You should read the following discussion and analysis of our financial condition
and results of operations together with the unaudited condensed consolidated
financial statements and related notes that are included elsewhere in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal
year ended September 30, 2020 filed with the U.S. Securities and Exchange
Commission, or the SEC, on November 27, 2020, or our Annual Report on Form 10-K.
This discussion contains forward-looking statements based upon current plans,
expectations and beliefs that involve risks and uncertainties including the
effect of the COVID-19 pandemic and our response thereto. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including, but not limited to, those discussed in
the section entitled “Risk Factors” and elsewhere in this Quarterly Report on
Form 10-Q. In preparing this MD&A, we presume that readers have access to and
have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2
to paragraph (b) of Item 303 of Regulation S-K.
Overview
We are an innovative synthetic biology and genomics company that has developed a
disruptive DNA synthesis platform to industrialize the engineering of biology.
The core of our platform is a proprietary technology that pioneers a new method
of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have
combined this technology with proprietary software, scalable commercial
infrastructure, and an e-commerce platform to create an integrated technology
platform that enables us to achieve high levels of quality, precision,
automation, and manufacturing throughput at a significantly lower cost than our
competitors. We are leveraging our unique technology to manufacture a broad
range of synthetic DNA-based products, including synthetic genes, tools for
next-generation sample preparation, and antibody libraries for drug discovery
and development.
Additionally, we believe our platform will enable new value-add opportunities,
such as discovery partnerships for biologic drugs, and will enable new
applications for synthetic DNA, such as digital data storage. We sell our
synthetic DNA and synthetic DNA-based products to a customer base of over
2,200 customers across a broad range of industries.
We launched the first application of our platform, synthetic genes and oligo
pools, in April 2016 to disrupt the gene synthesis market and make legacy DNA
synthesis methods obsolete.
We generated revenues of $28.2 million and $17.1 million in the three months
ended December 31, 2020 and 2019, while incurring net losses of $32.9 million
and $55.6 million for the three months ended December 31, 2020 and 2019
respectively. Since our inception, we have incurred significant operating
losses. Our ability to generate product revenue sufficient to achieve
profitability will depend heavily on the success of our existing products and
development and commercialization of additional products in the synthetic
biology industry.
For the three months ended December 31, 2020 and 2019 we served approximately
1,500 and 1,000 customers, respectively, and revenue to one of our largest
customers, Ginkgo Bioworks, Inc. which we believe is the largest global
purchaser of synthetic DNA, was $1.4 million, and $2.1 million, respectively.
Sales to Ginkgo Bioworks, Inc. has accounted for 5% and 12% of our total revenue
for the three months ended December 31, 2020 and 2019 respectively.
Highlight from three months ended December 31, 2020 compared with three months
ended December 2019 included:
• Revenue growth of 64% to $28.2 million from $17.2 million, primarily
due to growth in NGS tools, DNA Libraries and Synthetic Genes.
We have built a scalable commercial platform that enables us to reach a diverse
customer base in a variety of industries including industrial chemicals,
academic research, healthcare, food, agriculture and data storage. To address
this diverse customer base, we have employed a multi-channel strategy comprised
of a direct sales force targeting synthetic DNA customers, international
distributors, and an e-commerce platform. We launched our proprietary,
innovative, and easy-to-use e-commerce platform in October 2017 to existing
customers and expanded access to the general public in January 2018. Our
platform allows customers to design, validate and place on-demand orders of
customized DNA online. This is a key component of our strategy to address and
support our diverse and growing customer base, as well as support commercial
productivity, enhance the customer experience, and promote loyalty.
In the three months ended December 31, 2020, our net revenues declined to $28.2
million from net revenues of $32.4 million in the three months ended
September 30, 2020. Our net revenues from NGS tools declined to $15.6 million in
the three months ended December 31, 2020, from $20.2 million in the three months
ended September 30, 2020, mainly due to a $9.0 million revenue from a single
order of a large customer in the three months ended September 30, 2020 offset by
a $4.6 million order from another large customer in the three months ended
December 31, 2020. Our synthetic gene revenue attributable to Ginkgo Bioworks,
our largest synthetic gene customer, was $1.4 million in the three months ended
December 31, 2020, versus $1.8 million in the three months ended September 30,
2020. Our non-Ginkgo synthetic gene revenue of $7.4 million in the three months
ended December 31, 2020 decreased from $ 9.2 million in the three months ended
September 30, 2020. Our selling, general and administrative expenses, or SG&A,
increased to $28.8 million in the three months ended December 31, 2020 from
$27.2 million in the prior three months ended September 30, 2020, due to
increases in professional services and outside services costs. Our R&D expenses
increased from $11.6 million in the three months ended September 30, 2020 to
$14.0 million in the three months ended December 31, 2020 due to increase in
payroll expenses related to increased headcount, stock based compensation and
outside services expenses.
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COVID-19 considerations
In March 2020, the World Health Organization declared the COVID-19 outbreak to
be a pandemic. During the three months ended December 31, 2020, our revenues
were not significantly affected by the COVID-19 pandemic. However, the extent to
which the COVID-19 pandemic affects our future financial results and operations
will depend on future developments which are highly uncertain and cannot be
predicted, including the recurrence, severity and/or duration of the ongoing
pandemic, and current or future domestic and international actions to contain
and treat COVID-19.
We are following public and private sector policies and initiatives to reduce
the transmission of COVID-19, such as the imposition of travel restrictions and
the promotion of social distancing and work-from-home arrangements. We have
taken and continue to take a variety of measures to ensure the availability and
functioning of our critical infrastructure, to promote the safety and security
of our employees and to support the communities in which we operate. These
measures include increasing our inventory, requiring remote working arrangements
for employees not integral in physically making and shipping our products or who
need specialized equipment to perform their work, investing in personal
protective equipment, and providing paid sick leave to affected employees.
Due to the speed with which the situation may change, we are not able at this
time to estimate the effect of COVID-19 on our financial results and operations,
but the effect could be material for the remainder of fiscal year 2021 and/or
during any future period affected either directly or indirectly by this
pandemic. For further discussion of the risks relating to COVID-19, see Part II,
Item 1A. “Risk Factors-We are subject to risks associated with COVID-19.”
Financial overview
The following table summarizes certain selected historical financial results:
Three months ended
December 31,
(in thousands) 2020 2019
Revenues $ 28,161$ 17,164
Loss from operations (32,793 ) (55,830 )
Net loss attributable to common stockholders (32,900 ) (55,638 )
Revenues
We generate revenue from sales of synthetic genes, oligo pools, NGS tools, DNA
and Biopharma libraries. Our ability to increase our revenues will depend on our
ability to further penetrate the domestic and international markets, launch new
products, generate sales through our direct sales force, and over time from our
e-commerce platform.
Revenues by geography
We have one reportable segment from the sale of synthetic DNA products. The
following table shows our revenues by geography, based on our customers’
shipping addresses. Americas consists of Canada, Mexico, and South America; EMEA
consists of Europe, the Middle East, and Africa; and APAC consists of Japan,
China, South Korea, India, Singapore, Malaysia, and Australia.
Three months ended December 31,
(in thousands, except percentages) 2020 % 2019
%
United States $ 17,034 61 % $ 9,827 57 %
EMEA 9,058 32 % 5,941 35 %
APAC 1,767 6 % 1,241 7 %
Americas 302 1 % 155 1 %
Total revenues $ 28,161 100 % $ 17,164 100 %
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Revenues by product
The table below sets forth revenues by product:
Three months ended December 31,
(in thousands, except percentages) 2020 % 2019
%
Synthetic genes $ 8,874 32 % $ 7,836 46 %
Oligo pools 1,510 5 % 1,242 7 %
DNA and Biopharma libraries 2,205 8 % 1,057 6 %
NGS tools 15,572 55 % 7,029 41 %
Total revenues $ 28,161 100 % $ 17,164 100 %
Revenues by industry
The table below sets forth revenues by industry:
Three months ended December 31,
(in thousands, except percentages) 2020 % 2019
%
Industrial chemicals $ 7,132 25 % $ 6,137 36 %
Academic research 4,901 17 % 4,951 29 %
Healthcare 15,976 57 % 5,835 34 %
Food/agriculture 152 1 % 241 1 %
Total revenues $ 28,161 100 % $ 17,164 100 %
Product shipments including synthetic genes
Shipments of all products and number of genes shipped in the three months ended
December 31, 2020, September 30, 2020, June 30, 2020, March 31,
2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019
were as follows:
Three months ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
(in thousands, except shipments) 2020 2020 2020 2020 2019 2019 2019 2019
Number of genes shipped 84,234 86,605 83,216 88,545 79,851 80,022 68,069 69,087
Number of shipments 9,313 8,292 7,213 6,595 6,154 5,631 5,151 3,909
Comparison of the three months ended December 31, 2020 and 2019
Revenues
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change
%
Revenues $ 28,161$ 17,164$ 10,997 64 %
Revenues increased from $17.2 million to $28.2 million in the three months ended
December 31, 2020, which was an increase of $11.0 million, or 64%, over the
three months ended December 31, 2019. The revenue increase reflects growth in
synthetic genes revenue of $1.0 million and NGS tools revenue of $8.5 million.
The increase in synthetic genes revenue was primarily due to our DNA preps
launched in April 2020 and higher shipments of non-clonal genes. In the three
months ended December 31, 2020, we shipped 84,234 genes compared to 79,851 genes
in the three months ended December 31, 2019, an increase of 6%. Synthetic gene
pricing to our customers was relatively constant period-over-period, but revenue
increased due to maxiprep and non-clonal genes. The primary reason for NGS tools
revenue growth was the adoption of our product by a larger customer base and a
$4.6 million shipment to a liquid biopsy customer. We do not believe that
pricing changes had a meaningful impact on the revenue changes for NGS tools
period-over-period.
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Cost of revenues
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change
%
Cost of revenues $ 18,162$ 13,792$ 4,370 32 %
In the three months ended December 31, 2020, cost of revenue increased to $18.2
million from $13.8 million in the three months ended December 31, 2019. The
increase was primarily due to the increase in the personnel costs of $1.0
million related to supporting new product portfolio launches and increase in
volume of products shipped. Consumption of reagents and production materials and
labor costs increased by $2.4 million associated with the increased product
shipments and higher revenue. Information technology costs increased by $0.5
million. The Company’s cost of revenues was 65% and 80% of total revenues for
the three months ended December 31, 2020 and 2019, respectively.
Research and development expenses
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change
%
Research and development $ 14,000$ 10,297$ 3,703 36 %
In the three months ended December 31, 2020, research and development expenses
increased to $14.0 million from $10.3 million in the three months ended
December 31, 2019. The increase was primarily due to expanding our DNA synthesis
R&D capabilities which includes increase in payroll and stock compensation
expense of $3.3 million and outside services of $0.4 million relating to
increase in engineering services.
Selling, general and administrative
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change
%
Selling, general and administrative $ 28,792$ 26,405$ 2,387
9 %
In the three months ended December 31, 2020, selling, general and administrative
expenses increased to $28.8 million from $26.4 million in the three months ended
December 31, 2019, primarily due to increases in payroll expenses related to
increased headcount and outside audit services,
Sarbanes-Oxley
compliance, and other professional services offset by a $6.0 million decrease in
legal expenses. Salaries and related costs increased by $6.1 million, as a
result of increased headcount, including $1.9 million higher stock-based
compensation expense. Outside services costs increased by $2.0 million. The
increase was offset by a decrease in travel expenses of $0.9 million, primarily
due to COVID-19 travel restrictions.
Litigation settlement
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change
%
Litigation settlement $ – $ 22,500$ 22,500 100 %
On February 6, 2020, we, Dr. Leproust, Dr. Chen, Ms. Glaize, and Agilent agreed
to the terms of the Settlement Agreement to pay Agilent $22.5 million within 14
days of the Settlement Agreement to resolve all claims and counterclaims
initiated with the Complaint. This expense was accrued in the consolidated
financial statements in the three months ended December 31, 2019 and paid on
February 13, 2020.
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Interest, and other income (expense), net
Three months ended December 31,
(in thousands, except percentages) 2020 2019 Change %
Interest income $ 134$ 564$ (430 ) 76 %
Interest expense (118 ) (248 ) 130 52 %
Other income (expense) (77 ) (87 ) 10 11 %
Total interest and other income (expense), net (61 ) $ 229
(290 ) 140 %
In the three months ended December 31, 2020, interest income was $0.1 million
compared to $0.6 million in the three months ended December 31, 2019, resulting
from our short-term investments. The decrease in interest expense was related to
the amount of debt outstanding under our credit facility with Silicon Valley
Bank.
Provision for income taxes
Three months ended
December 31,
(in thousands, except percentages) 2020 2019 Change %
Provision for income taxes
$ 46$ 37$ 9 24 %
In the three months ended December 31, 2020 and 2019, we recorded income tax
expense of less than $0.1 million.
Liquidity and capital resources
Sources of liquidity
To date, we have financed our operations principally through public equity
raises, private placements of our convertible preferred stock, borrowings from
credit facilities and revenue from our commercial operations.
Since our inception on February 4, 2013 and through December 31, 2020, we have
received an aggregate of $1,063.9 million in net proceeds from the issuance of
equity securities and an aggregate of $13.8 million from debt. As of
December 31, 2020, we had a balance of $348.8 million of cash and cash
equivalents and $238.5 million in short-term investments.
Loan and Security Agreement
In September 2017, we entered into a Fourth Amended and Restated Loan and
Security Agreement, or the Fourth Loan, with SVB, which allowed for borrowings
aggregating up to $20.0 million in a series of three advances.
The first advance-which was effectuated in September 2017-provided a principal
amount of $10.0 million, the second optional advance allowed for a principal
amount of $5.0 million and the third optional advance allowed for a principal
amount of $5.0 million during their respective drawdown periods; however, the
draw periods for the second and third tranches under this agreement have expired
as of January 31, 2018 and June 30, 2018, respectively.
In connection with the first advance, we issued warrants to purchase
64,127 shares of common stock at an exercise price of $6.24 per share. The
Fourth Loan contains a subjective acceleration clause under which the Fourth
Loan could become due and payable to SVB in the event of a material adverse
change in our business. The term of the loan was 51 months with an interest rate
of prime plus 3.00% and a final payment fee of $0.7 million.
In addition, we obtained a revolving facility from SVB in September 2017 as part
of the Fourth Loan and the facility which allows us to borrow up to
$10.0 million. The principal amount outstanding under the revolving line accrues
interest at a floating per annum rate equal to one percentage point
(1.00%) above the prime rate, which interest is payable monthly. The amounts
available under the revolving line are limited by an advance rate which is a
percentage of our account receivables balance. As of December 31, 2020, we have
not borrowed against the $10.0 million revolving facility.
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Our credit facilities contain customary representations and warranties and
customary affirmative and negative covenants applicable to us and our
subsidiaries, including, among other things, restrictions on changes in
business, management, ownership or business locations, indebtedness,
encumbrances, investments, mergers or acquisitions, dispositions, maintenance of
collateral accounts, prepayment of other indebtedness, distributions and
transactions with affiliates. The credit facilities contain customary events of
default subject in certain cases to grace periods and notice requirements,
including (a) failure to pay principal, interest and other obligations when due,
(b) material misrepresentations, (c) breach of covenants, conditions or
agreements in the credit facilities, (d) default under material indebtedness,
(e) certain bankruptcy events, (f) a material adverse change; (g) attachment,
levy or restraint on business, (h) default with respect to subordinated debt,
(i) cross default under our credit facilities, and (j) government approvals
being revoked. As part of the Fourth Loan, all rights, title and interest to our
personal property with the exception of our intellectual property, have been
pledged as collateral, including cash and cash equivalents, short-term
investments, accounts receivable, contractual rights to payment, license
agreements, general intangibles, inventory and equipment. We were in compliance
with all covenants under the loan and security agreement as of December 31,
2020.
Future maturities of the loan as of December 31, 2020 are as follows:
(in thousands), years ending September 30 Principal Interest Total
Remainder of 2021 $ 2,500$ 106$ 2,606
2022 833 9 842
3,333 115 3,448
Less: Interest (115 )
Total amount of loan principal
3,333
Less unamortized debt discount (55 )
Add accretion of final payment fee 680
$ 3,958
Capital resources
As of December 31, 2020, our principal sources of liquidity were $587.3 million
of cash, cash equivalents and short-term investments, which primarily consist of
short-term, investment-grade commercial paper and U.S.Treasury bills.
In October of 2018 in connection with our initial public offering, we sold a
total of 5,750,000 shares at a price of $14.00 per share and received
approximately $69.6 million in net proceeds, after deducting underwriting
discounts and commissions of $5.6 million and offering expenses of $5.3 million
payable by the Company.
In May 2019, we sold 4,312,500 shares in a public offering at a price of $21.00
per share, and received net proceeds of $84.3 million, after deducting an
underwriting discount and commission totaling $5.4 million and offering expenses
of $0.9 million. In December 2019 and January 2020, we completed an
at-the-market offering of common stock selling a total of 2,239,680 shares with
proceeds of $48.0 million, after deducting underwriting discounts of
$1.5 million and commissions and offering expenses of $0.5 million. In February
2020, we completed an underwritten public offering of common stock selling a
total of 5,339,285 shares with proceeds of $140.2 million, after deducting
underwriting discounts of $9.0 million and commissions and offering expenses of
$0.4 million. In June 2020, we completed an underwritten public offering of
common stock selling a total of 3,484,848 shares with proceeds of
$107.4 million, after deducting underwriting discounts of $6.9 million and
commissions and offering expenses of $0.7 million. In December 2020, the Company
completed an underwriting public offering of 3,136,362 shares of its common
stock with proceeds of $323.9 million, after deducting underwriting discounts of
$20.7 million and commissions and offering expenses of $0.4 million.
We believe that our existing cash, cash equivalents and short-term investments
are sufficient to fund our operating expenses, capital expenditure requirements
and debt service payments for at least one year from the issuance of these
consolidated financial statements. In the future, we may still need to obtain
additional financing to fund operations beyond this period, and there can be no
assurance that we will be successful in raising additional financing on terms
which are acceptable to us. In addition, our operating plan may change as a
result of factors currently unknown to us, and we may need to seek additional
funds sooner than planned. Such financing may result in dilution to
stockholders, imposition of debt covenants and repayment obligations, or other
restrictions that may adversely affect our business. In addition, we may seek
additional capital due to favorable market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operating plans. Our future capital requirements will depend on many
factors. See “Risk factors-We will require additional financing to achieve our
goals, and a failure to obtain this necessary capital when needed on acceptable
terms, or at all, could force us to delay, limit, reduce or terminate our
product manufacturing and development and other operations.”
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could adversely affect our business, financial condition and results of
operations.
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Operating capital requirements
Our primary uses of capital are, and we expect will continue to be for the near
future, working capital, compensation and related expenses, manufacturing costs,
laboratory and related supplies, legal and other regulatory expenses and general
overhead costs. As of December 31, 2020, we had $3.8 million in commitments for
capital expenditures.
Cash flows
The following table summarizes our sources and uses of cash and cash
equivalents:
Three months ended
December 31,
(in thousands) 2020 2019
Net cash used in operating activities $ (24,932 )$ (34,914 )
Net cash (used in) provided by investing activities (45,921 ) 12,405
Net cash provided by financing activities 326,921
2,057
Operating activities
Net cash used in operating activities was $24.9 million in the three months
ended December 31, 2020, and consisted primarily of a net loss of $32.9 million
adjusted for non-cash items including depreciation and amortization expenses of
$2.1 million, stock-based compensation expense of $7.0 million, and a change in
operating assets and liabilities of $1.6 million. The change in operating assets
and liabilities was mainly due to decrease in inventories of $1.2 million,
prepaid expenses and other current assets of $2.0 million and accrued expenses
of $3.4 million off set by increases in accounts receivable of $0.9 million,
accounts payable of $3.5 million and other liabilities of $0.7 million.
Net cash used in operating activities was $34.9 million in the three months
ended December 31, 2019, and consisted primarily of a net loss of $55.6 million
adjusted for non-cash items including depreciation and amortization expenses of
$1.5 million, stock-based compensation expense of $3.7 million, litigation
settlement of $22.5 million and a change in operating assets and liabilities of
$7.2 million.
Investing activities
In the three months ended December 31, 2020, our investing activities used net
cash of $45.9 million. The use of net cash resulted primarily from the net
purchases and maturity of investments of $42.3 million, and purchases of
laboratory property, equipment, and computers of $3.6 million.
In the three months ended December 31, 2019, our investing activities provided
net cash of $12.4 million. The net cash provided resulted primarily from the net
impact of purchases and maturity of investments, and purchases of laboratory
property, equipment, and computers.
Financing activities
Net cash provided by financing activities was $326.9 million in the three months
ended December 31, 2020, which consisted of $324.1 million in proceeds from a
public offering of our common stock, net of underwriting discounts and
commissions and offering expenses, and $6.1 million from the exercise of stock
options, offset by $0.8 million in principal payments on long term debt and $2.4
million in repurchases of common stock for income tax withholdings.
Net cash provided by financing activities was $2.1 million in the three months
ended December 31, 2019, which consisted of $2.0 million in proceeds from an ATM
offering, net of underwriting discounts and commissions and offering expenses,
and $1.7 million from the exercise of stock options, offset by $0.8 million in
principal payments on long term debt and $0.8 million in repurchases of common
stock for income tax withholdings.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Contractual obligations and other commitments
Our contractual obligations have not materially changed from those reported in
our Annual Report on Form 10-K.
In December 2020, we entered into a 12-year operating lease for a 110,995 square
foot facility in Wilsonville, Oregon to further expand our operations. Subject
to certain conditions pursuant to the lease, we expect monthly rent payments on
the new facility to commence in the first quarter of 2022. We will pay an
initial annual base rent of approximately $1.7 million, which is subject to
scheduled 3% annual increases, plus certain operating expenses. We have been
provided a tenant improvement allowance of $13.3 million. We have the right to
sublease the facility, subject to landlord consent. We also have the option to
extend the lease for two terms of five years. The lease has not commenced as of
December 31, 2020. The lease commencement is contingent upon assuming control
over the facility which is not expected to occur until the landlord completes
their portion of the buildout which has not yet commenced as of December 31,
2020. The future minimum lease payments under the agreement are $27.9 million.
Critical accounting policies and significant management estimates
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these condensed consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs, and expenses, and related disclosures. On an
ongoing basis, we evaluate our estimates and assumptions. Changes in these
estimates and assumptions or conditions could significantly affect our financial
condition and results of operations.
We believe the following critical accounting policies require that we make
significant judgments and estimates in preparing our consolidated financial
statements.
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Revenue recognition
Our revenue is generated through the sale of synthetic biology tools, such as
synthetic genes, or clonal genes and fragments, oligonucleotide pools, or oligo
pools, NGS tools and DNA libraries. We account for a contract when it has
approval and commitment from both parties, the rights of the parties are
identified, payment terms are identified, the contract has commercial substance
and collectability of consideration is probable.
Contracts with customers are generally in the written form of a purchase order
or a quotation, which outline the promised goods and the agreed upon price. Such
orders are often accompanied by a Master Supply or Distribution Agreement that
establishes the terms and conditions, rights of the parties, delivery terms, and
pricing. We assess collectability based on a number of factors, including past
transaction history and creditworthiness of the customer.
For all of our contracts to date, the customer orders a specified quantity of a
synthetic DNA sequence; therefore, the delivery of the ordered quantity per the
purchase order is accounted for as one performance obligation. Some contracts
may contain prospective discounts when certain order quantities are exceeded;
however, these future discounts are either not significant, not deemed to be
incremental to the pricing offered to other customers, or not enforceable
options to acquire additional goods. As a result, these discounts do not
constitute a material right and do not meet the definition of a separate
performance obligation. We do not offer retrospective discounts or rebates.
The transaction price is determined based on the agreed upon rates in the
purchase order or master supply agreements applied to the quantity of synthetic
DNA that was manufactured and shipped to the customer. Our contracts include
only one performance obligation-the delivery of the product to the customer.
Accordingly, all of the transaction price, net of any discounts, is allocated to
the one performance obligation. Therefore, upon delivery of the product, there
are no remaining performance obligations. Our shipping and handling activities
are performed before the customer obtains control of the goods and therefore are
considered a fulfillment cost. We have elected to exclude all sales and value
added taxes from the measurement of the transaction price. We have not adjusted
the transaction price for significant financing since the time period between
the transfer of goods and payment is less than one year. We have elected the
practical expedient of not disclosing the consideration allocated to remaining
performance obligations and an explanation of when those amounts are expected to
be recognized as revenue since the duration of our contracts is less than one
year.
We recognize revenue at a point in time when control of the products is
transferred to the customer. Management applies judgment in evaluating when a
customer obtains control of the promised good which is generally when the
product is delivered to the customer. Our customer contracts generally include a
standard assurance warranty to guarantee that our products comply with agreed
specifications. We reduce revenue by the amount of expected returns which have
been insignificant.
We do not have any contract assets or contract liabilities as of December 31,
2020 and September 30, 2020. For all periods presented, we did not recognize
revenue from amounts that were included in the contract liability balance at the
beginning of each period. In addition, for all periods presented, there was no
revenue recognized in a reporting period from performance obligations satisfied
in previous periods.
Based on the nature of our contracts with customers which are recognized over a
term of less than 12 months, we have elected to use the practical expedient
whereby costs to obtain a contract are expensed as they are incurred.
We state our revenues net of any taxes collected from customers that are
required to be remitted to various government agencies. The amount of taxes
collected from customers and payable to governmental entities is included on the
balance sheet as part of “Accrued expenses and other current liabilities.”
Stock-based compensation
We have granted stock-based awards, consisting of stock options and restricted
stock, to our employees, certain non-employee consultants and certain members of
our board of directors. We measure stock-based compensation expense for
restricted stock and stock options granted to our employees and directors on the
date of grant and recognize the corresponding compensation expense of those
awards over the requisite service period, which is generally the vesting period
of the respective award. We account for stock-based compensation arrangements
with non-employee consultants using a fair value approach. The estimated fair
value of unvested options granted to non-employee consultants is remeasured at
each reporting date through the date of final vesting. As a result, the noncash
charge to operations for nonemployee options with vesting conditions is affected
in each reporting period by changes in the estimated fair value of our common
stock. We adjust for actual forfeitures as they occur.
We have granted performance-based stock units (PSUs) to executive officers and
senior level employees. The Company uses the Black-Scholes method to calculate
the fair value at the grant date without regard to the vesting condition and
will recognize compensation cost for the units that are expected to vest.
Recently issued accounting pronouncements
For a description of accounting changes and recent accounting pronouncements,
including the expected dates of adoption and estimated effects, if any, on our
condensed consolidated financial statements, see Note 2, “Summary of Significant
Accounting Policies” in Item 1 of Part I of this Quarterly Report on Form 10-Q
for a full description of the recent accounting pronouncements and our
expectation of their impact, if any, on our results of operations and financial
condition.
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Item 3.
Quantitative and qualitative disclosures about market risk
Interest rates sensitivity
We are exposed to market risk related to changes in interest rates. We had cash
and cash equivalents totaling $384.8 million and $93.7 million as of
December 31, 2020 and September 30, 2020, respectively. We had short-term
investments of $238.5 million and $196.3 million as of December 31, 2019 and
September 30, 2020, respectively. Our cash and cash equivalents consist of cash
in bank accounts and money market funds, and short-term investments consist of
U.S. government agency bonds, corporate bonds, and commercial paper.
The primary objective of our investment activities is to preserve capital to
fund our operations. We also seek to maximize income from our investments
without assuming significant risk. To achieve our objectives, we maintain a
portfolio of investments in a variety of securities of high credit quality and
short-term duration, according to our board-approved investment policy. Our
investments are subject to interest rate risk and could fall in value if market
interest rates increase. A hypothetical 10% relative change in interest rates
during any of the periods presented would not have had a material impact on our
condensed consolidated financial statements.
Foreign currency sensitivity
The majority of our transactions occur in U.S. dollars. However, we do have
certain transactions that are denominated in currencies other than the U.S.
dollar, primarily the Euro, Chinese Yuan, and British Pound, and we therefore
are subject to foreign exchange risk. The fluctuation in the value of the U.S.
dollar against other currencies affects the reported amounts of expenses, assets
and liabilities primarily associated with a limited number of manufacturing
activities.
We do not use derivative financial instruments for speculative trading purposes,
nor do we hedge foreign currency exchange rate exposure in a manner that
entirely offsets the effects of changes in foreign currency exchange rates. The
counterparties to these forward foreign currency exchange contracts are
creditworthy multinational commercial banks, which minimizes the risk of
counterparty nonperformance. We regularly review our hedging program and may, as
part of this review, make changes to the program.
Item 4.
Controls and procedures
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2020 as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the
period covered by the Quarterly Report on Form 10-Q.
Based on the evaluation of our disclosure controls and procedures as of
December 31, 2020, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were not
effective as of such date due to the material weaknesses in our internal control
over financial reporting described below.
Previously Identified Material Weaknesses
Refer to the management report on internal control over financial reporting
disclosed in Part II-Item 9A of the Form 10-K for the year ended September 30,
2020 filed with SEC on November 27, 2020 .
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Remediation Efforts
We have identified the following remediation efforts for the material weaknesses
described above.
Journal Entries
We are designing and implementing a process and control whereby an individual
without access to create and post journal entries independently reviews journal
entries that are created and posted by the same individual or edited and posted
by the same individual.
Revenue
We are designing and implementing processes and controls to ensure that any
edits to customer order entry data, including price and quantity, are
appropriately reviewed. We are also redesigning our segregation of duties
framework within the revenue cycle to ensure appropriate segregation of duties
throughout the order entry and revenue processes.
ITGCs
We are designing and implementing improved processes and controls for
requesting, authorizing, and reviewing user access to key information systems
which impact our financial reporting, including identifying access to roles
where manual business process controls may be required. This implementation will
include the addition of new preventative control activities associated with user
access provisioning within our key applications which impact our financial
reporting, as well as certain detective controls which review user access and
activity logs.
Additional changes and improvements may be identified and adopted as we continue
to evaluate and implement our remediation plans. These material weaknesses will
not be considered remediated until the applicable controls operate for a
sufficient period of time and management has concluded, through testing, that
the enhanced control is operating effectively.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) and
15d-15(d) of the Exchange Act that occurred during the quarter ended
December 31, 2020 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
(c) Inherent limitations on effectiveness of controls
Our management, including the CEO and CFO, recognizes that our disclosure
controls or our internal control over financial reporting cannot prevent or
detect all possible instances of errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. The design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
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PART II. Other information
Item 1.
Legal proceedings
We are subject to various legal proceedings and claims arising in the ordinary
course of business. Although occasional adverse decisions or settlements may
occur, management believes that the final disposition of such matters will not
have a material adverse effect on our business, financial position, results of
operations or cash flows.
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