vitro diagnostic purposes. Our NGS target enrichment and library preparation products are used in
a more comprehensive workflow for next generation sequencing for research purposes only. In the future, we may develop this larger workflow as an in
vitro diagnostic, for which we will obtain prior authorization from FDA or other applicable regulatory authorities before commercialization.
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FDA
Pursuant to its authority under the Federal Food, Drug, and Cosmetic Act, or the FDC Act, the FDA has jurisdiction over medical devices. The FDA
regulates, among other things, the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing
and promotion and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and
effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.
Medical device regulation in general
The FDC Act classifies medical devices into one of three categories based on the risks associated with the device and the level of control necessary to
provide reasonable assurance of safety and effectiveness. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to previously 510(k) cleared devices are generally categorized as Class III. These
devices typically require submission and approval of a Premarket Approval Application, or PMA. However, FDA can reclassify or use “de novo
classification” for a device that meets the FDC Act standards for a class II device, permitting the device to be marketed without PMA approval. Devices
deemed to pose lower risk are categorized as either Class I or II. Class II classification usually requires the manufacturer to submit to the FDA a premarket
notification submission requesting clearance of the device for commercial distribution in the United States pursuant to Section 510(k) of the FDC Act,
referred to as 510(k) clearance. Most Class I devices are exempt from this requirement, as are some lower risk Class II devices. When a 510(k) is required,
the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is “substantially equivalent” to: (i) a device
that was legally marketed prior to May 28, 1976, for which PMA approval is not required, (ii) a legally marketed device that has been reclassified from
Class III to Class II or Class I, or (iii) another legally marketed, similar device that has been cleared through the 510(k) process.
All clinical studies of investigational medical devices to determine safety and effectiveness must be conducted in accordance with FDA’s investigational
device exemption (IDE) regulations, including the requirement for the study sponsor to submit an IDE application to FDA, unless exempt, which must
become effective prior to commencing human clinical studies. PMA reviews generally last between one and two years, although they can take longer. Both
the 510(k) and the PMA processes can be expensive and lengthy and may not result in clearance or approval. If we are required to submit our products for
pre-market review by the FDA, we may be required to delay marketing and commercialization while we obtain premarket clearance or approval from the
FDA. There would be no assurance that we could ever obtain such clearance or approval.
All medical devices, including in vitro diagnostics, or IVDs, that are regulated by the FDA are also subject to the Quality System Regulation. Obtaining the
requisite regulatory approvals, including the FDA quality system inspections that are required for PMA approval, can be expensive, may involve delay, and
could conclude without such products being approved by the FDA. Changes to the current regulatory framework, including the imposition of additional or
new regulations, could arise at any time during the development or marketing of our products. This may negatively affect our ability to obtain or maintain
FDA or comparable regulatory clearance or approval of our products in the future.
IVDs are a category of medical devices that include reagents, instruments, and systems intended for use in diagnosis of disease or other conditions,
including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease or its sequelae. IVDs are intended for use in the
collection, preparation, and examination of specimens taken from the human body. A RUO IVD product is an IVD product that is in the laboratory research
phase of development. As such, an RUO IVD is not intended for use in clinical investigations or in clinical practice. Such RUO products do not require
premarket clearance or approval from the FDA, provided that they be labeled “For Research Use Only. Not For Use In Diagnostic Procedures” pursuant to
FDA regulations.
As noted above, although our products are currently intended for research purposes only, the regulatory requirements related to marketing, selling, and
supporting such products could be uncertain and depend on the totality of circumstances. This uncertainty exists even if such use by our customers occurs
without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our
business, financial condition, or results of operations could be adversely affected.
According to the FDA, merely including the RUO labeling statement will not necessarily render the device exempt from FDA premarket clearance,
approval, or other regulatory requirements if the totality of circumstances surrounding the distribution of the product indicate that the manufacturer
intended its IVDs for diagnostic use. Such circumstances may include, but are not limited to, the product’s advertising, labeling, or promotion, or the
manufacturer’s assistance of a clinical laboratory in validating or verifying a test that incorporates products labeled RUO. This uncertainty exists even if
such use by our customers occurs without our consent. If the FDA or other regulatory authorities assert that any of our
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RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
EU Regulation
In the European Union (EU), the new In Vitro Diagnostic Device Regulation (EU) 2017/746, or IVDR, imposes stricter requirements for the marketing and
sale of applicable medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Some of the
IVDR requirements such as general safety and performance requirements became effective in May 2022 while the complete enforcement of the entirety of
IVDR will not happen until May 2028. We likely will be impacted by this new regulation, either directly as a manufacturer of IVDs, or indirectly as a
supplier to customers who are placing IVDs in the EU market for clinical or diagnostic use. Complying with the IVDR requirements may require us to
incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product
registrations to the EU requirements.
FSAP
The Federal Centers for Disease Control and Prevention (CDC) and the Animal and Plant Health Inspection Service (APHIS) administer requirements of
the Federal Select Agent Program, or FSAP. FSAP requirements govern possession, use, and transfer of select agents and toxins consisting of biological
materials that have the potential to pose a severe threat to public, animal or plant health or to animal or plant products. The FSAP currently lists
approximately 67 select agents and toxins, and approximately 247 entities were registered under FSAP to possess a select agent or toxin. The registered
entities primarily consist of academic, federal and non-federal government, commercial, and private facilities that conduct research studies or diagnostic
activities. We are not a registered entity under FSAP and it is our policy generally not to produce or otherwise work with any biological material that is
subject to FSAP license requirements. To the extent that we may possess, use, or transfer any material considered a select agent or toxin under FSAP
prospectively, we would seek to register with FSAP and obtain all necessary permits for possession, transfer, importation, or any other regulated activity.
Export controls
Some sequences and synthetic controls we produce may be subject to licensing requirements for export outside of the United States under the U.S. Export
Administration Regulations (EAR). Given the evolving nature of our industry, legislative bodies or regulatory authorities may adopt additional regulation
or expand existing regulation to include our service. Changes to the current regulatory framework, including the imposition of additional or new
regulations, could arise at any time, and we may be unable to obtain or maintain comparable regulatory approval or clearance of our service, if required.
These regulations and restrictions may materially and adversely affect our business, financial condition, and results of operations.
Available information
Our corporate website address is www.twistbioscience.com. We use the investor relations page of our website for purposes of compliance with Regulation
FD and as a routine channel for distribution of important information, including news releases, analyst presentations, financial information and corporate
governance practices. Our filings with the SEC are posted on our website and available free of charge as soon as reasonably practical after they are
electronically filed with, or furnished to, the SEC. The SEC’s website, www.sec.gov, contains reports, proxy statements and other information regarding
issuers that file electronically with the SEC. The content on any website referred to in this Form 10-K is not incorporated by reference in this Form 10-K
unless expressly noted. Further, the Company’s references to website URLs are intended to be inactive textual references only.
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 and in
subsequent reports we file with SEC 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;
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• We may 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 of synthetic DNA using a silicon chip;
If we are unable to expand our DNA synthesis manufacturing capacity, we could lose revenue and our business could be harmed.
• 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 and divestitures 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; and
•
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.
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this
Annual Report on Form 10-K. The following information should be read in conjunction with Part II, Item 7, “Management’s discussion and analysis of
financial condition and results of operations” and the consolidated financial statements and related notes in Part II, Item 8, “Consolidated financial
statements and supplementary data” of this Form 10-K. 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.
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not
limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary
materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and
adversely affect our business, financial condition, operating results and stock price.
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Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be
considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
We are subject to risks associated with COVID-19.
Risks related to our business
As discussed below, our global operations expose us to risks associated with COVID-19. While our financial results for the fiscal year 2022 have not been
significantly affected by COVID-19 outbreaks due to variants of the virus that continue to appear, impacts from COVID-19 may, in the future, adversely
affect our operations, supply chains, distribution systems and customer demand, including as a result of impacts associated with preventive and
precautionary measures that we, other businesses and governments have taken and may take in the future. Some of the risks we have experienced and/or
may experience in the future as a result of impacts from COVID-19 include:
• A decline in sales activities and customer orders or cancellations of existing orders, depending on the severity and duration of any future COVID-
•
•
•
•
•
19 outbreaks and the extent of mitigation and containment measures that may be undertaken by governments and businesses.
Remote working, which we, similar to many other companies, implemented in response to the initial outbreak of COVID-19, and which continues
even as COVID-19 outbreaks generally subside, could cause challenges for the effective operation of our internal controls, increase the risk of a
security breach of our information technology systems, create data accessibility issues, and increase the risk for communication disruptions.
The unanticipated loss or unavailability of key employees due to the COVID-19 outbreaks could harm our ability to operate or execute our
business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Supply chain disruptions may result in the lack of raw materials or component shortages, delay in the release of new products or deliveries of
products or compressed margins due to an increase in material costs. Due to these impacts and measures, we may experience significant and
unpredictable reductions in demand for our products and our customers may postpone or cancel their existing orders.
The effectiveness of our sales teams may be negatively impacted by the lack of or reduction in travel resulting in their reduced ability to engage
with decision-makers.
In addition to travel restrictions, while countries in general have re-opened their borders to U.S. travelers, some countries still have quarantine
requirements, and, in the future, countries may again impose or expand travel restrictions and impose or resume prolonged quarantines if there is a
resurgence of COVID-19 cases, which would significantly impact our ability to support our business operations and customers in those locations
and the ability of our employees to access their places of work to produce products, or significantly hamper our products from moving through the
supply chain.
As a result, given the uncertainty of the evolving nature of the virus and how quickly mitigation measures, such as vaccines, will be widely available and
adopted by the public, the COVID-19 outbreaks may continue and may negatively affect our revenue growth, and it is uncertain how materially COVID-19
will affect our global operations if we experience any one or a combination of these impacts over an extended period of time. Any of these impacts would
have an adverse effect on our business, financial condition and results of operations. In addition, our ability to raise capital in the future may also be
negatively affected.
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 have incurred net losses each year since inception and have generated limited revenue from product sales to date. We expect to continue to incur
increasing costs as we grow our business. We cannot be certain if or when we will produce sufficient revenue from our operations to support our costs.
Even if profitability is achieved, we may not be able to sustain profitability. We incurred net losses of $217.9 million, $152.1 million and $139.9 million for
the years ended September 30, 2022, 2021 and 2020, respectively. As of September 30, 2022, we had an accumulated deficit of $828.4 million. We expect
to incur substantial losses and negative cash flow for the foreseeable future. We may incur significant losses in the future for a number of reasons, many of
which are beyond our control, including the other risks described in this Form 10-K, market acceptance of our products, business and economic conditions
resulting from the COVID-19 outbreaks, future product development, and our market penetration and margins. In addition, inflationary pressure could
adversely impact our financial results by increasing operating costs. We may not fully offset these cost increases by raising prices for our products and
services, which could result in downward pressure on our margins. Further, our clients may choose to reduce their business with us if we increase our
pricing.
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We may 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.
Since our inception, substantially all of our resources have been dedicated to the development of our DNA synthesis platform and our sample preparation
kit for NGS. We believe that we will continue to expend substantial resources for the foreseeable future as we continue to expand our production
capabilities and enter additional markets we may choose to pursue, including new COVID-19 testing products, pharmaceutical biologics drug discovery
and digital data storage in DNA. These expenditures are expected to include costs associated with research and development, increasing manufacturing
capabilities, including operating costs of our new Wilsonville, Oregon facility, and increasing supply capabilities as well as marketing and sales capabilities
of existing and new products. In addition, other unanticipated costs may arise.
We expect that our existing cash and cash equivalents will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt
service payments through at least the next 12 months. However, our operating plan may change as a result of factors currently unknown to us, and as a
result, we have sought and may in the future need to seek additional funds sooner than planned, through public or private equity or debt financings or other
sources, such as strategic collaborations. 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. Such financing may result in dilution to stockholders, imposition of debt
covenants and repayment obligations, or other restrictions that may adversely affect our business.
Our future capital requirements depend on many factors, including:
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the number and characteristics of any additional products or manufacturing processes we develop or acquire to serve new or existing markets;
the scope, progress, results and costs of researching and developing future products or improvements to existing products or manufacturing
processes, including increasing our manufacturing capabilities;
the cost of manufacturing our DNA synthesis equipment and tools, our NGS sample preparation kits, and any future products we successfully
commercialize;
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;
the costs of expanding our sales and marketing capabilities in the United States and in other geographies;
any lawsuits related to our products or commenced against us or any regulatory actions or proceedings commenced;
the expenses needed to attract and retain skilled personnel;
the costs associated with being a public company;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome
of such litigation; and
the timing, receipt and amount of sales of, or royalties on, any future approved products, if any.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely
basis, we may be required to:
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delay, limit, reduce or terminate our manufacturing, research and development activities; or
delay, limit, reduce or terminate our establishment of marketing and sales capabilities or other activities that may be necessary to generate revenue
and achieve profitability.
If we are unable to maintain adequate revenue growth or do not successfully manage such growth, our business and growth prospects will be harmed.
We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors should not
rely on our operating results for any prior periods as an indication of our future
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operating performance. To effectively manage our anticipated future growth, we must continue to maintain and enhance our manufacturing, sales, financial
and customer support administration systems, processes and controls. Failure to effectively manage our anticipated growth could lead us to over-invest or
under-invest in development, operational, and administrative infrastructure; result in weaknesses in our infrastructure, systems, or controls; give rise to
operational mistakes, losses, loss of customers, productivity or business opportunities; and result in loss of employees and reduced productivity of
remaining employees.
Our continued growth could require significant capital expenditures and might divert financial resources from other projects such as the development of
new products and services. As additional products are commercialized, we may need to incorporate new equipment, implement new technology systems, or
hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays, higher manufacturing
costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could
make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business.
If our management is unable to effectively manage our anticipated growth, our expenses may increase more than expected, our revenue could decline or
grow more slowly than expected and we may be unable to implement our business strategy. In addition, the quality of our products may suffer, which could
negatively affect our reputation and harm our ability to retain and attract customers.
Our quarterly and annual operating results and cash flows have fluctuated in the past and might continue to fluctuate, causing the value of our
common stock to decline substantially.
Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results.
These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our
available cash, which could negatively affect our business and prospects. In addition, one or more of such factors may cause our revenue or operating
expenses in one period to be disproportionately higher or lower relative to the others. As a result, comparing our operating results on a period-to-period
basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on
expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of
investors or securities analysts, the price of our common stock could decline substantially.
Our operating results have varied in the past. As a result, our operating results could be unpredictable, particularly on a quarterly basis. In addition to other
risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly and annual operating results are further
described in “Risk factors—Risks relating to owning our stock.”
In addition, a significant portion of our operating expense is relatively fixed in nature, and planned expenditures are based in part on expectations regarding
future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results
from quarter to quarter. If this occurs, the trading price of our common stock could fall substantially.
If we are unable to attract new customers and retain and grow sales from our existing customers, our business will be materially and adversely
affected.
In order to grow our business, we must continue to attract new customers and retain and grow sales from our existing customers on a cost-effective basis.
To do this, we aim to attract new and existing buyers of synthetic DNA and NGS tool kits, convert makers of synthetic DNA into buyers of synthetic DNA,
monetize our antibody discovery platform by entering into partnerships and achieve widespread market acceptance by delivering both our current product
offerings and new products and technologies at low cost, with high-quality, reliable turn around times and throughput, superior e-commerce services and
effective technical support. We cannot guarantee that our efforts to provide these key requirements will be consistently acceptable to, and meet the
performance expectations of, our customers and potential customers. If we are unable to successfully attract and retain customers, our business, financial
position and results of operations would be negatively impacted.
If we, or our partners or suppliers, experience a significant disruption in, or breach in security of, information technology systems, or fail to implement
new systems and software successfully, our business could be adversely affected. Cyberattacks and security vulnerabilities could lead to reduced
revenue, increased costs, liability claims, or harm to our reputation or competitive position.
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We rely on several centralized information technology systems throughout our company to provide products, keep financial records, process orders,
manage inventory, process shipments to customers and operate other critical functions. In addition, we currently generate a growing portion of our revenue
through sales on our e-commerce platform. We manage our website and e-commerce platform internally and as a result any compromise of our security or
misappropriation of proprietary information could have a material adverse effect on our business, financial condition and results of operations. We rely on
encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure Internet
transmission of confidential information, such as credit and other proprietary information. We announced on February 12, 2020 that our information
security management system received ISO 27001:2013 certification, an information security standard published by the International Organization for
Standardization (ISO), the world’s largest developer of voluntary international standards, and the International Electrotechnical Commission. Even though
our information security management system received ISO 27001:2013 certification, our, and our partners’ or suppliers’, information technology systems
have been and may still be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, cyberattacks such
as phishing, social engineering, ransomware, denial-of-service and other malware attacks, telecommunication failures, user errors, catastrophes or other
unforeseen events. Our, or our partners’ or suppliers’ information technology systems also may experience interruptions, delays or cessations of service or
produce errors in connection with system integration, software upgrades or system migration work that takes place from time to time. If we were to
experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, including
negatively impacting our order fulfillment and order entry on our e-commerce platform, it could result in the loss of sales and customers and significant
incremental costs, which could adversely affect our business.
In addition, security breaches of our, or our partners’ or suppliers’, information technology systems could result in the misappropriation or unauthorized
disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, including trade secrets or other intellectual
property, proprietary business information, and personal information. Cybersecurity incidents, including phishing attacks and attempts to misappropriate or
compromise confidential or proprietary information or sabotage enterprise IT systems are becoming increasingly frequent. For example, as the result of a
security breach of one of our vendor’s email system, we received fraudulent bank account information from the vendor. In addition, we were recently
notified by customers of phishing incidents in which they received emails from parties pretending to be us. We have determined that our internal systems
were not breached as a result of the unauthorized access to the vendor’s email system and the number of phishing incidents were not material. While we
have not, to our knowledge, experienced any material system failure, accident, or security breach to date, because techniques used to obtain unauthorized
access to or to sabotage systems are constantly evolving and generally are not recognized until they are launched against a target, we cannot be sure that
our continued data protection efforts and investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems
or the systems of our third party contractors and collaborators, or other cyber incidents in the future that could have a material adverse effect upon our
reputation, business, operations, or financial condition. If such an event were to occur, it could materially disrupt our operations and programs, the
development of our product candidates and production and shipment of our products. Any event that leads to unauthorized access, use, or disclosure of
personal information, including personal information regarding our partners, suppliers or employees, could require us to comply with federal or state
breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and
regulations that protect the privacy and security of personal information and harm our reputation. We would also be exposed to a risk of litigation and
potential liability, which could materially adversely affect our business, results of operations and financial condition. In addition, the costs related to
significant security breaches or disruptions could be material and exceed the limits of the cybersecurity insurance we maintain against such risks. As a
result of any cyber incident, we could incur significant legal and financial exposure and reputational damages that could have a material adverse effect on
our business.
Threats involving the misuse of access our network, systems, and information by our current or former employees, contractors, vendors, or partners,
whether intentional or unintentional, also pose a risk to the security of our network, systems, and information and data. For example, we are subject to the
risk that employees may inadvertently share confidential information with unintended third parties, or that departing employees may take, or create their
own information based on, our confidential information upon leaving the company. In addition, any such insiders may be the victims of social engineering
attacks that enable third parties to access our network, systems, and information using an authorized person’s credentials. We and our network, systems,
and information are also vulnerable to malicious acts by insiders, including leaking, modifying, or deleting confidential information, or performing other
acts that could materially interfere with our operations and business. While we provide regular training to our employees regarding cybersecurity threats
and best practices, we cannot ensure that such training or other efforts will prevent unauthorized access to or sabotage of our network, systems, and
information.
In addition, due to political uncertainty and military actions associated with Russia’s invasion of Ukraine, we and our third-party providers are at
heightened risk of theft or cyber attack of technology, data, and intellectual property through direct intrusion by private parties or foreign actors, including
those affiliated with or controlled by nation-state actors. This
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includes attacks which could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products and
services. If any theft affects or attack our technology, data, or intellectual property, our efforts to protect and enforce our intellectual property rights around
the world may be inadequate to obtain a significant commercial advantage from our intellectual property, and we may be at heightened risk of losing our
proprietary intellectual property rights around the world, including outside of such countries, to the extent such theft, attack or intrusion destroys the
proprietary nature of our intellectual property. While we implement security measures designed to reduce these risks, there is no guarantee these measures
will be adequate to safeguard all systems and networks. Any failure to maintain performance, reliability, security and availability of our systems and
networks may result in accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or
unauthorized access to our data, including personal or proprietary information.
Our actual operating results may differ significantly from our guidance.
From time to time, we may release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future
performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, is based on
projections prepared by our management. This guidance is not prepared with a view toward compliance with published guidelines of the American Institute
of Certified Public Accountants (AICPA) regarding projections or the SEC regarding forward-looking statements, and neither our independent registered
public accounting firm nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person will express
any opinion or any other form of assurance with respect to the projections.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with
respect to future business decisions, some of which will change. Our aim is to state possible outcomes as high and low ranges to provide a sensitivity
analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that
we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any
responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not
materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the
date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon
our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in the “Risk factors” section
in this Form 10-K could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
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 synthetic biology industry is characterized by rapid and significant technological changes, frequent new product introductions and enhancements and
evolving industry demands and standards. Our future success will depend on our ability to continually improve the products we are developing and
producing, to develop and introduce new products that address the evolving needs of our customers on a timely and cost-effective basis and to pursue new
market opportunities that develop as a result of technological and scientific advances. These new market opportunities may be outside the scope of our
proven expertise or in areas which have unproven market demand, and the utility and value of new products and services developed by us may not be
accepted in the markets served by the new products. Our inability to gain market acceptance of existing products in new markets or market acceptance of
new products could harm our future operating results. Our future success also depends on our ability to manufacture these new and improved products to
meet customer demand in a timely and cost-effective manner, including our ability to resolve manufacturing issues that may arise as we commence
production of any new products we develop. Unanticipated difficulties or delays in replacing existing products with new products we introduce or in
manufacturing improved or new products in sufficient quantities to meet customer demand could diminish future demand for our products and harm our
future operating results.
In addition, there is extensive competition in the synthetic biology industry, and our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Technological development by others may result in our technologies, as well as products developed using
our technologies, becoming obsolete. Our ability to compete successfully will depend on our ability to develop proprietary technologies and products that
are technologically superior to and/or are less expensive than our competitors’ technologies and products. Our competitors may be able to
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develop competing and/or superior technologies and processes and compete more aggressively and sustain that competition over a longer period of time.
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.
Our future profitability will depend on our ability to successfully execute and maintain a sustainable business model and generate continuous streams of
revenue. Our business model is premised on the fact that we are the only DNA synthesis provider to synthesize DNA on a silicon chip on a large
commercial level and the competitive advantages this creates. Our DNA synthesis methods, among other things, reduce the amount of raw materials
required, speed up the synthesis process and deliver large volumes of high-quality synthetic DNA at low unit cost. However, if other competitors develop
and commercialize a manufacturing process using a silicon chip or other similar technologies providing for the development of competitive synthetic DNA
products at scale, this could be disruptive to our business model and could adversely affect our business prospects, financial condition and results of
operations. If we are unable to convert sufficient number of current manufacturers of synthetic DNA to buyers of our synthetic DNA, surpass our
competitors regarding certain industry-related data points, and effectively implement our e-commerce platform which facilitates efficient order entry and
fulfillment for our customers, our business, prospects, financial condition and results of operation will be adversely affected.
If we are unable to expand into adjacent addressable markets, our business may be materially and adversely affected.
Our future revenue growth and market potential may depend on our ability to leverage our DNA synthesis platform together with our custom libraries and
other proprietary tools, such as our antibody discovery and optimization platform, in adjacent businesses such as pharmaceutical biologics drug discovery
and digital data storage in DNA. There can be no assurance that we can continue to utilize our antibody libraries to accelerate the lead identification and
lead optimization steps of antibody discovery or to discover more effective antibody drugs. In addition, our technology may not develop in a way that
allows data storage in DNA to become cost competitive with traditional data storage media or in a way that otherwise enables us to address the markets
opportunities that we believe exist. If we are unable to expand into adjacent addressable markets, our business, financial position and results of operations
could be negatively impacted.
A significant portion of our sales depends on customers’ budgets that may be subject to significant and unexpected variation, including seasonality.
Our customers’ spending on research and development impacts our sales and profitability. Our customers and potential customers include
chemicals/materials, diagnostics, therapeutics, food/agriculture, and their budgets can have a significant effect on the demand for our products. Their
research and development budgets are based on a wide variety of factors, including factors beyond our control, such as:
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the allocation of available resources to make purchases;
funding from government sources;
funding from research grants;
changes in government programs that provide funding to research institutions and companies;
the spending priorities among various types of research equipment;
policies regarding capital expenditures during recessionary periods;
political climate or macroeconomic conditions, including economic downturns or market uncertainty or reduced spending in response to
emergency situations, such as the outbreak of COVID-19;
inability to raise sufficient funds in the capital markets;
changes in the regulatory environment;
healthcare legislative reform measures, such as the Inflation Reduction Act of 2022;
differences in budgetary cycles;
inflationary pressures; and
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• market acceptance of relatively new technologies, such as ours.
Any decrease in spending or change in spending priorities of our customers and potential customers could significantly reduce the demand for our products.
As we expand into new geographic markets, our revenue may be impacted by seasonal trends in the different regions, the seasonality of customer budgets
in those regions and the mix of domestic versus international sales. In addition, access to capital markets is critical to many of our customers’ ability to
fund their operations, including purchase our products and services. Traditionally, biotechnology and life sciences companies have funded their research
and development expenditures by raising capital in the equity markets. Declines and uncertainties in these markets have severely restricted raising new
capital and have affected companies’ ability to fund existing research and development efforts which may lead them to delay project starts, reduce orders
and or cancel projects. For example, in the third quarter of fiscal year 2022, we believe two customers cancelled orders due to funding concerns. Moreover,
we have no control over the timing and volume of purchases by these customers and potential customers, and as a result, revenue from these sources may
vary significantly due to factors that can be difficult to forecast. Any delay or reduction in purchases by customers and potential customers or our inability
to forecast fluctuations in demand could harm our future operating results.
We generally do not have long-term contracts with our customers requiring them to purchase any specified quantities from us.
We generally do not have long-term contracts with our customers requiring them to purchase any specified quantities from us and without such contracts
our customers are not obligated to order or reorder our products. As a result, we cannot accurately predict our customers’ decisions to reduce or cease
purchasing our products. Additionally, even where we enter into contracts with our customers, there is no guarantee that such agreements will be negotiated
on terms that are commercially favorable to us in the long-term. Therefore, if many of our customers were to substantially reduce their transaction volume
or cease ordering products from us, this could materially and adversely affect our financial performance.
We may be unable to successfully recruit and maintain adequate sales, marketing and other support personnel in order to increase our market share
and expand our customer base.
Our ability to achieve profitability depends on our being able to increase our market share and expand our customer base. Although members of our sales
and marketing teams have considerable industry experience and have engaged in marketing activities for our products, in the future we must expand our
sales, marketing, distribution and customer support capabilities with the appropriate technical expertise to effectively market our products. Furthermore, it
takes six to nine months to recruit, onboard and ramp sales personnel to full capability. To perform sales, marketing, distribution and customer support
successfully, we will face a number of risks, including that:
• we may not be able to attract, retain and manage the sales, marketing and service workforce necessary to publicize and gain broader market
acceptance of our technology;
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the time and cost of establishing a specialized sales, marketing and service force for a particular product or service, which may be difficult to
justify in light of the revenue generated;
our field sales personnel may not be able to access our customers’ premises which could delay the adoption and ordering of our products; and
our sales, marketing and service force may be unable to initiate and execute successful commercialization activities with respect to new products
or markets we may seek to enter.
If our sales and marketing efforts, or those of any third-party sales and distribution partners, are not successful, our new technologies and products may not
gain market acceptance, which could materially impact our business operations.
The United Kingdom’s (“U.K.”) referendum to exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely
impact our business, results of operations and financial condition.
As a result of a referendum in June 2016, the U.K. withdrew from the E.U. (“Brexit”) on January 31, 2020. It began a transition period in which to
negotiate a new trading relationship for goods and services that ended on December 31, 2020. During the time since the June 2016 referendum, there have
been periods of significant volatility in the global stock markets and currency exchange rates, as well as challenging market conditions in the U.K. On
December 24, 2020, the U.K. and E.U. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political
issues. We are continuing to evaluate our own risks and uncertainty related to ascertain what financial, trade, regulatory and legal implications this new
Brexit trade deal could have on our U.K. and European business operations. This uncertainty also includes the impact on our customers’ business
operations and capital planning as well as the overall
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impact on the biotechnology industry in the U.K. While we have not experienced any direct material financial impact since the 2016 referendum, we cannot
predict its future implications, and Brexit and its related effects could result in a negative impact on our consolidated financial position and results of
operations.
If we are unable to expand our DNA synthesis manufacturing capacity, we could lose revenue and our business could be harmed.
In order to expand our manufacturing capacity of new and existing products, we need to either build additional internal manufacturing capacity, contract
with one or more partners, or both. We are currently building a new production facility in Wilsonville, Oregon but we cannot guarantee that such a facility
will allow us to effectively increase our manufacturing capacity which could impact our revenue growth. Our technology and the production process for
our DNA synthesis equipment and tools are complex, involving specialized parts, and we may encounter unexpected difficulties in the manufacture,
improvement or increasing the capacity of our DNA synthesis equipment and tools, and addressing these difficulties may cause us to divert our time and
resources from our other product offerings. There is no assurance that we will be able to continue to increase manufacturing capacity internally or that we
will find one or more suitable partners to help us towards this objective, in order to meet the volume and quality requirements necessary for success in our
existing and potential markets. Manufacturing and product quality issues may arise as we continue to increase the scale of our production. If our DNA
synthesis equipment and tools do not consistently produce DNA products that meet our customers’ performance expectations, our reputation may be
harmed, and we may be unable to generate sufficient revenue to become profitable. Any delay or inability in expanding our manufacturing capacity could
diminish our ability to develop or sell our products, which could result in lost revenue and materially harm our business, financial condition and results of
operations.
We are substantially dependent on the success of our synthetic DNA products.
To date, we have invested a substantial portion of our efforts and financial resources towards the research and development and commercialization of our
synthetic DNA products. The DNA synthesis business is very capital intensive, particularly for early-stage companies that do not have significant off-
setting revenues and which are making significant investments in the commercialization and marketing of their products.
Substantially all of our revenue generated to date is from our synthetic DNA products. Our financial results are dependent on strengthening our core
business while diversifying into other developing sectors such as pharmaceutical biologics drug discovery, creating useful DNA libraries and data storage.
Our near-term prospects, including our ability to finance our research and development activities and initiatives and enter into strategic collaborations, will
depend heavily on the successful development and commercialization of our synthetic DNA products. These initiatives will be substantially dependent on
our ability to generate revenue from our synthetic DNA products and obtain other funding necessary to support these initiatives. Our inability to continue
these initiatives and initiate new research and development efforts could result in a failure to develop new products, improve upon existing products such
that sectors such as pharmaceutical biologics drug discovery, DNA library creation and data storage may never be fully developed, and expand our
addressable market, which could have a material and adverse impact on our sales, business, financial position and results of operations.
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 one single-source supplier for a critical component for our DNA synthesis process. We do not currently have the infrastructure or capability
internally to manufacture this component. Although we have a reserve of supplies and although alternative suppliers exist for this critical component of our
synthesis process, our existing DNA synthesis manufacturing process has been designed based on the functions, limitations, features and specifications of
the components that we currently utilize. We have a supply agreement in place with this component supplier. However, there can be no assurance that our
supply of this component will not be limited, interrupted, or of satisfactory quality or continue to be available at acceptable prices. Additionally, we do not
have any control over the process or timing of the acquisition or manufacture of materials by our supplier and cannot ensure that it will deliver to us the
component we order on time, or at all.
The loss of this component provided by this supplier could require us to change the design of our manufacturing process based on the functions,
limitations, features and specifications of the replacement components.
In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the
event we must switch to a new supplier. The time and effort to qualify a new supplier could result in additional costs, diversion of resources or reduced
manufacturing yields, any of which would negatively impact our operating results. Further, we may be unable to enter into agreements with a new supplier
on commercially
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reasonable terms, which could have a material adverse impact on our business. Our dependence on this single-source supplier exposes us to certain risks,
including the following:
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our supplier may cease or reduce production or deliveries, raise prices or renegotiate terms;
• we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all;
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if there is a disruption to our single-source supplier’s operations, and if we are unable to enter into arrangements with alternative suppliers, we will
have no other means of completing our synthesis process until they restore the affected facilities or we or they procure alternative manufacturing
facilities or sources of supply;
delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects; and
our ability to progress our DNA synthesis products could be materially and adversely impacted if the single-source supplier upon which we rely
were to experience a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, issues relating to
other customers such as regulatory or quality compliance issues, or other financial, legal, regulatory, operational or reputational issues.
Moreover, to meet anticipated market demand, our single-source supplier may need to increase manufacturing capacity, which could involve significant
challenges. This may require us and our supplier to invest substantial additional funds and hire and retain the technical personnel who have the necessary
experience. Neither we nor our supplier may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all.
We must continue to secure and maintain sufficient and stable supplies of raw materials. Any shortage of raw materials or materials necessary for our
production capabilities may adversely affect our business.
Although historically we have not experienced price increases due to unexpected shortages in raw materials or other materials and other unanticipated
events, there is no assurance that our supply of raw materials or other materials will not be significantly adversely affected in the future, which may in turn
adversely affect our business, prospects, financial condition and results of operation.
In addition, as we grow, our existing suppliers may not be able to meet our increasing demand, and we may need to find additional suppliers. There is no
assurance that we will always be able to secure suppliers who provide raw materials at the specification, quantity and quality levels that we demand (or at
all) or be able to negotiate acceptable fees and terms of services with any such suppliers. Identifying a suitable supplier is an involved process that requires
us to become satisfied with their quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to
expand existing sources, we may encounter delays in production and added costs as a result of the time it takes to train suppliers in our methods, products
and quality control standards.
We typically do not enter into agreements with our suppliers but secure our raw materials and component parts we use in our equipment on a purchase
order basis. Our suppliers may reduce or cease their supply of raw materials, component parts and outsourced services and products to us at any time in the
future. If the supply of raw materials, component parts and the outsourced services and products is interrupted due to shortages or other reasons, our
production processes may be delayed. If any such event occurs, our operation and financial position may be adversely affected.
A deterioration of our relationship with any of our suppliers, or problems experienced by these suppliers, could lead to shortages in our production capacity
for some or all of our products. In such case, we may not be able to fulfill the demand of existing customers or supply new customers. In addition,
shortages of raw materials or component parts or an increase in the cost of the raw materials or component parts we use could result in decreased revenue
or could impair our ability to maintain or expand our business.
While we have experienced increased operating costs in recent periods, which we believe are due in part to the recent growth in inflation, we do not believe
that inflation has had a material effect on our business, financial condition or results of operations. In the event of significant price increases for raw
materials, we may have to pass the increased raw materials costs to our customers. However, we cannot assure you that we will be able to raise the prices of
our products sufficiently to cover increased costs resulting from increases in the cost of our raw materials or overcome the interruption of a sufficient
supply of qualified raw materials for our products. As a result, a price increase for our raw materials may negatively impact our business, financial position
and results of operations.
We may encounter difficulties in managing our growth, and these difficulties could impair our profitability.
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Currently, we are working simultaneously on multiple projects, expanding our capacity as well as targeting several market sectors, including activities in
the chemicals/materials, diagnostics, therapeutics, food and data storage sectors. In addition, we work to renew our ISO certifications from time to time.
These diversified operations and activities place significant demands on our limited resources and require us to substantially expand the capabilities of our
technical, administrative and operational resources.
If we are unable to manage this growth and the periodic ISO recertification of our manufacturing facilities effectively, our shipments to our customers
could be impacted, our time and resources could be diverted from other products and offerings and our business and operating results could suffer. In
addition, if we fail to timely deliver products or meet quantity requirements under our contracts with customers, we may offer discounts to them, and
customers' minimum purchase requirements, if applicable, may be reduced. Our ability to manage our operations and costs, including research and
development, costs of components, manufacturing, sales and marketing, requires us to continue to enhance our operational, financial and management
controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. Failure to attract and retain sufficient
numbers of talented employees will further strain our human resources and could impede our growth.
Our revenue, results of operations, cash flows and reputation in the marketplace may suffer upon the loss of a limited number of large customers.
We have derived, and believe we may continue to derive, a significant portion of our revenues from a limited number of large customers. Our customers
may buy less of our products depending on their own technological developments, end-user demand for our products and internal budget cycles. In
addition, existing customers may choose to produce some or all of their synthetic DNA requirements internally by using or developing manufacturing
capabilities organically or by using capabilities from acquisitions of assets or entities from third parties with such capabilities. The loss of any significant
customer or a significant reduction in the amount of product ordered by Ginkgo or any other significant customer would adversely affect our revenue,
results of operations, cash flows and reputation in the marketplace.
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.
Our future success depends upon the continuing services of members of our senior management team and scientific and engineering personnel. We are
highly dependent on Dr. Emily Leproust, our Chief Executive Officer, who is employed “at will,” meaning we or she may terminate the employment
relationship at any time. In particular, our researchers and engineers are critical to our future technological and product innovations, and we will need to
hire additional qualified personnel. We may not be able to attract and retain qualified personnel on acceptable terms, or at all. In addition, to the extent we
hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other
confidential information, or that their former employers own their research output. Our industry, particularly in the San Francisco Bay Area, is
characterized by high demand and intense competition for talent, and the turnover rate can be high. We compete for qualified management and scientific
personnel with other life science companies, academic institutions and research institutions, particularly those focusing on genomics.
Many of these employees could leave our company with little or no prior notice and would be free to work for a competitor. If one or more of our senior
executives or other key personnel were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all, and
other senior management may be required to divert attention from other aspects of the business. In addition, we do not have “key person” life insurance
policies covering members of our management team or other key personnel except Dr. Leproust. While we conduct succession planning to identify the
person(s) for key positions who possess the skills and capabilities to take on the responsibilities filled by our leaders, we cannot assure you that these
strategies will successfully mitigate the loss of any key personnel. The loss of any of these individuals or our inability to attract or retain qualified
personnel, including researchers, engineers and others, could prevent us from pursuing collaborations and adversely affect our product development and
introductions, business growth prospects, results of operations and financial condition.
We may engage in strategic transactions, including acquisitions, collaborations, or investments in other companies or technologies, that could disrupt
our business, cause dilution to our stockholders, reduce our financial resources, or prove not to be successful.
We may enter into transactions to acquire other businesses, products or technologies and our ability to do so successfully cannot be ensured. While
historically we have not completed many acquisitions, we closed a business acquisition in the first quarter of 2022 and we are continuing to pursue
opportunities in the life sciences industry that complement and expand our synthetic DNA product and our other products in both local and international
markets. If we identify suitable
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opportunities, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive
position, and these transactions may be viewed negatively by customers or investors. We may decide to incur debt in connection with an acquisition or
issue our common stock or other equity securities to the stockholders of the acquired company, as we did for the business acquisitions, which would reduce
the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that are not
covered by any indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel,
technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management
attention from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. In addition, we cannot
guarantee that we will be able to fully recover the costs of such acquisitions or that we will be successful in leveraging any such strategic transactions into
increased business, revenue or profitability. We also cannot predict the number, timing or size of any future acquisitions or the effect that any such
transactions might have on our operating results.
From time to time, we may consider other strategic transactions, including collaborations or investments in other companies. The competition for
collaborators is intense, and the negotiation process is time-consuming and complex. Any new collaboration may be on terms that are not optimal for us,
and we may not be able to maintain any new collaboration. Any such collaboration may require us to incur non-recurring or other charges, increase our
near- and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business. These transactions
would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business and diversion of our
management’s time and attention to manage a collaboration, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction
consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges,
increased amortization expenses, difficulty and cost in facilitating the collaboration or combining the operations and personnel of any acquired business,
impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the
inability to retain key employees of any acquired business. Antitrust or other competition laws may also limit our ability to acquire or work collaboratively
with certain businesses or to fully realize the benefits of strategic transactions to acquire or collaborate with other businesses. Accordingly, although there
can be no assurance that we will undertake or successfully complete any collaborations, any transactions that we do complete may be subject to the
foregoing or other risks and have a material and adverse effect on our business, financial condition, results of operations and prospects. Conversely, any
failure to enter into any collaboration or other strategic transaction that would be beneficial to us could delay the development and potential
commercialization of our products and technologies.
As we expand our development and commercialization activities outside of the United States, we will be subject to an increased risk of inadvertently
conducting activities in a manner that violates the U.S. Foreign Corrupt Practices Act and similar laws. If that occurs, we may be subject to civil or
criminal penalties which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, which prohibits corporations and individuals from paying, offering to pay, or
authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an
attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We are also subject to the UK Anti-Bribery Act,
which prohibits both domestic and international bribery, as well as bribery across both public and private sectors. We require that our employees review our
Code of Business Conduct and Ethics, our Anti-Money Laundering Policy and our Anti-Corruption Policy on an annual basis.
In the course of establishing and expanding our commercial operations and complying with non-U.S. regulatory requirements, we will need to establish and
expand business relationships with various third parties and we will interact more frequently with foreign officials, including regulatory authorities.
Expanded programs to maintain compliance with such laws will be costly and may not be effective. Any interactions with any such parties or individuals
where compensation is provided that are found to be in violation of such laws could result in substantial fines and penalties and could materially harm our
business. Furthermore, any finding of a violation under one country’s laws may increase the likelihood that we will be prosecuted and be found to have
violated another country’s laws. We require that our employees annually certify that they understand and will comply with our Code of Business Conduct
and Ethics Policy, our Anti-Money Laundering Policy, our Anti-Corruption Policy as well as the UK Modern Slavery Act of 2015. Even so, if our business
practices outside the United States are found to be in violation of the FCPA, UK Anti-Bribery Act, antitrust or other similar laws, we may be subject to
significant civil and criminal penalties which could have a material adverse effect on our financial condition and results of operations.
We could engage in exporting or related activity that contravenes international trade restraints, or regulatory authorities could promulgate more far-
reaching international trade restraints, which could give rise to one or more of substantial legal liability, impediments to our business and reputational
damage.
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Our international business activities must comport with U.S. export controls and other international trade restraints, including the U.S. Department of
Commerce’s Export Administration Regulations and economic sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign
Assets Controls.
We have established an international trade compliance program that encompasses best practices for preventing, detecting and addressing noncompliance
with international trade restraints. Furthermore, to date our exports have not been licensable under export controls; however, we could fail to observe the
compliance program requirements in a manner that leaves us in noncompliance with export controls or other international trade restraints. In addition,
authorities could promulgate international trade restraints that impinge on our ability to pursue our business as planned. One or more of resulting legal
penalties, restraints on our business or reputational damage could have material adverse effects on our business and financial condition.
We operate in a highly competitive industry and if we are not able to compete effectively, our business and operating results will likely be harmed.
We face competition from a broad range of providers of core synthetic biology products such as GenScript Biotech Corporation, DNA Script, Inc.,
GENEWIZ (owned by Azenta), Integrated DNA Technologies, Inc. (owned by Danaher Corporation), DNA 2.0 Inc. d/b/a/ ATUM, GeneArt (owned by
Thermo Fisher Scientific Inc.), Eurofins Genomics LLC, Sigma-Aldrich Corporation (owned by Charles River Laboratories, Inc.) (an indirect wholly
owned subsidiary of Merck & Company), Promega Corporation, OriGene Technologies, Inc., Blue Heron Biotech, LLC and others. Additionally, we
compete with both large and emerging providers in the life sciences tools and diagnostics industries focused on sample preparation for NGS such as
Thermo Fisher Scientific Inc., Illumina, Inc., Integrated DNA Technologies, Inc.and Agilent. In the antibody discovery market, we compete with clinical
research organizations, such as Curia, GenScript, and Genovac (formerly part of Aldevron, LLC), and antibody discovery biotechnology companies, such
as Fair Journey/Iontas, Adimab, Zymeworks, Distributed Bio (owned by Charles River), Ablexis, Specifica, OmniAb and AbCellera Biologics Inc. In the
emerging field of DNA digital data storage, we compete with Catalog Technologies, Inc., Helixworks, Iridia, Inc., Roswell, Seagate, Microsoft, Genscript,
Molecular Assemblies, Ansa Biotechnologies, various academic institutions, and other emerging competitors. We may not be successful in maintaining our
competitive position for a number of reasons. Some of our current competitors, as well as many of our potential competitors, have significant name
recognition, substantial intellectual property portfolios, longer operating histories, greater resources to invest in new technologies, substantial experience in
new product development and manufacturing capabilities and more established distribution channels to deliver products to customers than we do. These
competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer
requirements. Our competitors may develop disruptive technologies or products that are comparable or superior to our technologies and products. In light
of these advantages, even though we believe our technology is superior to the products offerings of our competitors, current or potential customers might
accept competitive products in lieu of purchasing our products. Increased competition is likely to result in continued pricing pressures, which could harm
our sales, profitability or market share. Our failure to continue competing effectively or winning additional business with our existing customers could
materially and adversely affect our business, financial condition or results of operations.
We may be subject to significant pricing pressures and if we are unable to pass on any cost increase to our customers, our business, financial position
and results of operations could be adversely affected.
Over time, increasing customer demand for lower prices could force us to discount our products and result in lower margins. The impact may be further
exacerbated if we are unable to successfully control production costs. In addition, if due to rising market prices as a result of inflation or otherwise, our
suppliers increase prices or reduce discounts on their supplies, we may be unable to pass on any cost increase to our customers, thereby resulting in reduced
margins and profits. Furthermore, changes in our product mix may negatively affect our gross margins. Overall, these pricing pressures may adversely
affect our business, financial position and results of operations.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our technology.
Our products may be used to create DNA sequences of humans, agricultural crops and other living organisms. Our products could be used in a variety of
applications, which may have underlying ethical, legal and social concerns. Governmental authorities could, for safety, social or other purposes, impose
limits on or implement regulation of the use of gene synthesis. Such concerns or governmental restrictions could limit the use of our DNA synthesis
products, which could have a material adverse effect on our business, financial condition and results of operations. In addition, public perception about the
safety and environmental hazards of, and ethical concerns over, genetically engineered products and processes could influence public acceptance of our
technologies, products and processes. These concerns could result in increased expenses, regulatory scrutiny, delays or other impediments to our programs.
We use biological and hazardous materials that require considerable expertise and expense for handling, storage and disposal and may result in claims
against us.
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We work with materials, including chemicals, biological agents, and compounds and DNA samples that could be hazardous to human health and safety or
the environment. Our operations also produce hazardous and biological waste products. Federal, state and local laws and regulations govern the use,
generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations is
expensive, and current or future environmental laws and regulations may restrict our operations. If we do not comply with applicable regulations, we may
be subject to fines and penalties.
In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or wastes, which could cause an interruption of our
commercialization efforts, research and development programs and business operations, as well as environmental damage resulting in costly clean-up and
liabilities under applicable laws and regulations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to
become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. While our property insurance policy
provides limited coverage in the event of contamination from hazardous and biological products and the resulting cleanup costs, we do not currently have
any additional insurance coverage for legal liability for claims arising from the handling, storage or disposal of hazardous materials. Accordingly, in the
event of contamination or injury, we could be liable for damages or penalized with fines in an amount exceeding our resources and our operations could be
suspended or otherwise adversely affected.
We could develop DNA sequences or engage in other activity that contravenes biosecurity requirements, or regulatory authorities could promulgate
more far-reaching biosecurity requirements that our standard business practices cannot accommodate, which could give rise to substantial legal
liability, impede our business and damage our reputation.
The Federal Select Agent Program, or the FSAP, involves rules administered by the Centers for Disease Control and Prevention and Toxins and the Animal
and Plant Health Inspection Service that regulate possession, use and transfer of biological select agents and toxins that have the potential to pose a severe
threat to public, animal or plant health or to animal or plant products.
We have established a comprehensive, biosecurity program under which we follow biosafety and biosecurity best practices and avoid DNA synthesis
activities that implicate FSAP rules; however, we could err in our observance of compliance program requirements in a manner that leaves us in
noncompliance with FSAP or other biosecurity rules. In addition, authorities could promulgate new biosecurity requirements that restrictions our
operations. One or more resulting legal penalties, restraints on our business or reputational damage could have material adverse effects on our business and
financial condition.
Third parties may use our products in ways that could damage our reputation.
After our customers have received our products, we do not have any control over their use and our customers may use them in ways that are harmful to our
reputation as a supplier of synthetic DNA products. In addition, while we have established a biosecurity program designed to comply with biosafety and
biosecurity requirements and perform export control screening in an effort to ensure that third parties do not obtain our products for malevolent purposes,
we cannot guarantee that these preventative measures will eliminate or reduce the risk of the domestic and global opportunities for the misuse of our
products. Accordingly, in the event of such misuse, our reputation, future revenue and operating results may suffer.
Any damage to our reputation or brand may materially and adversely affect our business, financial condition and results of operations.
We believe that developing and maintaining our brand is important to our success and that our financial success is influenced by the perception of our
brand by our customers. Furthermore, the importance of our brand recognition may become even greater to the extent that competitors offer more products
similar to ours. Many factors, some of which are beyond our control, are important to maintaining our reputation and brand. These factors include our
ability to comply with ethical, social, product, labor and environmental standards. Any actual or perceived failure in compliance with such standards could
damage our reputation and brand.
Because we are subject to existing and potential additional governmental regulation, the markets for our products may be narrowed.
We are subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. For
example, the export of our products is subject to strict regulatory control in a number of jurisdictions. The failure to satisfy export control criteria or obtain
necessary clearances could delay or prevent the shipment of products, which could adversely affect our revenues and profitability. Moreover, the life
sciences industry, which is currently the primary market for our technology, has historically been heavily regulated. There are, for example, laws in several
jurisdictions restricting research in genetic engineering, which can operate to narrow our markets. Given the
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evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulation that adversely affects our market opportunities.
Our business is also directly affected by a wide variety of government regulations applicable to business enterprises generally and to companies operating
in the life science industry in particular. Failure to comply with these regulations or obtain or maintain necessary permits and licenses could result in a
variety of fines or other censures or an interruption in our business operations which may have a negative impact on our ability to generate revenues and
could increase the cost of operating our business.
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.
The FDA regulates medical devices, including in vitro diagnostics, or IVDs. IVDs are a category of medical devices that include reagents, instruments, and
systems intended for use in diagnosis of disease or other conditions, including a determination of the state of health, in order to cure, mitigate, treat, or
prevent disease or its sequelae. IVDs are intended for use in the collection, preparation, and examination of specimens taken from the human body. A RUO
IVD product is an IVD product that is in the laboratory research phase of development. As such, an RUO IVD is not intended for use in clinical
investigations or in clinical practice. Such RUO products do not require premarket clearance or approval from the FDA, provided that they are labeled “For
Research Use Only. Not For Use In Diagnostic Procedures” pursuant to FDA regulations. Our IVD products are not intended for clinical or diagnostic use,
and we market and label them as RUO. However, the FDA may disagree with our assessment that our products are properly marketed as RUO and may
determine that our products are subject to pre-market clearance, approval, or other regulatory requirements. If the FDA determines that our products are
subject to such requirements, we could be subject to enforcement action, including administrative and judicial sanctions, and additional regulatory controls
and submissions for our tests, all of which could be burdensome.
In the future, certain of our products or related applications could be subject to additional FDA regulation. Even where a product is not subject to FDA
clearance or approval requirements, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such
regulation and restrictions may materially and adversely affect our business, financial condition and results of operations. Other regulatory regimes that do
not currently present material challenges but that could in the future present material challenges include export controls and biosecurity.
Many countries have laws and regulations that could affect our products and which could limit our ability to sell our products in those countries. The
number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs
in obtaining or maintaining foreign regulatory approvals. For example, the European Union, or EU, is transitioning from the existing European Directive
98/79/EC on in vitro diagnostic medical devices, or IVD Directive (IVDD), to the In Vitro Diagnostic Device Regulation (EU) 2017/746, or IVDR, which
imposes stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and
post-market surveillance. The IVDR became effective in May 2022 for certain device types while extending the transition periods for other devices,
depending on the device type. It is likely that we will be impacted by this new regulation, either directly as a manufacturer of IVDs, or indirectly as a
supplier to customers who are placing IVDs in the EU market for clinical or diagnostic use. Complying with the requirements of the IVDR may require us
to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product
registrations or chemical regulations to the EU requirements.
Certain of our potential customers may require that we become certified under the Clinical Laboratory Improvement Amendments of 1988.
Although we are not currently subject to the Clinical Laboratory Improvement Amendment of 1988, or CLIA, we may in the future be required by certain
customers to obtain a CLIA certification. CLIA, which extends federal oversight over clinical laboratories by requiring that they be certified by the federal
government or by a federally approved accreditation agency, is designed to ensure the quality and reliability of clinical laboratories by mandating specific
standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management, quality control, quality
assurance and inspections. If our customers require a CLIA certification, we will have to continually expend time, money and effort to ensure that we meet
the applicable quality and safety requirements, which may divert the attention of management and disrupt our core business operations.
Our manufacturing operations in the United States currently depend primarily on one facility. If this facility is destroyed or we experience any
manufacturing difficulties, disruptions, or delays, this could limit supply of our product or adversely affect our ability to sell products or conduct our
clinical trials, and our business would be adversely impacted.
While we are in the process of building out a second manufacturing facility in Wilsonville, Oregon, and expect to begin manufacturing products in
Wilsonville facility by January 2023, a substantial portion of our manufacturing currently takes
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place at our headquarters in South San Francisco, California. If regulatory, manufacturing, or other problems require us to discontinue production at this
facility, we will not be able to manufacture our synthetic genes, oligo pools or NGS tool or create our DNA libraries, which would adversely impact our
business. If this facility or the equipment in it is significantly damaged or destroyed by fire, flood, power loss, or similar events, or is shut down for health
and safety or other reasons, we may not be able to quickly or inexpensively replace our manufacturing capacity or replace the facility at all. In the event of
a temporary or protracted loss of this facility or equipment, we might not be able to transfer manufacturing to another third party. Even if we could transfer
manufacturing from one facility to another, the shift would likely be expensive and time-consuming, particularly if we were to maintain the current
manufacturing standards procedures at such alternative facility.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our facilities or
the facilities of third parties on which we depend and could impact our ability to sell products.
Our headquarters in South San Francisco is located near known earthquake fault zones and is vulnerable to damage from earthquakes. An earthquake or
other natural disaster or power shortages or outages could disrupt operations or impair critical systems at our headquarters or at any of our other facilities
throughout the world. We, our suppliers, third-party service providers and customers are vulnerable to damage from natural disasters, including fire, floods
or monsoons, power loss, communications failures, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war, political
instability or other conflict and similar events. If any disaster were to occur, our ability to operate our business at any of our facilities could be seriously, or
potentially completely, impaired. In addition, the nature of our activities could cause significant delays in our research programs and commercial activities
and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other
business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business. Furthermore, our
in vivo antibody discovery services involve mice. In the past, vivarium sites have been shut down by animal activists, and any disturbance or shut down at
the site where our in vivo antibody discovery work is being conducted could disrupt our business operations or harm our reputation.
Delivery of our products could be delayed or disrupted by factors beyond our control, and we could lose customers as a result.
We rely on third-party carriers for the timely delivery of our products. As a result, we are subject to carrier disruptions and increased costs that are beyond
our control, including travel restrictions, employee strikes, inclement weather and increased fuel costs. Any failure to deliver products to our customers in a
timely and accurate manner may damage our reputation and brand and could cause us to lose customers. If our relationship with any of these third-party
carriers is terminated or impaired or if any of these third parties are unable to deliver our products, the delivery and acceptance of our products by our
customers may be delayed which could harm our business and financial results. The failure to deliver our products in a timely manner may harm our
relationship with our customers, increase our costs and otherwise disrupt our operations.
Doing business internationally creates operational and financial risks for our business.
During our fiscal years ended September 30, 2022, 2021 and 2020, 41% , 42%, and 36%, respectively, of our revenue was generated from customers
located outside of the United States. In connection with our growth strategy, we intend to further expand in international markets. Conducting and
launching operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones and consumes
significant management resources. If we fail to coordinate and manage these activities effectively, our business, financial condition or results of operations
could be adversely affected. International sales entail a variety of risks, including longer payment cycles and difficulties in collecting accounts receivable
outside of the United States, currency exchange fluctuations, challenges in staffing and managing foreign operations, tariffs and other trade barriers
(including tariffs enacted and proposed by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods),
unexpected changes in legislative or regulatory requirements of foreign countries into which we sell our products, difficulties in obtaining export licenses
or in overcoming other trade barriers, laws and business practices favoring local companies, political and economic instability, difficulties protecting or
procuring intellectual property rights, and restrictions resulting in delivery delays and significant taxes or other burdens of complying with a variety of
foreign laws.
Changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Changes in currency exchange rates may also
affect the relative prices at which we are able to sell products in the same market. Our revenue from international customers may be negatively impacted as
increases in the U.S. dollar relative to our international customers’ local currency could make our products more expensive, impacting our ability to
compete. Our costs of materials from international suppliers may increase if in order to continue doing business with us they raise their prices as the value
of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United
States and other countries to offset the effects of such fluctuations.
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The recent global financial downturn has led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which
could adversely affect our business, financial condition or results of operations.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is
subject to limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. We have experienced at
least one ownership change in the past, and we may experience ownership changes in the future. Future changes in our stock ownership, some of which are
outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to use NOLs of companies that we may
acquire in the future may be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs reflected on our balance
sheet, even if we attain profitability.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform policies,
or changes in tax legislation or policies could impact our future financial position and results of operations.
Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we intend to have business
operations. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform
legislation is being proposed or enacted in a number of jurisdictions. For example, the Tax Cuts and Jobs Act of 2017, or the Tax Act, signed into law on
December 22, 2017, adopting broad U.S. corporate income tax reform, among other things, reduced the U.S. corporate income tax rate, but imposed base-
erosion prevention measures on non-U.S. earnings of U.S. entities as well as a one-time mandatory deemed repatriation tax on accumulated non-U.S.
earnings of U.S. entities.
In addition, many countries are beginning to implement legislation and other guidance to align their international tax rules with the Organization for
Economic Co-operation and Development’s Base Erosion and Profit Shifting recommendations and action plan that aim to standardize and modernize
global corporate tax policy, including changes to cross-border tax, transfer-pricing documentation rules, and nexus-based tax incentive practices.
Such legislative initiatives may materially and adversely affect our plans to expand internationally and may negatively impact our financial condition and
results of operations generally.
Our inability to collect on our accounts receivable by a significant number of customers may have an adverse effect on our business, financial
condition and results of operations.
Sales to our customers are generally made on open credit terms. Management maintains an allowance for potential credit losses. If our customers’ cash
flow, working capital, financial conditions or results of operations deteriorate, they may be unable or even unwilling to pay trade receivables owed to us
promptly or at all. As a result, we could be exposed to a certain level of credit risk. If a major customer experiences, or a significant number of customers
experience, financial difficulties, the effect on us could be material and have an adverse effect on our business, financial condition and results of operations.
Risks related to being a public company
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.
As a public company, we are required to comply with Section 404 of the Sarbanes Oxley Act of 2002 (“SOX”), which requires, among other things, that
companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness
of those controls on a quarterly basis and that our independent registered public accounting firm provide an attestation report on the effectiveness of our
internal control over financial reporting in this Annual Report on Form 10-K, among other additional requirements. Effective internal controls are
necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of
time to these compliance requirements. These rules and regulations also increase our legal and financial compliance costs and make some activities more
time-consuming and costly.
As disclosed in Part II—Item 9A, “Controls and Procedures”, of this Annual Report on Form 10-K, we identified a material weakness in our internal
control over financial reporting related to controls surrounding our information technology general controls. As a result, management concluded that our
internal control over financial reporting was not effective as of September 30, 2022. A material weakness is a deficiency, or a combination of deficiencies,
in internal
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control over financial reporting, such that there is a reasonable possibility that a material misstatement in a company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The material weakness identified in Item 9A in this Annual Report on Form 10-K did not
result in any misstatement of our financial statements for any period presented. We have designed and are implementing a remediation plan for the material
weakness. However, our remediation efforts may be inadequate, and we may in the future discover other areas of our internal controls that require
remediation.
We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future. If we fail to maintain
effective internal controls, investors may lose confidence in the accuracy and completeness or our financial reports, the market price of our securities may
be negatively affected, and we could be subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq.
The requirements of being a public company may strain our resources and require a substantial amount of management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or the Dodd-Frank Act, Nasdaq listing requirements and other applicable securities rules and regulations. The SEC and other
regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Stockholder
activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new
regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in
which we operate our business. Compliance with these rules and regulations may cause us to incur additional accounting, legal and other expenses. We also
incur costs associated with corporate governance requirements, including requirements under securities laws, as well as rules and regulations implemented
by the SEC and Nasdaq, particularly as a large accelerated filer. These rules and regulations have increased our legal and financial compliance costs and we
devote significant time to comply with these requirements. We are currently evaluating and monitoring developments with respect to these rules and
regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Risks related to our intellectual property
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our commercial success depends in part on our ability to protect our intellectual property and proprietary technologies. We rely on patent protection, where
appropriate and available, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual
restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or
permit us to gain or keep any competitive advantage.
As of September 30, 2022, we own 39 issued U.S. patents and 29 issued international patents; four in China, three in Europe, eight in South Korea, four in
Taiwan, five in Japan, one in Eurasia, one in Singapore, one in Israel, one in Hong Kong, and one in Australia. There are 342 pending patent applications,
including 103 in the United States, 216 international applications, and 23 applications filed under the Patent Cooperation Treaty. Additionally, we have
exclusively licensed a patent portfolio containing 12 issued patents, including one U.S. patent and 11 international patents, and 11 pending applications,
including three in the U.S. and eight international applications. We have also licensed a patent portfolio containing 11 pending applications, including one
in the U.S. and ten international applications. We have further licensed another patent portfolio containing two issued U.S. patents, four international
patents, and five pending applications (one in the U.S. and four international applications). Our policy is to file patent applications to protect technology,
inventions and improvements that are important to our business.
Several patent applications covering our technologies have been filed recently. We cannot offer any assurances about which, if any, patents will issue, the
breadth of any such patent, or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful
opposition to these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for the practice
of our technologies or the successful commercialization of products that we may develop. Since patent applications in the United States and most other
countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our
technologies or products. Furthermore, an interference proceeding can be provoked by a third party or instituted by the U.S. Patent and Trademark Office
("USPTO"), or the European Patent Office ("EPO"), to determine who was the first to invent any of the subject matter covered by the patent claims of our
applications. For example, on March 3, 2021, our European Patent No. 3030682 which relates to polynucleotide synthesis was opposed by an anonymous
third party. An oral hearing was held at the EPO on November 10, 2022, where the EPO initially revoked
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the patent for alleged insufficiencies under European Patent Convention Article 83. We believe the EPO's decision relating to the original claims is
erroneous and we intend to appeal the EPO’s decision while continuing to prosecute related pending European applications.
Patent law can be highly uncertain and involve complex legal and factual questions for which important principles remain unresolved. In the United States
and in many international jurisdictions, policy regarding the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the
Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted.
Similarly, international courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted.
We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and international
legislative bodies.
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 may not pursue or maintain patent protection for our products in every country or territory in which we sell our products and technologies. In addition,
our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be sufficient to protect our proprietary
technology and gain or keep our competitive advantage. Any patents we have obtained or do obtain may be subject to re-examination, reissue, opposition
or other administrative proceedings, or may be challenged in litigation, and such challenges could result in a determination that the patent is invalid or
unenforceable.
Patents have a limited lifespan. Patent terms may be shortened or lengthened by, for example, terminal disclaimers, patent term adjustments, supplemental
protection certificates, and patent term extensions. Although extensions may be available, the life of a patent, and the protection it affords, is limited. Patent
term extensions and supplemental protection certificates, and the like, may be impacted by the regulatory process and may not significantly lengthen patent
term. Non-payment or delay in payment of patent fees or annuities, delay in patent filings or delay in extension filing, whether intentional or unintentional,
may also result in the loss of patent rights important to our business. In such an event, competitors might be able to enter the market earlier than would
otherwise have been the case. In addition, certain countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses
to other parties. Furthermore, many countries limit the enforceability of patents against other parties, including government agencies or government
contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of any patents.
We cannot be certain that the steps we have taken will prevent unauthorized use or unauthorized reverse engineering of our technology. In addition,
competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property, including
licensed intellectual property, offers inadequate protection, or is found to be invalid or unenforceable, we are exposed to a greater risk of direct competition.
If our intellectual property does not provide adequate protection against our competitors’ products, our competitive position could be adversely affected, as
could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.
Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we review our competitors’ products, and may in the
future seek to enforce our patents or other rights against potential infringement. However, the steps we have taken to protect our proprietary rights may not
be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce,
our intellectual property rights. We cannot guarantee that any of our patent searches or analyses, including but not limited to the identification of relevant
patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and
every third-party patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of our products in
any jurisdiction. For example, U.S. applications filed before November 29, 2000 and certain U.S. applications filed after that date that will not be filed
outside the United States remain confidential until patents issue. Patent applications in the United States and elsewhere are published approximately 18
months after the earliest filing for which priority is claimed. Therefore, patent applications covering our product candidates or technologies could have
been filed by others without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later
amended in a manner that could cover our platform technologies, our products or the use of our products or technologies. The scope of a patent claim is
determined by the interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the
scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine
that our products are not covered by a third-party patent or may incorrectly predict whether a third party’s pending application will issue with claims of
relevant scope. Our
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determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact
our ability to develop and market our product candidates.
A court or other judicial body may decide that the patent we seek to enforce is invalid or unenforceable or may refuse to stop the other party from using the
technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation could put one or
more of our patents at risk of being invalidated or interpreted narrowly. Some of our competitors may be able to devote significantly more resources to
intellectual property litigation and may have significantly broader patent portfolios to assert against us if we assert our rights against them.
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We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our technologies and products in all countries throughout the world would be prohibitively expensive. In
addition, the laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many
companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Consequently, we may not be able to
prevent third parties from using our inventions in countries outside the United States, or from selling or importing products made using our inventions in
and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to
develop their own technologies and products and, may export otherwise infringing products to territories where we have patent protection. These products
may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
The legal systems of certain countries, particularly China and certain other developing countries, do not favor the enforcement of patents and other
intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our
business, put our own patents at risk of being invalidated or interpreted narrowly, put our patent applications at risk of not being issued, and provoke third
parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be
commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop. Certain countries in Europe and developing countries, including China and India,
have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited
remedies if any of our patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those
patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be
inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be
adversely affected.
In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into
confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our
advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the
event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring
unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to
enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would
be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
Trade secrets and know-how can be difficult to protect as trade secrets, and know-how will over time be disseminated within the industry through
independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company. In addition,
because we may rely on third parties in the development of our products, we may, at times, share trade secrets with them. We seek to protect our proprietary
technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar
agreements with third parties prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third
parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third
parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are
inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. If we are unable to prevent unauthorized
material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive
advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either lawfully or through breach of our agreements with
third parties, independent development or publication of information by any of our third-party collaborators. Competitors could willfully infringe our
intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual
property rights. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to
prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Given that our
proprietary position is based, in part, on our know-how and trade secrets, a
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competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have an adverse effect
on our business and results of operations.
We may be involved in lawsuits to protect or enforce our patents and proprietary rights, to determine the scope, coverage and validity of others’
proprietary rights, or to defend against third party claims of intellectual property infringement that could require us to spend significant time and
money and could prevent us from selling our products or impact our stock price.
Litigation may be necessary for us to enforce our patent and proprietary rights and/or to determine the scope, coverage and validity of others’ proprietary
rights. Litigation on these matters has been prevalent in our industry and we expect that this will continue. As the biotechnology and synthetic biology
industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our technologies and products
of which we are not aware or that we may need to challenge to continue our operations as currently contemplated. In addition, our competitors and others
may have patents or may in the future obtain patents and claim that the use of our products or processes infringes these patents. As we move into new
markets and applications for our products and processes, incumbent participants in such markets may assert their patents and other proprietary rights
against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us.
Patent infringement suits can be expensive, lengthy and disruptive to business operations and the outcome following legal assertions of invalidity and
unenforceability is unpredictable. We could incur substantial costs and divert the attention of our management and technical personnel in prosecuting or
defending against any claims and may harm our reputation. Some of our competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater resources. There can be no assurance that we will prevail in any suit initiated against us by
third parties, successfully settle or otherwise resolve patent infringement claims. If we are unable to successfully settle claims on terms acceptable to us, we
may be required to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial delays
in marketing our technologies and products. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could
block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us, including treble damages and
attorneys’ fees and costs in the event that we are found to be a willful infringer of third party patents.
In the event of a successful claim of infringement against us, we may be required to obtain one or more licenses from third parties, which we may not be
able to obtain at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties,
which could negatively affect our gross margins. In addition, we could encounter delays in product introductions while we attempt to develop alternative
methods or products to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any required licenses on
favorable terms could prevent us from commercializing our products, and the risk of a prohibition on the sale of any of our products could adversely affect
our ability to grow and gain market acceptance for our products.
Suppliers of certain equipment and technology platforms on which we rely for our business may also be subject to patent infringement lawsuits. Even if we
are not a named party in such lawsuits, if such suppliers are enjoined by a court to stop selling their equipment and technology platforms or supporting our
existing equipment and technology platforms, we may not have an alternative source for such equipment and technology platforms, which may have a
material adverse effect on our business.
We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual
property. We were previously involved in litigation of this kind with Agilent. While we have settled this dispute, there can be no assurance that future
litigation will not be initiated by these parties. Some of our employees were previously employed at universities or biotechnology or biopharmaceutical
companies, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise
used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these and other
claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights. A loss of key research personnel or their work product could hamper our ability to commercialize, or prevent us from
commercializing, our products and technologies. Such an outcome could have a material adverse effect on our business. Even if we are successful in
defending against such claims, litigation could result in substantial costs and distraction to management and other employees.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our
confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive
these results to be
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negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our
operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Finally, any
uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary
to continue our operations.
In addition, our agreements with some of our suppliers, distributors, customers and other entities with whom we do business may require us to defend or
indemnify these parties to the extent they become involved in infringement claims against us, including the claims described above. We could also
voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business
relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur
significant costs and expenses that could adversely affect our business, operating results, or financial condition.
We may not be successful in obtaining or maintaining necessary rights to our products and technologies through acquisitions and in-licenses, and our
intellectual property agreements with third parties may involve unfavorable terms or be subject to disagreements over contract interpretation.
We may find that our programs require the use of proprietary rights held by third parties, and the growth of our business may depend in part on our ability
to acquire, in-license or use these proprietary rights. We may be unable to acquire or in-license compositions, methods of use, processes or other third-party
intellectual property rights from third parties that we identify as necessary for our products and technologies. The licensing and acquisition of third-party
intellectual property rights is a competitive area, and other companies may also be pursuing strategies to license or acquire third-party intellectual property
rights that we may consider attractive. These companies may have a competitive advantage over us due to their size, financial resources and greater
commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. Moreover,
collaboration arrangements are complex and time-consuming to negotiate, document, implement and maintain. We may not be successful in our efforts to
establish and implement collaborations or other alternative arrangements should we so choose to enter into such arrangements. We also may be unable to
license or acquire third-party intellectual property rights on terms that would be favorable to us or would allow us to make an appropriate return on our
investment.
We engage in discussions regarding other possible commercial and cross-licensing agreements with third parties from time to time. There can be no
assurance that these discussions will lead to the execution of commercial license or cross-license agreements or that such agreements will be on terms that
are favorable to us. Even if we are able to obtain a license to intellectual property of interest, we may not be able to secure exclusive rights, in which case
others could use the same rights and compete with us. In addition, if we enter into cross-licensing agreements, there is no assurance that we will be able to
effectively compete against others who are licensed under our patents.
In addition, provisions in our licensing and other intellectual property agreements may be susceptible to multiple interpretations. The resolution of any
contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology or affect financial
or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of
operations and prospects.
We have not yet registered some of our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our
business.
Some of our trademark applications may not be allowed for registration, and our registered trademarks may not be maintained or enforced. In addition, in
the U.S. Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending
trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our
trademarks may not survive such proceedings.
In addition, third parties may file first for our trademarks in certain countries. If they succeed in registering such trademarks, and if we are not successful in
challenging such third-party rights, we may not be able to use these trademarks for marketing our products and technologies in those countries. Over the
long-term, if we are unable to establish name recognition based on our trademarks, then our marketing abilities may be materially adversely impacted.
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us
from selling our products.
We rely on, or may in the future rely on, licenses in order to be able to use various proprietary technologies that are material to our business. We do not or
will not own the patents that underlie these licenses. Our rights to use the technology we license are subject to the negotiation of, continuation of and
compliance with the terms of those licenses. In some cases, we do not or will not control the prosecution, maintenance, or filing of the patents to which we
hold licenses, or the
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enforcement of these patents against third parties. Some of our patents and patent applications were either acquired from another company who acquired
those patents and patent applications from yet another company or are licensed from a third party. For example, Twist Bioscience acquired Genome
Compiler Corporation in 2016, and Genome Compiler had a non-exclusive license to U.S. Patent No- 7,805,252 owned by DNA 2.0. Thus, these patents
and patent applications are not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and
our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the
owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting and/or prosecution of the
licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in
valid and enforceable patents and other intellectual property rights.
Our rights to use the technology we license is subject to the validity of the owner’s intellectual property rights. Enforcement of our licensed patents or
defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated
against the owners of the intellectual property that we license. Even if we are not a party to these legal actions, an adverse outcome could harm our business
because it might prevent these other companies or institutions from continuing to license intellectual property that we may need to operate our business.
Our licenses contain or will contain provisions that allow the licensor to terminate the license upon specific conditions. Our rights under the licenses are
subject to or will be subject to our continued compliance with the terms of the license, including the payment of royalties due under the license.
Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we
have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An
unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying
the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If
such an attempt were successful, we might be barred from producing and selling some or all of our products.
Risks relating to owning our common stock
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.
We have never declared or paid any dividends on our common stock and do not intend to pay any dividends in the foreseeable future. We anticipate that we
will retain all of our future earnings for use in the operation of our business and for general corporate purposes. Any determination to pay dividends in the
future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after any price appreciation as the
only way to realize any future gains on their investments. Furthermore, we are party to a credit agreement with SVB which contains negative covenants that
limit our ability to pay dividends. For more information, see the section of this Form 10-K captioned “Management’s discussion and analysis of financial
condition and results of operation—Liquidity and capital resources.” For more information regarding the negative covenants in our loan and security
agreement with Silicon Valley Bank.
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our
stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a change in
control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These
provisions include:
•
•
•
•
providing for a classified board of directors with staggered, three-year terms;
authorizing our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover attempt or
delay changes in control;
prohibiting cumulative voting in the election of directors;
providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
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•
•
•
•
prohibiting the adoption, amendment or repeal of our amended and restated bylaws or the repeal of the provisions of our amended and restated
certificate of incorporation regarding the election and removal of directors without the required approval of at least 66.67% of the shares entitled
to vote at an election of directors;
prohibiting stockholder action by written consent;
limiting the persons who may call special meetings of stockholders; and
requiring advance notification of stockholder nominations and proposals.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions
of Section 203 of the Delaware General Corporate Law, or the DGCL, govern us. These provisions may prohibit large stockholders, in particular those
owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of
directors.
These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law could
discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock and result in the
market price of our common stock being lower than it would be without these provisions.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of
the United States will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any
derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other
employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provisions of the DGCL, our amended and restated
certificate of incorporation or our amended and restated bylaws, any action or proceeding asserting a claim as to which the Delaware General Corporation
Law confers jurisdiction upon the Court of Chancery of the State of Delaware or any action asserting a claim against us that is governed by the internal
affairs doctrine, subject in each case to the Court of Chancery having personal jurisdiction over the parties named as defendants therein. The exclusive
forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts
have exclusive jurisdiction. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other
employees. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or
unenforceable in an action, we might incur additional costs associated with resolving such action in other jurisdictions.
In addition, our amended and restated certificate of incorporation provides that the U.S. federal district courts are the exclusive forum for the resolution of
any complaint asserting a cause of action arising under the Securities Act. Our exclusive forum provision will not relieve us of our duties to comply with
the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these
laws, rules and regulations.
The enforceability of similar federal court choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal
proceedings, and it is possible that a court could find our federal court choice of forum provision to be inapplicable or unenforceable. If a court were to find
either of the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action,
we may incur additional costs associated with resolving such action in other jurisdictions. Additionally, while the Delaware Supreme Court recently
determined that choice of forum provisions for actions arising under the Securities Act are facially valid, a stockholder may nevertheless seek to bring such
a claim arising under the Securities Act against us, our directors, officers, or other employees in a venue other than in the federal district courts of the
United States of America. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our
amended and restated certificate of incorporation, and this may require significant additional costs associated with resolving such action in other
jurisdictions.
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General risk factors
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.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this “Risk factors”
section or otherwise, and other factors beyond our control, such as fluctuations in the valuations of companies perceived by investors to be comparable to
us.
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These
broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, interest rate changes or international
currency fluctuations, may negatively affect the market price of our common stock.
Factors that could cause the market price of our common stock to fluctuate significantly include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our financial condition and operating results, including fluctuations in our quarterly and annual results;
announcements of technological innovations by us or our competitors;
overall conditions in our industry and the markets in which we operate;
addition or loss of significant customers, or other developments with respect to significant customers;
changes in laws or regulations applicable to our products;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
additions or departures of key personnel;
competition from existing products or new products that may emerge;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property
protection for our technologies;
announcement or expectation of additional financing efforts;
sales of our common stock by us or our stockholders;
the addition or removal of our stock to or from a stock index fund;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
the expiration of contractual lock-up agreements with our executive officers, directors and stockholders, which we may enter into in the future
from time to time;
general economic and market conditions, including economic downturns or uncertainty in financial markets; and
other factors beyond our control, such as terrorism, war, natural disasters and pandemics.
In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We
may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s
attention from other business concerns, which could harm our business.
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If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price
and trading volume could decline.
The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business and
we will not have any control over such analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares,
our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We have in the past and may in the future be subject to short selling strategies that may drive down the market price of our common stock.
Short sellers have in the past and may attempt in the future to drive down the market price of our common stock. Short selling is the practice of selling
securities that the seller does not own but may have borrowed with the intention of buying identical securities back at a later date. The short seller hopes to
profit from a decline in the value of the securities between the time the securities are borrowed and the time they are replaced. As it is in the short seller’s
best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of,
negative opinions regarding the relevant issuer and its business prospects to create negative market momentum. Although traditionally these disclosed
shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and
technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to
publicly attack a company’s credibility, strategy and veracity by means of so-called “research reports” that mimic the type of investment analysis performed
by large Wall Street firms and independent research analysts. These short attacks have, in the past, led to selling of shares in the market. Further, these short
seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S. and they are not subject to
certification requirements imposed by the SEC. Accordingly, the opinions they express may be based on distortions, omissions or fabrications. Companies
that are subject to unfavorable allegations, even if untrue, may have to expend a significant amount of resources to investigate such allegations and/or
defend themselves, including shareholder suits against the company that may be prompted by such allegations. We may in the future be the subject of
shareholder suits that we believe were prompted by allegations made by short sellers.
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.
As we have in the past, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner,
we determine from time to time. We have also issued and expect to issue common stock to employees and directors pursuant to our equity incentive plans.
If we sell common stock, convertible securities or other equity securities in future transactions, or common stock is issued pursuant to equity incentive
plans, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of
holders of our common stock.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may
reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each
case to the fullest extent permitted by Delaware law.
In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with
our directors and officers provide that:
• we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest
extent permitted by Delaware law, which provides that a corporation may indemnify such person if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding,
had no reasonable cause to believe such person’s conduct was unlawful;
• we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;
• we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such
directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification;
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• we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person
against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to
indemnification;
•
the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with
our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and
• we may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers,
employees and agents.
Evolving expectations around corporate responsibility practices, specifically related to environmental, social and governance (“ESG”) matters, may
expose us to reputational and other risks.
Investors, stockholders, customers, suppliers and other third parties are increasingly focusing on ESG and corporate social responsibility endeavors and
reporting. Certain institutional investors, investment funds, other influential investors, customers, suppliers and other third parties are also increasingly
focused on ESG practices. Companies that do not adapt to or comply with the evolving investor or stakeholder expectations and standards, or which are
perceived to have not responded appropriately, may suffer from reputational damage and result in the business, financial condition and/or stock price of a
company being materially and adversely affected. Further, this increased focus on ESG issues may result in new regulations and/or third-party requirements
that could adversely impact our business, or certain shareholders reducing or eliminating their holdings of our stock. Additionally, an allegation or
perception that we have not taken sufficient action in these areas could negatively harm our reputation.
Item 1B.
Unresolved staff comments
None.
Item 2.
Properties
Our principal facilities are described below:
Principal Facilities
Wilsonville, Oregon
South San Francisco, CA
Brisbane, CA
Quincy, Massachusetts
Canton, Massachusetts
Guangzhou, China
Tel Aviv, Israel
Carlsbad, CA
Shanghai, China
Singapore
Approximate Square
Footage
211,995
91,791
24,786
21,657
12,158
11,583
9,332
4,710
2,067
1,353
Lease Expiration
2044
2028
2026
2032
2025
2024
2024
2023
2022
2025
Use
General & Administration and Manufacturing
General & Administration, R&D and Manufacturing
Warehouse facility
General & Administration, R&D and Manufacturing
R&D and Manufacturing
Office Space & Biopharma Services facility
R&D (software development )
Sales & Marketing
Sales & Marketing
Sales & Marketing
Owned or
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
The Company believes its existing facilities are in good operating condition and are suitable for the conduct of its business.
Item 3.
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.
Item 4.
Mine safety disclosures
Not applicable.
PART II
45
Table of Contents
Item 5.
Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
Market information for common stock
Our common stock began trading on The Nasdaq Global Market under the symbol “TWST” on October 31, 2018 in connection with the initial public
offering of our common stock. Prior to that date, there was no public market for our common stock.
Performance Graph
This graph is not “soliciting material” or subject to Regulation 14A, deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or
otherwise subject to liabilities under that section, and shall not be deemed incorporated by reference into any filing of the Company under the Securities
Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The following graph compares the cumulative total return to stockholder return on our common stock relative to the cumulative total returns of the Nasdaq
Composite Index and the Nasdaq Biotechnology Index. An investment of $100 is assumed to have been made in our common stock and each index on
October 31, 2018 (the first day of trading of our common stock) and its relative performance is tracked through September 30, 2022. Pursuant to applicable
SEC rules, all values assume reinvestment of the full amount of all dividends; however, no dividends have been declared on our common stock to date. The
stockholder returns shown on the graph below are based on historical results and are not necessarily indicative of future performance, and we do not make
or endorse any predictions as to future stockholder returns.
*
$100.00 invested on October 31, 2018 in stock or index, including reinvestment of dividends.
Twist Bioscience Corporation
$
165.00
$
166.00
$
207.00
$
171.00
$
150.00
$
218.00
$
324.00
$
Nasdaq Composite Index
Nasdaq Biotechnology Index
91.00
93.00
106.00
107.00
110.00
105.00
109.00
95.00
123.00
116.00
105.00
104.00
138.00
131.00
400.00
153.00
130.00
12/31/2018
3/29/2019
6/28/2019
9/30/2019
12/31/2019
3/31/2020
6/30/2020
9/30/2020
46
Table of Contents
Twist Bioscience Corporation
$
1,009.00
$
885.00
$
952.00
$
879.00
$
553.00
$
353.00
$
250.00
$
Nasdaq Composite Index
Nasdaq Biotechnology Index
176.00
145.00
181.00
144.00
199.00
157.00
198.00
155.00
214.00
144.00
195.00
127.00
151.00
114.00
252.00
145.00
115.00
12/31/2020
3/31/2021
6/30/2021
9/30/2021
12/31/2021
3/31/2022
6/30/2022
9/30/2022
Holders of Record
As of November 23, 2022, there were approximately 55 holders of record of our common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future
determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial
condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
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Sales of unregistered securities
None.
Issuer Purchases of Equity Securities
None.
Item 6.
[Reserved]
48
Table of Contents
Item 7.
Management’s discussion and analysis of financial condition and results of operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of
the results of operations and financial condition. The following discussion and analysis of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to
historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of
many factors, including those discussed under “Risk factors” and elsewhere in this Form 10-K. The last day of our fiscal year is September 30, and we
refer to our fiscal year ended September 30, 2020 as fiscal year 2020 or 2020, September 30, 2021 as fiscal year 2021 or 2021 and our fiscal year ended
September 30, 2022 as fiscal year 2022 or 2022.
Overview
We are an innovative synthetic biology and genomics company that has developed a scalable 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 miniaturized traditional chemical DNA synthesis reactions to write over one million short pieces of DNA on each silicon chip,
approximately the size of a large mobile phone. 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 enables new value-added opportunities, such as discovery partnerships for biologic drugs, and enables 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
approximately 3,300 customers in fiscal year 2022 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 have grown rapidly and generated revenues of $203.6 million in the year ended September 30, 2022, $132.3 million in the year ended September 30,
2021 and $90.1 million in the year ended September 30, 2020, while incurring net losses of $217.9 million, $152.1 million and $139.9 million in the years
ended September 30, 2022, 2021 and 2020, respectively. Since our inception, we have incurred significant operating losses and have accumulated net
deficit of $828.4 million. To support our growth, we have increased our number of employees and increased investment in our manufacturing capabilities.
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, biologic drug industry or the data storage industry.
In 2022, 2021 and 2020 we served approximately 3,300, 2,900 and 2,200 customers, respectively.
Highlights from fiscal year 2022 compared with fiscal year 2021 included
•
Revenue growth of 54% to $203.6 million from $132.3 million in 2021, primarily due to order growth in NGS tools, synthetic genes and antibody
discovery; and
• Our gross margin increased to 41% in 2022 from 39% in 2021.
We have built a scalable commercial platform that enables us to reach a diverse customer base in a variety of industries including industrial
chemicals/materials, 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. Launched in
fiscal 2018, our e-commerce 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.
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Over the years, we have experienced a pattern, although not consistently, of our third-quarter revenue growth being lower than revenue growth in other
quarters due to a decrease in demand from certain potentially significant customers during such quarter and periodic revenue fluctuations in our NGS tools.
As we grow our NGS tools, our revenue may continue to fluctuate from quarter to quarter. As our European and APAC businesses become larger
percentage of our revenues, we anticipate reduced revenue in our fourth quarter due to the seasonal slowdown caused by summer vacations and European
holiday schedules.
Seasonality
Key business metrics
We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business,
formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business. However, we
anticipate these will change or may be substituted for additional or different metrics as our business grows.
Value of orders received
We believe that the value of orders we receive is a leading indicator of our ability to generate revenue in subsequent quarters, although there can be no
assurance orders will translate into revenue. We define an order as a contract with a customer or purchase order from a customer, which outlines the
promised goods at an agreed upon-price. In some cases, we receive a blanket purchase order from our customers, which includes pricing, payment and
other terms and conditions, with quantities defined at the time each customer subsequently issues periodic releases against the blanket purchase order. We
regularly assess trends relating to the value of orders we receive, including with respect to our customer concentration.
Orders may never convert into actual revenue and the timing of delivery of our orders and recognition of revenue, if any, may vary based on the nature of
the order, and there can be no assurance that orders will result in recognized revenue. The following table lists the value of orders received during the
periods indicated:
Order value
Number of customers
Year ended September 30,
2022
2021
2020
$
226,435 $
159,545 $
116,717
We believe that the number of customers who have purchased from us since inception is representative of our ability to drive adoption of our products. We
define customers as separate legal entities or persons who have purchased and directly paid for our products. This means that if a parent company is a
customer of ours, it is counted as one customer, and if its subsidiary also purchases our products from us, and the subsidiary makes a payment directly to
us, we count the subsidiary as a separate customer. We apply this methodology of counting customers because it is not possible for our e-commerce
platform and other data tracking software to distinguish accurately between affiliated purchasers.
Percentage of revenue from new and repeat customers
We believe that the percentage of revenue that we generate from both new and repeat customers is an indicator of our ability to drive adoption of our
products amongst existing customers while also generating a robust pipeline of new customers. We define a new customer as a customer who, as a separate
legal entity or person, has not had multiple purchases in the current fiscal year. We define a repeat customer as any customer who, as a separate legal entity
or person, has purchased products or services from us more than once in the current fiscal year.
Number of customers
Revenue from repeat customers
Year ended September 30,
2022
2021
2020
3,300
98 %
2,900
98 %
2,200
97 %
Financial overview
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The following table summarizes certain selected historical financial results:
(in thousands)
Revenues
Loss from operations
Net loss attributable to common stockholders
Revenues
Year ended September 30,
2022
2021
2020
$
203,565 $
(234,776)
(217,863)
132,333 $
(152,726)
(152,098)
90,100
(140,079)
(139,931)
We generate revenue from sales of synthetic genes, oligo pools, NGS tools, DNA libraries and antibody discovery services. Our ability to increase our
revenues will depend on our ability to further penetrate the domestic and international markets, generate sales through our direct sales force, distributors
and over time from our e-commerce digital platform and launch new products.
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 United States of America, Canada, Mexico and South America; EMEA consists of Europe, Middle East and
Africa; and APAC consists of Japan, China, South Korea, India, Singapore, Malaysia and Australia.
(in thousands, except percentages)
2022
%
2021
%
2020
%
Year ended September 30,
Americas
EMEA
APAC
Total revenues
$
$
122,473
62,078
19,014
203,565
61% $
30%
9%
77,909
44,124
10,300
100% $
132,333
59% $
33%
8%
100% $
59,164
25,821
5,115
90,100
Revenues by products
The table below sets forth revenues by products:
(in thousands, except percentages)
2022
%
2021
%
2020
%
Year ended September 30,
Synthetic genes
Oligo pools
DNA libraries
Antibody discovery
NGS tools
Total revenues
$
61,509
12,424
6,149
24,171
99,312
30% $
6%
3%
12%
49%
38,964
8,039
5,678
6,985
72,667
30% $
6%
4%
5%
55%
$
203,565
100% $
132,333
100% $
35,192
4,545
3,965
2,383
44,015
90,100
Revenues by industry
Revenues by industry were as follows:
(in thousands, except percentages)
Industrial chemicals/materials
Academic research
Healthcare
Food/agriculture
Total revenues
2022
%
2021
%
2020
%
Year ended September 30,
$
$
57,940
37,097
106,363
2,165
203,565
28% $
18%
52%
1%
34,475
25,299
71,241
1,318
100% $
132,333
26% $
19%
54%
1%
100% $
29,054
19,642
40,036
1,368
90,100
65%
29%
6%
100%
39%
5%
4%
3%
49%
100%
32%
22%
44%
2%
100%
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Revenues and accounts receivable concentration
There are no major customers who accounted for 10% or more of our revenue for the fiscal year ended September 30, 2022 and 2021. There were two
major customers who accounted for 12% and 10% of our revenue for the fiscal year ended September 30, 2020.
There are no major customers who accounted for 10% or more of the net accounts receivable as of September 30, 2022 and 2021.
Product shipments including synthetic genes
Shipments of number of genes in years ended September 30, 2022, 2021 and 2020 were as follows:
(in thousands)
Number of genes shipped
Cost of revenues
Year ended September 30,
2022
2021
2020
558
372
339
Cost of revenues reflects the aggregate cost incurred in the production and delivery of our products and consists of production materials, personnel costs,
cost of expensed equipment and consumables, laboratory supplies, consulting costs, depreciation, production overhead costs, information technology
(“IT”), maintenance and facility costs. Personnel costs consist of salaries, employee benefit costs, bonuses, and stock-based compensation expenses. We
expect that our cost of revenues will vary with changes in our revenues and our revenue mix.
Research and development
Research and development expenses consist primarily of costs incurred for the development of our products, which include personnel costs, laboratory
equipment and supplies, consulting costs, depreciation, rent, IT, maintenance and facility costs. Personnel costs consist of salaries, employee benefit costs,
bonuses, and stock-based compensation expenses. We expense our research and development expenses in the period in which they are incurred. We expect
to increase our research and development expenses as we continue to invest in new product development.
Selling, general and administrative
Selling expenses consist of personnel costs, customer service expenses, direct marketing expenses, educational and promotional expense, market research
and analysis. General and administrative expenses are incurred for executive, finance and accounting, legal and human resources functions and consist of
personnel costs, audit and legal expenses, consulting costs, depreciation, insurance costs, travel expenses, rent, IT, maintenance and facility costs. Personnel
costs consist of salaries, employee benefit costs, bonuses, commissions and stock-based compensation expenses. We expense all selling, general and
administrative expenses as incurred. We expect our selling costs will continue to increase in absolute dollars, primarily driven by our efforts to expand our
commercial capability, with an increased presence both within and outside the United States, and to expand our brand awareness and customer base through
targeted marketing initiatives. We expect general and administrative expenses will increase as well as we scale our operations.
Change in fair value of contingent considerations and holdbacks
Change in fair value of contingent considerations and holdbacks consists of remeasurement of contingent consideration and indemnity holdbacks related to
the acquisitions of Abveris and iGenomX.
Interest expense
Interest expense is attributable to borrowing under our senior secured term loan which was paid in December 2021.
Interest income
Interest income consists primarily of interest earned on our cash, cash equivalents, and short-term investments.
Gain on deconsolidation of a subsidiary
Gain on deconsolidation of a subsidiary represents gain on deconsolidation of Revelar Biotherapeutics, Inc. (“Revelar”).
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Other income (expense), net
Other income (expense), net consists of realized foreign exchange gains and losses and loss on disposal of property and equipment.
The following table sets forth selected consolidated statements of operations data for the fiscal years indicated and the percentage change in such data from
year to year. These historical operating results may not be indicative of the results for any future period.
Results of operations
(in thousands)
Revenues
Operating expenses:
Cost of revenues
Research and development
Selling, general and administrative
Change in fair value of contingent considerations and holdbacks
Litigation settlement
Total operating expenses
Loss from operations
Interest income
Interest expense
Gain on deconsolidation of a subsidiary
Other income (expense), net
Benefit from (provision for) income taxes
Net loss attributable to common stockholders
Comparison of the years ended September 30, 2022, 2021 and 2020
Revenues
Year ended September 30,
2022
2021
2020
$
203,565 $
132,333 $
90,100
119,330
120,307
212,949
(14,245)
—
80,620
69,072
135,901
(534)
—
438,341 $
285,059 $
(234,776) $
3,062
(80)
4,607
(1,087)
10,411
(217,863) $
(152,726) $
435
(367)
—
(1,370)
1,930
(152,098) $
61,406
43,006
103,267
—
22,500
230,179
(140,079)
1,499
(787)
—
(182)
(382)
(139,931)
$
$
$
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Revenues
$
203,565 $
132,333 $
90,100 $
71,232
54% $
42,233
47%
Year ended September 30,
Change
Revenues increased from $132.3 million to $203.6 million in the year ended September 30, 2022, which was an increase of $71.2 million, or 54%, as
compared to the same period in 2021. The increase in revenue was primarily due to increase in revenue from NGS tools, which grew from $72.7 million in
2021 to $99.3 million in 2022, an increase in revenue from synthetic genes which grew from $39.0 million in 2021 to $61.5 million and an increase in
revenue from antibody discovery, which grew from $7.0 million in 2021 to $24.2 million. The primary reason for NGS tools revenue growth was an
increase in both revenue from our top customers and adoption of our product by a larger customer base. We do not believe that pricing changes had a
meaningful impact on revenue from NGS tools period-over-period. Our synthetic genes revenue grew mainly due to growth in our customers across all
industries including industrial chemicals, healthcare and academic research. In the year ended September 30, 2022, we shipped approximately 558,000
genes compared to approximately 372,000 genes in the year ended September 30, 2021, an increase of 50%. Synthetic gene pricing to our customers was
relatively constant period-over-period. Our antibody services revenue grew year over year as a result of Abveris acquisition and an increase in the Twist
Antibody discovery project revenue.
Revenues increased from $90.1 million to $132.3 million in the year ended September 30, 2021, which was an increase of $42.2 million, or 47%, as
compared to the same period in 2020. The increase in revenue was primarily due to an increase in revenue from NGS tools which grew from $44.0 million
in 2020 to $72.7 million in 2021, and an increase from antibody
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discovery, which grew from $2.4 million to $7.0 million primarily due to growth in our revenues from antibody discovery project services. Our synthetic
genes revenue grew from $35.2 million in 2020 to $39.0 million in 2021, mainly due to growth in the pharma industry. In the year ended September 30,
2021, we shipped approximately 372,000 genes, including approximately 28,000 adapters-off non-clonal genes that were introduced in December 2020
compared to approximately 339,000 genes in the year ended September 30, 2020, an increase of 10%. Synthetic gene pricing to our customers was
relatively constant period-over-period. NGS tools revenue growth was primarily attributable to the adoption of our product by a larger customer base. We
do not believe that pricing changes had a meaningful impact on revenue from NGS tools period-over-period.
A discussion of our revenues for the year ended September 30, 2020 can be found on page 54 of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2021 filed with the SEC on November 23, 2021, or our 2021 Annual Report.
Cost of revenues
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Cost of revenues
$
119,330 $
80,620 $
61,406 $
38,710
48% $
19,214
31%
Year ended September 30,
Change
Cost of revenue increased from $80.6 million in the prior year to $119.3 million in the year ended September 30, 2022, which was an increase of $38.7
million, or 48%. The increase was primarily due to an increase in the cost of consumption of reagents and production materials costs of $20.4 million
associated with increased production due to higher sales volume and product shipments. The increase in personnel costs of $7.7 million was mainly due to
increased headcount to support growth in the volumes. Maintenance costs increased by $2.6 million, equipment costs increased by $1.3 million and
depreciation expense increased by $3.3 million due to investment in equipment. Our cost of revenues represented 59% and 61% of total revenues for the
year ended September 30, 2022 and 2021, respectively. The favorable change in cost of revenues as a percentage to total revenues was mainly due to an
increase in volume of product sold and change in the mix of products sold during the current year.
Cost of revenue increased from $61.4 million in the prior year to $80.6 million in the year ended September 30, 2021, which was an increase of $19.2
million, or 31%. The increase was primarily due to an increase in the cost of consumption of reagents and production materials costs of $9.6 million
associated with increased product shipments. The increase in personnel costs of $5.3 million was due to increased expenses related to supporting new
product portfolio launches and an increase in volume of products shipped. Outside services increased by $1.5 million, depreciation increased by $1.1
million and information technology costs increased by $1.6 million. Our cost of revenues represented 61% and 68% of total revenues for the year ended
September 30, 2021 and 2020, respectively. The favorable change in cost of revenues as a percentage of total revenues was mainly due to an increase in
volume of product sold and change in the mix of products sold during the current year.
A discussion of our cost of revenues for the year ended September 30, 2020 can be found on page 55 of our 2021 Annual Report.
Research and development expenses
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Research and development
$
120,307 $
69,072 $
43,006 $
51,235
74% $
26,066
61%
Year ended September 30,
Change
Research and development expenses increased by $51.2 million to $120.3 million for the year ended September 30, 2022, as compared to the same period
2021, including increased expense related to Revelar and Abveris. The increase was mainly in personnel costs of $31.3 million associated with an increase
in our research and development headcount, an increase in laboratory supplies costs of $13.8 million due to an increase in research activities, including
$8.0 million for Revelar, an increase in the rent expense of $2.6 million associated with increased research and development laboratory space and an
increase in outside services of $3.5 million primarily associated with development activities for our data storage technology.
Research and development costs increased by $26.1 million to $69.1 million for the year ended September 30, 2021, as compared to the same period 2020.
The increases were mainly in personnel costs of $18.4 million associated with increasing our research and development headcount, and an increase in
outside services of $8.1 million primarily associated with the development activities for our data storage technology.
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A discussion of our research and development expenses for the year ended September 30, 2020 can be found on page 55 of our 2021 Annual Report.
Selling, general and administrative expenses
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Selling, general and administrative
$
212,949 $
135,901 $
103,267 $
77,048
57% $
32,634
32%
Year ended September 30,
Change
Total selling, general and administrative expenses increased by $77.0 million to $212.9 million for the year ended September 30, 2022, compared to the
same period for 2021. The increase in expenses was primarily due to an increase in personnel costs by $50.9 million, as a result of an increase in headcount
in the commercial organization and included $30.8 million higher stock-based compensation expense. Advertising costs increased by $1.7 million,
consulting costs increased by $3.4 million, depreciation expense increased by $3.5 million, facility costs increased by $2.3 million, legal costs increased by
$1.4 million, online services costs increased by $1.3 million, travel costs increased by $3.7 million, rent expense increased by $2.2 million and other costs
including audit expenses, equipment costs and laboratory supplies increased by $6.6 million.
Included in total selling, general and administrative expenses for the year ended September 30, 2022 are Wilsonville costs, comprised of personnel costs of
$6.0 million, facilities costs of $4.6 million, outside services of $2.2 million, laboratory supplies of $1.3 million and other costs of $1.8 million.
Selling, general and administrative expenses increased by $32.6 million to $135.9 million for the year ended September 30, 2021, compared to the same
period for 2020. The increase was primarily due to increases in personnel costs by $30.5 million as a result of increased headcount in our commercial
organization, which included $11.7 million higher of stock-based compensation expenses and $2.5 million higher of sales commission. Outside services,
including audit costs, COVID-19 testing costs and advisory services, increased by $11.0 million, depreciation expense increased by $1.8 million, merger &
acquisition costs increased by $1.4 million, computer software costs increased by $1.0 million and rent expense increased by $1.9 million, mainly due to
our Wilsonville facility lease expense. The increase in selling, general and administrative expenses was offset by a decrease of $11.8 million in legal
expenses as our litigation with Agilent Technologies, Inc. (“Agilent”) concluded on February 6, 2020, a decrease of $3.0 million in consulting costs and a
decrease of $1.2 million in travel costs.
A discussion of our selling, general and administrative expenses for the year ended September 30, 2020 can be found on page 56 of our 2021 Annual
Report.
Change in fair value of contingent considerations and holdbacks
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Year ended September 30,
Change
Change in fair value of contingent considerations and
holdbacks
$
(14,245)
$
(534)
$
—
$
(13,711)
2568 % $
(534)
100 %
During the year ended September 30, 2022, we recognized the change in the fair value of the contingent consideration and holdbacks of $13.4 million and
$0.8 million related to the acquisitions of Abveris and iGenomX, respectively, primarily as a result of the change in fair value of our stock price as of
September 30, 2022 and a change in the probability of the attainment of the calendar year 2022 revenue target.
Change in the fair value was $0.5 million for the year ended September 30, 2021 associated with the contingent consideration and indemnity holdback
related to the acquisition of iGenomX as a result of the change in fair value of our stock price as of September 30, 2021.
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Interest, and other income (expense), net
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Interest income
Interest expense
Other income (expense)
Total interest, and other income (expense), net
$
$
3,062
$
435
$
1,499
$
2,627
604 % $
(1,064)
(80)
(1,087)
(367)
(1,370)
(787)
(182)
287
283
(78)%
(21)%
1,895
$
(1,302)
$
530
$
3,197
505 % $
420
(1,188)
(1,832)
(71)%
(53)%
653 %
528 %
Year ended September 30,
Change
Interest income was $3.1 million in the year ended September 30, 2022, $0.4 million in the year ended September 30, 2021 and $1.5 million in the year
ended September 30, 2020, resulting from our short-term investments. Interest expense was $0.1 million in fiscal year 2022, $0.4 million in fiscal year
2021 and $0.8 million in fiscal year 2020 mainly due to the reduction in the amount of debt outstanding under our credit facility with Silicon Valley Bank.
Other expense was $1.1 million in fiscal year 2022, $1.4 million in fiscal year 2021 and $0.2 million in fiscal year 2020, mainly due to one-time costs not
related to our normal business activities.
Gain on deconsolidation of a subsidiary
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Gain on deconsolidation of a subsidiary
4,607
—
—
$
4,607
100 % $
—
— %
Year ended September 30,
Change
Gain on deconsolidation of a subsidiary represents the gain associated with the deconsolidation of a variable interest entity, Revelar, on September 30,
2022. Refer to Note 15 to the consolidated financial statements for further details.
Benefit from (provision for) income taxes
(in thousands, except percentages)
2022
2021
2020
2022-2021
2021-2020
Year ended September 30,
Change
Benefit from (provision for) income
taxes
$
10,411
$
1,930
$
(382)
$
8,481
439 % $
2,312
(605)%
We recorded income tax benefit of $10.4 million and $1.9 million in 2022 and 2021 mainly as a result of the business acquisition of Abveris and iGenomX
respectively. We recorded provision for income taxes of $0.4 million in 2020.
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Sources of liquidity
Liquidity and capital resources
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 September 30, 2022, we have received an aggregate of $1,333.7 million in net proceeds from the
issuance of equity securities and an aggregate of $13.8 million from debt. As of September 30, 2022, we had a balance of $378.7 million of cash and cash
equivalents and $126.3 million in short-term investments.
Loan and Security Agreement
In September 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement with SVB, which allowed for term loan borrowings
aggregating up to $20.0 million in a series of three advances and contained a $10.0 million revolving credit facility. We obtained a term loan under the only
the first tranche in a principal amount of $10.0 million, which matured and was paid in full in December 2021.
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.
We did not make any borrowings under the revolving loan facility which expired on December 31, 2021. We had no amounts outstanding under the loan
facility at September 30, 2022.
Capital resources
Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. As of September 30,
2022, we had cash, cash equivalents and short-term investments of $505.0 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 the next 12 months. 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 plans 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
While we have experienced increased operating costs in recent periods, which we believe are due in part to the recent
growth in inflation, 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.
Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs, laboratory
and related supplies, legal and other regulatory expenses, and general overhead costs and the capital expenditures for the Wilsonville, Oregon facility
expansion. We had $10.1 million and $67.4 million in commitments for capital expenditures as of September 30, 2022 and 2021, respectively.
Operating capital requirements
Cash flows
The following table summarizes our sources and uses of cash and cash equivalents:
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(in thousands)
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Operating activities
$
2022
(124,385) $
(232,930)
270,534
Year ended
September 30,
2021
(112,244) $
156,155
329,182
2020
(142,255)
(114,650)
303,732
Net cash used in operating activities was $124.4 million in fiscal year 2022 and consisted primarily of a net loss of $217.9 million adjusted for non-cash
items including depreciation and amortization expenses of $16.5 million, stock-based compensation expense of $79.7 million, a tenant improvement
allowance net of operating lease expense of $20.1 million, gain on deconsolidation of subsidiary of $4.6 million, change in fair value of contingent
consideration and holdbacks of $14.2 million, a change in operating assets and liabilities of $5.4 million, and a net total of other non-cash items of $1.4
million. The change in operating assets and liabilities was mainly due to increases in account receivable of $9.6 million, inventory of $7.5 million, prepaid
expenses and other current assets of $2.6 million, accounts payable of $7.4 million, accrued expenses of $2.3 million, accrued compensation of $4.9
million, offset by decreases in other non-current assets of $7.3 million, and other liabilities of $7.4 million.
Net cash used in operating activities was $112.2 million in fiscal year 2021 and consisted primarily of a net loss of $152.1 million adjusted for non-cash
items including depreciation and amortization expenses of $9.8 million, stock-based compensation expense of $37.0 million, a change in operating assets
and liabilities of $9.4 million, and a net total of other non-cash items of $2.5 million. The change in operating assets and liabilities was mainly due to
increase in inventory of $19.5 million, other non-current assets of $4.7 million, accounts receivable of $2.2 million and decrease in accounts payable of
$8.5 million and accrued compensation of $7.4 million.
A discussion of our net cash used in operating activities for the fiscal year 2020 can be found on page 59 of our 2021 Annual Report.
Investing activities
In fiscal year 2022, our net cash used in the investing activities was $232.9 million primarily as a result of net impact of purchases and maturity of
investments of $117.2 million, purchases of laboratory property, equipment and computers of $101.9 million, new business acquired of $8.2 million and
deconsolidation of Revelar of $5.8 million.
In fiscal year 2021, our net cash provided by the investing activities was $156.2 million primarily as a result of net impact of purchases and maturity of
investments of $183.7 million and purchases of laboratory property, equipment and computers of $27.1 million.
A discussion of our net cash used in investing activities for the fiscal year 2020 can be found on page 59 of our 2021 Annual Report.
Financing activities
Net cash provided by financing activities was $270.5 million in fiscal year 2022, which consisted of $269.8 million in proceeds from a public offering of
our common stock, net of underwriting discounts and commissions and offering expenses, $4.0 million from proceeds from issuance of shares under the
2018 ESPP and $6.0 million from the exercise of stock options, offset by $1.6 million in principal payments on long term debt and $7.8 million in
repurchases of common stock for income tax withholdings.
Net cash provided by financing activities was $329.2 million in fiscal year 2021, which consisted of $323.9 million in proceeds from a public offering of
our common stock, net of underwriting discounts and commissions and offering expenses, $4.9 million from proceeds from issuance of shares under the
2018 ESPP and $14.6 million from the exercise of stock options, offset by $3.3 million in principal payments on long term debt and $10.8 million in
repurchases of common stock for income tax withholdings.
A discussion of our net cash provided by financing activities for the fiscal year 2020 can be found on page 59 of our 2021 Annual Report.
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Off-balance sheet arrangements
We do not have any off-balance sheet arrangements other than our indemnification agreements as described in Note 7 of the consolidated financial
statements included elsewhere in this Form 10-K.
Contractual obligations and other commitments
On July 28, 2021, we entered into a 7-year operating lease for an approximately 21,000 square-feet of office space located in South San Francisco,
California, to further expand our operations. Upon execution of the lease agreement, we provided the landlord an approximately $0.2 million security
deposit. 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 the right to sublease the facility, subject to landlord consent. The lease commenced on October 1, 2021. The total future minimum lease
payments under the agreement are $13.1 million.
On August 6, 2021, Abveris, which was subsequently acquired by us, entered into a 10-year, 5-month operating lease for approximately 22,000 square-feet
of office space located in Quincy, Massachusetts, to further expand operations. We have two options to extend the term for five years. We do not have
reasonable certainty that these options will be exercised. Upon execution of the lease agreement, Abveris provided the landlord an approximate $0.6
million irrevocable letter of credit as a security deposit. Abveris will pay an initial annual base rent of approximately $1.2 million, which is subject to
scheduled 2% annual increases, plus certain operating expenses. We have the right to sublease the facility, subject to landlord consent. The lease
commenced on March 3, 2022. As of lease commencement date, the total future minimum lease payments under the agreement were $13.2 million.
Other than the above leases, during 2022, we entered into immaterial operating lease agreements with total minimum lease payments under these
agreements were less than $2.0 million and the lease terms ranging from 2 to 3 years.
Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on
historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial
statements.
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 recognize revenue when control of the products is transferred to the customer and at a transaction price that is
determined based on the agreed upon rates in the applicable order or master supply agreement applied to the quantity of synthetic DNA that was
manufactured and shipped to the customer.
Contracts with customers are 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 other than antibody discovery services and DNA libraries (“Biopharma”) contracts, 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.
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 shipment of the product to the
customer. Accordingly, all of the transaction price, net of any discounts, is allocated to the one performance obligation. Our sales are primarily subject to
Ex Works (as defined in
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Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up by the customer’s freight forwarder, as we have
determined that this is the point in time that product control transfers to the customer. Therefore, upon shipment 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. Shipping and handling fees charged to our customers are recognized as product revenue in the period shipped and the related costs for
providing these services are recorded as a cost of revenue. 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.
Our Biopharma revenue currently primarily consists of research and development agreements with third parties that provide for up-front and milestone-
based payments. We also enter into research and development agreements that do not include up-front or milestone-based payments and recognize revenue
on these types of agreements based on the timing of development activities. Our research and development agreements may include more than one
performance obligation. At the inception of the agreement, we assess whether each obligation represents a separate performance obligation or whether such
obligations should be combined as a single performance obligation. The transaction price for each agreement is determined based on the amount of
consideration we expect to be entitled to for satisfying all performance obligations within the agreement. We assess the nature of the combined performance
obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method
of measuring progress for purposes of recognizing revenue. In agreements where we satisfy performance obligation(s) over time, we recognize
development revenue typically using an input method based on our costs incurred relative to the total expected cost which determines the extent of our
progress toward completion. As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to
determine the transaction price and progress towards completion. We review our estimate of the transaction price and progress toward completion based on
the best information available to recognize the cumulative progress toward completion as of the end of each reporting period and make revisions to such
estimates as necessary. Also, these research and development agreements may include license payments. We recognize revenue from functional license
agreements when the license is transferred to the customer and the customer is able to use and benefit from the license. A functional license has significant
standalone functionality because it can be used “as is” for performing a specific task.
We had contract assets of $3.4 million and contract liabilities of $3.5 million as of September 30, 2022. We had contract assets of $2.0 million and contract
liabilities of $1.1 million as of September 30, 2021. For the year ended September 30, 2022, we recognized revenue of $1.1 million from the amount that
was included in the contract liability balance at the beginning of the year. For September 30, 2021 and 2020 the Company 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. The aggregate amount of the transaction price allocated to the
performance obligations that are unsatisfied as of September 30, 2022 was $4.5 million.
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 measure stock-based compensation expense for restricted stock and stock options granted to non-employee
consultants on the date of grant and recognize the corresponding compensation expense of those awards over the period in which the related services are
received. We adjust for actual forfeitures as they occur.
We have granted performance-based stock units (PSUs) and performance stock options (PSOs) to executive officers and senior level employees. We value
PSUs using a grant date fair value equal to the closing share price of our common stock on the date of grant and the probability of the achievement of the
performance condition.
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We estimate the fair value of stock options granted to our employees, directors and non-employee consultants on the grant date, and rights to acquire stock
granted under our Employee Stock Purchase Plan, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These
assumptions include:
•
•
•
•
Expected Term. Our expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the
simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical
data to use any other method to estimate expected term.
Expected Volatility. As we have very limited trading history of our common stock, the expected volatility is estimated based on the average
volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. The
comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.
Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods
corresponding with the expected term of the stock option grants.
Expected Dividend. We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we
use an expected dividend yield of zero.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions as of the acquisition date which are inherently
uncertain. Intangible assets we have recognized from such transactions includes goodwill, developed technology and customer relationships. Significant
judgment was exercised in estimating the fair value of the developed technology and customer relationships, which included estimates and assumptions
related to the projected revenues (specifically forecasted selling prices and unit volume of sales), and discount rates. Similarly, significant judgment was
exercised in estimating the contingent consideration which included key assumptions related to the forecasted calendar year 2022 revenue and the
Company's share price for Abveris and progress toward completion of transition milestones for iGenomX.
The rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to
reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or
actual results.
Goodwill
Determining when to test for impairment, the reporting unit, the assets and liabilities of the reporting unit, and the fair value of the reporting unit requires
significant judgment and involves the use of significant estimates and assumptions. We test goodwill for impairment in our fourth quarter each year, or
more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is
less than its carrying value. When this qualitative assessment concludes that it is more likely than not that the fair value is more than its carrying value,
goodwill is considered not impaired and we are not required to perform the goodwill impairment test. Qualitative factors considered in this assessment
include industry and market considerations, overall financial performance, and other relevant events and factors affecting the fair value of the reporting
unit. When this qualitative assessment concludes that it is more likely than not that the fair value is below the carrying value, goodwill is tested for
impairment by determining the fair value of the reporting unit and comparing it to the carrying value of the net assets assigned to the reporting unit. If the
fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair
value, we would record an impairment loss up to the difference between the carrying value and implied fair value. For 2022, our qualitative assessment
indicated that the fair value of our reporting unit substantially exceeded the carrying value and that a quantitative assessment was unnecessary.
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 consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Item
8 of this Annual Report on Form 10-K.
Item 7A.
Quantitative and qualitative disclosures about market risk
Interest rate sensitivity
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We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and marketable securities of $505.0 million as of
September 30, 2022, which consisted primarily of money market funds and marketable securities, largely composed of investment grade, short to
intermediate term fixed income securities.
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. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be
expected to have a material impact on our financial condition or results of operations. For example, a hypothetical 10% relative change in interest rates
during any of the periods presented would not have a material impact on our 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 exposure and may, as
part of this review, make changes to it.
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Item 8.
Consolidated financial statements and supplementary data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm - PCAOB ID 42
Report of Independent Registered Public Accounting Firm - PCAOB ID 238
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
63
64
66
67
68
69
70
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To the Stockholders and Board of Directors of Twist Bioscience Corporation
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Twist Bioscience Corporation (the Company) as of September 30, 2022, the related
consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 2022, and the results of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 28, 2022 expressed an adverse
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
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Description of the
Matter
Valuation of intangible assets acquired in a business combination
As described in Note 14, on December 1, 2021, the Company acquired all of the outstanding stock of AbX Biologics, Inc.
(“Abveris”), which was accounted for as a business combination using the acquisition method of accounting. The acquired
intangible assets principally consisted of developed technology and customer relationships, which had estimated acquisition-
date fair values of $30.9 million and $14.7 million, respectively.
How We Addressed the
Matter in Our Audit
Auditing the acquisition date fair values of the acquired developed technology and customer relationships was complex due to
the significant judgment required in estimating their fair values. In particular, the fair value estimates required the use of
valuation methodologies that were sensitive to significant assumptions (e.g., projected revenue growth rates, including
forecasted selling prices and unit volumes, and discount rates applied to each intangible asset), which were affected by
expected future market or economic conditions.
We tested controls that address the risks of material misstatement relating to the valuation of the intangible assets which were
primarily comprised of developed technology and customer relationships. For example, we tested controls over management’s
review of the significant assumptions, such as the acquired business’s projected revenue growth rates, including forecasted
selling prices and unit volumes, and the discount rate applied to each intangible asset.
To test the estimated fair value of the acquired developed technology and customer relationship intangible assets, our audit
procedures included, among others, assessing the appropriateness of the valuation methodologies and testing the significant
assumptions discussed above and the completeness and accuracy of the underlying data used by the Company. For example,
we evaluated the reasonableness of assumptions used to determine the projected revenue growth rates by comparing the
forecasted assumptions to historical performance, projected industry growth rates, and other factors considered by
management in developing the model. We involved our valuation specialist to assist in evaluating the valuation methodologies
and discount rates used to value the developed technology and customer relationships. We also performed sensitivity analyses
to evaluate the changes in the fair value of the acquired developed technology and customer relationship intangible assets that
would result from changes in the significant assumptions.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2022.
San Mateo, California
November 28, 2022
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Twist Bioscience Corporation
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Twist Bioscience Corporation and its subsidiaries (the “Company”) as of September 30, 2021, and the
related consolidated statements of operations and comprehensive loss, of redeemable convertible preferred stock and stockholders’ equity and of cash flows
for each of the two years in the period ended September 30, 2021, including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
September 30, 2021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021 in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers
San Jose, California
November 28, 2022
We served as the Company’s auditor from 2015 to 2021.
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Table of Contents
(In thousands except per share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Restricted cash, non-current
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation
Current portion of operating lease liability
Current portion of long-term debt
Other current liabilities
Total current liabilities
Operating lease liability, net of current portion
Other non-current liabilities
Twist Bioscience Corporation
Consolidated Balance Sheets
September 30, 2022
September 30, 2021
$
$
$
$
$
$
$
$
$
378,687 $
126,281
40,294
39,307
11,914
596,483 $
139,441
74,948
85,811
59,738
1,572
3,385
961,378 $
20,092 $
10,169
27,023
13,642
—
19,737
90,663 $
81,270
60
465,829
12,034
28,549
31,800
8,283
546,495
44,122
61,580
22,434
18,262
1,530
7,674
702,097
14,900
6,437
22,327
8,213
1,552
9,623
63,052
53,156
5,068
171,993 $
121,276
— $
1,619,644
(1,843)
(828,416)
789,385 $
961,378 $
—
1,190,828
546
(610,553)
580,821
702,097
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, $0.00001 par value — 100,000 and 100,000 shares authorized at September 30, 2022 and
2021, respectively; 56,523 and 49,499 shares issued and outstanding at September 30, 2022 and 2021,
respectively
Additional paid-in capital
Accumulated other comprehensive (loss)/income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
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Twist Bioscience Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Revenues
Operating expenses:
Cost of revenues
Research and development
Selling, general and administrative
Change in fair value of contingent considerations and holdbacks
Litigation settlement
Total operating expenses
Loss from operations
Interest income
Interest expense
Gain on deconsolidation of subsidiary
Other income (expense), net
Loss before income taxes
Benefit from (provision for) income taxes
Net loss attributable to common stockholders
Other comprehensive loss:
Change in unrealized gain (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
$
$
$
$
$
$
$
$
$
Year ended September 30,
2022
2021
2020
203,565 $
132,333 $
90,100
119,330 $
120,307
212,949
(14,245)
—
438,341 $
(234,776) $
3,062
(80)
4,607
(1,087)
(228,274) $
10,411
(217,863) $
(1,594) $
(795)
80,620 $
69,072
135,901
(534)
—
285,059 $
(152,726) $
435
(367)
—
(1,370)
(154,028) $
1,930
(152,098) $
(14) $
473
(220,252) $
(151,639) $
(4.04) $
(3.15) $
61,406
43,006
103,267
—
22,500
230,179
(140,079)
1,499
(787)
—
(182)
(139,549)
(382)
(139,931)
(34)
(60)
(140,025)
(3.57)
53,885
48,251
39,190
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
(In thousands)
Balances as of September 30, 2019
Issuance of common stock in public offerings, net of
underwriting discounts, commissions and offering
expenses of $18,916
Vesting of restricted stock units
Issuance of shares under the employee stock purchase plan
Exercise of stock options
Repurchase of early exercised stock options
Stock-based compensation
Other comprehensive loss
Repurchase of common stock for income tax withholdings
Net loss
Twist Bioscience Corporation
Consolidated Statements of Stockholders’ Equity
Common stock
Shares
Amount
Additional paid-in
capital
Accumulated other
comprehensive income
Accumulated deficit
Total stockholders'
equity
32,873 $
—
$
470,425
$
181
$
(318,524)
$
152,082
11,064
178
126
915
(2)
—
—
(71)
—
—
—
—
—
—
—
—
—
—
295,563
—
3,428
10,539
—
17,096
—
(2,421)
—
—
—
—
—
—
—
(94)
—
—
—
—
—
—
—
—
—
—
(139,931)
Balances as of September 30, 2020
45,083 $
—
$
794,630
$
87
$
(458,455)
$
Issuance of common stock in public offerings, net of
underwriting discounts, commissions and offering
expenses of $21,139
Vesting of restricted stock units
Issuance of shares under the employee stock purchase plan
Exercise of stock options
Repurchase of early exercised stock options
Business acquisition
Stock-based compensation
Net exercise of stock warrants
Other comprehensive income
Repurchase of common stock for income tax withholdings
Net loss
3,136
237
74
804
(2)
237
—
22
—
(92)
—
—
—
—
—
—
—
—
—
—
—
—
323,861
—
4,944
14,471
—
26,773
36,998
—
—
(10,849)
—
—
—
—
—
—
—
—
—
459
—
—
—
—
—
—
—
—
—
—
—
—
(152,098)
Balances as of September 30, 2021
49,499 $
—
$
1,190,828
$
546
$
(610,553)
$
Issuance of common stock in public offering, net of
underwriting discounts and commissions and offering
expenses of $17,678
Vesting of restricted stock units
Issuance of shares under the employee stock purchase plan
Exercise of stock options
Business acquisition
Stock-based compensation
Other comprehensive loss
Repurchase of common stock for income tax withholdings
Net loss
5,227
365
97
486
988
—
—
(139)
—
—
—
—
—
—
—
—
—
—
269,822
—
4,010
5,952
77,122
79,664
—
(7,754)
—
—
—
—
—
—
—
(2,389)
—
—
—
—
—
—
—
—
—
—
(217,863)
Balances as of September 30, 2022
56,523 $
—
$
1,619,644
$
(1,843)
$
(828,416)
$
The accompanying notes are an integral part of these consolidated financial statements.
69
295,563
—
3,428
10,539
—
17,096
(94)
(2,421)
(139,931)
336,262
323,861
—
4,944
14,471
—
26,773
36,998
—
459
(10,849)
(152,098)
580,821
269,822
—
4,010
5,952
77,122
79,664
(2,389)
(7,754)
(217,863)
789,385
Table of Contents
Twist Bioscience Corporation
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
Non-cash lease expense, net of tenant improvement allowance
Gain on deconsolidation of Revelar
Loss on disposal of property and equipment
Stock-based compensation
Discount (premium) accretion on investment securities
Realized gain on investments
Allowance for doubtful accounts
Change in fair value of contingent considerations and holdbacks
Non-cash interest expense
Amortization of debt discount
Write off property and equipment
Changes in assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accrued expenses
Accrued compensation
Other liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchases of property and equipment
Business acquisition, net of cash acquired
Deconsolidation of cash and cash equivalent relating to Revelar
Purchases of investments
Proceeds from maturity of investments
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from exercise of stock options
Year ended September 30,
2022
2021
2020
$
(217,863)
$
(152,098)
$
(139,931)
16,514
20,127
(4,607)
—
79,664
1,315
—
(11)
(14,245)
3
4
70
(9,622)
(7,536)
(2,551)
7,273
7,383
2,269
4,852
(7,424)
(124,385)
(101,857)
(8,160)
(5,755)
(217,639)
100,481
(232,930)
6,014
269,822
4,010
(1,558)
(7,754)
270,534
(319)
(87,100)
467,359
380,259
9
246
$
$
9,750
2,243
—
2
36,998
593
(5)
40
(534)
67
81
—
(2,202)
(19,489)
(2,058)
(4,653)
8,542
3,115
7,392
(28)
6,677
(1,043)
—
—
17,096
(214)
—
—
—
152
184
—
(14,272)
(4,956)
(3,683)
(554)
(5,506)
(2,648)
4,465
1,978
(112,244)
(142,255)
(27,061)
(483)
—
(58,795)
242,494
156,155
14,559
323,861
4,944
(3,333)
(10,849)
329,182
20
373,113
94,246
467,359
167
101
$
$
(9,868)
—
—
(202,882)
98,100
(114,650)
10,495
295,563
3,428
(3,333)
(2,421)
303,732
21
46,848
47,398
94,246
438
172
1,333
3,718
—
Proceeds from public offerings, net of underwriting discounts, commissions and offering expenses
Proceeds from issuance under employee stock purchase plan
Repayments of long-term debt
Repurchases of common stock for income tax withholding
Net cash provided by financing activities
Effect of exchange rates on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
Supplemental disclosure of cash flow information
Interest paid
Income taxes paid, net of refunds
Non-cash investing and financing activities
Property and equipment additions included in accrued expenses and accounts payable
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
Issuance of common stock in connection with the business acquisition
$
$
$
6,297
$
21,367
77,122
2,011
$
33,617
26,773
The accompanying notes are an integral part of these consolidated financial statements.
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1. The company
Twist Bioscience Corporation
Notes to Consolidated Financial Statements
Twist Bioscience Corporation (the Company) was incorporated in the state of Delaware on February 4, 2013. The Company is a synthetic biology company
that has developed a disruptive DNA synthesis platform. DNA is used in many applications across different industries: industrial chemicals/materials,
academic, healthcare and food/agriculture.
The core of the Company’s platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a
silicon chip. The Company has combined this technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to
create an integrated technology platform that enables the Company to achieve high levels of quality, precision, automation, and manufacturing throughput
at a significantly lower cost than its competitors. The Company is leveraging its 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.
The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this
industry. These risks include, but are not limited to, the uncertainty of availability of additional financing, market acceptance of its products, the ability to
retain and attract new customers, and the uncertainty of achieving future profitability.
The Company has generated net losses in all periods since inception. As of September 30, 2022, the Company had an accumulated deficit of $828.4 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.
Since its inception, the Company has received an aggregate of $1,333.7 million in net proceeds from the issuance of equity securities and an aggregate of
$13.8 million from debt. 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, if the Company needs to obtain additional financing to fund
operations beyond this period, there can be no assurance that it will be successful in raising additional financing on terms which are acceptable to the
Company.
2. Summary of significant accounting policies
Basis of presentation and use of estimates
The presentation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates
include the valuation of deferred tax assets, stock-based compensation expense, transaction price and progress toward completion of performance
obligation under the contracts with customers, determination of the net realizable value of inventory, valuation of developed technology, and customer
relationships and the fair value of the Company’s common stock. Actual results could differ from those estimates. The Company’s consolidated financial
statements include its wholly-owned subsidiaries. All intercompany balances and accounts are eliminated in consolidation.
Risks and uncertainties
The Company relies on third parties for the supply and manufacture of its products, including a single-source supplier for a critical component, as well as
third-party logistics providers. In instances where these parties fail to perform their obligations, the Company may be unable to find alternative suppliers to
satisfactorily deliver its products to its customers on time, if at all.
The Company operates in a dynamic and highly competitive industry and believes that changes in any of the following areas could have a material adverse
effect on the Company’s future financial position, results of operations, or cash flows: ability to obtain future financing; advances and trends in new
technologies and industry standards; market acceptance of the Company’s products; development of sales channels; certain strategic relationships; litigation
or claims against the Company regarding intellectual property, patent, product, regulatory, or other factors; and the ability to attract and retain employees
necessary to support its growth.
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The Company has expended and expects to continue to expend substantial funds to complete the research and development of its production process. The
Company may require additional funds to commercialize its products and may be unable to entirely fund these efforts with its current financial resources.
Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable on a timely basis from operations or additional
sources of financing, the Company may have to delay the sale of the Company’s products and services which would materially and adversely affect its
business, financial condition and operations.
During the year ended September 30, 2022, financial results of the Company were not significantly affected by the COVID 19 pandemic, which continues
to have global impact. 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.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments
and accounts receivable. Substantially all of the Company’s cash is held with two financial institutions that management believe are of high credit quality.
Such deposits may, at times, exceed federally insured limits. The Company’s investment policy addresses the level of credit exposure by establishing a
minimum allowable credit rating and by limiting the concentration in any one investment.
The Company’s accounts receivable is derived from customers located principally in the United States and Europe. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit losses on customers’ accounts when deemed necessary. The Company does not
typically require collateral from its customers. Credit losses historically have not been material. The Company continuously monitors customer payments
and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances,
and other current economic conditions or other factors that may affect customers’ ability to pay.
Customer concentration
There are no major customers who accounted for 10% or more of the Company’s revenue for the fiscal year ended September 30, 2022 and September 30,
2021. There were two major customers who accounted for 12% and 10% of the Company’s revenue for the fiscal year ended September 30, 2020.
There are no major customers who accounted for 10% or more of the net accounts receivable as of September 30, 2022 and September 30, 2021.
Cash and cash equivalents
Cash equivalents that are readily convertible to cash are stated at cost, which approximates fair value. The Company considers all highly liquid investments
with an original or remaining maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of investments in
money market funds as of September 30, 2022 and 2021.
Restricted cash represents cash held at financial institutions that are pledged as collateral for stand-by letters of credit for lease commitments. The lease
related letters of credit will lapse at the end of the respective lease terms through 2044. At September 30, 2022 and 2021, the Company had restricted cash
in the amount of $1.6 million and $1.5 million, respectively.
Short-term investments
The Company invests in various types of securities, including United States government, commercial paper, and corporate debt securities. It classifies its
investments as available-for-sale and records them at fair value based upon market prices at period end. Unrealized gains and losses that are deemed
temporary in nature are recorded in accumulated other comprehensive income as a separate component of stockholders’ equity. Dividend and interest
income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for
determining the cost of investments sold. The Company may sell these securities at any time for use in current operations.
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Accounts receivable
Trade receivables include amounts billed and currently due from customers, recorded at the net invoice value and are not interest bearing. The amounts due
are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amounts of
receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of
outstanding receivables and collateral to the extent applicable.
The Company re-evaluates such allowance on a regular basis and adjusts its allowance as needed. Once a receivable is deemed to be uncollectible, such
balance is charged against the allowance.
The Company has a short order-to-invoice lifecycle, as most products can be manufactured within one month. Upon delivery of the products to the
customer, the Company invoices the customer. The typical timing of payment is net 30 days.
Fair value of financial instruments
The carrying amounts of the Company’s financial instruments including cash equivalents, short term investments, and accounts receivable approximate fair
value due to their relatively short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying
value of the Company’s long-term debt approximated its fair value (level 2 within the fair value hierarchy).
Inventories
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Determining net realizable value of
inventory involves judgments and assumptions, including projecting selling prices and costs to sell. Provisions are made to reduce excess and obsolete
inventories to their estimated net realizable value based on forecasted demand, past experience, the age and nature of inventories.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets or the lesser of the useful life and the remaining lease term of the respective leasehold
improvements assets, if any. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations in
the period recognized. Repairs and maintenance costs are expensed as incurred.
The Company recorded depreciation and amortization expense of $16.5 million, $9.8 million, and $6.7 million for the years ended September 30, 2022,
2021 and 2020, respectively. Estimated lives of property and equipment are as follows:
Laboratory equipment
Furniture, fixtures and other equipment
Computer equipment
Computer software
Leasehold improvements
Capitalized software development costs
5 Years
5 Years
3 Years
3 Years
Lesser of useful life or facilities’ lease term
Costs associated with internal-use software systems, including those to improve e-commerce capabilities, during the application development stage are
capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is
probable that the project will be completed and the software will be used to perform the function intended. Costs include external direct costs of services
and applicable personnel costs of employees devoted to specific software application development. Personnel costs consist of salaries, employee benefit
costs, bonuses and stock-based compensation expenses. The capitalized amounts are included in property and equipment, net on the consolidated balance
sheets.
Capitalization ceases at the point when the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in
property and equipment, net on the consolidated balance sheets.
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Capitalized software development costs were $5.3 million and $3.0 million as of September 30, 2022 and 2021, respectively. Capitalized costs are
amortized from the project completion date, using the straight-line method over an estimated useful life of the assets.
Long-lived assets
The Company reviews property and equipment, right of use assets and intangibles subject to amortization for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to
the future undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds their fair value. There have been no such impairments of long-lived assets
during the years ended September 30, 2022, 2021 and 2020.
Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method. The Company reviews intangible assets for
impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable.
Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those
assumptions. No impairment charges were recorded during the years ended September 30, 2022, 2021 and 2020.
Leases
On October 1, 2019, the Company adopted Topic 842 using the modified retrospective approach. The adoption had a material effect on the consolidated
balance sheets but did not have a material effect on the 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.
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, net of any tenant improvement allowance. Operating lease
right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In
determining the present value of committed 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 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 7.
Goodwill and indefinite intangible assets
Goodwill is evaluated for impairment annually at the reporting unit level during the fourth quarter of the fiscal year or more frequently if events or changes
in circumstances indicate that the carrying value of the asset may not be recoverable. If, based on a qualitative assessment, the Company determines it is
more likely than not that goodwill is impaired, a quantitative assessment is performed to determine if the fair value of the Company’s one reporting unit is
less than its carrying value. During its goodwill impairment review, the Company assessed qualitative factors to determine whether it is more likely than
not that the fair value of its reporting unit is less than its carrying value, including goodwill. The qualitative factors include, but are not limited to, industry
and market considerations and the Company’s overall financial performance. The Company performed its annual assessment for goodwill impairment in
the fourth quarter of the fiscal year noting no indication of impairment. There were no triggering events indicating potential for impairment through
September 30, 2022.
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Segment information
The Company is a synthetic biology and genomics company that has developed a disruptive DNA synthesis platform to industrialize the engineering of
biology and manufactures synthetic genes, tools for next-generation sequencing preparation, and antibody libraries for drug discovery and development and
operates as one reportable and operating segment. The Company’s chief operating decision-maker, its Chief Executive Officer (CEO), reviews the
Company’s operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Revenue recognition
The Company’s revenue is generated through the sale of synthetic biology tools, such as synthetic genes, oligo pools, next generation sequencing tools, and
DNA and biopharma libraries. The Company recognizes revenue when control of the products is transferred to the customer and at a transaction price that
is determined based on the agreed upon rates in the applicable order or master supply agreement applied to the quantity of synthetic DNA that was
manufactured and shipped to the customer.
Contracts with customers are 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. The Company assesses collectability based on a number of factors, including past transaction history and creditworthiness of the customer.
For Company contracts to date other than antibody discovery services and DNA libraries ("Biopharma") contracts, the customer orders a specified quantity
of synthetic DNA sequence; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation.
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. The Company’s contracts include only one performance obligation – the shipment of the product
to the customer. Accordingly, all of the transaction price, net of any discounts, is allocated to the one performance obligation. The Company’s sales are
subject to Ex Works (as defined in Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up by the
customer’s freight forwarder, as the Company has determined that this is the point in time that control transfers to the customer. Therefore, upon shipment
of the product, there are no remaining performance obligations. The Company’s shipping and handling activities are performed before the customer obtains
control of the goods and therefore are considered a fulfillment cost. Shipping and handling fees charged to our customers are recognized as product revenue
in the period shipped and the related costs for providing these services are recorded as a cost of revenue. The Company has elected to exclude all sales and
value added taxes from the measurement of the transaction price. The Company has not adjusted the transaction price for significant financing since the
time period between the transfer of goods and payment is less than one year. The Company has elected the practical expedient to not disclose 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 the contracts is less than one year.
The Company’s Biopharma revenue currently primarily consists of research and development agreements with third parties that provide for up-front and
milestone-based payments. The Company also enters into research and development agreements that do not include up-front or milestone-based payments
and recognizes revenue on these types of agreements based on the timing of development activities. The Company’s research and development agreements
may include more than one performance obligation. At the inception of the agreement, the Company assesses whether each obligation represents a separate
performance obligation or whether such obligations should be combined as a single performance obligation. The transaction price for each agreement is
determined based on the amount of consideration the Company expects to be entitled to for satisfying all performance obligations within the agreement.
The Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time
or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. In agreements where the
Company satisfies performance obligation(s) over time, the Company recognizes development revenue typically using an input method based on costs
incurred relative to the total expected cost which determines the extent of progress toward completion. As part of the accounting for these arrangements,
the Company must develop estimates and assumptions that require judgment to determine the transaction price and progress towards completion. The
Company reviews its estimate of the transaction price and progress toward completion based on the best information available to recognize the cumulative
progress toward completion as of the end of each reporting period and makes revisions to such estimates as necessary. Also, these research and
development agreements may include license payments. The Company recognizes revenue from functional license agreements when the license is
transferred to the customer and the customer is able to use and benefit from the license. Functional license has significant standalone functionality because
it can be used as is for performing a specific task.
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The Company had contract assets of $3.4 million and contract liabilities of $3.5 million as of September 30, 2022. The Company had contract assets of
$2.0 million and contract liabilities of $1.1 million as of September 30, 2021. For the year ended September 30, 2022, the Company recognized revenue of
$1.1 million from the amount that was included in the contract liability balance at the beginning of the year. For September 30, 2021 and 2020, the
Company 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. The aggregate amount
of the transaction price allocated to the performance obligations that are unsatisfied as of September 30, 2022 was $4.5 million.
Based on the nature of the Company’s contracts with customers which are recognized over a term of less than 12 months, the Company has elected to use
the practical expedient whereby costs to obtain a contract are expensed as they are incurred.
The Company states its 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.”
Refer to Note 13 for the disaggregation of revenues by geography, by product and by industry.
Research and development
Research and development expenses consist of compensation costs, employee benefits, subcontractors, research supplies, allocated facility related expenses
and allocated depreciation and amortization. All research and development costs are expensed as incurred.
Advertising costs
Costs related to advertising and promotions are expensed to sales and marketing as incurred. Advertising and promotion expenses for the years ended
September 30, 2022, 2021 and 2020, were $2.4 million, $2.5 million and $1.2 million, respectively.
Government contract payments
The Company has a subcontract with the Georgia Institute of Technology funded by the United States Director of Central Intelligence (IARPA). This
subcontract is for the period from September 2019 to February 2023. The Company recognizes payments received from these arrangements when
milestones are achieved and records them as a reduction of research and development expenses. The total expected cost for the IARPA development project
is $7.2 million with IARPA funding $5.2 million and the Company is responsible for providing a minimum contribution of $2.0 million, which remains
outstanding as of September 30, 2022. In fiscal year 2022, 2021, and 2020, the Company received IARPA payments of $0.9 million, $1.1 million, and $2.5
million, respectively.
Stock-based compensation
The Company maintains performance incentive plans under which incentive and nonqualified stock options and restricted stock units are granted primarily
to employees and may be granted to members of the board of directors and certain non-employee consultants, and employees may participate in an
employee stock purchase plan.
The Company recognizes stock compensation in accordance with ASC 718, Compensation—Stock Compensation. ASC 718 requires the recognition of
compensation expense, using a fair value-based method, for costs related to all stock-based payments including stock options, restricted stock units and
employee stock purchase plan.
The Company recognizes fair value of stock options granted to non-employees as a stock-based compensation expense over the period in which the related
services are received. The Company recognizes forfeitures as they occur. The Company believes that the estimated fair value of stock options is more
readily measurable than the fair value of the services rendered.
For performance-based stock options, expense is recognized over the period from the grant date to the estimated attainment date, which is the derived
service period of the award.
Net loss per share attributable to common stockholders
The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for
companies with participating securities. In computing diluted net loss attributable to
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common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. For purposes of the calculation of diluted
net loss per share attributable to common stockholders, unvested shares of common stock issued upon the early exercise of stock options, shares issuable
for employee stock purchase plan contributions received, warrants to purchase common stock, unvested restricted common stock, unvested restricted stock
units and stock options to purchase common stock are considered potentially dilutive securities but have been excluded from the calculation of diluted net
loss per share attributable to common stockholders as their effect is antidilutive.
Basic and diluted net loss per share of common stock attributable to common stockholders is calculated by dividing the net loss attributable to common
stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and excludes any
dilutive effects of employee stock-based awards and warrants. Because the Company has reported a net loss for the years ended September 30, 2022, 2021
and 2020, diluted net loss per common share is the same as the basic net loss per share for those years.
Income taxes
The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability accounts are determined based on
differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in
effect. Valuation allowances are established where necessary to reduce deferred tax assets to the amounts expected to be realized.
In fiscal 2022, the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income
(“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2022. The Company elected to account for GILTI as a period cost,
and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the
years ended September 30, 2022, 2021 and 2020.
Variable interest entities
The Company consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the
following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the
equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their
obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or
are conducted on behalf of the investor with disproportionately few voting rights. The Company periodically makes judgments in determining whether its
investees are VIEs and, for each reporting period, the Company assesses whether it is the primary beneficiary of its VIE. See Note 15 “Investment in
variable interest entity.”
Business combinations
The Company accounts for business combinations using the acquisition method.
Under the acquisition method, the purchase price of the acquisition is allocated to the acquired tangible and identifiable intangible assets and assumed
liabilities based on their estimated fair values at the time of the acquisition. This allocation involves a number of assumptions, estimates, and judgments
that could materially affect the timing or amounts recognized in the Company’s financial statements. As a result, the Company may record adjustments to
the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding
offset to goodwill. The most subjective areas of the acquisition accounting method include determining the fair value of the following:
•
•
•
identifiable intangible assets, including the valuation methodology, estimates of projected revenues, technology obsolescence, and discount rates,
as well as the estimated useful life of the intangible assets;
contingent consideration; and
goodwill, as measured as the excess of consideration transferred over the acquisition date fair value of the assets acquired, including the amount
assigned to identifiable intangible assets, and the liabilities assumed.
The assumptions and estimates are based upon comparable market data and information obtained from the management of the acquired business.
Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date.
Identifiable intangible assets with finite lives are amortized over their estimated useful lives in a pattern in which the asset is consumed. Acquisition-related
costs, including advisory, legal, accounting, valuation, and other similar costs, are
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expensed in the periods in which those costs are incurred. The results of operations of acquired businesses are included in the Company’s consolidated
financial statements from the acquisition date.
Recent accounting pronouncements
New accounting guidance adopted
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU simplifies the accounting for income taxes by
eliminating certain exceptions to the guidance in ASC 740, Income Taxes, 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. The Company
adopted this standard effective October 1, 2021. The adoption of ASU-2019 12 did not have an impact on the Company’s consolidated financial statements
as of and for the year ended September 30, 2022.
New accounting guidance issued but not yet effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
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 the Company for the fiscal year ending September 30, 2024, including interim periods within that fiscal year. Early application is permitted.
Entity should apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective (that is, modified-retrospective approach). A prospective transition approach is required for debt securities for
which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact that the
adoption of this standard will have on its consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.
The amendments in this update require the following annual disclosures about transactions with a government that are accounted for by applying a grant or
contribution accounting model. The amendments in this update are effective for all entities within their scope for financial statements issued for annual
periods beginning after December 15, 2021. Early application is permitted. Entity should apply the amendments in this update either (1) prospectively to all
transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are
entered into after the date of initial application or (2) retrospectively to those transactions. The Company is currently evaluating the impact that the
adoption of this standard will have on its consolidated financial statements.
3. Fair value measurement
The Company assesses the fair value of financial instruments based on the provisions of ASC 820, Fair Value Measurements. 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:
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.
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 considering counterparty credit risk in its assessment of fair value.
The following table sets forth the cash and cash equivalents, and short-term investments as of September 30, 2022:
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(in thousands)
Cash and cash equivalents
Short-term investments:
Commercial paper
U.S. government treasury bills
Total
Amortized cost
Gross unrealized gains Gross unrealized losses
Fair value
$
$
378,687 $
14,997
112,878
506,562 $
— $
—
—
— $
— $
378,687
—
(1,594)
(1,594) $
14,997
111,284
504,968
The following table sets forth the cash and cash equivalents, and short-term investments as of September 30, 2021:
(in thousands)
Cash and cash equivalents
Short-term investments:
U.S. government treasury bills
Total
Amortized cost
Gross unrealized gains Gross unrealized losses
Fair value
$
$
465,829 $
12,033
477,862 $
— $
1
1 $
— $
465,829
—
— $
12,034
477,863
As of September 30, 2022, financial assets and liabilities measured and recognized at fair value are as follows:
(in thousands)
Assets
Money market funds
Commercial paper
U.S. government treasury bills
Total financial assets
Liabilities
Contingent consideration and indemnity holdback
Total financial liabilities
$
$
$
$
Level 1
Level 2
Level 3
Fair value
316,805 $
—
111,284
428,089 $
— $
14,997
—
14,997 $
— $
—
—
— $
316,805
14,997
111,284
443,086
— $
— $
9,592 $
9,592 $
2,100 $
2,100 $
11,692
11,692
As of September 30, 2021, financial assets and liabilities measured and recognized at fair value are as follows:
(in thousands)
Assets
Money market funds
U.S. government treasury bills
Total financial assets
Liabilities
Contingent consideration and indemnity holdback
Total financial liabilities
Level 1
Level 2
Level 3
Fair value
$
$
$
$
430,438 $
12,034
442,472 $
— $
—
— $
— $
— $
9,856 $
9,856 $
— $
—
— $
— $
— $
430,438
12,034
442,472
9,856
9,856
Contractual maturities of short-term investments, as of September 30, 2022, were less than 12 months. The Company does not intend to sell the money
market funds and short term investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their
amortized cost basis. The unrealized loss on short-term investments have been in a continuous unrealized loss position for less than 12 months.
As of September 30, 2022, the Company’s contingent consideration related to its Abveris acquisition is categorized as Level 3 within the fair value
hierarchy. Contingent consideration is classified as a liability and is remeasured to an estimated fair value at each reporting date until the contingency is
resolved. Contingent consideration has been recorded at
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its fair values using unobservable inputs and have included using the Monte Carlo simulation option pricing framework, incorporating contractual terms
and assumptions regarding financial forecasts, discount rates, and volatility of forecasted revenue. The key assumptions are forecasted calendar year 2022
revenue and the Company's share price. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value
calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist.
The key inputs into the Monte Carlo simulation as of December 1, 2021, the acquisition date and as of September 30, 2022 were as follows:
Contingent consideration
Stock price
Equity volatility
Risk-free interest rate
Revenue volatility
September 30,
2022
December 1,
2021
$
$
35.24
93.7 %
3.9 %
30.2 %
87.06
81.3 %
0.4 %
21.9 %
The following table provides a reconciliation of beginning and ending balances of the Level 3 financial liabilities during the year ended September 30,
2022:
(in thousands)
Balance as of September 30, 2021
Contingent consideration – additions
Change in fair value
Balance as of September 30, 2022
4. Balance sheet components
The Company’s accounts receivable, net balance consists of the following:
(in thousands)
Trade Receivables
Other Receivables
Allowance for doubtful accounts
Accounts Receivable, net
Inventories consist of the following:
(in thousands)
Raw Materials
Work-in-process
Finished Goods
Total
—
8,500
(6,400)
2,100
$
$
September 30,
2022
2021
35,706 $
4,822
(234)
40,294 $
September 30,
2022
2021
28,787 $
2,866
7,654
39,307 $
26,549
2,337
(337)
28,549
18,778
4,837
8,185
31,800
$
$
$
$
The work-in-process inventory included consigned inventory of $0.1 million and $1.9 million as of September 30, 2022 and 2021 respectively.
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Property and Equipment, net consists of the following:
(in thousands)
Laboratory equipment
Furniture, fixtures and other equipment
Computer equipment
Computer software
Leasehold improvements
Construction in progress
Less: Accumulated depreciation and amortization
September 30,
2022
2021
$
62,285 $
2,332
2,815
1,693
14,371
87,723
171,218
(31,777)
$
139,441 $
48,439
2,195
2,977
3,899
5,066
16,968
79,544
(35,422)
44,122
Construction in progress mainly represents equipment and leasehold improvements relating to the Wilsonville facility.
Other non-current assets
Other non-current assets consist of the following:
(in thousands)
Convertible note receivable
Other non-current assets
September 30,
2022
2021
$
$
— $
3,385
3,385 $
3,021
4,653
7,674
During 2021 and as amended in 2022, the Company entered into convertible promissory note agreements with a privately held company (“Borrower”)
pursuant to which the Company agreed to loan to the Borrower $3.5 million in a series of loan installments, evidenced by a convertible promissory note
having a maturity date of May 1, 2023 (“Convertible Note”). The Convertible Note accrues interest at a rate of 4% per annum. Outstanding principal and
any unpaid accrued interest will be converted into preferred shares of the Borrower if before the repayment of the Note, the Borrower has an equity
financing round. The convertible note receivable balance at September 30, 2022 is recognized in the prepaid expenses and other current assets on the
balance sheet.
Other current liabilities
Other current liabilities consist of the following:
(in thousands)
Contingent consideration
Indemnity holdbacks
Income and sales taxes payable
Deferred revenue
Other current liabilities
September 30,
2022
2021
$
$
2,100 $
9,592
3,661
3,476
908
19,737 $
5,186
—
2,440
1,088
909
9,623
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Other non-current liabilities
The other non-current liabilities consist of the following:
(in thousands)
Holdback
Other non current liabilities
5. Goodwill and intangible assets
September 30,
2022
2021
$
$
— $
60
60 $
4,671
397
5,068
For the year ended September 30, 2022, goodwill and intangible assets increased from prior year by $63.4 million and $46.5 million, respectively, as a
result of a business acquisition. For the year ended September 30, 2021, goodwill and intangible assets increased from the prior year by $21.3 million and
$18.4 million, respectively, as a result of a business acquisition. See Note 14, “Business acquisition”. Total amortization expense related to intangible assets
was $4.9 million, $0.5 million, and $0.2 million for the years ended September 30, 2022, 2021 and 2020, respectively.
The goodwill balance is presented below:
(in thousands)
Balance at beginning of year
Business acquisition – additions (see Note 14)
Remeasurement adjustments to the deferred tax assets
Balance at end of year
The finite-lived intangible assets balances are presented below:
(in thousands, except for years)
Developed Technology
Customer Relationships
Tradenames & Trademarks
Total finite-lived intangible assets
(in thousands, except for years)
Developed Technology
Tradenames & Trademarks
Customer Relationships
Total finite-lived intangible assets
September 30,
2022
2021
22,434
61,768
1,609
$
85,811 $
1,138
21,538
(242)
22,434
Weighted average
Amortization period
in years
Gross
carrying
amount
Accumulated
amortization
Net book
value
September 30, 2022
$
$
$
$
50,020 $
15,210
900
66,130 $
(4,375) $
(1,767)
(250)
(6,392) $
45,645
13,443
650
59,738
September 30, 2021
Gross
carrying
amount
19,120 $
20
510
19,650 $
Accumulated
amortization
Net book
value
(1,361) $
(20)
(7)
(1,388) $
17,759
—
503
18,262
11
11
3
Weighted average
Amortization period
in years
16
2
1.5
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Future annual amortization expense is as follows (in thousands):
Years ending September 30,
2023
2024
2025
2026
2027
Thereafter
6. Long-term debt
$
$
5,255
5,170
4,920
4,870
4,320
35,203
59,738
In September 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the Fourth Loan) with SVB for loan
amounts aggregating up to $20.0 million in a series of three advances. The first advance provided a principal amount of $10.0 million, the second advance
provided a principal amount of $5.0 million and the third advance provided a principal amount of $5.0 million during their respective draw down periods.
The draw down periods for the second and third advances under this agreement have expired as of January 31, 2018 and June 30, 2018, respectively and
were not utilized. The Company obtained a term loan under the only the first tranche in a principal amount of $10.0 million, which matured and was paid in
full in December 2021.
In connection with the first advance the Company issued a warrant to purchase 64,127 shares of common stock at an exercise price of $6.24 per share. The
Fourth Loan contained 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 the Company’s business. The term of the loan was 51 months with an interest rate of prime plus 3.0% and a final payment fee of $0.7
million.
The first advance, totaling $10.0 million, was drawn in September 2017 and comprised $7.8 million to refinance a prior loan and a new advance of $2.2
million. The debt provided for interest only payments through December 31, 2018 at which time monthly principal payments became due.
In addition, the Company obtained a revolving loan facility for a principal amount of up to $10.0 million for which the principal amount outstanding under
the revolving line would accrue interest at a floating per annum rate equal to one percentage point (1.0%) above the prime rate, which interest shall be
payable monthly. The Company did not make any borrowings under the revolving loan facility which expired on December 31, 2021.
The Company had no amounts outstanding under the loan facility at September 30, 2022.
7. Commitments and contingencies
The Company may be subject to litigation, claims and disputes in the ordinary course of business. There is an inherent risk in any litigation or dispute and
no assurance can be given as to the outcome of any claims.
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. From time to time, the Company has entered
into indemnification agreements with its directors and officers that requires 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 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 2044. The Company is also
responsible for utilities, maintenance, insurance, and property taxes under these leases. Our lease payments consist primarily of fixed rental payments for
the right to use the underlying leased assets over the lease terms, as
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well as payments for common-area-maintenance and administrative services. We often receive customary incentives from our landlords, such as
reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases. Leases are
classified as operating or financing at commencement. We do not have any material financing 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 leases as of September 30, 2022 is as follows:
(in thousands)
Assets:
Operating lease right-of-use-assets
Current liabilities:
Current portion of operating lease liabilities
Noncurrent liabilities:
Operating lease liabilities, net of current portion
Future minimum lease payments under all non-cancelable operating leases as of September 30, 2022 are as follows:
(in thousands)
Years ending September 30 :
2023
2024
2025
2026
2027
Thereafter
Total minimum lease payments
Less: imputed interest
Total operating lease liabilities
Less: current portion
Operating lease liabilities, net of current portion
September 30, 2022
74,948
13,642
81,270
Operating
leases
14,734
14,153
14,005
12,550
7,205
90,072
152,719
(57,807)
94,912
(13,642)
81,270
$
$
$
$
$
$
$
The statement of cash flows for the year ended September 30, 2022, include changes in right-of-use assets and operating lease liabilities of $13.4 million
and $33.5 million, respectively. For the year ended September 30, 2021, changes in right-of-use assets and operating lease liabilities were $27.9 million and
$30.1 million, respectively.
Operating lease expense was $15.6 million and $9.5 million for the years ended September 30, 2022 and 2021 respectively. Cash payments for amounts
included in the measurement of operating lease liabilities for the year ended September 30, 2022 were $13.0 million. During the year end September 30,
2022 the Company received $17.6 million of lease incentive payments, which is an allowance for improvements made by the Company to the Wilsonville
facility. As of September 30, 2022, the weighted-average remaining lease term was 15.98 years and the weighted-average incremental borrowing rate was
6.39%.
On July 28, 2021, the Company entered into a 7-year operating lease for approximately 21,000 square-feet of office space located in South San Francisco,
California, to further expand the Company operations. Upon execution of the lease agreement, the Company provided the landlord an approximately $0.2
million security deposit. The Company will pay an initial annual base rent of approximately $1.7 million, which is subject to scheduled 3% annual
increases, plus certain operating expenses. The Company has the right to sublease the facility, subject to landlord consent. The lease commenced on
October 1, 2022. As of lease commencement, the total future minimum lease payments under the agreement are $13.1 million.
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On August 6, 2021, Abveris, which was subsequently acquired by the Company, entered into a 10-year, 5-month operating
lease for approximately 22,000 square-feet of office space located in Quincy, Massachusetts, to further expand operations.
The Company has two options to extend the term for five years. The Company does not have reasonable certainty that these options will be exercised.
Upon execution of the lease agreement, an approximate $0.6 million irrevocable letter of credit was provided as a security deposit. The Company will pay
an initial annual base rent of approximately $1.2 million, which is subject to scheduled 2% annual increases, plus certain operating expenses. The Company
has the right to sublease the facility, subject to landlord consent. The lease commenced on March 3, 2022. As of lease commencement date, the total future
minimum lease payments under the agreement were $13.2 million.
Other than the above leases, during 2022, the Company entered into immaterial operating lease agreements with total minimum lease payments under these
agreements of less than $2.0 million and with lease terms ranging from 2.0 to 4.0 years.
8. Related party transactions
During the years ended September 30, 2022, 2021 and 2020, the Company purchased raw materials from related party in the amount of $8.0 million, $5.0
million and $3.4 million, respectively. During the year ended September 30, 2022, the Company had revenues from related party in the amount of $3.5
million. The revenues from related party were immaterial for the years ending September 30, 2021 and 2020. Payable balances and receivable balances
with the related party were immaterial as of September 30, 2022, 2021 and 2020. During the year ended September 30, 2022, the Company entered into a
service agreement with a related party for the total consideration of $0.1 million.
9.
Income taxes
The Company recorded an income tax benefit of $10.4 million and $1.9 million for the years ended September 30, 2022 and 2021, respectively. The
Company recorded provisions for income taxes of $0.4 million for the year ended September 30, 2020.
The domestic and foreign components of pre-tax loss for the years ended September 30, 2022, 2021, and 2020 are as follows:
(in thousands)
US
Foreign
Total
Year ended September 30,
2022
2021
2020
(231,659)
3,385
(228,274)
(149,533)
(4,495)
(154,028)
(138,016)
(1,533)
(139,549)
The components of the provision for income taxes for the years ended September 30, 2022, 2021, and 2020 are as follows:
(in thousands)
Current
Federal
State
Foreign
Total current
Deferred
Federal
State
Foreign
Total deferred
Total (benefit)/provision
Year ended September 30,
2022
2021
2020
—
(1)
767
766
(9,765)
(1,412)
—
(11,177)
(10,411)
—
(29)
108
79
(2,268)
259
—
(2,009)
(1,930)
—
0
382
382
—
—
—
—
382
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The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended September 30, 2022, 2021,
and 2020:
Tax expense computed at the federal statutory rate
Change in valuation allowance
Research and development credit benefit
Business combination
Stock-based compensation
Change in fair value of contingent consideration and holdbacks
Gain on deconsolidation of variable interest entity
Total income tax expense
2022
Year ended
September 30,
2021
2020
21 %
(13)%
4 %
(4)%
(1)%
(1)%
(1)%
5 %
21 %
(33)%
3 %
(2)%
12 %
— %
— %
1 %
21 %
(25)%
1 %
—
3 %
— %
— %
— %
The significant components of the Company’s deferred tax assets and liabilities are as follows for the years ended September 30, 2022, and 2021:
(in thousands)
Net operating loss carryforwards
Research and development credit carryforwards
Operating lease liability
Stock-based compensation
Other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Fixed assets
Operating lease right-of-use asset
Intangible assets
Gross deferred tax liabilities
Total net deferred tax asset
September 30,
2022
2021
$
191,337 $
35,109
23,118
13,138
11,541
274,243
(240,660)
33,583
(1,169)
(17,986)
(14,428)
(33,583)
$
— $
163,782
20,163
14,890
6,737
4,894
210,466
(190,428)
20,038
(785)
(14,893)
(4,360)
(20,038)
—
Based on the available objective evidence, management believes it is more likely than not that the deferred tax assets will not be fully realizable.
Accordingly, the Company has provided a full valuation allowance against its deferred tax assets at September 30, 2022 and 2021. The valuation allowance
was $240.7 million and $190.4 million as of September 30, 2022 and 2021, respectively. The change in the valuation allowance was mainly due to an
increase in the net operating loss and research and development credits during the fiscal year 2022.
The Company intends to continue maintaining a full valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support
the reversal of all or some portion of the allowance. The release of all, or a portion, of the valuation allowance would result in the recognition of certain
deferred tax assets and a decrease to income tax expense for the period the release is recorded.
As of September 30, 2022, the Company had net operating loss carryforwards of approximately $777.2 million and $452.2 million available to reduce
future taxable income, if any, for federal and state income tax purposes, respectively. The net operating losses will begin to expire in fiscal year 2024.
The Company also had federal and state research and development credit carryforwards of approximately $29.9 million and $20.8 million, respectively, at
September 30, 2022. The federal credits will expire starting in 2033 if not utilized. The California research and development credits have no expiration
date. Utilization of the net operating losses and tax credits is subject to annual limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such annual limitations may result in the expiration of the net operating losses and tax credits before utilization.
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The provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, prescribe a comprehensive model for the recognition, measurement, and
presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The Company
has identified uncertain tax positions related to federal and state research and development credits and foreign jurisdictions.
The aggregate changes in the balance of gross unrecognized tax benefits are as follows:
(in thousands)
Balance as of September 30, 2019
Increases related to tax positions taken during 2020
Balance as of September 30, 2020
Increases related to tax positions taken during 2021
Balance as of September 30, 2021
Increases related to tax positions taken during 2022
Increases related to tax positions taken in the prior year
Balance as of September 30, 2022
Federal
and state
3,291
1,409
4,700
2,737
7,437
5,082
864
13,383
$
$
$
$
$
The Company does not expect a material change in unrecognized tax benefits in the next twelve months. As of September 30, 2022 and 2021,
approximately $0.1 million and $0.1 million of unrecognized tax benefit would, if recognized, impact the Company’s effective income tax rate,
respectively.
It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense,
respectively, as necessary. The Company’s management determined that no accrual for interest and penalties was required as of September 30, 2022 and
2021.
The Company’s files federal and state income tax returns with varying statutes of limitations. All tax years remain open to examination due to the carryover
of net operating losses or tax credits. The Company currently has no federal or state tax examinations in progress.
On August 16, 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law, with tax provisions primarily focused on implementing a 15%
minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. In general, the provisions of the IRA will become
effective beginning in 2023, with certain exceptions. The Company currently does not expect the IRA to have a material impact on its consolidated
financial statements. Management will continue to evaluate the potential impact of the IRA on the Company's financial statements.
10. Common stock
As of September 30, 2022, the Company had reserved sufficient shares of common stock with a par value of $0.00001 per share for issuance upon exercise
of outstanding stock options. Each share of common stock is entitled to one vote. The holders of shares of common stock are also entitled to receive
dividends whenever funds are legally available and when declared by the board of directors.
In February 2022, the Company completed an underwritten public offering of 5,227,272 shares of its common stock at a price to the public of $55.00 per
share, including the full exercise of underwriters’ option to purchase an additional 681,818 shares of common stock. The Company received total net
proceeds from the offering of $269.8 million, net of underwriting discounts and commissions and offering expenses.
11. Stock-based compensation expense
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 maximum aggregate number of shares that may be issued under the 2018 Plan is 6,856,405 of the Company’s common stock. The number of
shares reserved for issuance under the 2018 Plan will be increased 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, 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 are
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registered pursuant to a registration statement on Form S-8 on November 1, 2018. As of September 30, 2022, a total of 1,142,937 shares of the Company’s
common stock have been reserved for issuance under the 2018 Plan.
Any shares subject to outstanding awards under the 2013 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 non-statutory stock options, stock appreciation
rights, restricted stock, restricted stock units, performance shares, and performance units.
Restricted Stock Units
Restricted stock consists of restricted stock unit awards (RSUs) which have been granted to employees and non-employee directors. The value of an RSU
award is based on the Company’s stock price on the date of grant. Employee grants generally vest over four years and non-employee director grants
generally vest over one year. Forfeitures of RSUs are recognized as they occur. 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 restricted stock units during the year ended September 30, 2022 is as follows:
(In thousands, except per share data)
Nonvested shares at October 1, 2021
Granted
Vested/Issued
Forfeited
Nonvested shares at September 30, 2022
Shares
Weighted average grant date
fair value per share
697 $
1,430 $
(377)
(184)
1,566 $
73.27
67.30
72.00
77.23
67.66
As of September 30, 2022, there was $92.2 million of total unrecognized compensation cost related to these issuances that is expected to be recognized
over a weighted average period of 2.7 years. The total grant date fair value of RSUs awarded during the year ended September 30, 2022 was $96.2 million.
The weighted average grant date fair value for RSUs and performance stock units was $113.06 for the year ended September 30, 2021. The weighted
average grant date fair value for RSUs was $38.66 for the year ended September 30, 2020.
Performance Stock Units
Performance stock unit awards (“PSUs”) granted to certain employees will vest upon achievement of operational milestones related to the Wilsonville
facility, and to Company executives will vest upon achievement of revenue and gross profit metrics as determined by the board, and to certain non-
employee consultants will vest upon achievement of operational milestones. Stock compensation expense for PSUs is recorded over the vesting period
based on the grant date fair value of the awards and probability of the achievement of specified performance targets. The grant date fair value is equal to the
closing share price of the Company’s common stock on the date of grant. For employees, PSUs generally vest over a one to three-year service period
following the grant date, provided that the recipient is a Company employee at the time of vesting and the performance targets applicable to each award are
achieved. For non-employees, PSUs generally vest over a one to three-year service period following the grant date, provided that the performance targets
applicable to each award are achieved. The percentage of PSUs that vest will depend on the achievement of specified performance targets at the end of the
performance period and can range from 0% to 150% of the number of units granted. Forfeitures of PSUs are recognized as they occur.
Activity under the PSUs during the year ended September 30, 2022 is summarized below:
(In thousands, except per share data)
Nonvested shares at October 1, 2021
Granted
Vested/Issued
Forfeited
Nonvested shares at September 30, 2022
Shares
Weighted average grant date
fair value per share
10 $
621 $
(14)
(88)
529 $
128.49
78.81
34.35
85.40
79.60
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As of September 30, 2022, the unrecognized compensation costs related to these awards was $21.6 million. The Company expects to recognize those costs
over a weighted average period of 1.5 years. The total grant date fair value of PSUs awarded during the year ended September 30, 2022 was $49.0 million.
Options
Options are generally granted to employees and were previously granted to non-employee directors. Stock options entitle the holder to purchase, at the end
of the vesting term, a specified number of shares of Company common stock at an exercise price per share equal to the closing market price of the common
stock on the date of grant. Stock options have a contractual life from the date of the grant and a vesting schedule as established by the board of directors.
The maximum term of stock options granted under the 2018 Plan is 10 years and the awards generally vest over a four-year period. Forfeitures of options
are recognized as they occur. The fair value of each services based stock option grant is estimated on the date of grant using the Black-Scholes option-
pricing model. The Company historically had been a private company and lacked company-specific historical and implied volatility information for its
stock. Therefore, it estimated its expected stock price volatility based on the historical volatility of publicly traded peer companies through the period ended
September 30, 2022 and utilized the “simplified” method for awards that qualify as “plain-vanilla” options. As determined under the simplified method, the
expected term of stock options granted is calculated based on contractual and vesting terms of the option award, the risk-free interest rate is determined by
reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award,
the expected dividend yield is zero based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash
dividends in the foreseeable future.
Options activity during the year ended September 30, 2022 is summarized below:
(In thousands, except per share data)
Outstanding at October 1, 2021
Granted
Forfeited
Exercised
Outstanding at September 30, 2022
Nonvested at September 30, 2022
Exercisable
Shares
Weighted average
exercise price per share
Weighted average
remaining contractual
term (years)
Aggregate intrinsic value
2,875 $
223 $
(161)
(484)
2,453 $
581 $
1,872 $
22.83
24.03
35.79
12.42
24.67
32.61
22.20
$
$
7.11
9.21
—
— $
6.33
7.20
6.05
$
$
242,291
—
—
31,918
33,447
5,435
28,012
As of September 30, 2022, the unrecognized compensation costs related to these awards was $12.2 million. The Company expects to recognize those costs
over a weighted average period of 1.1 years. The total grant date fair value of stock options awarded during the year ended September 30, 2022 was $15.8
million. The Company recognized a tax benefit of $44.2 million in year ended September 30, 2022. The weighted average grant date fair value of options
and performance stock options was $42.80 and $20.76 granted during the years ended September 30, 2021 and 2020, respectively.
The fair value of options granted during the year ended September 30, 2022, were calculated using the weighted average assumptions set forth below:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
89
Year ended
September 30,
2022
6.0
70.7 %
1.4 %
—%
Table of Contents
The fair value of options and performance stock options granted during the years ended September 30, 2021 and 2020, respectively, were calculated using
the weighted average assumptions set forth below:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Performance Stock Options
Year ended
September 30,
2021
2020
6.1
64.4 %
1.0 %
—%
6.2
62.1 %
1.3 %
—%
On September 1, 2020, the board of directors approved the implementation of a revised annual equity award program for executive officers, senior level
employees and consultants to be granted as performance-based stock options ("PSOs") under the 2018 Plan. The number of PSOs ultimately earned under
the awards to executive officers and senior level employees is calculated based on the achievement of a certain total revenue threshold during the fiscal
year ending September 30, 2022. The percentage of performance stock options that vest will depend on the board of directors’ determination of total
revenue at the end of the performance period and can range from 0% to 150% of the number of options granted. The number of PSOs ultimately earned
under the awards to a consultant is calculated based on the achievement of certain operational milestones. The maximum term of performance stock options
granted under the 2018 Plan is 10 years for both employees and non-employees. The awards generally vest over a two-year period for executive officers
and senior level employees. Awards to non-employees generally vest over a five-year period.
The provisions of the PSO 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 options that are expected to vest. Forfeitures of PSOs are recognized as they occur. The Company reassesses the
probability of the performance condition at each reporting period and adjusts the compensation cost based on the probability assessment. As of
September 30, 2022, the Company determined that 293,730 shares are expected to vest based on the probability of the performance condition that will be
achieved under this equity award program.
Activity under the PSOs during the year ended September 30, 2022 is summarized below:
(In thousands, except per share data)
Shares
Outstanding and nonvested at October 1, 2021
Granted
Forfeited
Vested
Nonvested at September 30, 2022
Exercisable
Outstanding at September 30, 2022
Weighted average
exercise price per
share
Weighted average
remaining contractual
term (years)
Aggregate intrinsic value
256 $
75 $
(19)
(19)
293 $
19
312 $
70.62
31.29
67.85
31.29
63.27
31.29
61.35
8.94 $
9.57
—
—
8.25 $
9.57
8.33 $
9,331
—
—
—
222
74
296
As of September 30, 2022, the unrecognized compensation costs related to these awards was $0.9 million. The Company expects to recognize those costs
over a weighted average period of 1.9 years. The total grant date fair value of performance stock options awarded during the year ended September 30,
2022 was $1.5 million. The weighted average grant date fair value was $45.18 and $43.06 for the years ended September 30, 2021 and 2020, respectively.
The fair values of PSOs granted during the year ended September 30, 2022 respectively, were calculated using the weighted average assumptions set forth
below:
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Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Stock-based compensation
Year ended
September 30,
2022
5.9
70.9%
2.8%
—%
Total stock-based compensation expense recognized were as follows:
(in thousands)
Cost of revenues
Research and development
Selling, general and administrative
Total stock-based compensation
2022
4,587 $
19,541
54,905
79,033 $
$
$
Year ended
September 30,
2021
2,678 $
10,166
24,154
36,998 $
2020
1,290
3,346
12,460
17,096
An immaterial amount of stock-based compensation was capitalized to inventories attributable to employees who support the manufacturing of the
Company's products for the year ended September 30, 2022. The balance sheet as of September 30, 2022 includes $0.7 million of stock-based
compensation primarily related to implementation of the Company’s lab production software system and order management system, which was capitalized
in property and equipment.
The total amount of share-based liabilities settled was $4.6 million for the year ended September 30, 2022. The settlement of the liabilities related entirely
to the issuance of contingent consideration associated with the iGenomX acquisition to non-employees only.
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 be
increased 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 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 September 30, 2022 is as follows:
(In thousands)
Outstanding at September 30, 2021
Additional shares authorized
Shares issued during the period
Outstanding at September 30, 2022
Shares
available
355
249
(97)
507
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 are beginning in February and August of each year, except 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.
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, which for the initial offering period is the price at which shares of the Company’s common stock were first sold to the public, or 85% of the fair
market value of the
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Company’s common stock on the last trading day of the offering period. During the years ended September 30, 2022 and 2021, activity under the 2018
ESPP was immaterial.
401(k) Savings Plan
During 2018, the Company adopted a 401(k) savings plan for the benefit of its employees. In January 2022, the Company modified its plan to include an
employer matching contribution. The Company is required to make matching contributions to the 401(k) plan equal to 50% of the first 6% of wages
deferred by each participating employee. The Company incurred expenses for employer matching contributions of $2.0 million for the year ended
September 30, 2022.
Abveris Acquisition
As discussed further in Note 14 “Business acquisition”, on December 1, 2021, the Company completed the acquisition of AbX Biologics, Inc. and granted
certain equity awards to new employees. These equity awards included up to 231,876 restricted shares of the Company’s common stock which are issuable
based on achievement of the 2022 calendar revenue target, which had an aggregate grant date fair value of $20.1 million. In addition, all employees must
remain employed through the payout date, and certain employees have an additional vesting period of up to two years from the acquisition date. The
vesting upon achievement of the 2022 calendar revenue target is 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 stock price as of December 1, 2021 for the fair value of restricted shares.
As of September 30, 2022, the Company determined that 177,390 shares are expected to vest 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 Company recorded approximately $9.9 million in stock-based compensation
expense for the year ended September 30, 2022 related to these awards. The grant date fair value was determined to be $87.06 per share for restricted
shares. As of September 30, 2022, the unrecognized compensation costs related to these awards were $5.6 million. The Company expects to recognize
those costs over a weighted average period of 0.6 years.
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:
(in thousands, except per share data)
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
$
$
Year ended September 30,
2022
2021
2020
(217,863) $
(152,098) $
(139,931)
53,885
(4.04) $
48,251
(3.15) $
39,190
(3.57)
The potentially dilutive common shares that were excluded from the calculation of diluted net loss per share because their effect would have been
antidilutive for the periods presented are as follows:
(in thousands)
Shares subject to options to purchase common stock
Unvested restricted stock units and performance stock units
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
Year ended September 30,
2022
2021
2020
2,765
2,095
—
97
—
4,957
3,131
707
3
27
—
3,868
3,948
569
17
33
26
4,593
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13. Geographic, product and industry information
The table below sets forth revenues by geographic region, based on ship-to destinations. Americas consists of the United States of America, 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.
(in thousands)
Americas
EMEA
APAC
Total
The table below sets forth revenues by products.
(in thousands)
Synthetic genes
Oligo pools
DNA libraries
Antibody discovery
NGS tools
Total
The table below sets forth revenues by industry.
(in thousands)
Industrial chemicals/materials
Academic research
Healthcare
Food/agriculture
Total revenues
Year ended September 30,
2022
2021
2020
122,473 $
62,078
19,014
203,565 $
77,909 $
44,124
10,300
132,333 $
Year ended September 30,
2022
2021
2020
61,509 $
12,424
6,149
24,171
99,312
38,964 $
8,039
5,678
6,985
72,667
203,565 $
132,333 $
Year ended September 30,
2022
2021
2020
57,940 $
37,097
106,363
2,165
203,565 $
34,475 $
25,299
71,241
1,318
132,333 $
59,164
25,821
5,115
90,100
35,192
4,545
3,965
2,383
44,015
90,100
29,054
19,642
40,036
1,368
90,100
$
$
$
$
$
$
Long-lived assets located in the United States were $136.3 million and $40.6 million as of September 30, 2022 and 2021, respectively. Long-lived assets
located outside of the United States were $3.1 million and $3.5 million as of September 30, 2022 and 2021, respectively.
14. Business acquisition
AbX Biologics, Inc. (“Abveris”)
On December 1, 2021, the Company acquired all of the outstanding stock of AbX Biologics, Inc. (“Abveris”), a privately-held company providing in vivo
antibody discovery services. Abveris offers animal-based antibody discovery and screening services for its customers using the Berkeley Lights Beacon
Platform and its proprietary DiversimAb and DivergimAb mouse models, which the Company can humanize using its antibody optimization solution.
The acquisition date fair value of the consideration transferred for Abveris was $102.6 million, consisting of cash totaling $9.5 million, 759,601 shares of
the Company’s common stock valued at $66.1 million based on the Company’s closing stock price on December 1, 2021, employee stock awards issued to
certain Abveris employees valued at $6.4 million, contingent consideration of $8.5 million, holdbacks of $12.8 million, and a net working capital
adjustment of $0.7 million.
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The contingent consideration is subject to the attainment of the calendar year 2022 revenue target. The contingent consideration becomes payable after
December 31, 2022 and will be settled in a combination of cash and up to 334,939 shares of the Company’s common stock. The acquisition date fair value
of the contingent consideration was based on forecasted revenue of Abveris relative to the 2022 revenue target as well as the Company’s stock price as of
December 1, 2021.
The Company maintains an indemnity and adjustment holdback for the purposes of providing security against any adjustment to the amounts at closing.
The indemnity holdback period extends for 18 months from the anniversary of the closing date. The indemnity holdback will be settled by transferring up
to 128,351 shares of the Company’s stock, 15,304 options of the Company’s common stock and an immaterial amount of cash. The fair value of the
indemnity holdback was $12.5 million as of the acquisition date. The adjustment holdback will be settled by transferring up to 3,416 shares of the
Company’s stock, 408 options of the Company’s common stock and an immaterial amount of cash. The holdback adjustment liability was $0.3 million as
of the acquisition date.
As at acquisition date, post-combination compensation expense excluded from the purchase price includes employee stock awards issued to certain Abveris
employees valued at $41.0 million. This includes awards valued at $17.7 million which vest over a two year service period following the acquisition date
and awards valued at $3.2 million with no future vesting requirements, which were deemed accelerated by the Company at the acquisition date and
expensed within the three months ended December 31, 2021. Finally, post-combination expense includes awards valued at approximately $20.1 million
which vest based on achievement of the calendar year 2022 revenue target and continuing employment through the payout date, and for certain employees,
additional continuing employment through the two year anniversary of the acquisition date. As at September 30, 2022, the fair value of post-combination
awards which vest based on performance was $15.4 million.
This acquisition was accounted for using the acquisition method of accounting in accordance with the business combination guidance in ASC 805. Under
the acquisition accounting method, the total estimated purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their
fair values. The excess of the purchase price over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed has been
recorded as goodwill. Management’s estimate of the fair values of the acquired intangible assets at December 1, 2021 is preliminary and subject to change
and is based on established and accepted valuation techniques performed with the assistance of third-party valuation specialists. Additional information,
which existed as of the acquisition date but is yet unknown to the Company may become known to the Company during the remainder of the measurement
period, which will not exceed twelve months from the acquisition date. Changes to amounts will be recorded as adjustments to the provisional amounts
recognized as of the acquisition date and may result in a corresponding adjustment to goodwill in the period in which new information becomes available.
The goodwill that arose from the acquisition consists of synergies expected from integrating Abveris into the Company’s operations and customer base.
The goodwill recognized is not expected to be deductible for income tax purposes.
The following table summarizes the preliminary fair value amounts of the assets acquired and liabilities assumed as of the acquisition date, as well as the
purchase consideration:
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(in thousands)
Assets acquired
Cash and cash equivalents
Accounts receivable
Other current assets and prepaid expenses
Property, plant and equipment
Other non-current assets
Intangible assets
Liabilities assumed
Current liabilities
Non-current liabilities
Deferred tax liability
Fair value of assets acquired and liabilities assumed
Goodwill
Total purchase price
Consideration transferred
Cash
Company common stock
Contingent consideration
Holdback liabilities
Net working capital adjustment
Fair value of purchase consideration
The following table summarizes the preliminary estimate of the intangible assets as of the acquisition date:
(in thousands except for years)
Developed technology
Customer relationships
Trade name
Estimated fair value of acquired intangible assets
December 1, 2021
1,306
2,309
1,654
1,078
2,970
46,500
3,549
846
10,545
40,877
61,768
102,645
9,467
72,514
8,500
12,838
(674)
102,645
Estimated Fair
Value
30,900
14,700
900
46,500
$
$
$
$
$
$
$
Estimated
Weighted
Average
Useful Lives
in Years
14
10
3
The Company estimated the fair value of the developed technology intangible asset and a portion of the customer relationships intangible assets using an
excess earnings model. An additional portion of the customer relationships intangible assets was valued using the with and without method. The Company
estimated the fair value of the trade name intangible asset using a relief from royalty approach. These fair value measurements were based on significant
inputs not observable in the market and thus represent a Level 3 measurement. Key assumptions include the level and timing of expected future revenue,
conditions and demands specific to each intangible asset over its remaining useful life, and discount rates the Company believes to be consistent with the
inherent risks associated with each type of asset, which was approximately 9.6%. The fair value of these intangible assets is primarily affected by the
projected revenues, gross margins, operating expenses, the technology obsolescence curve, and the anticipated timing of the projected income associated
with each intangible asset coupled with the discount rates used to derive their estimated present values. The Company believes the level and timing of
expected future cash flows appropriately reflects market participant assumptions.
Revenue from Abveris included in the Company’s consolidated statements of operations since the acquisition date through September 30, 2022 is $12.3
million. Net loss included in the Company’s consolidated statements of operations from Abveris since the acquisition date through September 30, 2022 is
$6.6 million. The Company incurred transaction costs related to the acquisition of $1.5 million, which were recorded as an selling, general and
administrative expense on the consolidated statements of operations and comprehensive loss for the year ended September 30, 2022.
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The following table provides a reconciliation of contingent consideration and holdbacks balances from acquisition date to September 30, 2022:
(in thousands)
Balance at December 1, 2021 – acquisition date
Change in fair value during the period
Balance at September 30, 2022
Contingent
consideration
Holdbacks
Total
$
$
8,500 $
(6,400)
2,100 $
12,164 $
(7,071)
5,093 $
20,664
(13,471)
7,193
The estimated fair value of the contingent consideration liability decreased as a result of the change in the Company’s stock price from December 1, 2021
and a change in the probability of the attainment of the calendar year 2022 revenue target as calculated using the Monte Carlo simulation model. The
estimated fair value of the holdback liability decreased as a result of the change in the Company’s stock price as of September 30, 2022. For the year ended
September 30, 2022, the Company recognized a gain of $13.5 million relating to the change in fair value of acquisition consideration in its consolidated
statement of operations.
The post-combination effect from net deferred tax liability assumed from the Abveris acquisition also caused a release of the Company’s deferred income
tax valuation allowance. On the acquisition date, the release resulted in an income tax benefit of $10.5 million.
The following unaudited pro forma financial information presents the combined results of operations for the Company and Abveris as if the Abveris
acquisition had occurred on October 1, 2020. The pro forma information contains the actual operating results of the Company, adjusted to include the pro
forma impact of the Abveris acquisition, which is primarily additional expense as a result of the amortization of identifiable intangible assets. The
unaudited pro forma financial information is prepared for comparative purposes only and does not purport to be indicative of the actual operating results
that would have been recorded had the Abveris acquisition actually taken place on October 1, 2020 and should not be taken as indicative of future
consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits
from the Abveris acquisition.
(in thousands)
Revenues
Net loss attributable to common stockholders
iGenomX International Genomics Corporation (iGenomX)
Year ended September 30,
2022
2021
206,011
(216,796)
143,632
(146,515)
On June 14, 2021, the Company acquired all of the outstanding stock of iGenomX International Genomics Corporation (iGenomX). iGenomX offers
multiplex library preparation tools for next-generation sequencing (NGS) workflows. The Company’s acquisition is expected to enhance its capabilities to
support multiplex sequencing preparations across multiple markets and to accelerate the Company’s conversion of customers from static microarray
platforms to genotyping by sequencing workflows.
The acquisition date fair value of the consideration transferred for iGenomX was approximately $27.3 million, consisting of a combination of cash totaling
$0.5 million and 237,409 of the Company’s common stock valued at $26.8 million based on the Company’s closing stock price on June 14, 2021 and
contingent consideration of up to 48,478 shares valued at $5.5 million based on the Company’s closing stock price on June 14, 2021 and indemnity
holdback of up to 43,662 shares valued at $4.9 million based on the Company’s closing stock price on June 14, 2021. The contingent consideration was
settled in shares of the Company’s common stock upon completion of the transition milestones. The Company maintains an indemnity holdback for the
purposes of providing security against any adjustment to the amounts at closing. The indemnity holdback period extends for 18 months from the
anniversary of the closing date.
This acquisition has been accounted for using the acquisition method of accounting in accordance with the business combination guidance in FASB ASC
805. Under the acquisition accounting method, the total estimated purchase price was allocated to the tangible and intangible assets acquired and liabilities
assumed based on their relative fair values. The excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed has
been recorded as goodwill. The goodwill that arose from the acquisition consists of synergies expected from integrating iGenomX into the Company’s
operations and customer base. The goodwill recognized is not expected to be deductible for income tax purposes. The goodwill acquired from the
iGenomX transaction was assigned to the Company’s only reportable and
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operating segment business activity, which is manufacturing of synthetic DNA using its semiconductor-based silicon platform.
The estimated fair value of the consideration as of the acquisition date was approximately $37.7 million.
The following table summarizes the preliminary fair value amounts of the assets acquired and liabilities assumed as of the acquisition date, as well as the
purchase consideration:
(in thousands)
Assets acquired
Cash and cash equivalents
Accounts receivable
Inventories
Intangible assets
Goodwill
Liabilities assumed
Accounts payable
Accrued expenses
Deferred tax liability
Fair value of assets acquired and liabilities assumed
Consideration transferred
Cash
Company common stock
Contingent consideration
Indemnity holdback
Fair value of purchase consideration
The following table summarizes the preliminary estimate of the intangible assets as of the acquisition date:
(in thousands, except for years)
Developed technology
Customer relationships
Estimated fair value of acquired intangible assets
June 14, 2021
7
37
14
18,410
21,538
57
44
2,252
37,653
490
26,772
5,467
4,924
37,653
Estimated Fair
Value
17,900
510
18,410
$
$
$
$
$
$
Estimated
Weighted
Average
Useful Lives
in Years
17
1.5
The Company estimated the fair value of the developed technology intangible asset using a discounted cash flow model. Significant judgment was
exercised in determining the fair value of the developed technology intangible assets acquired, which included estimates and assumptions related to the
projected revenues (specifically volume of sales), discount rate, and technology obsolescence curve. The Company estimated the fair value of the customer
relationships intangible asset using a cost approach. These fair value measurements were based on significant inputs not observable in the market and thus
represent a Level 3 measurement. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to each
intangible asset over its remaining useful life, and discount rates, the Company believes to be consistent with the inherent risks associated with each type of
asset, which was approximately 8.5%. The fair value of these intangible assets is primarily affected by the projected revenues, gross margins, operating
expenses, the technology obsolescence curve, and the anticipated timing of the projected income associated with each intangible asset coupled with the
discount rates used to derive their estimated present values. The Company believes the level and timing of expected future cash flows appropriately reflects
market participant assumptions.
97
The Company has included the financial results of iGenomX in its consolidated financial statements from the date of acquisition, which were not material.
The Company incurred transaction costs related to the acquisition of $0.8 million, which were recognized as an expense on the consolidated statements of
operations and comprehensive loss for the year ended September 30, 2021.
The estimated fair value of the contingent consideration and indemnity holdback decreased from $10.4 million as of June 14, 2021 to $4.5 million as of
September 30, 2022. For the year ended September 30, 2022, the Company recognized a gain of $0.8 million as change in fair value of acquisition
consideration in its consolidated statement of operations due to the change in fair value of such liabilities, as a result of the change in the Company’s stock
price.
The post-combination effect from net deferred tax liability assumed from the iGenomX acquisition also caused a release of the Company’s income tax
valuation allowance. The release resulted in an income tax benefit of $2.0 million for the year ended September 30, 2021.
Issuance of contingent consideration for iGenomX acquisition
In December 2021, the Company determined that the transition milestones specified in the iGenomX acquisition agreement were completed, and the
Company became obligated to issue 59,190 shares of its common stock to satisfy the contingent consideration. The shares of common stock, valued at
$4.6 million, were subsequently issued by the Company during January 2022 along with an immaterial cash payment for fractional shares.
15. Investment in variable interest entity
On November 1, 2021, the Company contributed certain assets and licensed certain intellectual property rights to the then newly formed Revelar
Biotherapeutics, Inc. (“Revelar”), an independently operated, new biotechnology company, to develop and commercialize an antibody, discovered and
optimized by Twist Biopharma, a division of the Company. The Company granted a license to Revelar for the exclusive development of an antibody lead
along with a series of back up compounds for the potential treatment of SARS-CoV-2. While the licensed antibody neutralized all known variants of
concern through Omicron, it does not neutralize the BA.4 and BA.5 variants. The Company committed to invest up to $10.0 million in seed funding based
on Revelar’s progress in the development of the lead antibody and the potential licensing of additional antibody therapeutics, of which the Company made
an initial investment of $5.0 million in a simple agreement for future equity (“SAFE”), and two additional investments of $2.5 million each, as described
below. In exchange for the assignment of certain contractual rights and the license to the antibody, and its back-up compounds, the Company received stock
of Revelar amounting to an ownership percentage as of the date of these financial statements of 49.80%, excluding shares and options reserved for future
stock awards and further excluding shares that Revelar would have issued to the Company upon conversion of its SAFEs.
On February 3, 2022, the Company purchased an additional SAFE issued by Revelar for $2.5 million pursuant to the Asset License and Contract
Assignment Agreement between the parties. In exchange for the SAFE, the Company obtained the right to receive shares of Revelar issued in a future
preferred stock financing.
On April 6, 2022, the Company purchased an additional SAFE issued by Revelar for $2.5 million pursuant to the Asset License and Contract Assignment
Agreement between the parties. In exchange for the SAFE, the Company obtained the right to receive shares of Revelar issued in a future preferred stock
financing.
The Company determined that Revelar was a VIE as the entity lacks sufficient equity to finance its activities without additional support. Additionally, the
Company determined that it has (a) the power to direct the activities that significantly impact Revelar’s economic performance and (b) the obligation to
absorb losses of, and the right to receive benefits from, Revelar that are potentially significant to Revelar. As a result, the Company was deemed to be the
primary beneficiary of Revelar and is required to consolidate Revelar in accordance with ASC 810; however, the Company deconsolidated Revelar as
described below.
Revelar incurred a net loss of approximately $14.6 million for the year ended September 30, 2022, and the decrease in net assets was fully absorbed by the
Company.
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The license agreement with Revelar which provided the Company with power to direct Revelar's activities that most significantly affected Revelar's
economic performance and caused the Company to have the obligation to absorb or right to receive the majority of Revelar's losses or benefits, was
terminated by all parties on September 30, 2022. As a result, the Company assessed its status as the primary beneficiary of Revelar and determined it was
no longer the primary beneficiary of the VIE. The Company deconsolidated Revelar as of September 30, 2022. The deconsolidation resulted in a gain of
$4.6 million, recorded in “gain on deconsolidation of subsidiary” in the consolidated statements of comprehensive loss in the year ended September 30,
2022 and the Company deconsolidated Revelar's net liabilities of $4.6 million.
* * * * *
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Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of September 30, 2022, which is the end of the period covered by this Annual Report. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of
September 30, 2022 as a result of material weakness in our internal control over financial reporting as described below.
In light of the material weakness in the Company’s internal control over financial reporting, we performed additional procedures to ensure that our
consolidated financial statements included in Form 10-K were prepared in accordance with accounting principles generally accepted in the United States
(“GAAP”). Following such additional procedures, our management, including our principal executive officer and principal financial officer, has concluded
that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods
presented in this Form 10-K, in conformity with GAAP.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a framework designed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in
accordance with US GAAP. Our control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
As of September 30, 2022, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting established by the Committee of Sponsoring Organization of the Treadway Commission
(COSO) in Internal Control – Integrated Framework (2013).
Based on this evaluation, due to the material weakness described below, we concluded that the Company's system of internal control over financial
reporting was not effective.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Our management
concluded that a material weakness existed as of September 30, 2022 related to the ineffective design and implementation of information technology
general controls (“ITGCs”) in the areas of user access and program change-management for systems that support the Company’s financial reporting
processes. As a result, the Company’s related process-level IT dependent manual and automated controls that rely upon the affected ITGCs, or information
coming from IT systems with affected ITGCs, were also deemed ineffective.
Notwithstanding our material weakness, we have concluded that the financial statements and other financial information included in this Annual Report
fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States.
The scope of management’s assessment of the effectiveness of internal control over financial reporting excluded AbX Biologics, Inc. (“Abveris”), which
the Company acquired in a business combination on December 1, 2021 and is included in our fiscal 2022 Consolidated Financial Statements. Total assets,
excluding goodwill and intangibles assets, total liabilities, total revenues, and total expenses of Abveris represented approximately 2%, 7%, 6%, and 4% of
the total assets, total liabilities, total revenues, and total expenses of our Consolidated Financial Statements as of and for the year ended September 30,
2022, respectively.
Our independent registered public accounting firm, Ernst & Young LLP, has audited our Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K and has issued a report on our internal control over
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financial reporting as of September 30, 2022. Their report on the audit of internal control over financial reporting appears below.
Planned Material Weakness Remediation Activities
Management is committed to the remediation of the material weakness described above, as well as the continued improvement of our internal control over
financial reporting. Our planned remediation efforts related to the above identified material weakness include, but are not limited to:
•
•
•
•
implementing improved IT policies, procedures and control activities for key systems which impact our financial reporting;
investments to upgrade or replace existing systems which do not have the appropriate infrastructure to meet the requirements of our internal
control framework;
expanding the available resources at the Company with experience designing and implementing control activities, including information
technology general controls, through hiring and use of third-party consultants and specialists;
perform additional training to ensure a clear understanding of risk assessment, controls and monitoring activities related to automated processes
and systems and ITGCs related to financial reporting.
We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters
we identify. See the section titled “Risk Factors — We identified material weaknesses in our internal control over financial reporting. If we are unable to
remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of
internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our
business and stock price.”
Remediation of Prior Year Material Weaknesses
As discussed in our Annual Report on Form 10-K filed for the year ended September 30, 2021, management had identified the following material
weaknesses in our internal control over financial reporting:
• We did not appropriately design and maintain effective segregation of duties controls to timely detect and independently review instances where
individuals with access to post a journal entry may also have edited or created the journal entry;
• We did not appropriately design and maintain effective controls relating to the accuracy and occurrence of our accounting for revenues,
specifically to ensure the accuracy of edits to customer order entry data, including price and quantity, and appropriate segregation of duties during
the order entry and revenue processes; and
• We did not design and maintain effective controls over certain information technology general controls (ITGCs) for information systems that are
relevant to the preparation of our financial statements. Specifically, we did not design and maintain user access controls to ensure appropriate
segregation of duties and that adequately restrict user access to certain financial applications and data to appropriate Company personnel.
To address the previously reported material weaknesses related to journal entry posting segregation of duties (“SOD”) and accuracy and occurrence of
accounting for revenues, described in Part II, Item 9A of our 2020 Form 10-K, management identified the people, process, and technology necessary to
strengthen our internal control over financial reporting and to address the material weaknesses. We began implementing certain of these measures in the
fourth quarter of 2021 and continued to develop remediation plans and implemented additional measures throughout 2022. These measures included:
• We updated controls to identify high-risk SAP transaction codes that could potentially allow SOD conflicts and through either automated or
manual processes and aligned role-based access provisioning to eliminate SOD posting conflicts. Based on the results of our testing, management
concluded that the controls are designed effectively and were in place for a sufficient period during 2022.
• We designed and implemented processes and controls to ensure that any edits to customer order entry data, including price and quantity, are
appropriately reviewed. Additionally, we redesigned our SOD framework within the revenue cycle to ensure appropriate SOD throughout the
order entry and revenue processes. Based on the results of our testing, management concluded that the controls are adequately designed and were
in place for a sufficient period during 2022.
As a result of the material weakness noted above relating to ITGCs, the operating effectiveness of our IT-dependent and automated controls (including the
controls noted above that are responsive to the previously identified material weaknesses) have been assessed as ineffective and will remain as such until
the ITGC material weakness has been remediated.
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Changes in Internal Control over Financial Reporting
Except as noted in the preceding paragraphs, other than the changes noted above associated with the remediation activities relating to the prior year
material weaknesses, there were no changes during the quarter ended September 30, 2022 in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our plans for remediating the material
weakness, described above, will constitute changes in our internal control over financial reporting, prospectively, when such remediation plans are
effectively implemented.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management
recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions, and cannot provide
absolute assurance that its objectives will be met.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Twist Bioscience Corporation
Opinion on Internal Control over Financial Reporting
We have audited Twist Bioscience Corporation’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Twist
Bioscience Corporation (the Company) has not maintained effective internal control over financial reporting as of September 30, 2022, based on the COSO
criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to the
ineffective design and implementation of information technology general controls (“ITGCs”) in the areas of user access and program change-management
for systems that support the Company’s financial reporting processes.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of AbX Biologics, Inc. (“Abveris”), which is
included in the 2022 consolidated financial statements of the Company and constituted 2% and 7% of total assets and total liabilities, respectively, as of
September 30, 2022 and 6% and 4% of revenues and operating expenses, respectively, for the year then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over financial reporting of Abveris.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheet of the Company as of September 30, 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity
and cash flows for the year ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). This
material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial
statements, and this report does not affect our report dated November 28, 2022, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Mateo, California
November 28, 2022
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdiction That Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, executive officers and corporate governance
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2023 Annual Meeting of Stockholders.
Code of Conduct
We have adopted the Twist Bioscience Corporation Code of Business Conduct and Ethics, or Code of Ethics, with which every person, including executive
officers, who works for Twist and every member of our board of directors is expected to comply. The full text of our Code of Ethics is posted on the
investor relations section of our website at www.twistbioscience.com. If any substantive amendments are made to the Code of Ethics or any waiver is
granted, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding such amendment to, or waiver from, a provision of this
Code of Ethics by posting such information on our website, at the address and location specified above, or as otherwise required by the Nasdaq Global
Select Market.
Item 11. Executive compensation
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2023 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2023 Annual Meeting of Stockholders.
Item 13. Certain relationships and related transactions, and director independence
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2023 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2023 Annual Meeting of Stockholders.
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Item 15. Exhibits, financial statement schedules
Documents filed as part of this report are as follows:
(a) Consolidated Financial Statements
PART IV
Our Consolidated Financial Statements are included in the “Index to Consolidated Financial Statements” under Part II, Item 8 and filed as part of this
Annual Report on Form 10-K.
(b) Consolidated Financial Statement Schedules
All financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements
or in the notes thereto.
(c) Exhibits
Set forth below is a list of exhibits that are being filed or incorporated by reference into this Annual Report on Form 10-K:
Exhibit
Number
3.1
3.2
4.1
4.3
Description
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Form of common stock certificate
Warrant to Purchase Stock by and between Twist Bioscience
Corporation and Silicon Valley Bank, dated March 28. 2016.
4.4
Description of Common Stock
+10.1
2013 Stock Plan and forms of agreement thereunder
+10.2
2018 Equity Incentive Plan and forms of agreement thereunder
+10.3
2018 Employee Stock Purchase Plan
+10.4
Executive Incentive Bonus Plan
+10.5
10.6
Form of Indemnification Agreement between Twist Bioscience
Corporation and each of its Officers and Directors
Fourth Amended and Restated Loan and Security Agreement by and
between Twist Bioscience Corporation, Silicon Valley Bank and
certain other co-borrowers, dated September 6. 2017
Filed /
Furnished /
Incorporated
by Reference
from Form
Incorporated
by
Reference
from Exhibit
Number
8-K
8-K
S-1/A
S-1
10-K
S-1
S-1/A
S-1/A
S-1
S-1/A
3.1
3.1
4.1
4.7
4.5
10.1
10.2
10.3
10.4
10.8
Date Filed
11/7/2018
11/18/2022
10/17/2018
10/3/2018
11/20/2020
10/3/2018
10/17/2018
10/17/2018
10/3/2018
10/17/2018
S-1
10.9
10/3/2018
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Exhibit
Number
10.7
10.7.1
Lease Agreement by and between Twist Bioscience Corporation and
ARE-San Francisco No. 32. LLC dated March 21, 2018
Description
First Amendment to Lease by and between Twist Bioscience
Corporation and ARE-San Francisco No. 32, LLC, dated March 21,
2019
10.8*
Lease Agreement by and between Twist Bioscience Corporation and
PWII Owner, LLC, dated December 18, 2020
10.8.1*
First Amendment to Lease between Twist Bioscience Corporation
and PWII Owner, LLC, dated April 13, 2021
10.9†
End User Supply Agreement by and between Twist Bioscience
Corporation and FUJIFILM Dimatix, Inc., dated November 5, 2015
Filed /
Furnished /
Incorporated
by Reference
from Form
Incorporated
by
Reference
from Exhibit
Number
Date Filed
S-1
10.11
10/3/2018
10-Q
8-K
8-K
S-1
8-K
10.2
10.1
10.1
5/1/2019
12/22/2020
4/16/2021
10.14
10/3/2018
16.1
3/9/2022
16.1
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Letter from PricewaterhouseCoopers LLP addressed to the Securities
Exchange Commission, dated March 9, 2022
List of subsidiaries of the Registrant
Filed herewith
Consent of Ernst & Young, Independent Registered Public
Accounting Firm
Filed herewith
Consent of PricewaterhouseCoopers, Independent Registered Public
Accounting Firm
Filed herewith
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, Rule 13(a)-14(a)/15d-14(a), by President and Chief Executive
Officer.
Filed herewith
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, Rule 13(a)-14(a)/15d-14(a), by Chief Financial Officer.
Filed herewith
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by President and
Chief Executive Officer.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial
Officer.
Furnished
herewith
Furnished
herewith
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Exhibit
Number
Description
Filed /
Furnished /
Incorporated
by Reference
from Form
Incorporated
by
Reference
from Exhibit
Number
Date Filed
101.INS
XBRL Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
104
Cover page from the Company’s Annual Report on Form 10-K for the
year ended September 30, 2022, formatted in Inline XBRL
+ Indicates a management contract or compensatory plan.
* Registrant has omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of
the omitted schedules and exhibits to the SEC upon request.
†
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment that was separately filed with the
SEC.
Item 16. Form of 10-K summary
Not applicable
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
November 28, 2022
Twist Bioscience Corporation
By:
/s/ Emily M. Leproust
Emily M. Leproust
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Emily M. Leproust
Emily M. Leproust
/s/ James M. Thorburn
James M. Thorburn
/s/ Kevin B. Yankton
Kevin B. Yankton
/s/ William Banyai
William Banyai
Chief Executive Officer and
Chair of the Board of Directors (principal executive officer)
Chief Financial Officer (principal financial
officer)
Chief Accounting Officer (principal
accounting officer)
Director
/s/ Nicolas Barthelemy
Director
Nicolas Barthelemy
/s/ Nelson C. Chan
Nelson C. Chan
/s/ Robert Chess
Robert Chess
/s/ Keith Crandell
Keith Crandell
/s/ Jan Johannessen
Jan Johannessen
/s/ Xiaoying Mai
Xiaoying Mai
/s/ Robert Ragusa
Robert Ragusa
Director
Director
Director
Director
Director
Director
/s/ Melissa Starovasnik
Director
Melissa Starovasnik
108
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
November 28, 2022
Executive Officers
Board of Directors
Emily M. Leproust, Ph.D.
Chief Executive Officer
Patrick Finn, Ph.D.
President and Chief Operating Officer
James M. Thorburn
Chief Financial Officer
William Banyai, Ph.D.
Senior Vice President of Advanced Development,
General Manager of Data Storage
Dennis Cho
Senior Vice President, General Counsel,
Secretary and Chief Ethics and Compliance
Officer
Paula Green
Senior Vice President of Human Resources
Kevin Yankton
Chief Accounting Officer
Emily M. Leproust, Ph.D.
Chief Executive Officer, Chair of the Board of
Directors
William Banyai, Ph.D.
Senior Vice President of Advanced Development,
General Manager of Data Storage
Nicolas Barthelemy
Member of the Audit and Risk Committee and
Compensation Committee
Nelson C. Chan
Member of the Audit and Risk Committee and
Nominating and Corporate Governance
Committee; Lead Director for ESG
Robert Chess
Lead Independent Director; Chair of the
Nominating and Corporate Governance
Committee; Member of the Compensation
Committee
Keith Crandell
Managing Director at ARCH Venture
Management, L.P.; Member of the
Compensation Committee and Nominating and
Corporate Governance Committee
Jan Johannessen
Advisor at iGlobe Partners; Chair of the Audit
and Risk Committee; Member of the Nominating
and Corporate Governance Committee
Xiaoying Mai
Executive Director at GF Investments (Hong
Kong); Member of the Audit and Risk Committee
Robert Ragusa
Chief Executive Officer at GRAIL, LLC
Melissa Starovasnik
Chair of the Compensation Committee