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As submitted for confidential review with the Securities and Exchange Commission on February 8, 2018. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TWIST BIOSCIENCE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2836   46-2058888
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification Number)

455 Mission Bay Boulevard South, Suite 545

San Francisco, CA 94158

(800) 719-0671

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Emily M. Leproust

President and Chief Executive Officer

Twist Bioscience Corporation

455 Mission Bay Boulevard South, Suite 545

San Francisco, CA 94158

(800) 719-0671

(Name, address including zip code, and telephone number including area code, of agent for service)

 

 

COPIES TO:

 

John V. Bautista, Esq.

Christopher J. Austin, Esq.

Peter M. Lamb, Esq.

Orrick, Herrington & Sutcliffe LLP

1000 Marsh Road

Menlo Park, CA 94025

(650) 614-7400

 

Mark Daniels, Esq.

General Counsel

Twist Bioscience Corporation

455 Mission Bay Boulevard

Suite 545

San Francisco, CA 94158

(844) 362-8978

 

Brian J. Cuneo, Esq.

B. Shayne Kennedy, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

(650) 328-4600

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934 (check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer     (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per unit(2)

 

Proposed

maximum

aggregate

offering price(2)

  Amount of
registration fee

Common Stock, par value $0.00001 per share

      $                       $                       $                    

 

 

(1)   Includes             shares of Common Stock issuable upon exercise of the Underwriters’ option to purchase additional shares, solely to cover overallotments. See “Underwriting.”

 

(2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated     , 2018

PRELIMINARY PROSPECTUS

            shares

 

LOGO

Common stock

This is the initial public offering of shares of common stock of Twist Bioscience Corporation. Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $        and $        per share.

We intend to apply to list our common stock on The Nasdaq Global Market under the symbol “TWST.”

We are an “emerging growth company,” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

        Per Share        Total  

Initial public offering price

     $                         $                   

Underwriting discounts and commissions(1)

     $        $  

Proceeds, before expenses, to Twist Bioscience Corporation

     $        $  

 

 

 

(1)   See “Underwriting” for additional disclosure regarding underwriting discounts and commissions and estimated offering expenses.

We have granted the underwriters a 30-day option to purchase up to                additional shares of common stock from us at the initial public offering price less the underwriting discounts and commissions, solely to cover overallotments.

Investing in our common stock involves a high degree of risk. See the section entitled “Risk factors” beginning on page 17 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the shares of common stock to purchasers on or about                , 2018.

Joint book running managers

 

J.P. Morgan         Cowen  

Co-managers

 

Allen & Company LLC         Baird  

                , 2018


Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1  

Risk factors

     17  

Special note regarding forward-looking statements

     52  

Industry and market data

     54  

Use of proceeds

     55  

Dividend policy

     56  

Capitalization

     57  

Dilution

     59  

Selected consolidated financial data

     62  

Management’s discussion and analysis of financial condition and results of operations

     64  

Business

     80  

Management

     108  

Executive compensation

     119  

Certain relationships and related party transactions

     133  

Principal stockholders

     137  

Description of capital stock

     140  

Shares eligible for future sale

     145  

Material U.S. federal income tax considerations for non-U.S. holders

     147  

Underwriting

     151  

Legal matters

     162  

Experts

     162  

Where you can find more information

     162  

Index to consolidated financial statements

     F-1  

NEITHER WE NOR THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN ANY FREE WRITING PROSPECTUSES WE HAVE PREPARED. NEITHER WE NOR THE UNDERWRITERS TAKE RESPONSIBILITY FOR, AND CAN PROVIDE NO ASSURANCE AS TO THE RELIABILITY OF, ANY OTHER INFORMATION THAT OTHERS MAY GIVE YOU. THIS PROSPECTUS IS AN OFFER TO SELL ONLY THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.

For investors outside of the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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“Twist Bioscience,” and “Sequencespace” are registered trademarks in the U.S. and, in some cases, in certain other countries and our logo is an unregistered trademark of Twist Bioscience Corporation. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

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Prospectus summary

This summary highlights information contained in greater detail elsewhere in this prospectus. Before making an investment in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information in the sections entitled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.” The last day of our fiscal year is September 30.

Overview

We are a leading and rapidly growing synthetic biology company that has developed a disruptive DNA synthesis platform. 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 and scalable commercial infrastructure to create an integrated platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We believe that we are the first and only company to harness the highly-scalable production and processing infrastructure of the semiconductor industry to industrialize the production of a wide range of synthetic DNA-based products.

Synthetic DNA is the fundamental building block of synthetic biology, an emerging industry that we believe represents one of the most exciting areas of growth and technological innovation in the 21st century. The ability to modify DNA and design biological systems is the foundation for a rapidly growing set of synthetic DNA-based products, applications, and markets across multiple industries.

The synthetic biology market is growing rapidly and is being fueled by increased access to affordable and innovative tools that enable new applications. We believe this is analogous to the trends seen in the next generation sequencing, or NGS, market, where declining costs of sequencing drove adoption, new applications and market expansion. Tools that combine advanced production technology with modern digital technology and software capabilities, such as our DNA synthesis platform, are driving growth and market creation. In calendar year 2016, the market for synthetic biology products was approximately $4.0 billion and is expected to grow to $11.0 billion by calendar year 2021. We believe this period of accelerated growth in the synthetic biology industry is in its early stages.

The applications of our DNA synthesis platform are broad, and have enabled us to develop and produce an array of different synthetic DNA-based products targeting multiple market opportunities. In April 2016, we launched the first application of our platform, our synthetic DNA product offering, with the goal to become the leading synthetic DNA provider, disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete. We believe that the traditional DNA synthesis methods used by our competitors are inherently limited in scalability and are not optimized to satisfy the rapidly growing demand for high-quality, low-cost synthetic DNA. Our silicon-based chip technology is able to increase DNA production by a factor of 9,600 on a footprint similar to that of traditional DNA synthesis methods. Also, it significantly lowers the volume of required reagents, specifically the most expensive reagent by a factor of 1,000,000, and improves the precision of the synthesis process relative to legacy methods. This enables us to produce high-quality synthetic DNA on a much larger scale and at lower cost than competitors.

We have rapidly become a leading synthetic DNA provider. In fiscal 2017, we served 292 customers including nine of the top 20 pharmaceutical companies by revenue, Ginkgo Bioworks, Inc., or Gingko Bioworks, which we believe is the largest global purchaser of synthetic DNA, four of the largest agricultural biotechnology

 

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companies, over 100 academic research institutions worldwide, and innovative customers using synthetic DNA for new and emerging applications, such as Microsoft Corporation and the University of Washington for use of DNA as a digital data storage medium. We are also an original equipment manufacturer, or OEM, of synthetic DNA to four synthetic DNA manufacturers that also compete with us, which we believe is a strong demonstration of the superiority of our platform.

We have also leveraged the versatility of our platform to expand our product portfolio into other markets in which we believe we have a competitive advantage. In October 2017, we launched an innovative and comprehensive sample preparation kit for next generation sequencing that simplifies the workflow, improves accuracy, and lowers the cost of NGS. We have launched a product for CRISPR gene editing that enables customers to edit an exponentially larger number of DNA regions in parallel. We have also commercialized a DNA library solution which enables more effective biologic drug discovery and development for our customers. We continue to expand our portfolio of commercial and development-stage products derived from synthetic DNA.

Our currently marketed products target the synthetic DNA market, a sub-segment of the synthetic biology market, and NGS sample preparation, a large adjacent market opportunity. We estimate that the combined market opportunity was $1.8 billion in calendar year 2016. The growing synthetic biology industry and demand for better DNA sequencing products are driving market growth. We believe that current estimates understate our market potential as they reflect a market that has historically been limited by the costly, time-consuming, and cumbersome nature of legacy DNA synthesis methods. We are seeing growth in our market opportunity as we improve access to affordable tools that encourage adoption of, and foster new applications and markets for our products.

We have built a scalable commercial platform that enables us to reach a diverse customer base that we estimate consists of over 100,000 synthetic DNA users today. In order to address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force 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 critical part of our strategy to address our large and diverse customer base, as well as drive commercial productivity, enhance the customer experience, and promote loyalty.

Since our formation in 2013, we have grown rapidly and achieved several key milestones that we believe position us for continued growth and success:

 

 

In 2015, we demonstrated the benefits and validated the commercial utility of our proprietary silicon-based platform for DNA synthesis through a proof-of-concept program called the Alpha Access program, which provided initial access to our platform to select customers.

 

 

In 2016, we (i) secured a long-term contract with Ginkgo Bioworks to provide up to 100 million base pairs of DNA, which we believe was the largest agreement for synthetic DNA at that time, (ii) launched our early commercial access program in April called the Beta Access program to select customers and expanded our existing relationship with Ginkgo Bioworks, (iii) acquired Genome Compiler Corporation to add software design capabilities for our e-commerce ordering system, (iv) laid the groundwork to pursue an opportunity in pharmaceutical drug discovery though a relationship with Distributed Bio, Inc., and (v) supplied DNA to Microsoft Corporation for its work with the University of Washington to develop DNA as a data storage medium.

 

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In 2017, we continued to increase penetration with existing customers and expand our customer base, by (i) serving 292 customers, up from 97 customers in 2016, (ii) agreeing to terms to supply one billion base pairs to Ginkgo Bioworks over a period of three years, (iii) extending the scope of our relationship with Microsoft Corporation and the University of Washington, (iv) entering into an agreement to supply thousands of genes for public benefit through the BioBricks Foundation, (v) successfully achieving industry-leading volumes of synthetic DNA shipped every month, (vi) becoming an OEM supplier of synthetic DNA to four synthetic DNA manufacturers that also compete with us, (vii) launching our e-commerce platform to existing customers in October 2017, and (viii) shipping over 38,000 genes compared to approximately 7,600 for the fourth quarter of fiscal 2016, which represents 400% year-over-year growth.

 

 

In January 2018, we launched our e-commerce platform to the general public.

We generated revenue of $2.3 million in fiscal 2016 and $10.8 million in fiscal 2017 representing 375% year-over-year growth, while incurring net losses of $44.1 million in fiscal 2016 and $59.3 million in fiscal 2017.

Our headquarters and manufacturing facilities are located in San Francisco, California. As of September 30, 2017, we had 187 full-time employees across three locations in the San Francisco Bay Area and an international location in Tel Aviv, Israel. We also utilize a team of 10 dedicated commercial consultants across the European Union and the United Kingdom. As of September 30, 2017, we have raised a total of $200.3 million in gross proceeds from the sale of equity securities.

The synthetic biology industry

We operate in the field of synthetic biology, which is undergoing an era of rapid innovation and transformation, catalyzed by technological advancements in bioinformatics, genomics, computation and automation. Synthetic biology is the engineering of biology to build new biological systems or re-design existing biological systems. The ability to engineer biology is creating advances and benefits for a broad and growing range of end markets and consumers, including:

 

 

healthcare for the discovery and production of new therapeutics and molecular diagnostics;

 

 

agriculture for more effective and sustainable crop production;

 

 

industrial chemicals for cost-effective and sustainable production of specialty chemicals and materials, such as nylon, rubber, fragrances and food flavors; and

 

 

academic research for a broad range of applications.

According to BCC Research, the overall market for synthetic biology products was approximately $4.0 billion in calendar year 2016 and is expected to grow to over $11.0 billion by calendar year 2021. This industry momentum creates a significant opportunity for us to grow within our existing markets as well as expand our product offering.

Synthetic DNA is the fundamental building block of synthetic biology. DNA controls all cellular processes by coding for the production of proteins and other molecules. Users of synthetic biology can design synthetic DNA to regulate the production of these proteins and 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.

 

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Limitations of existing solutions

Traditional methods of DNA synthesis consist of a two-step process that initially involves the synthesis of oligonucleotides, also referred to as oligos, which are short strands of DNA. These oligos are then combined to create longer strands of DNA. Currently, there are two primary methodologies used by others to create synthetic DNA, each having production limitations that we believe make these technologies sub-optimal to satisfy the rapidly growing demand for synthetic DNA. Today, all of our competitors use one of these two primary methods of DNA synthesis:

96-well plate method of DNA synthesis

Introduced as early as the 1950s, a 96-well plate is a flat plastic plate, roughly the size of two smartphones, with eight rows of 12 wells that are used as small test tubes. Instead of creating one sequence of DNA at a time in a single test tube, the 96-well plate allows researchers to create 96 oligos in parallel, one in each well. While this process successfully achieves DNA synthesis, it requires high volumes of phosphoramidites, an expensive raw material, as well as other ancillary reagents. It also produces excessive amounts of the final product, significantly more than is required for most subsequent processes, resulting in material that is discarded and an unnecessary expense. Additionally, this process is not scalable to produce high volumes, as approximately 100 oligos are needed to assemble one gene and therefore only one gene can be made from each 96-well plate.

Microarray method of DNA synthesis

Unlike a 96-well plate, a microarray is a flat surface made of plastic or glass on which DNA is synthesized directly in an array of discrete locations. Microarrays allow large numbers of oligos to be synthesized in parallel, increasing DNA production by up to four orders of magnitude when compared to the 96-well plate. However, while this method can make 100 genes in parallel, it remains difficult to scale, requires many steps, and results in significant waste of materials.

Because the synthesis of oligos can introduce errors in the sequence order, all DNA synthesis methods require a process called cloning.

Cloning

Cloning is a tedious process to filter out errors and produce many identical copies of a strand of DNA, such as a gene. While the cloning process results in a precise sequence, it is incredibly slow and labor intensive and generally takes around 10 business days to complete. As a result, it is time consuming, expensive, and, in many cases, not an efficient use of researchers’ time. In general, more accurate DNA synthesis technology results in fewer errors in the sequence order and reduces the time and costs required or allocated to the cloning process.

 

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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 of, 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. With a footprint that is similar to the size of a 96-well plate that produces one gene, we are able to produce 9,600 genes in parallel. Based on current production needs, we have intentionally designed our latest chip to make 6,144 genes in parallel, but we have the current capability to increase this to 9,600 genes as needed. We have combined our DNA synthesis technology with propriety software and scalable commercial infrastructure to create our vertically integrated DNA synthesis platform capable of delivering very large volumes of high-quality synthetic DNA at low cost.

 

LOGO

 

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Based on market research, we believe that buyers of DNA are looking for a product and purchasing experience that delivers on a number of key factors, and our platform is uniquely designed to meet these customer needs and overcome the limitations of legacy DNA synthesis methods in order to support the growing demand for synthetic DNA:

 

      Customer desires    Twist Bioscience advantages
Quality and accuracy   

•  Quality and accuracy is a basic requirement for all customers. Deviations from customer specifications can render customers’ downstream uses less productive or ineffective.

  

•  Synthetic DNA providers are able to supply perfect clonal DNA to the customer. However, existing DNA synthesis technologies require significant cloning and error filtration to produce perfect clonal DNA. We are able to consistently produce high-quality oligos with what we believe is an industry-leading error rate of 1/1000 base pairs. This enables us to reduce the cloning and error filtration necessary to achieve perfect clonal DNA.

Cost

  

•  Cost is a critical consideration for both large and small-scale customers. Large-scale commercial DNA purchasers that outsource their DNA supply are becoming increasingly price sensitive due to their growing demand for DNA. On the other hand, smaller-scale users, particularly academic users, typically have made their own DNA because of limited budgets relative to the prices charged by legacy DNA suppliers.

  

•  Because we miniaturize the chemical reaction on a silicon chip, require lower volumes of reagents, and automate the production process, we are able to dramatically lower the production cost per base pair of DNA and offer our synthetic DNA at a lower price than competitors. As of November 2017, the publicly available pricing of our competitors for clonal DNA ranged from $0.17—$3.00 per base pair. Our standard pricing for comparable DNA is $0.09 per base pair. One of the best demonstrations of our cost advantage is that we supply synthetic DNA to four other competing synthetic DNA providers.

Throughput/scale   

•  As the applications for synthetic biology have expanded, customers are increasingly seeking to purchase large quantities of DNA in relatively short periods of time, which often cannot be supplied by a single synthetic DNA provider due to production capacity constraints. Ordering from multiple suppliers to fulfill large orders can be costly and administratively cumbersome for customers.

  

•  Our silicon chip technology is able to increase DNA production by a factor of 9,600 on a footprint similar to traditional DNA synthesis methods. We currently have the capability to manufacture more than 45,000 genes per month, which we believe is the highest in the industry. We have agreed to terms to supply one billion base pairs to Ginkgo Bioworks over a period of three years, which we believe is the largest volume supply commitment in the industry.

 

 

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      Customer desires    Twist Bioscience advantages
Turnaround time   

•  The time between placement of the order and delivery is a key consideration for customers. For example, pharmaceutical companies are focused on shortening internal R&D timelines and ready availability of high-quality, synthetic DNA to meet their internal timelines is an important factor.

  

•  Because our platform enables the large-scale production of DNA, our turnaround time is largely independent of order size. We have enhanced our manufacturing capabilities and expect to reduce turnaround time on large commercial quantities of genes (i.e., orders of over 15,000 per month) to 10 business days.

Product offering / complexity   

•  Customers require a broad range of products including different gene lengths, complicated sequences and a wide range of additional configurations to fulfill a diverse set of applications and uses.

  

•  Because we synthesize each oligonucleotide individually, we can customize orders to almost any customer’s specifications. We currently offer genes of up to 3,200 base pairs in length, which we believe satisfies a vast majority of the market for synthetic DNA today. We expect to offer genes of up to 10,000 base pairs in the future. Unlike traditional DNA synthesis technologies, we can also manufacture a broad range of additional products on our same DNA synthesis platform, including antibody libraries and oligo pools, among others.

Reliability

  

•  Customers value the reliability of a supplier to deliver on promises of quality and turnaround time to allow them to plan their downstream workflow and hit internal deadlines.

  

•  Due to our throughput capability and proprietary integrated production and ordering process we have been able to consistently meet the specifications and turnaround time that we promise customers.

E-commerce capability   

•  Customers, particularly smaller-scale customers, value an intuitive, seamless e-commerce experience to simplify and automate the purchasing process. Some customers also value an application protocol interface, or an API, for electronic integration into their own procurement systems.

  

•  While some synthetic DNA providers have an e-commerce platform for ordering DNA, we believe we offer the most comprehensive e-commerce platform consisting of customized quotes, automated feedback on the feasibility of the sequence and the ability to track orders from placement to delivery. An API is also a core component of our e-commerce system.

 

Our target markets

Our currently marketed product offering addresses a market opportunity that was approximately $1.8 billion in calendar year 2016. We believe our solution has the potential to materially expand our initial market by providing end-users with access to high-quality and lower cost tools, encouraging adoption, and facilitating new applications for our products.

 

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Synthetic DNA market

We believe that our current market opportunity for synthetic DNA was approximately $1.3 billion in calendar year 2016. The market consists of those who buy DNA, or DNA Buyers, and those who make their own DNA, or DNA Makers. Driven by access to more affordable and high-quality synthetic DNA, we believe that there is a strong trend of DNA Makers converting to DNA Buyers. According to BCC Research, the size of the DNA Buyer market in 2016 was approximately $300 million and is growing at a rate of approximately 20% annually as existing DNA Buyers develop new uses for synthetic DNA and existing DNA Makers convert to DNA Buyers. We estimate our market opportunity in the DNA Maker market to be approximately $950 million. Our market estimate is based on the market sizes for products used in manual DNA synthesis including the cloning and restriction digestion enzyme market in 2016, according to a report on Molecular Biology by Markets and Markets.

NGS sample preparation market

Our NGS sample preparation kits address the demand for better sample preparation products that improve the sequencing workflow, increase sequencing accuracy and lower sequencing costs. We offer kits consisting of double-stranded DNA probes and a comprehensive target enrichment kit that are used for exome sequencing and custom targeted sequencing. Kalorama Information, a division of marketresearch.com, estimates the market for sample preparation for next generation sequencing was approximately $500 million in calendar year 2016 and growing at approximately 20% annually.

Future market opportunities

The applications of our platform are broad and we are applying our technology towards additional large market opportunities. We have identified two vertical markets as our initial strategic priorities: Pharmaceutical drug discovery and digital data storage in DNA.

Pharmaceutical drug discovery

We believe we are uniquely positioned to capture a larger portion of the drug discovery value chain given that our synthetic DNA products are already used by our pharmaceutical partners throughout the drug development process. As part of our effort in this market, we recently launched our DNA library solution which facilitates biologic drug discovery and development. We are already in agreement with a top three pharmaceutical company by revenue to supply our DNA libraries instead of them producing their own. We are also developing a proprietary DNA library with our own antibodies which we plan to license to pharmaceutical companies for further discovery and development.

Digital data storage in DNA

Due to the explosion of data across many industries, finding efficient means of storage has become more important. Through the Semiconductor Research Consortium, many leading semiconductor companies, including Microsoft Corporation, IBM Corporation, Micron Technology, Inc., Autodesk Inc., Mentor Graphics Corporation and GLOBALFOUNDRIES Inc., are exploring DNA as a data storage medium. Through our relationship with Microsoft Corporation and the University of Washington, we have demonstrated the feasibility of storing data on DNA and the unique benefits of longevity, density, and universality of this format. We expect that over time our technology will develop to allow data storage in DNA to become cost competitive with magnetic tape and enable us to target several large markets within data storage. The market for digitized data storage, including solid-state disk, magnetic disk, magnetic tape and optical disc storage and is currently estimated at over $35 billion.

 

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Our growth strategy:

Our objective is to be the leading provider of synthetic DNA worldwide and to leverage the versatility of our platform to build a leadership position in other 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 DNA to customers across multiple industries

 

 

Increase our penetration within existing buyers of synthetic DNA

 

 

Further expand our addressable market by converting current “DNA Makers” into “DNA Buyers”

 

 

Broaden our reach to the more than 100,000 estimated synthetic DNA users

 

 

Augment our product offering within our core DNA synthesis franchise to meet the growing needs of our existing and potential new customers

 

 

Expand into adjacent addressable markets

 

 

Expand our global presence

Beyond these opportunities, we are working with industry partners to create new markets for our products. For example, through our relationship with Microsoft Corporation and the University of Washington we have demonstrated the advantages of DNA as a long-term medium for digital data storage, and are developing technology to address this potential market opportunity. Furthermore, given that synthetic DNA is the foundation for a broad range of products, we are in a strong position to evaluate acquisition opportunities in existing and adjacent markets and address other new markets as they emerge.

Risks related to our business

Investing in our common stock involves substantial risk. You should carefully consider all of the information in this prospectus prior to investing in our common stock. There are several risks related to our business that are described under “Risk factors” elsewhere in this prospectus. Among these important risks are the following:

 

 

We are an early stage company with limited operating history, which may make it difficult to evaluate our current business and predict our future performance;

 

 

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;

 

 

Our consolidated financial statements contain a going concern qualification and we will require additional financing to achieve our goals;

 

 

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;

 

 

Rapidly changing technology and extensive competition in synthetic biology could make the products we are developing obsolete or non-competitive unless we continue to develop new and improved products and pursue new market opportunities;

 

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We and our chief executive officer are currently involved in litigation with Agilent Technologies, Inc., in which Agilent has alleged a claim of trade secret misappropriation against Twist Bioscience and trade secret misappropriation and other related claims against our chief executive officer, and an adverse result could harm our business and results of operations;

 

 

Our revenue, results of operations, cash flows and reputation in the marketplace may suffer upon the loss of a significant customer;

 

 

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; 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.

Corporate information

We were incorporated in Delaware on February 4, 2013. Our principal executive offices are located at 455 Mission Bay Boulevard South, Suite 545, San Francisco, CA 94158. Our telephone number at that location is (800) 719-0671. References in the prospectus to “we,” “our,” “us,” “Twist Bioscience” and the “Company” refer to Twist Bioscience Corporation and, where appropriate, its wholly-owned subsidiaries unless the context requires otherwise. Our corporate website address is www.twistbioscience.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website to be part of this prospectus. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.

Implications of being an emerging growth company

We qualify as an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

 

an exemption from complying with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act of 2002, as amended, or Section 404;

 

 

a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

 

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

 

an exemption from the requirement to seek non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have not made a decision regarding whether to take advantage of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less

 

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attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably opted out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and (c) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

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The offering

The following information assumes that the underwriters do not exercise their option to purchase additional shares in the offering. See “Underwriting.”

 

Common stock offered by us

                    shares

 

Common stock to be outstanding after the offering

                shares

 

Option to purchase additional shares of common stock

The underwriters have an option to purchase a maximum of                additional shares of common stock from us, solely to cover overallotments. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We intend to use the net proceeds from this offering primarily to improve and update our platform and core technologies, to expand our sales and marketing capabilities, to further expand into other geographies, to continue to expand into new business verticals, and for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire other businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. See “Use of proceeds” for more information.

 

Listing

We intend to apply to list our common stock on The Nasdaq Global Market under the symbol “TWST.”

 

Directed share program

At our request, the underwriters have reserved         % of the shares of common stock offered hereby, at the initial public offering price, to directors, officers, employees, business associates and related persons of Twist Bioscience Corporation. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. See section captioned “Underwriting.”

 

Material U.S. federal income tax considerations for non-U.S. holders

For a discussion of the material U.S. federal income tax considerations that may be relevant to prospective investors who are non-U.S. holders, please see “Material U.S. federal income tax considerations for non-U.S. holders.”

 

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk factors” and all other information in this prospectus before investing in our common stock.

 

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We refer to our Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock and Series D redeemable convertible preferred stock as our “convertible preferred stock” in this prospectus, as well as for financial reporting-term purposes and in the financial tables included in this prospectus, as more fully explained in Note 13 to our audited consolidated financial statements. In this prospectus (as well as, for financial reporting-term purposes and in the financial tables included in this prospectus as more fully described in Note 12), we refer to our outstanding warrants as either warrants to purchase shares of redeemable convertible preferred stock or warrants to purchase shares of common stock.

Except as otherwise indicated, all information in this prospectus is based upon 176,612,969 shares of our common stock (including 2,047,292 unvested shares of restricted common stock subject to our repurchase right) outstanding as of September 30, 2017, and excludes:

 

 

18,017,311 shares of our common stock issuable upon exercise of stock options outstanding as of September 30, 2017, having a weighted-average exercise price of $0.67 per share;

 

 

            shares of our common stock issuable upon exercise of stock options granted after September 30, 2017, having a weighted-average exercise price of $        per share;

 

 

            shares of common stock reserved for future grant or issuance under our 2018 Equity Incentive Plan, or 2018 Plan (which includes 6,805,339 shares of our common stock as of September 30, 2017 reserved for future grant under our 2013 Stock Plan, or 2013 Plan, that will be added to the shares reserved for future issuance under our 2018 Plan upon effectiveness of that plan if the shares are not issued or subject to outstanding grants under the 2013 Plan at that time), which will become effective in connection with this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation—Equity incentive plans;”

 

 

            shares of common stock reserved for future grant or issuance under our 2018 Employee Stock Purchase Plan, or 2018 ESPP, which will become effective in connection with this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive Compensation—Equity incentive plans;”

 

 

634,921 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common stock outstanding as of September 30, 2017, having an exercise price of $0.63 per share, and an additional 634,920 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common stock, having an exercise price of $0.63 per share that would be exercisable upon the drawing down of additional loans under our amended and restated loan and security agreement with Silicon Valley Bank dated September 6, 2017, or credit facility;

 

 

364,742 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series A convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.329 per share;

 

 

160,606 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series B convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.792 per share;

 

 

186,679 shares of our common stock, issuable upon the exercise of outstanding warrants to purchase Series C convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $1.4999 per share; and

 

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74,567 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series D convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $2.1457 per share.

Except as otherwise indicated, all information in this prospectus reflects and assumes:

 

 

the conversion immediately prior to the completion of this offering of all of our outstanding shares of convertible preferred stock into an aggregate of 145,138,924 shares of common stock;

 

 

the automatic conversion of warrants to purchase an aggregate of 786,594 shares of redeemable convertible preferred stock into warrants to purchase an aggregate of 786,594 shares of common stock immediately prior to the closing of this offering;

 

 

no exercise or termination of outstanding stock options or warrants after September 30, 2017;

 

 

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and

 

 

no exercise by the underwriters of their overallotment option to purchase additional shares of common stock from us.

 

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Summary consolidated financial information

The following table summarizes our historical consolidated financial data and should be read together with our consolidated financial statements, the notes to our consolidated financial statements and the sections titled “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” contained elsewhere in this prospectus.

We derived the summary consolidated statements of operations data and consolidated balance sheet data for the fiscal years ended September 30, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future performance.

 

      Years ended September 30,  
(in thousands, except share and per share data)    2016     2017  

Consolidated statements of operations data:

    

Revenues

   $ 2,269     $ 10,767  

Operating expenses:

    

Cost of revenues

     9,421       24,020  

Research and development

     18,230       19,169  

Selling, general and administrative

     18,274       26,060  
  

 

 

 

Total operating expenses

     45,925       69,249  
  

 

 

 

Loss from operations

     (43,656     (58,482

Interest income

     241       412  

Interest expense

     (746     (905

Other income (expense), net

     73       (55
  

 

 

 

Loss before income taxes

     (44,088     (59,030

Provision for income taxes

           (280
  

 

 

 

Net loss attributable to common stockholders

   $ (44,088   $ (59,310
  

 

 

 

Other comprehensive loss

    

Change in unrealized gain (loss) on investments

     9       (9

Foreign currency translation adjustment

           33  
  

 

 

 

Comprehensive loss

   $ (44,079   $ (59,286
  

 

 

 

Net loss per share attributable to common stockholders—basic and diluted(1)

   $ (2.38   $ (2.47
  

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders—basic and diluted(1)

     18,511,202       23,982,605  
  

 

 

 

Pro forma net loss per share—basic and diluted(1)

     $ (0.39
    

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share—basic and diluted(1)

       152,397,059  

 

 

 

(1)   See Note 16 of the notes to our consolidated financial statements included elsewhere in this prospectus for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.

 

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      As of September 30, 2017  
(In thousands)    Actual     Pro
forma(2)
    Pro forma as
adjusted(3)
 

Consolidated balance sheet data:

      

Cash, cash equivalents, and short-term investments

   $ 62,204     $ 62,204    

Working capital

     58,392       58,392    

Total assets

     85,657       85,657    

Total liabilities

     19,382       18,738    

Convertible preferred stock

     199,633       —      

Additional paid-in capital

     6,228       206,503    

Accumulated deficit

     (139,619     (139,619  

Total stockholders’ equity (deficit)

     (133,358     66,919    

 

 

 

(2)   The pro forma column reflects, effective immediately prior to the closing of this offering, the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 145,138,924 shares of common stock.

 

(3)   The pro forma as adjusted column gives effect to the pro forma adjustments set forth in footnote 2 above and further reflects the sale by us of                shares of common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $        million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease the amount of our cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $        million, assuming an initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks related to our business

We are an early stage company with limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

We are an early stage company and have a limited operating history. We were incorporated in February 2013 and began commercial operations in April 2016. Prior to engaging in commercial operations, we focused on research and development of DNA synthesis. Our revenue for the fiscal years ended September 30, 2016 and 2017 was $2.3 million and $10.8 million, respectively. We may never achieve commercial success and we have limited historical financial data upon which we may base our projected revenue. We also have limited historical financial data upon which we may base our planned operating expense or upon which you may evaluate our business and our prospects. Based on our limited experience in developing and marketing new products, we may not be able to effectively:

 

 

drive adoption of our products;

 

 

attract and retain customers for our products;

 

 

anticipate and adapt to changes in our the existing and emerging markets in which we operate;

 

 

focus our research and development efforts in areas that generate returns on these efforts;

 

 

maintain and develop strategic relationships with suppliers to acquire necessary materials and equipment for the production of our products on appropriate timelines, or at all;

 

 

implement an effective marketing strategy to promote awareness of our products with potential customers;

 

 

scale our manufacturing activities to meet potential demand at a reasonable costs;

 

 

avoid infringement and misappropriation of third-party intellectual property;

 

 

obtain licenses on commercially reasonable terms to third-party intellectual property, as needed;

 

 

obtain valid and enforceable patents that give us a competitive advantage;

 

 

protect our proprietary technology;

 

 

provide appropriate levels of customer training and support for our products; and

 

 

attract, retain and motivate qualified personnel.

In addition, a high percentage of our expenses have been and will continue to be fixed. Accordingly, if we do not generate revenue as and when anticipated, our losses may be greater than expected and our operating results will suffer. You should consider the risks and difficulties frequently encountered by companies like ours in new and rapidly evolving markets when making a decision to invest in our common stock.

 

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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 in each year since inception and have generated limited revenue from product sales to date. We expect 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 $44.1 million and $59.3 million for the years ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $139.6 million. We expect to incur substantial losses and negative cash flow for the foreseeable future. In addition, as a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. These increased expenses will make it harder for us to achieve and sustain future profitability. 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 prospectus, the market acceptance of our products, future product development and our market penetration and margins.

Our consolidated financial statements contain a going concern qualification.

Our annual audited consolidated financial statements contain a going concern qualification. We have incurred net losses and used significant cash in operating activities since inception and have an accumulated deficit of $139.6 million and working capital of $58.4 million as of September 30, 2017. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise adequate capital to fund operating losses until we are able to engage in profitable business operations. To the extent financing is not available, we may not be able to develop, or may be delayed in developing, our products and meeting our obligations. There can be no assurance that we will be able to obtain additional debt or equity capital required in order to continue our operations on terms acceptable to us or at all.

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.

Since our inception, substantially all of our resources have been dedicated to the development of our DNA synthesis platform. Net cash used in operating activities was $38.6 million and $51.3 million for the years ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had working capital of $58.4 million and capital resources consisting of cash, cash equivalents and short-term investments of $62.2 million. We believe that we will continue to expend substantial resources for the foreseeable future as we expand into additional markets we may choose to pursue. These expenditures are expected to include costs associated with research and development, manufacturing and supply as well as marketing and selling existing and new products. In addition, other unanticipated costs may arise.

After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments 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 we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. 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.

 

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Our future capital requirements depend on many factors, including:

 

 

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;

 

 

the cost of manufacturing our DNA synthesis equipment and tools 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;

 

 

any lawsuits related to our products or commenced against us, including the costs associated with our current litigation with Agilent;

 

 

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:

 

 

delay, limit, reduce or terminate our manufacturing, research and development activities; or

 

 

delay, limit, reduce or terminate our establishment of sales and marketing 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 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.

 

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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. The quality of our products may suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. For example, several of the reports rely on discussions with industry thought leaders, employ projections of future applications of synthetic biology and next generation sequencing technology in major end-user market segments and by technology type, and incorporate data from secondary sources such as company websites as well as industry, trade and government publications. The estimates and forecasts in this prospectus relating to the size and expected growth of our market may prove to be inaccurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at the rate we anticipate, if at all.

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 and this offering.”

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, convert makers of synthetic DNA into buyers of synthetic DNA, 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. For additional information on our growth strategy, see the section of this prospectus

 

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captioned “Business—Business strategy.” 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.

Internet security poses a risk to our e-commerce sales.

We currently generate a small portion of our revenue through sales on our e-commerce platform. However, as part of our growth strategy, we intend to increase the level of customer traffic and volume of customer purchases through our e-commerce platform which we formally launched to the general public in January 2018. 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. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss and/or litigation. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may result in consumer distrust and may adversely affect our business, results of operations and financial condition.

Our actual operating results may differ significantly from our guidance.

From time to time, we plan to 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 will include forward-looking statements, will be based on projections prepared by our management. These projections will not be prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants 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. We intend to state possible outcomes as high and low ranges which are intended 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.

 

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Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk factors” section in this prospectus 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 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 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.

 

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A significant portion of our sales depends on customers’ capital spending 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 healthcare, agriculture, industrial chemicals and academic research sectors, and their capital spending 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:

 

 

the allocation of available resources to make purchases;

 

 

funding from government sources;

 

 

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;

 

 

macroeconomic conditions and the political climate;

 

 

changes in the regulatory environment;

 

 

differences in budgetary cycles; and

 

 

market acceptance of relatively new technologies, such as ours.

Any decrease in capital 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 capital budgets in those regions and the mix of domestic versus international sales. Moreover, we have no control over the timing and amount 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 enter into long-term contracts with our customers.

Our customers generally do not have long-term contracts with 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 have limited experience in sales and marketing of our products and, as a result, may be unable to successfully increase our market share and expand our customer base.

We have limited experience in sales and marketing of our products. 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

 

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with the appropriate technical expertise to effectively market our products. To perform sales, marketing, distribution and customer support successfully, we will face a number of risks, including:

 

 

we may not be able to attract, retain and manage the sales, marketing and service force necessary to publicize and gain broader market acceptance for our technology;

 

 

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; 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.

We have limited experience in manufacturing our DNA synthesis equipment and tools. If we are unable to expand our DNA synthesis manufacturing capacity, this would result in lost revenue and harm our business.

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. 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 manufacturing our DNA synthesis equipment and tools. There is no assurance that we will be able to continue to build manufacturing capacity internally or find one or more suitable partners, or both, to meet the volume and quality requirements necessary to be successful in our existing and potential markets. Manufacturing and product quality issues may arise as we 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 establishing or 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 core DNA synthesis business.

To date, we have invested nearly all of our efforts and financial resources in the research and development of our DNA synthesis business. The DNA synthesis business is very capital intensive, particularly for early stage companies that do not have significant off-setting revenues.

Our financial results are dependent on strengthening our core business while diversifying into other developing sectors such as data storage and industrial chemicals. Substantially all of our revenue generated to date is from our core DNA synthesis business.

Our near-term prospects, including our ability to finance our Company and enter into strategic collaborations, will depend heavily on the successful development and commercialization of our core DNA synthesis business. These initiatives will be substantially dependent on our ability to generate revenue from our core DNA synthesis business 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 like 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.

 

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We and our chief executive officer are currently involved in litigation with Agilent Technologies, Inc., in which Agilent has alleged a claim of trade secret misappropriation against Twist Bioscience and trade secret misappropriation and other related claims against our chief executive officer, and an adverse result could harm our business and results of operations.

We and our chief executive officer are currently involved in litigation with Agilent Technologies, Inc., or Agilent, in which Agilent has alleged a claim of trade secret misappropriation against our Company and trade secret misappropriation and other related claims against our chief executive officer. This litigation with Agilent could result in significant expense. Some of our competitors, including Agilent have considerable resources available to them. We, on the other hand, are an early-stage commercial company with comparatively few resources available to us to engage in costly and protracted litigation. Intellectual property infringement claims asserted against us, whether with or without merit, could be costly to defend and could limit our ability to use some technologies in the future. They will be time consuming, will divert our chief executive officer’s, management’s and scientific personnel’s attention and may result in liability for substantial damages. For example, we have incurred and anticipate that we will continue to incur significant expense and substantial time in defending against our current intellectual property infringement dispute with Agilent.

An adverse judgment in the Agilent proceeding could require us to pay damages, attorneys’ fees, costs and expenses, or result in injunctive relief, any of which could materially adversely affect our business, financial condition, results of operations and prospects. For more information on our current legal and regulatory proceedings, see the section of this prospectus captioned “Business — Legal proceedings.” And for other risks related to our intellectual property, see the section of this prospectus captioned “Risks related to our intellectual property.” We may also in the future be involved with other litigation. We expect that the number of such claims may increase as our scale and the level of competition in our industry segments grows.

We depend on single-source suppliers for two critical components for our synthesis process. The loss of these suppliers, or their failure to supply us with the necessary components on a timely basis, could cause delays in the future capacity of our synthesis process and adversely affect our business.

We depend on single-source suppliers for two critical components for our synthesis process. We do not currently have the infrastructure or capability internally to manufacture these components. Although we have a substantial stockpile of supplies and although alternative suppliers exist for each of these critical components 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 supply agreements in place with these component suppliers. However, there can be no assurance that our supply of these components 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 manufacturers, and cannot ensure that they will deliver to us the components we order on time, or at all.

The loss of either of the components provided by these suppliers 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 reasonable terms, which could have a material adverse

 

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impact on our business. Our dependence on these two single-source suppliers exposes us to certain risks, including the following:

 

 

our suppliers 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;

 

 

if there is a disruption to one or both of our single-source suppliers’ 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 core DNA synthesis business could be materially and adversely impacted if any of our single-source suppliers 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 or reputational issues.

Moreover, to meet anticipated market demand, our single-source suppliers may need to increase manufacturing capacity, which could involve significant challenges. This may require us and our suppliers to invest substantial additional funds and hire and retain the technical personnel who have the necessary experience. Neither we nor our suppliers may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all. For additional information on our single-source and other suppliers, see the section of this prospectus captioned “Business — Suppliers.”

We must continue to secure and maintain sufficient and stable supplies of raw materials.

Although historically we have not experienced price increases due to unexpected raw material shortages and other unanticipated events, there is no assurance that our supply of raw materials will not be significantly adversely affected in the future, adversely affecting 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 on a purchase order basis. Our suppliers may reduce or cease their supply of raw materials and outsourced services and products to us at any time in the future. If the supply of raw materials and the outsourced services and products is interrupted, 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

 

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fulfill the demand of existing customers or supply new customers. A raw material shortage or an increase in the cost of the raw materials we use could result in decreased revenue or could impair our ability to maintain or expand our business.

For the years ended September 30, 2016 and 2017, our cost of raw materials accounted for approximately 27%, and 30%, respectively, of our total cost of revenues. 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.

Currently, we are working simultaneously on multiple projects targeting several market sectors, including activities in the healthcare, agriculture, industrial chemicals and academic sectors. These diversified operations 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 effectively, our business and operating results could suffer. 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 significant customer.

We have derived, and believe we may continue to derive, a significant portion of our revenues from one large customer or a limited number of large customers. Our largest customer, Ginkgo Bioworks, Inc., or Ginkgo Bioworks, accounted for 30% and 40% of our revenue for the years ended September 30, 2016 and 2017. 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. For example, in January 2017, Ginkgo Bioworks announced the acquisition of Gen9, Inc., which is a competing DNA synthesis manufacturer. If Ginkgo Bioworks reduces the amount of products it purchases from us and increases the amount of synthetic DNA products it manufactures internally using the capabilities acquired in the Gen9 acquisition or otherwise, it could have a material adverse impact on our revenue, results of operations, cash flows and reputation in the marketplace. The loss of Ginkgo Bioworks as a customer, or the loss of any other significant customer or a significant reduction in the amount of product ordered by Ginkgo Bioworks or any other significant customer would adversely affect our revenue, results of operations, cash flows and reputation in the marketplace.

Our credit facility contains restrictions that limit our flexibility in operating our business.

In September 2017, we entered into an amended and restated loan and security agreement with Silicon Valley Bank, which we refer to as our credit facility. Our credit facility contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

 

sell, transfer, lease or otherwise dispose of our assets;

 

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create, incur or assume additional indebtedness;

 

 

engage in certain changes in business, management, control, or business location;

 

 

encumber or permit liens on certain of our assets;

 

 

make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our common stock;

 

 

make specified investments (including loans and advances);

 

 

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets or acquire other entities;

 

 

make or permit any payment on any subordinated debt; and

 

 

enter into certain transactions with our affiliates.

Our incurrence of this debt, and any future increases in our aggregate level of debt, may adversely affect our operating results and financial condition by, among other things:

 

 

increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions;

 

 

requiring the dedication of an increased portion of our expected cash flows from operations to service our indebtedness, thereby reducing the amount of expected cash flows available for other purposes, including capital expenditures, acquisitions and dividends; and

 

 

limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

A breach of any of these covenants could result in a default under our credit facility. Upon the occurrence of an event of default under our credit facility, Silicon Valley Bank could elect to declare all amounts outstanding under our credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our credit facility could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under our credit facility.

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 Emily Leproust, our President and 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

 

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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 may 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 Emily Leproust. 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 that could disrupt our business, cause dilution to our stockholders, reduce our financial resources, or prove not to be successful.

In the future, we may enter into transactions to acquire other businesses, products or technologies and our ability to do so successfully cannot be ensured. In April 2016, we acquired Genome Compiler Corporation, which became a wholly owned subsidiary. This acquisition allowed us to add software design capabilities for our e-commerce ordering system. However, to date, we have not successfully concluded other acquisitions, and we are pursuing opportunities in the life sciences industry that complement and expand our core DNA synthesis business, products and markets both locally and internationally. If we identify suitable 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, 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. 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. 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

 

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to enter 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.

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. If our business practices outside the United States are found to be in violation of the FCPA, UK Anti-Bribery Act 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.

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 prosecute 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.

Adverse conditions in the global economy and disruption of financial markets may significantly harm our revenue, profitability and results of operations.

The global economy has a significant impact on our business and volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner or to maintain operations, which could result in a decrease in sales volume that could harm our results of operations. General concerns about the fundamental soundness of domestic and international economies may also cause our customers to reduce their purchases. Changes in banking, monetary and fiscal policies to address liquidity and increase credit availability may not be effective. Significant government

 

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investment and allocation of resources to assist the economic recovery of sectors which do not include our customers may reduce the resources available for government grants and related funding for life sciences research and development. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm our sales, profitability and results of operations.

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 and providers in the life sciences tools and diagnostics industries such as GenScript Biotech Corporation, GENEWIZ, Integrated DNA Technologies, Inc., or IDT, ATUM, GeneArt (owned by Thermo Fisher Scientific Inc.), Eurofins Genomics, Sigma-Aldrich Corporation (an indirect wholly owned subsidiary of Merck), Promega Corporation and others. Additionally, we compete with both large and emerging providers in the life sciences tools and diagnostics industries focused on sample preparation for next generation sequencing such as Thermo Fisher Scientific Inc., Illumina, Inc., IDT, Agilent and Roche NimbleGen, Inc. 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 wining 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.

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. Alternatively, if due to rising market prices, 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.

 

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We use biological and hazardous materials that require considerable expertise and expense for handling, storage and disposal and may result in claims against us.

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, impediments to our business and reputational damage.

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 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.

 

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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, 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 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 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 U.S. Food and Drug Administration, or FDA, regulates medical devices, including in vitro diagnostics, or IVDs. IVDs 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 research use only, or RUO, IVD product is an IVD product that is in the laboratory research phase of development and is being shipped or delivered for an investigation that is not subject to FDA’s investigational device exemption requirements. 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. Our IVD products are not intended for clinical or diagnostic use, and we market and label them as RUO. Accordingly, we have not sought clearance or approval from the FDA to market our products. 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.

Further, 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

 

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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.

Similarly, even though our products and services are not currently covered and reimbursed by third-party payors, including government healthcare programs such as Medicare and Medicaid, to the extent our products or related applications become eligible for coverage and reimbursement by such payors, we could be subject to healthcare fraud and abuse laws of both the federal government and the states in which we conduct our business. Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment, and the curtailment or restructuring of our operations, any of which could materially adversely affect our ability to operate our business and our financial results.

Many countries have laws and regulations that could affect our products. The number and scope of these requirements are increasing. Unlike many of our competitors, this is an area where we do not have expertise. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining foreign regulatory approvals.

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.

If we experience a significant disruption in, or breach in security of, our information technology systems, or if we fail to implement new systems and software successfully, our business could be adversely affected.

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. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Our 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 fulfilment 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 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, which could result in our suffering significant financial or

 

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reputational damage. Further, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws. 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.

Our facilities in California are located near known earthquake faults, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

Our facilities in the San Francisco Bay Area are located near known earthquake fault zones and are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would 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.

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 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 is 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, 2016 and 2017, approximately 22% and 23%, 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, 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

 

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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. 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. If the Internal Revenue Service challenges our analysis that our existing NOLs will not expire before utilization due to previous ownership changes, our ability to use our NOLs could be limited by Section 382 of the Code. 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 signed into law on December 22, 2017, adopting broad U.S. corporate income tax reform will, among other things, reduce the U.S. corporate income tax rate, but will impose 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 Organisation for Economic Co-operation’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. The average days sales outstanding of our trade receivables as of September 30, 2016 and 2017 were 57 and 78 days outstanding, respectively. 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.

 

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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.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The rapid growth of our operations and the planned initial public offering has created a need for additional resources within the accounting and finance functions due to the increasing need to produce timely financial information and to ensure the level of segregation of duties customary for a U.S. public company. We have hired additional resources in the accounting and finance function and continue to reassess the sufficiency of finance personnel in response to these increasing demands and expectations.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

Commencing with our fiscal year ending September 30, 2019, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes Oxley Act. We expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we will be taking to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner. In addition, if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some

 

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investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the stock exchange on which our common stock is traded 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 that we did not incur as a private company. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under securities laws, as well as rules and regulations implemented by the SEC and The Nasdaq Global Market, particularly after we are no longer an “emerging growth company.” We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Furthermore, these rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. 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, 2017, we own four issued U.S. patents and two issued international patents in China. There are 58 pending patent applications, including 34 in the United States, 15 international applications and nine applications filed under the Patent Cooperation Treaty.

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

 

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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 U.S. 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 to determine who was the first to invent any of the subject matter covered by the patent claims of our 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 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.

Moreover, the United States Leahy-Smith American Invents Act, enacted in September 2011, brought significant changes to the U.S. patent system, including a change from a “first to invent” system to a “first to file” system. Under a “first to file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. Other changes affect the way the patent applications are prosecuted, redefine prior art, and may affect patent litigation. The United States Patent and Trademark Office developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act became effective on March 16, 2013. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, which could have a material adverse effect on our business and financial condition.

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 proceeding, 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

 

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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 an 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 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.

Any inability to meaningfully protect our intellectual property could result in competitors offering products or technologies that incorporate our products or technologies, which could reduce demand for our products or technologies. 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.

We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:

 

 

we might not have been the first to make the inventions covered by each of our pending patent applications;

 

 

we might not have been the first to file patent applications for these inventions;

 

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others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies;

 

 

it is possible that none of our pending patent applications will result in issued patents, and even if they issue as patents, they may not provide a basis for commercially viable products, or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties;

 

 

we may not develop additional proprietary products and technologies that are patentable;

 

 

the patents of others may have an adverse effect on our business; and

 

 

we apply for patents covering our products and technologies and uses thereof, as we deem appropriate. However, we may fail to apply for patents on important products and technologies in a timely fashion or at all.

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 practicing our inventions in all 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 further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient enough to prevent them from competing.

The legal systems of certain countries, particularly certain 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, could put our own patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could 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.

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

 

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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 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 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 also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Other than the currently pending litigation filed by Agilent, described under the captions “Business – Legal proceedings” and “Risk factors – We and our chief executive officer are currently involved in litigation with Agilent Technologies, Inc., in which Agilent has alleged a claim of trade secret misappropriation against Twist Bioscience and trade secret misappropriation and other related claims against our chief executive officer, and an adverse result could harm our business and results of operations,” no legal claims against us are currently pending. 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.

 

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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.

To determine the priority of inventions, we may have to initiate and participate in interference proceedings declared by the U.S. Patent and Trademark Office that could result in substantial legal fees and could substantially affect the scope of our patent protection. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as invalidity, unenforceability, re-examination and opposition proceedings against our patents. Whether merited or not, we may additionally face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including patents held by our competitors or by non-practicing entities. If we fail to identify and correctly interpret relevant patents, we may be subject to infringement claims. We may also face allegations that our employees have misappropriated the intellectual property rights of their former employers or other third parties. The outcome of any litigation or other proceeding is inherently uncertain and the results might not be favorable to us. For more information on our current legal and regulatory proceedings, see the section of this prospectus captioned “Business — Legal proceedings.”

In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. Patent and Trademark Office, or made a misleading statement during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on certain aspects of our platform technology. Such a loss of patent protection could have a material and adverse effect on our business, financial condition, results of operations and prospects.

Patent infringement suits can be expensive, lengthy and disruptive to business operations. 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

 

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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.

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 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 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

 

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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 to market 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 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 Twopointo. 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

 

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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 and this offering

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

The market price of our common stock is likely to be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

 

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 including the Agilent litigation, 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;

 

 

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; and

 

 

general economic and market conditions.

 

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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 and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been 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 seriously harm our business.

No public market for our common stock currently exists, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. Although we will apply to have our common stock listed on The Nasdaq Global Market, an active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. The initial public offering price was determined by negotiations between us and the underwriters and may not be indicative of the future prices of our common stock.

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. Currently, we do not have any analyst coverage and we may not obtain analyst coverage in the future. In the event we obtain analyst coverage, 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.

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.

We may issue additional securities following the completion of this offering. In the future, 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 also 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 subsequent 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.

Future sales of our common stock in the public market could cause our share price to fall.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair

 

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our ability to raise capital through the sale of additional equity securities. Based on the number of shares of common stock outstanding as of                , upon the closing of this offering, we will have             shares of common stock outstanding, assuming no exercise of our outstanding options.

All of the common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining              shares of common stock outstanding after this offering, based on shares outstanding as of             , will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

The underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements with the underwriters prior to expiration of the lock-up period. See also the section of this prospectus captioned “Shares eligible for future sale.” For more information regarding the lock-up agreements with the underwriters see the section of this prospectus captioned “Underwriting.”

The holders of 166,514,825 shares of common stock, or 94.28% based on shares outstanding as of September 30, 2017, will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement between such holders and us. See “Certain relationships and related party transactions—Registration rights agreement” below. If such holders, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. We intend to file a registration statement on Form S-8 under the Securities Act to register             shares of common stock for issuance under our 2018 Equity Incentive Plan, 2013 Stock Plan and 2018 Employee Stock Purchase Plan. Both our 2018 Equity Incentive Plan and 2018 Employee Stock Purchase Plan provide for automatic increases in the shares reserved for issuance under the plans which could result in additional dilution to our stockholders. Once we register the shares under these plans, they can be freely sold in the public market upon issuance and vesting, subject to a 180-day lock-up period and other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders.

Our management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

Our management will have broad discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Accordingly, investors will need to rely on our judgment with respect to the use of these proceeds. We currently intend to use the proceeds from this offering primarily to improve and update our platform and core technologies, to expand our sales and marketing capabilities, to further expand into other geographies, to continue to expand into new business verticals, and for working capital and other general corporate purposes. For more information see, “Use of proceeds.” The failure by our management to apply these funds effectively could adversely affect our ability to continue maintaining and expanding our business. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

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

 

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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 price appreciation, which may never occur, as the only way to realize any future gains on their investments. Furthermore, we are party to a credit agreement with Silicon Valley Bank which contains negative covenants that limit our ability to pay dividends. For more information, see the section of this prospectus 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, see “Risk factors—Our credit facility contains restrictions that limit our flexibility in operating our business.”

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 will 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 the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

   

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;

 

   

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 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. For more information, see the section of this prospectus captioned “Description of capital stock—Anti-takeover effects of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws.”

 

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Insiders have substantial control over us and will be able to influence corporate matters.

As of December 31, 2017, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 53.95% of our outstanding capital stock upon the completion of this offering. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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 Delaware General Corporation Law, 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. Delaware law 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;

 

 

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.

Our amended and restated certificate of incorporation to be in effect upon completion of this offering will provide that the Court of Chancery of the State of Delaware 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 to be in effect upon completion of this offering 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

 

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to any provisions of the General Corporation Law of the State of Delaware, our amended and restated certificate of incorporation or our amended and restated bylaws to be in effect upon completion of this offering, or any action asserting a claim against us that is governed by the internal affairs doctrine. 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 may incur additional costs associated with resolving such action in other jurisdictions.

Because the public offering price of our common stock will be substantially higher than the net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of approximately $        per share, the difference between the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and the net tangible book value per share of our common stock as of                , after giving effect to the issuance of shares of our common stock in this offering. Furthermore, if the underwriters exercise their overallotment option, or outstanding options and warrants are exercised, you could experience further dilution. For a further description of the dilution that you will experience immediately after the offering, see the section of this prospectus captioned “Dilution.”

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the operating results and financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, statements about:

 

 

our ability to increase our revenue and our revenue growth rate;

 

 

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

 

our estimates of the size of our market opportunity;

 

 

our expectations regarding our ability to increase gene 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;

 

 

significant disruption in, or breach in security of our information technology systems and resultant interruptions in service and any related impact on our reputation;

 

 

the attraction and retention of qualified employees and key personnel;

 

 

the effects of natural or man-made catastrophic events;

 

 

the effectiveness of our internal controls;

 

 

changes in government regulation affecting our business;

 

 

the impact of adverse economic conditions;

 

 

our use of the net proceeds from this offering; and

 

 

other risk factors included under “Risk factors” in this prospectus.

 

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In addition, in this prospectus, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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Industry and market data

This prospectus contains estimates, projections and other information concerning our industry, our business, and the markets for our products, including data regarding our current manufacturing capacity, product features and benefits, product quality, turnaround time, reliability and cost, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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Use of proceeds

We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $        million, assuming an initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses that the net proceeds from this offering will be approximately $        million.

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our net proceeds from this offering by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease our net proceeds from this offering by approximately $        million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

As of September 30, 2017, we had cash, cash equivalents and short-term investments of $62.2 million. We currently estimate that we will use the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments: (1) to improve and update our platform and core technologies, (2) to expand our sales and marketing capabilities, (3) to further expand into other geographies, (4) to continue to expand into new business verticals, and (5) for working capital and other general corporate purposes.

We believe opportunities may exist from time to time to expand our current business through acquisitions or in-licenses of complementary companies or technologies. While we have no current agreements, commitments or understandings for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

This expected use of the net proceeds from this offering and our existing cash, cash equivalents and short-term investments represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. For additional information regarding our potential capital requirements, see “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” under the heading “Risk factors.”

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

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Dividend policy

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future.

Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions including compliance with covenants under our credit facilities and other factors that our board of directors may deem relevant. In addition, under the terms of our current credit facilities, we are prohibited from paying cash dividends without the prior consent of Silicon Valley Bank.

 

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Capitalization

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of September 30, 2017 on:

 

 

An actual basis;

 

 

A pro forma basis, to give effect to (i) the conversion of the outstanding shares of our convertible preferred stock as of September 30, 2017 into 145,138,924 shares of our common stock immediately prior to the closing of this offering, (ii) the automatic conversion of warrants to purchase 786,594 shares of our convertible preferred stock into warrants to purchase 786,594 shares of common stock immediately prior to the closing of this offering; and (iii) the effectiveness of our amended and restated certificate of incorporation, as if such conversions, and effectiveness had occurred immediately prior to the closing of this offering; and

 

 

A pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above and (ii) the sale and issuance of shares of our common stock by us in this offering, based upon the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with the section of this prospectus entitled “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

      As of September 30, 2017  
(In thousands, except share and per share data)    Actual     Pro forma     Pro forma as
adjusted(1)
 

Cash, cash equivalents and short-term investments

   $ 62,204     $ 62,204     $           

Long-term debt

   $ 9,154     $ 9,154     $  

Convertible preferred stock warrant liabilities

     644       —      

Convertible preferred stock, $0.00001 par value: 150,231,568 shares authorized, 145,138,924 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     199,633       —      

Stockholders’ equity (deficit):

      

Common stock, $0.00001 par value: 210,000,000 shares authorized, 31,474,045 shares issued and outstanding, actual;                 shares authorized,                 shares issued and outstanding, pro forma;                 shares authorized,                 shares issued and outstanding, pro forma as adjusted

     —         2    

Additional paid-in capital

     6,228       206,503    

Accumulated other comprehensive income

     33       33    

Accumulated deficit

     (139,619     (139,619  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (133,358     (66,919  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 76,073     $ 76,073     $  

 

 

 

(1)  

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity and total capitalization by approximately $        million, assuming that

 

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the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease the amount of our cash, cash equivalents, and short-term investments working capital, total assets and total stockholders’ equity by approximately $        million, assuming an initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The total number of shares of our common stock reflected in the discussion and table above is based upon 176,612,969 shares of our common stock outstanding on a pro forma basis as of September 30, 2017, and excludes:

 

 

2,047,292 unvested shares of restricted common stock subject to our repurchase right;

 

 

18,017,311 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2017, with a weighted-average exercise price of $0.67 per share;

 

 

                shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted after September 30, 2017, with a weighted-average exercise price of $        per share;

 

 

634,921 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common stock outstanding as of September 30, 2017, having an exercise price of $0.63 per share and an additional 634,920 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common, having an exercise price of $0.63 per share that would be exercisable upon the drawing down of additional loans under our credit facility;

 

 

364,742 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series A convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.329 per share;

 

 

160,606 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series B convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.792 per share;

 

 

186,679 shares of our common stock, issuable upon the exercise of outstanding warrants to purchase Series C convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $1.4999 per share;

 

 

74,567 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series D convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $2.1457 per share; and

 

 

shares of common stock reserved for future grants under our stock-based compensation plans, consisting of:

 

   

6,805,339 shares of common stock reserved for future grants under our 2013 Stock Plan as of September 30, 2017, which shares will be added to the shares to be reserved under our 2018 Plan, which will become effective upon completion of this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation—Equity incentive plans”;

 

   

            shares of common stock reserved for future grants under our 2018 Plan, which will become effective upon completion of this offering; and

 

   

            shares of common stock reserved for future issuance under our 2018 ESPP, which will become effective upon completion of this offering.

 

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Dilution

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our historical net tangible book value as of September 30, 2017 was $(135.4) million, or $(4.30) per share of common stock. Our net tangible book value per share represents total tangible assets less total liabilities and convertible preferred stock, divided by the number of shares of common stock outstanding as of September 30, 2017. Our pro forma net tangible book value at September 30, 2017, before giving effect to this offering, was $64.9 million, or $0.36 per share of our common stock. Our pro forma net tangible book value before the issuance of shares in this offering gives effect to the conversion of our outstanding convertible preferred stock into our common stock immediately prior to the completion of this offering and the related reclassification of the redeemable convertible preferred stock warrant liability into additional paid-in capital immediately prior to the closing of this offering.

After giving effect to our sale of                shares of our common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2017 would have been $        , or $        per share. This represents an immediate increase in net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

            $         

Historical net tangible book value per share as of September 30, 2017

   $ (4.30)     

Pro forma increase in net tangible book value per share

     4.66     

Pro forma net tangible book value per share as of September 30, 2017

     0.36     

Increase in net tangible book value per share attributable to new investors purchasing shares in this offering

   $     

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $           

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $        million, or approximately $        per share, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $        million, or approximately $        per share, and would increase or decrease, as applicable, dilution per share to new investors in this offering by approximately $        per share, assuming an initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. If the underwriters exercise their overallotment option to purchase additional

 

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shares in full, the pro forma as adjusted net tangible book value per share would be $        per share, and the dilution per share to new investors in this offering would be $        per share.

The following table summarizes the pro forma on an as adjusted basis as described above, as of September 30, 2017, the differences between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid or to be paid to us at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

      Shares purchased      Total consideration      Average price
per  share
 
      Number      Percent      Amount      Percent     

Existing stockholders

            %      $                 %      $           

New investors

        %      $        %      $  

Total

        100.0%         $ 100.0%     

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $        million, assuming an initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The total number of shares of our common stock reflected in the discussion and table above is based upon 176,612,969 shares of our common stock outstanding on a pro forma basis as of September 30, 2017 and excludes:

 

 

2,047,292 unvested shares of restricted common stock subject to our repurchase rights;

 

 

18,017,311 shares of our common stock issuable upon exercise of stock options outstanding as of September 30, 2017, having a weighted-average exercise price of $0.67 per share;

 

 

            shares of our common stock issuable upon exercise of stock options granted after September 30, 2017, having a weighted-average exercise price of $        per share;

 

 

634,921 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common stock outstanding as of September 30, 2017, having an exercise price of $0.63 per share and an additional 634,920 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our common, having an exercise price of $0.63 per share that would be exercisable upon the drawing down of additional loans under our credit facility

 

 

364,742 shares of our common stock issuable upon the exercise of outstanding warrants to purchase our Series A convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.329 per share;

 

 

160,606 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series B convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $0.792 per share;

 

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186,679 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series C convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $1.4999 per share; and

 

 

74,567 shares of our common stock, issuable upon the exercise of outstanding warrants to purchase Series D convertible preferred stock outstanding as of September 30, 2017, having an exercise price of $2.1457 per share.

 

 

                shares of common stock reserved for future grants under our stock-based compensation plans, consisting of:

 

 

6,805,339 shares of common stock reserved for future grants under our 2013 Stock Plan as of September 30, 2017, which shares will be added to the shares to be reserved under our 2018 Plan, which will become effective upon completion of this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation – Equity incentive plans”;

 

 

            shares of common stock reserved for future grants under our 2018 Plan, which will become effective upon completion of this offering; and

 

 

            shares of common stock reserved for future issuance under our 2018 ESPP, which will become effective upon completion of this offering.

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

 

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Selected consolidated financial data

You should read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s discussion and analysis of financial condition and results of operations” contained elsewhere in this prospectus.

We derived the selected consolidated statements of operations data and consolidated balance sheet data for the fiscal years ended September 30, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future performance.

 

      Years ended September 30,  
(in thousands, except share and per share data)    2016     2017  

Consolidated statements of operations data:

  

Revenues

   $ 2,269     $ 10,767  

Operating expenses:

    

Cost of revenues

     9,421       24,020  

Research and development

     18,230       19,169  

Selling, general and administrative

     18,274       26,060  
  

 

 

 

Total operating expenses

     45,925       69,249  
  

 

 

 

Loss from operations

     (43,656     (58,482

Interest income

     241       412  

Interest expense

     (746     (905

Other income (expense), net

     73       (55
  

 

 

 

Loss before income taxes

     (44,088     (59,030

Provision for income taxes

           (280
  

 

 

 

Net loss attributable to common stockholders

   $ (44,088   $ (59,310
  

 

 

 

Other comprehensive loss:

    

Change in unrealized gain (loss) on investments

     9       (9

Foreign currency translation adjustment

           33  
  

 

 

 

Comprehensive loss

   $ (44,079   $ (59,286
  

 

 

 

Net loss per share attributable to common stockholders—basic and
diluted(1)

   $ (2.38   $ (2.47
  

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders—basic and diluted(1)

     18,511,202       23,982,605  
  

 

 

 

Pro forma net loss per share—basic and diluted(1)

     $ (0.39
    

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share—basic and diluted(1)

       152,397,059  

 

 

 

(1)   See Note 16 of the notes to our consolidated financial statements included elsewhere in this prospectus for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.

 

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      As of September 30,  
(in thousands)                  2016     2017  

Consolidated balance sheet data

  

Cash, cash equivalents, and short-term investments

   $ 55,920     $ 62,204  

Working capital

     50,361       58,392  

Total assets

     76,463       85,657  

Total liabilities

     19,037       19,382  

Convertible preferred stock

     134,037       199,633  

Additional paid-in capital

     3,689       6,228  

Accumulated deficit

     (80,309     (139,619

Total stockholders’ deficit

     (76,611     (133,358

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

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 prospectus. 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 prospectus. The last day of our fiscal year is September 30, and we refer to our fiscal year ended September 30, 2016 as fiscal 2016 or 2016 and our fiscal year ended September 30, 2017 as fiscal 2017 or 2017.

Overview

We are a leading and rapidly growing synthetic biology company that has developed a disruptive DNA synthesis platform. 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 and scalable commercial infrastructure to create an integrated platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We believe that we are the first and only company to harness the highly-scalable production and processing infrastructure of the semiconductor industry to industrialize the production of a wide range of synthetic DNA-based products.

We launched the first application of our platform, our synthetic DNA product offering, in April 2016 with the goal to become the leading synthetic DNA provider, disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete.

In April 2016, we have rapidly become a leading synthetic DNA provider. In 2017, we served 292 customers including nine of the top 20 pharmaceutical companies by revenue; Ginkgo Bioworks, Inc., or Ginkgo Bioworks, which we believe is the largest global purchaser of synthetic DNA, four of the largest agricultural biotechnology companies that use synthetic biology, over 100 academic research institutions worldwide, and innovative customers using synthetic DNA for new and emerging applications, such as Microsoft Corporation and the University of Washington for use of DNA as a digital data storage medium.

We have also leveraged the versatility of our platform to expand our product portfolio into other markets in which we believe we have a competitive advantage. In October 2017, we launched an innovative and comprehensive preparation kit for next generation sequencing that simplifies the workflow, improves accuracy and lowers the cost of next generation sequencing.

We have built a scalable commercial platform that enables us to reach a diverse customer base that we believe includes over 100,000 synthetic DNA users today. We launched our proprietary, innovative, and easy-to-use e-commerce platform in October 2017 to existing customers, which enables customers to design, validate, and place on-demand orders of customized DNA online. We also employ a direct sales force that is focused on customer acquisition, support and management, and is highly trained on both the technical aspects of our platform and DNA.

We generated revenues of $2.3 million in fiscal 2016, and $10.8 million in fiscal 2017, while incurring net losses of $44.1 million in fiscal 2016, and $59.3 million in fiscal 2017.

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

 

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and commercialization of additional products in the synthetic biology industry. Our net loss was $44.1 million and $59.3 million for fiscal 2017 and fiscal 2016, respectively. As of September 30, 2017, we had an accumulated deficit of $139.6 million. We expect to continue to incur significant expenses for at least the next several years. Furthermore, upon the closing of this offering, we expect to continue to incur additional costs associated with operating as a public company including accounting, investor relations, legal and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, we expect to finance our operations from revenue from our commercial operations, the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to grow our revenue, raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product opportunities or delay our pursuit of potential in-licenses or acquisitions.

As of September 30, 2017, we had $62.2 million in cash, cash equivalents and short-term investments and during 2017, we received net cash proceeds of $65.6 million from the sale of shares of Series D convertible preferred stock. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and capital resources.”

After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months.

In the future, we expect we will need to raise additional capital to finance our operations which cannot be assured. As of September 30, 2017, without giving effect to the anticipated net proceeds from this offering, we have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our consolidated financial statements for the year ended September 30, 2017. See Note 1 to our consolidated financial statements appearing in this prospectus for additional information.

Similarly, in its report on our financial statements for fiscal 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern.

Key factors affecting our performance

We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors:

Adoption of our products and solutions by existing and new customers.    A key factor to our future success is and will be our ability to increase orders from and sell new solutions to existing customers, and to acquire new customers. To do so, we must offer these customers synthetic DNA-based products with a superior combination of quality, cost, throughput, and scalability, and develop affordable tools for existing and prospective customers that expand the applications of our products and drive higher volume purchases. We must also convince potential customers who currently synthesize their own DNA that our products and solutions are superior and offer greater value to their organizations.

Expansion into new geographic markets.    Our revenue is currently generated from customers primarily in the United States. As we begin to expand our global sales efforts, we must be successful in marketing our products

 

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and solutions in geographies where we have limited experience. Our revenue may be affected by seasonal trends in some geographies during the calendar year as we expand into new geographic markets.

Expansion into adjacent addressable markets.    Our revenue growth and market potential depends on our ability to meet customer needs in adjacent markets, such as in pharmaceutical development, data storage and in other industrial markets. By combining our affordable and high-quality synthetic DNA with our proprietary, innovative, and easy-to-use e-commerce platform that allows customers to design, validate, and place on-demand orders of customized DNA online, we believe we will continue to convert those who make DNA, or DNA Makers, into those who buy their own DNA, or DNA Buyers.

Leverage our manufacturing capacity and commercial infrastructure.    We have, and will continue to invest significantly in our manufacturing capabilities and commercial infrastructure. With our current operating model and infrastructure, we have the capacity to significantly increase our manufacturing production and commercialize additional products. By doing so, we expect to grow revenue and spread our costs over a larger volume of products, which we believe will further reduce our manufacturing costs on a per-unit basis and improve our operating margins. Our ability to achieve and enhance profitability is dependent upon growing our revenue and further increasing our manufacturing efficiency, among other factors.

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. We define an order as a contract with a customer or purchase order from a customer, which outlines the promised good at an agreed upon price. We regularly assess trends relating to the value of orders we receive, including with respect to our customer concentration. For example, we have experienced continuous quarterly growth in the value of orders received from customers other than Ginkgo Bioworks, which has increased by approximately seven times from the quarter ended June 30, 2016 to the quarter ended September 30, 2017. 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 (inclusive of Ginkgo Bioworks) during the periods indicated:

 

      Years ended September 30,  
(in thousands)            2016              2017  

Order value

   $ 3,059      $ 17,557  

 

 

Number of customers

We believe that the number of customers purchasing from us is representative of our ability to drive adoption of our product and convert DNA Makers into DNA Buyers. We define a customer as a separate person or legal entity who has purchased any products from us in the past, regardless of the time since the last purchase.

 

      Years ended September 30,  
(in thousands)    2016      2017  

Customers

     97        292  

 

 

 

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Percentage of revenue from new vs. repeat customers

We believe that the percentage of revenue that we generate from both new and repeat customers is a leading 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, has not previously purchased any products or services from us. We define a repeat customer as any customer who, as a separate legal entity, has previously purchased any products or services from us. Because our first commercial shipment was in April 2016, 100% of our revenue for fiscal 2016 was from new customers, therefore we had no revenue from repeat customers in fiscal 2016.

 

        Years ended September 30,  
                2016              2017  

Percentage of revenue from repeat customers

       0%        78%  

Percentage of revenue from new customers

       100%        22%  

 

 

Financial overview

The following table summarizes certain selected historical financial results:

 

      Years ended September 30,  
(in thousands)              2016               2017  

Revenues

   $ 2,269     $ 10,767  

Loss from operations

     (43,656     (58,482

Net loss attributable to common stockholders

     (44,088     (59,310

 

 

Components of the results of operations

Revenues

We generate revenue from sales of synthetic genes, oligo pools, genes, next generation sequencing tools and DNA libraries. We recognize revenue upon delivery to our customers and bill them directly for the shipments. 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, 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. North America consists of Canada and Mexico; EMEA consists of Europe, Middle East, and Africa; and APAC consists of Japan, China, South Korea, Singapore, Malaysia and Australia.

 

      Years ended September 30,  
(in thousands, except percentages)    2016      Percentage      2017      Percentage  

United States

   $ 1,769        78%      $ 8,243        77%  

EMEA

     459        20%        2,023        19%  

APAC

     41        2%        274        2%  

North America

            0%        227        2%  
  

 

 

 

Total revenues

   $ 2,269        100%      $ 10,767        100%  

 

 

 

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Revenues by industry

Revenues by industry were as follows:

 

      Years ended September 30,  
(in thousands, except percentages)    2016      Percentage      2017      Percentage  

Industrial chemicals

   $ 960        42%      $ 6,702        62%  

Academic research

     830        37%        2,709        25%  

Healthcare

     461        20%        1,226        12%  

Agriculture

     18        1%        130        1%  
  

 

 

 

Total revenues

   $ 2,269        100%      $ 10,767        100%  

 

 

Revenues and accounts receivable concentration

Customer revenues equal to or greater than 10% of total revenues was as follows:

 

      Years ended September 30,  
          2016          2017  

Customer A

     30%        40%  

Customer B

     11%        0%  

 

 

One customer accounted for greater than 10% of net accounts receivable as follows:

 

      September 30,  
          2016          2017  

Customer A

     41%        35%  

 

 

Cost of revenues

Cost of revenues reflect the aggregate cost incurred in the production and delivery of our products and consists of: production materials, personnel costs (salaries, benefits, bonuses and stock-based compensation), cost of expensed equipment and consumables, laboratory supplies, depreciation of capitalized equipment, production overhead costs and allocations of IT and facility costs. We expect that our cost of revenues will increase as we increase our revenues with new product developments.

Other operating expenses

Our operating expenses are classified in the following categories: Research and development, and selling, general and administrative. For each category, the largest component is personnel costs, which includes salaries, employee benefit costs, bonuses, and stock-based compensation expenses.

Research and development

Research and development expenses consist primarily of costs incurred for the development of our products, which include personnel costs, laboratory supplies, consulting costs and allocated overhead, including IT and facility costs. 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 develop new products.

Selling, general and administrative

Selling expenses consist of personnel cost, customer service expenses, direct marketing expenses, educational and promotional expense, market research and analysis. General and administrative expenses include

 

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executive, finance and accounting, legal and human resources. These expenses consist of personnel costs, audit and legal expenses, consulting costs and allocated IT and facility costs. We expense all selling, general and administrative expenses as incurred. We expect our selling and marketing cost 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. In addition, we expect to incur additional accounting, legal and other expenses that we did not incur as a private company.

Interest expense

Interest expense is attributable to borrowing under our senior secured term loan and our equipment financing facility.

Interest income

Interest income consists primarily of interest earned on our cash, cash equivalents, and short-term investments.

Other income (expense), net

Other income (expense), net consists of realized gains and losses on sales of short-term investments and stock warrant expense.

Results of operations

 

      Years ended September 30,  
(in thousands)              2016               2017  

Revenues

   $ 2,269     $ 10,767  

Operating expenses:

    

Cost of revenues

     9,421       24,020  

Research and development

     18,230       19,169  

Selling, general and administrative

     18,274       26,060  
  

 

 

 

Total operating expenses

     45,925       69,249  
  

 

 

 

Loss from operations

     (43,656     (58,482

Interest income

     241       412  

Interest expense

     (746     (905

Other income (expense), net

     73       (55

Provision for income taxes

           (280
  

 

 

 

Net loss attributable to common stockholders

   $ (44,088   $ (59,310

 

 

Revenues

 

      Years ended
September 30,
     Change  
(in thousands, except percentages)    2016      2017      $      %  

Revenues

   $ 2,269      $ 10,767      $ 8,498        375%  

 

 

 

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We commenced selling our products in April 2016. In 2016, we generated revenue of $2.3 million primarily related to shipments of our synthetic DNA products, primarily oligonucleotides, clonal and non-clonal synthetic genes, and DNA libraries. Revenue from customers in the United States was 78% and 22% outside the United States.

Revenue increased to $10.8 million in 2017, as we continued to ramp up production capacity and sales of our synthetic DNA products, primarily oligonucleotides, clonal and non-clonal synthetic genes, DNA libraries and oligo pools. In 2017, revenues from customers in the United States accounted for 77% and 23% from customers outside the United States.

Cost of revenues

 

      Years ended
September 30,
     Change  
(in thousands)    2016      2017      $      %  

Cost of revenues

   $ 9,421      $ 24,020      $ 14,599        155%  

 

 

Cost of revenues increased by $14.6 million or 155% from $9.4 million in 2016 to $24.0 million in 2017 due to the increase in revenues. Cost of revenues was $9.4 million in 2016, driven by our initial ramp up of production capacity. Cost of revenues was primarily related to payroll of $3.5 million, production and lab supplies of $3.2 million, information technology and facilities costs of $1.8 million, consulting and outside services of $0.5 million, and maintenance costs of $0.3 million.

In 2017, total cost of revenues increased to $24.0 million, primarily from $8.2 million of payroll expenses due to an increase in headcount, consumption of reagents and production material of $7.4 million, information technology and facilities costs of $3.8 million, consulting and outside services of $1.1 million, $1.9 million of depreciation expense related to additional equipment for increased production capacity, maintenance costs of $0.7 million, and stock-based compensation expenses of $0.2 million.

Research and development expenses

 

      Years ended
September  30,
     Change  
(in thousands)            2016              2017      $      %  

Research and development

   $ 18,230      $ 19,169      $ 939        5%  

 

 

Research and development expenses increased by $0.9 million or 5% from $18.2 million in fiscal 2016 to $19.2 million in fiscal 2017 due to increased development activities, materials and fiscal lab costs, and information technology and facilities costs.

Research and development expenses for 2016 were $18.2 million, primarily consisting of payroll expenses of $10.6 million, depreciation expense of $2.7 million, production and lab supplies of $2.7 million, information technology and facilities costs of $2.1 million, consulting and outside services of $1.0 million and other expenses of $1.7 million, partially offset by government funding of $2.6 million.

Research and development expenses were $19.2 million for 2017, primarily consisting of payroll expenses of $8.6 million, $3.2 million of production materials and lab supplies, information and facilities costs of $3.0 million, consulting and outside services of $1.4 million, $1.2 million of depreciation, $0.6 million of stock based compensation and other expenses of $1.2 million.

 

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Selling, general and administrative expenses

 

      Years ended
September  30,
     Change  
(in thousands, except percentages)            2016              2017      $      %  

Selling, general and administrative

   $ 18,274      $ 26,060      $ 7,786        43%  

 

 

Selling, general and administrative expenses increased by $7.8 million, or 43%, from $18.3 million in 2016 to $26.1 million in 2017 primarily due to increases in payroll related to increased headcount, commercialization of products, professional and legal expenses, IT and facilities.

Selling, general and administrative expenses in 2016 were $18.3 million, which primarily consisted of payroll costs of $6.5 million, legal expenses of $4.1 million, rent and building maintenance of $2.3 million, consulting and outside services of $2.5 million including accounting and administrative costs, depreciation expense of $1.3 million, travel expenses of $1.2 million, advertising and tradeshows of $0.9 million, online services of $0.6 million, non-income taxes of $0.5 million, stock-based compensation expense of $0.5 million and other expenses of $1.8 million partially offset by shared information technology and facilities costs of $3.9 million.

Selling, general and administrative expenses were $26.1 million in 2017, which primarily consisted of $8.4 million payroll expenses, consulting and outside services of $5.5 million including accounting and professional services, legal expenses of $6.3 million, rent and building maintenance of $3.4 million, depreciation of $1.6 million, stock compensation expense of $1.1 million, $1.0 million of online services, advertising expenses of $0.5 million and other expenses of $5.2 million, partially offset by shared information technology and facility costs of $6.9 million. We believe that selling, general and administrative costs will continue to increase as we continue to increase revenue and penetrate new markets.

Interest, and other income (expense), net

 

      Years ended
September 30,
    Change  
(in thousands, except percentages)    2016     2017     $     %  

Interest income

   $ 241     $ 412     $ (171     (71)%  

Interest expense

     (746     (905     159       (21)%  

Other income (expense)

     73       (55     128       175 %  
  

 

 

 

Total interest, and other income (expense), net

   $ (432   $ (548   $ 116       (27)%  

 

 

Interest income was $0.2 million in 2016 and $0.4 million in 2017 resulting from our short-term investments. Other income and expenses were primarily due to the disposal of property and equipment. Interest expense was $0.7 million in 2016 and $0.9 million in 2017 related to our debt. Stock warrant expense was $(0.1) million in 2016 and $0.3 million in 2017.

Provision for income taxes

 

      Years ended
September 30,
    Change  
(in thousands, except percentages)        2016      2017     $      %  

Provision for income taxes

   $      $ (280   $ 280        100%  

 

 

We recorded an immaterial provision for income taxes in 2016 and $0.3 million in 2017.

 

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Liquidity and capital resources

Sources of liquidity

To date, we have financed our operations principally through 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, 2017, we have received an aggregate of $200.3 million in gross proceeds from the issuance of equity securities and an aggregate of $10.0 million from debt. As of September 30, 2017, we had a balance of $31.2 million of cash and cash equivalents and $31.0 million of short-term investments.

Preferred stock financings

As of September 30, 2017, we had raised $200.3 million in gross proceeds from the sale of our equity securities, including the sale of 59,743,942 shares of our Series D convertible preferred stock from January 2016 through September 2017 at a purchase price of $2.146 per share for gross proceeds of $128.2 million.

See Note 13 to our consolidated financial statements for a discussion of the terms and provisions of our Series D convertible preferred stock issued in 2016 and 2017.

Debt financings

We have entered into various credit facilities to obtain debt financing from time to time beginning in October 2013.

More recently, in December 2015, we entered into a Second Amended and Restated Loan and Security Agreement, or the Third Loan, for amounts aggregating up to $15.0 million in a series of three advances. The Third A&R Loan contains an acceleration clause under which the loan can become due and payable to Silicon Valley Bank, or SVB, in certain events of default, including in the event of a material adverse change in our business. The term of the loan was 41 months with an interest rate equal to the greater of (i) the prime rate or (ii) 3.25%, and there was a final payment fee of 6% of the amount loaned. In addition, we obtained a revolving facility from SVB of $5.0 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 (1.00%) above the Prime Rate, which interest shall be payable monthly.

The first advance, totaling $7.0 million, was drawn in December 2015 and comprised $3.3 million to refinance our prior loan with SVB and a new advance of $3.7 million. The debt provides interest only payments through December 31, 2016 at which time monthly principal payments become due. In connection with this advance, we issued warrants to purchase a total of 186,679 shares of Series C convertible preferred stock at an exercise price of $1.4999 per share. We accounted for this transaction as a debt modification and did not incur any gains or losses relating to the modification. The second advance, totaling $4.0 million, was drawn in March 2016. In connection with this advance, we issued warrants to purchase a total of 74,567 shares of Series D convertible preferred stock at an exercise price of $2.1457 per share.

In September 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Fourth Loan, with SVB, for amounts aggregating up to $20.0 million in a series of three advances. The first advance provides a principal amount of $10.0 million, the second advance provides a principal amount of $5.0 million and the third advance provides a principal amount of $5.0 million during their respective draw down periods. In connection with the first advance, we issued warrants to purchase 634,921 shares of common stock at an exercise price of $0.63 per share. If we draw down the second and third advances, the warrants

 

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would become exercisable for an additional 634,920 shares of common stock at an exercise price of $0.63 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.

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 of September 30, 2017, 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 fiscal 2016 and fiscal 2017.

Future maturities of the loan as of September 30, 2017 are as follows:

 

(in thousands)    Principal      Interest      Total  
Years ending September 30,                     

2018

   $      $ 715      $ 715  

2019

     2,500        673        3,173  

2020

     3,333        440        3,773  

2021

     3,333        194        3,527  

2022

     834        10        844  
  

 

 

 
     10,000        2,032        12,032  
  

 

 

 

Less: Interest

           (2,032

Total amount of loan principal

           10,000  

Less unamortized debt discount

           (860

Add accretion of final payment fee

           14  
        

 

 

 
         $ 9,154  

 

 

Capital resources

After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months. In the future, we expect we will need to raise additional capital to finance our operations which cannot be assured. As of September 30, 2017, without giving effect to the anticipated net proceeds from this offering, we have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our consolidated financial statements for the year ended September 30, 2017. However, 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, through public or private equity or debt financings or other sources, such as strategic collaborations. 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

 

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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.”

Operating capital requirements

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. As of September 30, 2017, we had $1.3 million in commitments for capital expenditures.

Cash flows

The following table summarizes our sources and uses of cash and cash equivalents:

 

      Years ended
September 30,
 
(in thousands)    2016     2017  

Net cash used in operating activities

   $ (38,592   $ (51,301

Net cash used in investing activities

     (33,345     (9,870

Net cash provided by financing activities

     69,648       63,802  
  

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (2,289   $ 2,631  

 

 

Operating activities

Net cash used in operating activities was $38.6 million in 2016 and consisted primarily of a net loss of $44.1 million adjusted for non-cash items including depreciation and amortization expenses of $4.2 million, stock-based compensation expense of $0.9 million, net increase in operating assets and liabilities of approximately $0.2 million, and other non-cash items of $0.2 million.

Net cash used in operating activities was $51.3 million in 2017 and consisted primarily of a net loss of $59.3 million adjusted for non-cash items including depreciation and amortization expenses of $5.0 million, stock-based compensation expense of $1.9 million, a net decrease in operating assets and liabilities of approximately $0.1 million, and a net increase of non-cash items of $1.2 million.

Investing activities

In 2016, our investing activities used net cash of $33.3 million. The use of net cash resulted from the purchases of investments and purchases of laboratory property and equipment.

In 2017, our investing activities used net cash of approximately $9.9 million. The use of net cash resulted primarily from the net impact of purchases and maturity of investments and purchases of laboratory property and equipment and computers.

Financing activities

Net cash provided by financing activities was $69.6 million in 2016, which consisted of $62.3 million from the issuance of convertible preferred stock and $7.7 million from the issuance of debt, partially offset by the repayment of $0.4 million of debt.

Net cash provided by financing activities was $63.8 million in 2017, which consisted of $65.6 million from the issuance of convertible preferred stock, $2.2 million from additional debt, off-set by the repayment of $4.2 million of debt.

 

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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 8 of the consolidated financial statements.

Contractual obligations and other commitments

The following table summarizes our outstanding contractual obligations as of the payment due date by period as of September 30, 2017:

 

(in thousands)    Total      Less than
1 Year
     Years
1-3
     Years
3-5
     After 5
Years
 

Contractual obligations

              

Future minimum operating lease payments

   $ 3,598      $ 2,133      $ 1,465      $      $  

Long-term debt obligations

     12,032        715        6,946        4,371         
  

 

 

 

Total

   $ 15,630      $ 2,848      $ 8,411      $ 4,371      $  

 

 

Qualitative and quantitative disclosures about market risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk and foreign currency risk as follows:

Interest rate risk

We had cash and cash equivalents totaling $28.6 million and $31.2 million as of September 30, 2016 and 2017, respectively. We had short-term investments totaling $27.3 million and $31.0 million as of September 30, 2016 and 2017, 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 objectives of our investment activities are to preserve principal and provide liquidity without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the relatively short-term nature of our investment portfolio, a hypothetical 100 basis point change in interest rate would not have a material effect on the fair value of our portfolio for the years presented.

Foreign currency risk

For the years ended in September 30, 2016 and 2017, the majority of our sales and operating expenses were each denominated in U.S. dollars. We therefore have not had material foreign currency risk associated with sales and operating expenses. For the years ended September 30, 2016 and 2017, our operations outside of the United States are not considered material. Therefore, our results of operations and cash flows are minimally subject to fluctuations from changes in foreign currency rates. As we grow our operations, our exposure to foreign currency exchange contracts will likely become more significant. We did not enter into any foreign currency exchange contracts in fiscal 2016 or fiscal 2017. We do, however, anticipate entering into foreign currency exchange contracts for purposes of hedging foreign exchange rate fluctuations on our business operations in future operating periods as our exposures are deemed to be material. For additional discussion on foreign currency risk, see “Risk factors—Doing business internationally creates operational and financial risks” elsewhere in this prospectus.

Critical accounting policies and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted

 

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accounting principles, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These estimates and assumptions are based on management’s best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ materially from these estimates and could have an adverse effect on our financial statements. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing in this prospectus, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Effective October 1, 2017, we elected to early adopt the requirements of ASC 606 – Revenue from Contracts with Customers using the full retrospective method. We evaluated the impact on revenues, loss from operations, net loss attributable to common stockholders and basic and diluted earnings per share for all periods presented and concluded that there was no material impact on our consolidated financial statements for all periods presented.

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, next generation sequencing, or 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.

 

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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 have elected the practical expedient whereby the consideration allocated to the remaining performance obligations and an explanation of when those amounts are expected to be recognized as revenue are not disclosed for all reporting periods presented before the date of initial application.

We do not have any contract assets or contract liabilities as of September 30, 2016 and 2017. 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.

Stock-based compensation

During the year ended September 30, 2016, we granted stock options to employees and non-employees to purchase 2,441,000 shares of common stock with a weighted average grant date fair value of $0.35. During the year ended September 30, 2017, we granted stock options to employees and non-employees to purchase 8,468,040 shares of common stock with a weighted average grant date fair value of $0.67. We recognized stock-based compensation expense of $0.9 million and $1.9 million, for the years ended September 30, 2016 and 2017, respectively. As of September 30, 2017, there was $6.7 million of total unrecognized compensation expense related to non-vested stock options under our 2013 Stock Plan that is expected to be recognized over a weighted-average period of 3.9 years. As of September 30, 2017, there was $1.2 million of total unrecognized compensation expense related to restricted stock under our 2013 Stock Plan that is expected to be recognized over a weighted-average period of 2.5 years.

Total stock-based compensation expense recognized was as follows:

 

      Years ended
September 30,
 
(in thousands)    2016      2017  

Cost of revenues

   $ 112      $ 202  

Research and development

     261        575  

Selling, general and administrative

     484        1,114  
  

 

 

 

Total stock-based compensation

   $ 857      $ 1,891  

 

 

We use the Black-Scholes option pricing model to calculate the grant date fair value of a stock option. The Black-Scholes model requires various assumptions, including the fair value of our common stock, expected term, expected dividend yield and expected volatility.

The expected volatility of our stock options is estimated from the historical volatility of selected public companies with comparable characteristics to us, including similarity in size and lines of business. The expected term of stock options represents the period that the options are expected to be outstanding before being exercised. The risk-free interest rate is based on the implied yield currently available on U.S. treasury notes

 

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with terms approximately equal to the expected life of the option. The expected dividend rate is zero as we currently have no history or expectation of declaring cash dividends on our common stock.

The fair value of options granted during the years ended September 30, 2016 and 2017, respectively, were calculated using the weighted average assumptions set forth below:

 

      Years ended
September 30,
 
          2016     2017  

Expected term (years)

     6.25       6.25  

Expected volatility

     64.4     65.5

Risk-free interest rate

     1.44     2.02

Dividend yield

     0     0

 

 

We expect the effect of our stock-based compensation expense to grow in future periods due to the potential increases in the fair value of our common stock and increased number of stock options granted due to anticipated increases in our overall headcount.

As of September 30, 2017, options to purchase 18,017,311 shares of our common stock were outstanding. The aggregate intrinsic value of these options was $7.1 million, assuming an initial public offering price of $                per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. The intrinsic value of all outstanding vested and unvested options as of September 30, 2017, assuming an initial public offering price of $                per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, are as follows:

 

      Shares
available
     Options
outstanding
    

Weighted
average
exercise price

per share

     Weighted average
remaining contractual
term
 

Outstanding as of September 30, 2015 (unaudited)

     6,377,752        8,711,502      $ 0.47        8.88  

Outstanding as of September 30, 2016

     4,659,659        10,233,795      $ 0.50        8.81  

Outstanding as of September 30, 2017

     6,805,339        18,017,311      $ 0.67        9.14  

Vested or expected to vest and exercisable as of September 30, 2017

        18,017,311      $ 0.67        9.14  

 

 

Determination of the fair value of common stock on grant dates

As there has been no public market for our equity instruments to date, the estimated fair value of our shares of common stock has been determined by our board of directors as of the grant date, with input from management, considering our most recently available independent third-party valuations of common shares and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Following the consummation of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock. The third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or AICPA’s Practice Aid. In conducting the valuations, the independent third-party valuation specialist considered all objective and subjective factors that it believed to be relevant for each valuation conducted in accordance with AICPA’s Practice Aid, including our

 

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best estimate of our business condition, prospects and operating performance at each valuation date. Other significant factors included:

 

 

the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock;

 

 

our results of operations, financial position and the status of research and development efforts;

 

 

the composition of, and changes to, our management team and board of directors;

 

 

the lack of liquidity of our common stock;

 

 

our stage of development and business strategy and the material risks related to our business and industry;

 

 

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

 

 

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

 

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions; and

 

 

the state of the IPO market for similarly situated privately held biotechnology companies.

Recently issued accounting pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

 

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Business

Overview

We are a leading and rapidly growing synthetic biology company that has developed a disruptive DNA synthesis platform. 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 and scalable commercial infrastructure to create an integrated platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We believe that we are the first and only company to harness the highly-scalable production and processing infrastructure of the semiconductor industry to industrialize the production of a wide range of synthetic DNA-based products.

Synthetic DNA is the fundamental building block of synthetic biology, an emerging industry that we believe represents one of the most exciting areas of growth and technological innovation in the 21st century. The ability to modify DNA and design biological systems is the foundation for a rapidly growing set of synthetic biology products, applications, and markets across multiple industries, including:

 

 

healthcare for the discovery and production of new therapeutics and molecular diagnostics;

 

 

industrial chemicals for cost-effective and sustainable production of speciality chemicals and materials, such as nylon, rubber, fragrances, food flavors and food additives;

 

 

agriculture for more effective and sustainable crop production; and

 

 

academic research for a broad range of applications.

The synthetic biology market is growing rapidly and is being fueled by increased access to affordable and innovative tools that enable new applications. We believe this is analogous to the trends seen in the next generation sequencing, or NGS, market, where declining costs of sequencing drove adoption, new applications and market expansion. Similarly, tools that combine advanced production technology with modern digital technology and software capabilities, such as our DNA synthesis platform, are driving growth and market creation. In calendar year 2016, the market for synthetic biology products was approximately $4.0 billion and is expected to grow to $11.0 billion by calendar year 2021. We believe this period of accelerated growth in the synthetic biology industry is in its early stages.

The applications of our DNA synthesis platform are broad and have enabled us to develop and produce an array of different synthetic DNA based products targeting multiple market opportunities. In April 2016, we launched the first application of our platform, our synthetic DNA product offering with the goal to become the leading synthetic DNA provider, disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete. We believe that the traditional DNA synthesis methods used by our competitors are inherently limited in scalability and are not optimized to satisfy the rapidly growing demand for high-quality, low-cost synthetic DNA. Our silicon-based chip technology is able to increase DNA production by a factor of 9,600 on a footprint similar to that of traditional DNA synthesis methods. Also, it significantly lowers the volume of required reagents, specifically the most expensive reagent by a factor of 1,000,000 and improves the precision of the synthesis process relative to legacy methods. This enables us to produce high-quality synthetic DNA on a much larger scale and at a lower cost than competitors.

Since our founding in 2013, we have rapidly become a leading synthetic DNA provider. In fiscal 2017, we served 292 customers including nine of the top 20 pharmaceutical companies by revenue, Ginkgo Bioworks, Inc., or Gingko Bioworks, which we believe is the largest global purchaser of synthetic DNA, four of the largest

 

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agricultural biotechnology companies, over 100 academic research institutions worldwide, and innovative customers using synthetic DNA for new and emerging applications, such as Microsoft Corporation and the University of Washington for use of DNA as a digital data storage medium. We are also an OEM supplier of synthetic DNA to four synthetic DNA manufacturers that also compete with us, which we believe is a strong demonstration of the superiority of our platform.    

We have also leveraged the versatility of our platform to expand our product portfolio into other markets in which we believe we have a competitive advantage. In October 2017, we launched an innovative and comprehensive sample preparation kit for next generation sequencing, or NGS, that simplifies the workflow, improves accuracy, and lowers the cost of NGS. Our kit enables customers to perform fewer sequencing runs per sample, without sacrificing accuracy. We have launched a product for CRISPR gene editing that enables customers to edit an exponentially larger number of DNA regions in parallel. We have also commercialized a DNA library solution which enables more effective biologic drug discovery and development for our customers. We continue to expand our portfolio of commercial and development-stage products derived from synthetic DNA.

Our currently marketed products target the synthetic DNA market, a sub-segment of the synthetic biology market, and NGS sample preparation, a large adjacent market opportunity. We estimate that the combined market opportunity was $1.8 billion in calendar year 2016. The growing synthetic biology industry and demand for better DNA sequencing products are driving market growth. We believe that current market estimates understate our market potential as they reflect a market that has historically been limited by the costly, time-consuming, and cumbersome nature of legacy DNA synthesis methods. We are seeing growth in our market opportunity as we improve access to affordable tools that encourage adoption of, and foster new applications and markets for our products.

We have built a scalable commercial platform that enables us to reach a diverse customer base that we estimate consists of over 100,000 synthetic DNA users today. In order to address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force and an e-commerce platform. Our sales force is focused on customer acquisition, support, and management, and is highly trained on both the technical aspects of our platform and how synthetic DNA is used in a wide range of industries. In fiscal 2017, we nearly tripled the size of our direct sales force to support our growth. 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. We have built our e-commerce platform to allow customers to receive real-time customized quotes for their sequence as well as track their order status through the manufacturing and delivery process, providing them improved flexibility to plan their budgets and internal timelines. 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.

Since our formation in 2013, we have grown rapidly and achieved several key milestones that we believe position us for continued growth and success:

 

 

In 2015, we demonstrated the benefits and validated the commercial utility of our proprietary silicon-based platform for DNA synthesis through a proof-of-concept program called the Alpha Access program, which provided initial access to our platform to select customers.

 

 

In 2016, we (i) secured a long-term contract with Ginkgo Bioworks to provide up to 100 million base pairs of DNA, which we believe was the largest agreement for synthetic DNA at that time, (ii) launched our early commercial access program in April called the Beta Access program to select customers and expanded our existing relationship with Ginkgo Bioworks, (iii) acquired Genome Compiler Corporation to add software

 

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design capabilities for our e-commerce ordering system, (iv) laid the groundwork to pursue an opportunity in pharmaceutical drug discovery though a relationship with Distributed Bio, Inc., and (v) supplied DNA to Microsoft Corporation for its work with the University of Washington to develop DNA as a data storage medium.

 

 

In 2017, we continued to increase penetration with existing customers and expand our customer base, by (i) serving 292 customers up from 97 customers in 2016, (ii) agreeing to terms to supply one billion base pairs to Ginkgo Bioworks over a period of three years, (iii) extending the scope of our relationship with Microsoft Corporation and the University of Washington, (iv) entering into an agreement to supply thousands of genes for public benefit through the BioBricks Foundation, (v) successfully achieving industry-leading volumes of synthetic DNA shipped every month, (vi) becoming an OEM supplier of synthetic DNA to four synthetic DNA manufacturers that also compete with us, (vii) launching our e-commerce platform to existing customers in October 2017 and (viii) shipping over 38,000 genes compared to approximately 7,600 for the fourth quarter of fiscal 2016, which represents 400% year-over-year growth.

 

 

In January 2018, we launched our e-commerce platform to the general public.

We generated revenue of $2.3 million in fiscal 2016 and $10.8 million in fiscal 2017 representing 375% year-over-year growth, while incurring net losses of $44.1 million in fiscal 2016 and $59.3 million in fiscal 2017.

Our headquarters and manufacturing facilities are located in San Francisco, California. As of September 30, 2017, we had 187 full-time employees across three locations in the San Francisco Bay Area and an international location in Tel Aviv, Israel. We also utilize a team of 10 dedicated commercial consultants across the European Union and the United Kingdom. As of September 30, 2017, we have raised a total of $200.3 million in gross proceeds from the sale of equity securities.

Industry overview

Synthetic biology

We operate in the field of synthetic biology, which is undergoing an era of rapid innovation and transformation. Synthetic biology is the engineering of biology to build new biological systems or re-design existing biological systems. The ability to engineer biology is creating advances and benefits for a broad and growing range of end markets and consumers. For example, in healthcare, synthetic biology is being used to develop and enable new drugs as well as to improve targeted molecular diagnostics for personalized medicine. In industrial chemical applications, synthetic biology is enabling the production of renewable, cost-effective chemicals such as nylon, rubber, fragrances, and food flavors or new materials, such as silk. In agricultural biotechnology, synthetic biology is being used to improve nutritional content, eliminate the need for oil-based fertilizers, and maximize crop yields. The applications of synthetic biology are constantly growing and new end markets are emerging, driven by innovation, our growing understanding of biology, and access to tools allowing us to modify and build biological systems. With this evolution of technology and demand, we believe synthetic biology is one of the most important technological advances of the 21st century.

The proliferation of modern research tools is transforming the synthetic biology industry and driving new areas of research and application. The understanding of, and the ability to use, synthetic biology continues to vastly improve, accelerated by technological advancements in bioinformatics, genomics, computation and automation, coupled with a decrease in DNA sequencing and DNA synthesis costs. Furthermore the availability and application of artificial intelligence and big data analysis to enhance biological experiments has led to an acceleration of valuable biological insights in a streamlined, automated, and industrialized manner. This digitization of biology has led to an explosion of new and accessible technologies and has made it possible for small and large organizations alike to conduct synthetic biology research.

 

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According to BCC research, the overall market for synthetic biology products was approximately $4.0 billion in calendar year 2016 and is expected to grow to over $11.0 billion by calendar year 2021. This industry momentum creates a significant opportunity for us to grow within our existing markets as well as expand our product offering.

The value chain within the synthetic biology market consists of three areas: enabled products, core technologies and products, and enabling technologies.

 

 

Enabled products are the true end products resulting from the use of synthetic biology, which include products such as pharmaceuticals, agricultural crops, industrial chemicals and materials, and molecular diagnostics. Companies that operate in this segment include pharmaceutical and biotech companies, large industrial chemical companies, and agriculture companies.

 

 

Core technologies and products include the biological components, integrated systems, and ingredients that form the building blocks for the enabled products, including synthetic genes and cells, delivery plasmids, and biobrick parts, among others. Companies that operate in this segment include Ginkgo Bioworks and other companies that help engineer biological components to create the enabled products.

 

 

Enabling technologies are the tools needed to produce both the core technologies and enabled products. These include technologies such as DNA synthesis, DNA sequencing, gene editing, workflow automation technologies, bioinformatics, and specialty media.

Today, we operate in the enabling technologies segment of the synthetic biology industry, although our platform provides flexibility to pursue opportunities in the core and enabled product segments as well.

Synthetic DNA is the fundamental building block of synthetic biology. DNA controls all cellular processes by coding for the production of proteins and other molecules. Users of synthetic biology can design synthetic DNA to regulate the production of these proteins and molecules to achieve a specific functional purpose. While humans have been slowly altering the genetic coding of DNA in plants and animals for millennia through selective breeding, synthetic biology is the process of rapidly coding man-made DNA to build new biological systems or modify the design of existing biological systems. This is implemented by using powerful computational models and advanced engineering to redesign existing biological systems for new purposes. As the ability to modify DNA has become increasingly accessible, the applications, products, and customer base for synthetic DNA have continued to grow.

Traditional DNA synthesis methods

While synthetic DNA (also referred to as recombinant 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. DNA synthesis is the process of linking together naturally occurring nucleotides and their phosphodiester analogs to create DNA strands that are chemically identical to naturally occurring DNA. This process is commonly referred to as phosphoramidite chemistry and was first published in 1982. Traditional methods of DNA synthesis consist of a two-step process that initially involves the synthesis of oligonucleotides, also referred to as oligos, which are short strands of DNA of up to approximately 200 base pairs (bp) in length. These oligos are then combined to create longer strands of DNA. The length of DNA required for specific research typically depends on the desired end use and can vary from 50bps to more than 100,000bps.

 

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LOGO

Currently, there are two primary methodologies used by others to create synthetic DNA, each having production limitations that we believe make these technologies sub-optimal to satisfy the rapidly growing demand for synthetic DNA. Today, all of our competitors use one of these two primary methods of DNA synthesis.

96-well plate method of DNA synthesis

Introduced as early as the 1950s, a 96-well plate is a flat plastic plate, roughly the size of two smartphones, with 8 rows of 12 wells that are used as small test tubes. This plate has become a standard tool used by researchers in multiple industries to conduct tests and also to manufacture synthetic DNA in the form of oligos. Instead of creating one sequence of DNA at a time in a single test tube, the 96-well plate allows researchers to create 96 oligos in parallel, one in each well. While this process successfully achieves DNA synthesis, it requires high volumes of phosphoramidites, an expensive raw material, as well as other ancillary reagents. It also produces excessive amounts of the final product, significantly more than is required for most subsequent processes, resulting in material that is discarded and an unnecessary expense. Additionally, this process is not scalable to produce high volumes, as approximately 100 oligos are needed to assemble one gene and therefore only one gene can be made from each 96-well plate of genes.

Microarray method of DNA synthesis

Unlike a 96-well plate, a microarray is a flat surface made of plastic or glass, on which DNA is synthesized directly in an array of discrete locations. Microarrays were initially developed as an analysis tool, to detect the identity and quantity of DNA in a sample. Beginning in the early 2000s, researchers began using microarrays to synthesize oligos. Microarrays allow large numbers of oligos to be synthesized in parallel, increasing production by up to four orders of magnitude when compared to the 96-well plate. However, DNA synthesis on microarrays presents other production limitations. In order to assemble the microarray-derived oligos into a gene, the oligos are distributed onto a plastic or glass plate, much like printing, and given unique barcodes for identification. Once printed, the oligos are cleaved off of the array chip into a single large pool of oligos, which are then amplified using polymerase chain reaction (PCR). Amplification is necessary because only small amounts of oligos can be produced on a microarray, not enough to be assembled into genes. Oligos are amplified using corresponding primers for their bar codes for separation into smaller pools of approximately 100 oligos. Separation into smaller pools and bar code removal is an expensive and time-consuming process. The oligos are then stored in the separate wells of a 96-well plate and are then assembled into a gene. While this method can make 100 genes in parallel, it remains difficult to scale, requires many steps and results in significant waste of materials.

 

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Because the synthesis of oligos can introduce errors in the sequence order, all DNA synthesis methods require a process called cloning.

Cloning

Cloning is a tedious process to filter out errors and produce many identical copies of a strand of DNA, such as a gene. While the cloning process results in a precise sequence, it is incredibly slow and labor intensive and generally takes around 10 business days to complete. As a result, it is time consuming, expensive, and, in many cases, not an efficient use of researcher’s time. In general, more accurate DNA synthesis technology results in fewer errors in the sequence order and reduces the time and costs required or allocated to the cloning process.

Example—Cloning Workflow (4 - 10 business days of researchers’ time) Compared to Purchase Workflow (10 business day turnaround at Twist Bioscience)

 

LOGO

Our solution: The Twist Bioscience DNA synthesis 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 of, 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. With a footprint that is similar to the size of a 96-well plate that produces one gene, we are able to produce 9,600 genes in parallel. Based on current production needs, we have intentionally designed our latest chip to make 6,144 genes in parallel but we have the current capacity to increase this to 9,600 genes, as needed. We have combined our DNA synthesis technology with propriety software and a scalable commercial infrastructure to create our vertically integrated DNA synthesis platform capable of delivering very large volumes of high-quality synthetic DNA at low cost.

 

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DNA writing on silicon

Silicon is an excellent medium for DNA synthesis because the properties of silicon allow us to miniaturize the chemical reactions of DNA synthesis and precisely control the position of fluid on the silicon surface. Silicon is flat and can be aligned, patterned and imaged. Fluids also flow uniformly over the surface. Silicon is a very hard material and other materials can be added or removed without changing the surface. It conducts heat very well, so the temperature can be controlled quickly, accurately and consistently across the surface.

As discovered and capitalized on by the semiconductor industry, it is possible to grow a thin layer of silicon oxide on the surface of silicon by reacting the silicon surface with oxygen at a very high temperature. The resulting oxide layer can be etched to produce micro- or nano-structures and the surface energy of the silicon oxide can be modified to be hydrophobic or hydrophilic. These modifications can also be patterned. We use these oxide-based properties to create an array of discrete devices that are similar in function to the wells on a 96-well plate to control the position of drops of fluid on the surface, replacing legacy plastic. Our process, which miniaturizes the devices relative to the wells on the 96-well plate, enables us to significantly reduce the volumes of reagents required in the oligo synthesis reaction, specifically the most expensive reagent (phosphoramidites) by a factor of 1,000,000. In addition, our silicon chip technology allows us to increase DNA production by a factor of 9,600 on a similar footprint to that of traditional DNA synthesis methods.

Currently, we manufacture DNA on a silicon chip with 6,144 distinct spaces on the chip which we call clusters, each comprised of 121 devices and we have the current capability to increase this to 9,600 genes, as needed. Each device supports the synthesis of a unique oligonucleotide sequence. In parallel, within each cluster, we construct 121 short oligos of 50 to 250 base pairs in length. Each cluster is individually customized to create and assemble the oligos into a single gene and clone them into final form using small volumes and automated processes. Because we synthesize each oligonucleotide individually, almost all DNA sequences can be customized to our customer’s specifications, both in terms of volume and amount. This improves production efficiency by enabling the manufacturing of different products in parallel without the need for retooling.

 

Diagram showing each cluster on the chip

containing 121 devices

   Optical image showing surface structure of a single cluster
LOGO    LOGO

We believe that we are only beginning to realize the benefits of our semiconductor-based production process and expect that, similar to the semiconductor industry, we will be able to continuously improve our production process over time and further our technology leadership position. By developing a semiconductor-based

 

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platform to harness the power of biology, we believe that we are promoting the digitization of biology and creating a modern production platform able to satisfy the demands of a rapidly growing industry.

 

 

LOGO

Key advantages of our proprietary DNA synthesis platform

We designed our DNA synthesis platform to address the diverse needs of our large potential customer base. Given the limitations of traditional DNA synthesis methods, buyers have historically faced trade-offs and compromises when purchasing from legacy DNA providers. Based on market research, we believe that DNA Buyers are looking for a product and purchasing experience that delivers on a number of key factors and that our platform is uniquely designed to meet these customer needs and overcome the limitations of legacy DNA synthesis methods to support the growing demand for synthetic DNA:

 

      Customer desires    Twist Bioscience advantages

Quality and accuracy

  

•  Quality and accuracy is a basic requirement for all customers. Deviations from customer specifications can render customers’ downstream uses less productive or ineffective.

  

•  Synthetic DNA providers are able to supply perfect clonal DNA to the customer. However, existing DNA synthesis technologies require significant cloning and error filtration to produce perfect clonal DNA. We are able to consistently produce high-quality oligos with what we believe is an industry-leading error rate of 1/1000 base pairs. This enables us to reduce the cloning and error

 

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      Customer desires    Twist Bioscience advantages
         

filtration necessary to achieve perfect clonal DNA. The benefits, quality and accuracy of our platform also apply to customers who purchase other synthetic DNA based products, such as antibody libraries and oligo pools. In each of our market opportunities, we believe the precision of our technology provides the advantage of cost and production throughput.

Cost

  

•  Cost is a critical consideration for both large and small-scale customers. Large-scale commercial DNA purchasers that outsource their DNA supply are becoming increasingly price sensitive due to their growing demand for DNA. On the other hand, smaller-scale users, particularly academic users, have always been price sensitive and typically have made their own DNA because of limited budgets relative to the prices charged by legacy DNA suppliers.

  

•  Because we miniaturize the chemical reaction on a silicon chip, require lower volumes of reagents and automate the production process, we are able to dramatically lower the production cost per base pair of DNA and offer our synthetic DNA at a lower price than competitors. As of November 2017, the publicly available pricing of our competitors for clonal DNA ranged from $0.17—$3.00 per base pair. Our standard pricing for comparable DNA is $0.09 per base pair. One of the best demonstrations of our cost advantage is that we supply synthetic DNA to four other competing synthetic DNA providers.

Throughput / scale

  

•  As the applications for synthetic biology have expanded, customers are increasingly seeking to purchase large quantities of DNA in relatively short periods of time, which often cannot be supplied by a single synthetic DNA provider due to

  

•  Our silicon chip technology is able to increase DNA production by a factor of 9,600 on a footprint similar to traditional DNA synthesis methods. We currently have the capability to manufacture more than 45,000 genes per month, which we believe is the

 

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      Customer desires    Twist Bioscience advantages
  

production capacity constraints. Ordering from multiple suppliers to fulfill large orders can be costly and administratively cumbersome for customers.

  

highest in the industry. We have agreed to terms to supply one billion base pairs to Ginkgo Bioworks over a period of three years, which we believe is the largest volume supply commitment in the industry.

Turnaround time

  

•  The time between placement of the order and delivery is a key consideration for customers. For example, pharmaceutical companies are focused on shortening internal R&D timelines and ready availability of high- quality, custom DNA to meet their internal timelines is an important factor.

  

•  Because our platform enables the large-scale production of DNA, our turnaround time is largely independent of order size. We have enhanced our manufacturing capabilities and expect to reduce turnaround time on large commercial quantities of genes (i.e., orders of over 15,000 per month) to 10 business days.

Product offering / complexity

  

•  Customers require a broad range of products including different gene lengths, complicated sequences and a wide range of additional configurations to fulfill a diverse set of applications and uses.

  

•  Because we synthesize each oligonucleotide individually, we can customize orders to almost any customer’s specifications. We offer genes of up to 3,200 base pairs in length, which we believe satisfies a substantial portion of the market for synthetic DNA today. We expect to offer genes of up to 10,000 base pairs in the future. Unlike traditional DNA synthesis technologies, we can also manufacture a broad range of additional products on our same DNA synthesis platform, including antibody libraries and oligo pools, among others.

Reliability

  

•  Customers value the reliability of a supplier to deliver on promises of quality and turnaround time to allow

  

•  Due to our throughput capability and proprietary integrated production and ordering process we have

 

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      Customer desires    Twist Bioscience advantages
    

them to plan their downstream workflow and hit internal deadlines.

  

been able to consistently meet the specifications and turnaround time that we promise customers.

E-commerce capability

  

•  Customers, particularly smaller-scale customers, value an intuitive, seamless e-commerce experience to simplify and automate the purchasing process. Some customers also value an application protocol interface, or an API, for electronic integration into their own procurement systems.

  

•  While some synthetic DNA providers have an e-commerce platform for ordering DNA, we believe we offer the most comprehensive e-commerce platform consisting of customized quotes, automated feedback on the feasibility of the sequence and the ability to track orders from placement to delivery. An API is also a core component of our e-commerce system.

Business strategy

We believe that our DNA synthesis platform will enable our customers to develop breakthrough applications for synthetic biology and further augment the growing demand for synthetic DNA. With our disruptive platform and synthetic DNA tools, our customers across healthcare, industrial chemicals, agriculture, and academia, are developing ways to improve lives and address critical challenges through synthetic biology.

We believe that current market estimates for synthetic DNA significantly underestimate the potential for our market opportunity as they reflect the costly, time-consuming and cumbersome nature of legacy DNA synthesis methods. With our novel, proprietary, silicon-based DNA synthesis platform, we are able to provide customers with large volumes of high-quality DNA at a fraction of the cost as compared to competitors’ methods. Accordingly, we believe we are uniquely positioned to scale alongside the rapidly growing synthetic biology industry and grow our leading market position.

Our growth strategy:

Our objective is to be the leading provider of synthetic DNA worldwide and to leverage the versatility of our platform to build a leadership position in other 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 DNA to customers across multiple industries.    Offer an unprecedented combination of quality, cost, throughput and scalability to deliver synthetic DNA to our existing customers and win new customers.

 

 

Increase our penetration within existing buyers of synthetic DNA.    Drive utilization of our products and expand our relationships with existing buyers of DNA by providing affordable tools that allow them to develop new applications and use more DNA. This is especially true for large-scale synthetic DNA Buyers

 

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including pharmaceutical and biotechnology companies, industrial chemical companies, agricultural biotechnology companies and academic institutions.

 

 

Further expand our addressable market by converting current DNA Makers into DNA Buyers.    Convert makers into buyers by offering a compelling value proposition that saves time and money for DNA users that are currently making their own DNA.

 

 

Broaden our reach to the more than 100,000 estimated synthetic DNA users.    Scale our multi-channel commercial strategy of our direct sales force and e-commerce platform to reach the large number of synthetic DNA users.

 

 

Augment our product offering within the core DNA synthesis franchise to meet the growing needs of our existing and potential new customers.    Continue to expand our product offering within our core DNA synthesis business. For example, we plan to offer longer genes, catalog vectors, maxiprep and products for CRISPR screens.

 

 

Expand into adjacent addressable markets.    Leverage the scalability and versatility of our platform to meet additional customer needs in adjacent markets. We have recently launched a next generation sequencing offering, as well as a DNA library product and anticipate launching an antibody optimization software product for pharmaceutical development in 2018. Substantially all of our revenue today is from the sale of synthetic DNA. Over time we expect to generate revenue from additional products, further diversifying our revenue.

 

 

Expand our global presence.    Our market is a global opportunity and the benefits of our platform are applicable wherever synthetic DNA is required. We intend to expand our operations into other large global markets in which we believe we can be competitive and build a growing and profitable business. For example, the synthetic biology market in Asia is rapidly growing and we believe represents an attractive market opportunity.

Beyond these opportunities, we are working with industry partners to create new markets for our products. For example, through our relationship with Microsoft and the University of Washington, we have demonstrated the advantages of DNA as a long-term medium for digital data storage, and are developing technology to address this potential large market opportunity. We are also poised to address other new market opportunities as they emerge, such as drug discovery. Furthermore, given that synthetic DNA is the foundation for a broad range of products, we are in a strong position to evaluate acquisition opportunities in existing and adjacent markets and address other new markets as they emerge.

Our products

We have developed multiple products derived from synthetic DNA and our versatile DNA synthesis technology. Our current offering consists of four primary product categories that address different needs of our customers across a variety of applications: synthetic genes, oligo pools, next generation sequencing tools and DNA libraries.

Synthetic genes

Synthetic genes are manufactured strands of DNA. Customers order our synthetic genes to conduct a wide range of research, including product development for the healthcare, agricultural, and industrial chemical industries as well as a multitude of applications within academic research. Virtually all research and

 

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development 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 to carry the DNA, also called a vector, and genes of near-perfect quality, non-clonal genes or fragments, that customers can place in their own vector. 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.

Clonal genes in a Twist Bioscience or customer vector

Our premier gene synthesis offering delivers clonally perfect genes. For our clonally perfect genes, we perform the cloning on behalf of our customers and deliver DNA in either a customer-supplied vector or a Twist Bioscience vector. Customer-supplied vectors greatly simplify downstream work for our customers, allowing them to take our genes and pass them directly into their workflows. We have also developed a catalog of our own specific vectors. Currently, we manufacture genes of up to 3,200 base pairs in length, yielding a clonally perfect piece of DNA that our customers can immediately use for their research. We offer turnaround times of approximately 15 – 20 business days for clonal genes. As of the date of this prospectus, our standard pricing for clonal DNA is $0.09 per base pair. We intend to further expand the length of genes offered to more than 10,000 base pairs and, in parallel, expand our catalog of available vectors to increase flexibility and reduce turnaround times. We also intend to offer express service options for customers that require genes on an expedited basis.

Non-clonal genes

Non-clonal genes serve customers who prefer to conduct their own cloning protocols or that do not need, or want, to pay for perfect quality genes. 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. From August 2017 through October 2017, we offered average monthly turnaround times of approximately six to 11 business days for non-clonal DNA. As of the date of this prospectus, our standard pricing for non-clonal DNA is $0.07 per base pair.

Oligonucleotide (Oligo) pools

Oligo pools, or high diversity collections of oligonucleotides, are utilized in many applications, including targeted next generation sequencing, or 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 200 nucleotides in length and, from October 2017 through December 2017, average monthly turnaround times of five to six business days. As of the date of this prospectus, our standard pricing for oligo pools is between $0.10 to $1.00 per oligo depending primarily on order size. Because the ability to design oligo pools and customize their experiments is very important to our customers, we have established a co-marketing agreement with Desktop Genetics, a company that specializes in developing algorithms which enable customers to design optimized and high-quality oligo pools. Integration of this design capability with our oligo pool synthesis production competency enables our customers to design and receive a high-quality oligo pool customized to meet their needs.

 

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In the future, we expect to offer longer oligonucleotides, cloned pools, and a sub-pooling capability which will allow our customers to purchase lower complexity pools and arrayed pools.

Oligo pools for CRISPR gene editing

CRISPR is a recently discovered gene editing tool that has become an area of significant research focus, especially in drug development, and is a rapidly growing application that is contributing to growing demand for our oligo pools. In the CRISPR editing process, a short sequence of RNA called guide-RNA (gRNA) binds to its target DNA sequence in a host cell, indicating to an enzyme where to cut and edit the DNA. In order to conduct gene editing research, many single guide-RNA must be created. Researchers can use oligo pools for CRISPR gene editing to silence, through editing, DNA locations. This process creates an error at a particular location in the DNA of the cell, rendering that location unusable, in other words silenced. By studying the relationship between silenced regions and change in phenotype (did the disease get worse or better), researchers can find the genomic regions important to the disease and identify targets for therapeutics. Similar to our standard oligo pools, we offer oligo pools for CRISPR screening with a diverse and customizable set of specifications, including pool sizes ranging from a few hundred oligos to over one million. From oligo produced on a single silicon chip, researchers can edit up to 1,000,000 DNA locations. We currently offer oligo pools for CRISPR screening of up to 200 nucleotides in length, which we believe addresses the vast majority of the market for CRISPR guide library generation.

Next generation sequencing (NGS) tools

We recently expanded the application of our DNA synthesis technology to develop products targeted at the large next generation sequencing market, or NGS. In particular, we are focused on addressing the demand for better sample preparation products that improve sequencing workflow, increase sequencing accuracy, and lower sequencing costs. In the target enrichment process, the DNA probes “enrich” a DNA sample by binding to specified segments of DNA in order to isolate and physically extract the targeted segment of DNA from the sample, prior to downstream sequencing. The targeted segment of DNA can then be copied uniformly prior to NGS analysis by our customers, yielding a larger volume of targeted segments in the sample used for sequencing. Because we are able to precisely target, extract, and uniformly amplify the target DNA segments, our solution considerably improves the accuracy of the downstream sequencing analysis. This enables our customers to perform fewer sequencing runs per sample, without sacrificing accuracy, saving them time and money.

We believe we are the only company to offer double-stranded DNA (dsDNA) probes within a comprehensive target enrichment kit used for exome and targeted sequencing. Using dsDNA as opposed to single-stranded DNA, or RNA, during next generation sequencing preparation avoids the problem of deamination (removal of an amino group). Deamination interferes with the detection of infrequent gene mutations, and may hinder genetic results and clinical diagnosis, particularly in cancer.

Our NGS products are primarily used for diagnostic testing, research for population genetics and biomarker discovery, translational research, microbiology and applied markets. 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.

In addition to our DNA probes, we have created a comprehensive sample preparation kit that combines these probes for NGS target enrichment with all the reagents and consumables necessary to process a sample into sequencing-ready material. This improves the NGS library preparation workflow and is a cost-effective solution that reduces sequencing costs, improves time to results, enhances sequencing coverage, and provides quality control on every DNA probe.

 

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We have launched a kit for sequencing of the exome, or NGS exome capture, the entire known coding region of the genome, and expect to launch a software tool to allow customers to customize their own kit, or NGS custom capture. We expect the development of this software tool, combined with our e-commerce platform, will simplify the design process for our customers and provide broader market access to our products.

DNA libraries

DNA libraries are collections of DNA fragments that are primarily used by pharmaceutical companies during antibody discovery and development. During the drug discovery phase, a pharmaceutical company typically has a biological target or function of interest. In order to find antibodies that best bind to that target in a specific region of a gene and deliver a therapeutic effect, it may be necessary to test many variants of an antibody. Synthetic DNA libraries become useful in this process, as they produce customized, controllable groups of antibodies from specific DNA sequences to run through assays that assess function, toxicity and binding affinity.

Traditionally, pharmaceutical companies have generated antibody libraries through a process called “random mutagenesis.” This uses a technique called polymerase chain reaction (PCR) mutagenesis, where PCR is used to introduce many sequence errors, or variations, within the copies of the antibody. While this generates many different antibody variants, the changes are entirely random and are unknown until the antibody DNA is sequenced. In addition, because of the random approach, there is no guarantee that the resulting antibodies will target the desired region of interest.

Our platform allows customers to customize every antibody variation and construct a library systematically to target the entire region of interest. We can create single site libraries in which we change one single amino acid (a group of three DNA bases) 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 areas of the genome desired. We specialize in antibodies that work within the human body, something that is unique among library providers. This enables us to make our libraries highly-focused and affordable for our customers. In the future, we expect to add digital library design tools to our e-commerce platform that will facilitate rapid library design.

End markets for Twist Bioscience products

Our current product set addresses customers across a range of major applications.

 

      Product offered    Healthcare    Industrial
chemicals
   Agriculture    Academic
research

Genes

  

Clonal genes

   X    X    X    X
  

Non-clonal genes

(Gene fragments)

   X    X    X    X

Oligo pools

  

Oligonucleotide

pools

   X    X    X    X
  

Oligo pools for

CRISPR gene editing

   X    X    X    X

NGS tools

  

NGS exome capture

   X          X
  

NGS custom capture

   X       X    X

Libraries

  

Antibody and protein

Variant libraries

   X    X    X    X

 

 

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Our target markets

Our currently marketed product offering addresses a market opportunity that was approximately $1.8 billion in calendar year 2016. We believe that current market estimates underestimate the potential for synthetic DNA because they reflect the costly, time-consuming and cumbersome nature of legacy DNA synthesis technologies. We believe our solution has the potential to materially expand our initial market by providing end users access to high-quality and lower cost tools, encouraging adoption and facilitating new applications for our products.

DNA synthesis—DNA Buyers and DNA Makers

Our core DNA synthesis market includes our synthetic DNA, oligo pools and DNA libraries. We believe that our current market opportunity for synthetic DNA was approximately $1.3 billion in calendar year 2016. The market consists of those who buy DNA, or DNA Buyers, and those who make their own DNA, or DNA Makers. Driven by access to more affordable and high-quality synthetic DNA, we believe that there is a strong trend of DNA Makers converting to DNA Buyers.

DNA Buyers

DNA Buyers are generally commercial users in the healthcare, industrial, agricultural and academic fields who require large amounts of DNA. These customers value speed, throughput, and reliability and are increasingly price sensitive given the volume of DNA that they purchase. According to BCC Research, the size of the buyer market in 2016 was approximately $300 million and is growing at a rate of approximately 20% annually as existing DNA Buyers develop new uses for synthetic DNA and existing DNA Makers convert to DNA Buyers.

DNA Makers

DNA Makers purchase supplies in order to make their own DNA. They typically require only a few genes at a time and are very price sensitive. While the consumables required to make DNA are relatively inexpensive, it is a time-consuming and labor-intensive task. The steps include copying and pasting each DNA sequence from one vector to another using restriction enzymes, and mutagenizing the sequence of interest to obtain the desired variant and cloning DNA. Our customers in this market segment are predominantly small-scale synthetic DNA users, which typically include emerging biopharmaceutical companies, academic institutions and research organizations. We estimate our market opportunity in the DNA Maker market to be approximately $950 million. Our market estimate is based on the market sizes for products used in manual DNA synthesis, including cloning and restriction digestion enzyme market in 2016, according to a report on Molecular Biology by Markets and Markets.

Cloning one gene is a cumbersome process which typically involves 11 discrete steps and generally takes around 10 business days to complete. However, most small scale researchers have historically made their own DNA due to the prohibitively high cost of purchasing synthetic DNA in small batches. Given the inefficiency of making DNA, we are increasingly seeing DNA Makers transition to DNA Buyers as we provide broader access to affordable DNA. In addition, as we increase the size of the DNA that we offer, we expect to convert certain researchers who are both DNA Buyers and DNA Makers that buy multiple genes and stitch them together for longer constructs. We also expect the implementation of our intuitive e-commerce platform to provide enhanced access to the relatively untapped market of DNA Makers.

We believe that the DNA synthesis market is in the early stages of a growth acceleration that is similar to the growth experienced by the DNA sequencing industry over the last two decades, where initial demand was severely limited by the high cost and time required to sequence genes. The Human Genome Project, which resulted in the sequencing of the full human genome in 2003, cost $2.7 billion in government funding. At that time, the cost to sequence an entire genome was $50 million. An enormous reduction in cost was required

 

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before human genome sequencing could realistically be used as a medical research tool. With innovation in sequencing technology, the first $1,000 genome was achieved in 2014, and costs are significantly lower today.

As the cost of sequencing has decreased, both the size of the market and the number of applications have expanded exponentially. Over the last five years, the market size has more than doubled. Decibio LLC estimates that by 2016 the total market for sequencing technology had grown to approximately $2.4 billion and expects the market to continue to grow at 17% annually to approximately $4.5 billion by 2019. We believe the synthetic DNA market is undergoing a comparable transformation.

Products for next generation sequencing applications (exome and custom capture tools)

Our NGS products target a market opportunity for NGS sample preparation that was approximately $500 million in calendar year 2016 and growing at approximately 20% annually, according to market research provided by Kalorama Information, a division of marketresearch.com. As the cost of sequencing genes has decreased significantly, the applications of sequencing and the utilization of sequencing technology has increased rapidly. Today, sequencing is used in many fields, including the study of population genetics to discover disease specific markers and the diagnosis of patient-specific mutations. However, in many cases, the sequencing of an entire genome is undesirable and custom targeted sequencing, which focuses on specific regions of the genome, is preferable, as it results in a lower cost per sample and deeper coverage. For example, cancer samples are notoriously heterogeneous, and sequencing them multiple times to achieve the desired result, otherwise known as deep sequencing, would be too costly using whole genome sequencing. Similarly, a growing clinical application for cancer treatment called minimal residual disease analysis requires following the evolution of a few genetic locations to instruct physicians when they have successfully managed the disease and can stop therapy. In this application, and many others, it is significantly more cost-effective to use exome sequencing and custom targeted sequencing rather than whole genome sequencing.

We are focused on addressing the demand for better sample preparation products that improve the sequencing workflow, increase sequencing accuracy and lower sequencing costs. We offer kits consisting of double-stranded DNA probe and a comprehensive set of reagents that are used for exome sequencing and custom targeted sequencing.

Future market opportunities

We continue to expand the applications of our silicon-based DNA synthesis technology towards additional large market opportunities and expand our product reach. We have identified two vertical markets as our initial strategic priorities: Pharmaceutical drug discovery and digital data storage in DNA.

Pharmaceutical drug discovery

In the field of pharmaceutical drug discovery we believe our platform can significantly accelerate the time it takes researchers to go from target identification to an Investigational New Drug application. We believe the integral role of synthetic DNA in the drug discovery and development process uniquely positions us to capture a larger portion of this value chain.

For example, in the initial stages of drug development, our oligo pools can be used to increase the probability of identifying a specific drug target. Our genes and gene fragments can be used to validate the specific function of this drug target. Our antibody libraries play a pivotal role in drug discovery selection. As a drug moves into development, our genes and gene fragments can again guide the process of drug optimization. In addition, our NGS target enrichment offering may play a role in patient selection and stratification. Longer term, it may be possible to store clinical data in our long-term data storage solution of DNA.

 

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We are already beginning to provide proprietary content in biologics with an initial focus on G-protein-coupled receptor, or GPCR, antibody and T-cell receptor, or TCR therapeutics, through a partnership with a pharmaceutical company. We are also working with Distributed Bio to develop custom software for the maturation and humanization of antibody hits through the design, build and testing of hyper-variant antibody libraries that follow the rules of the human repertoire. By following the rules of the human repertoire, these libraries will be natural in composition and are expected to be well tolerated in clinical trials. They also have a large degree of synthetic variation, enabling the discovery of antibodies with high affinity and specificity to drug targets. In parallel with the development of the design software, we are conducting a proof-of-concept project to validate whether we are able to identify a “bio-better” antibody of icrucumab, a molecule that failed in clinical studies. With proof that our library design and build software is able to design “bio-better” antibodies, we intend to license access to our design and build library service in order to provide improved variants for pharmaceutical and biotechnology customers. In addition, we are building a library of highly designed antibodies and screening it against approximately 40 of the most commonly studied GPCR targets. We plan to license the library and its hits to drug development partners for further discovery and development, and additional libraries will be designed and tested against other targets (e.g., ion channel, transporters).

Digital data storage in DNA

The market for digital data storage devices, including solid-state disk, magnetic disk, magnetic tape and optical disk storage, is currently estimated at over $35 billion, according to market estimates provided by Spectra Logic. Due to the explosion of data across many industries, finding efficient means of storage has become more important. Many leading semiconductor companies, including Microsoft Corporation, IBM Corporation, Micron Technology, Inc., Autodesk Inc., Mentor Graphics Corporation and GLOBALFOUNDRIES Inc., are participating in the Semiconductor Research Consortium, which is exploring DNA as a data storage medium. The goal of this consortium is to explore DNA as a potential superior storage solution for digital data as compared to magnetic tape. Through our relationship with Microsoft Corporation and the University of Washington, we have demonstrated the feasibility of storing data on DNA and the unique benefits of longevity, density, and universality of this format. We expect that over time our technology will develop to allow data storage in DNA to become cost competitive with magnetic tape and enable us to target several large markets within data storage.

While DNA is currently too expensive for routine storage, we believe that our modern, silicon-based process to synthesize DNA has the potential to make DNA cost-competitive with additional research and development efforts. If the cost of writing data in DNA becomes equivalent to or lower than magnetic tape, we believe DNA will have the advantage in serving several data storage markets, including the storage of deeply cold data, in particular the WORN (Write Once, Read Never) and WORSE (Write Once, Read Seldom if Ever) markets, and the market for digital preservation where latency and the cost of reading the data are minor considerations. Typical end-markets for these storage applications are media and entertainment, healthcare/pharmaceutical records, cultural/heritage, scientific data, intelligence/defense, and libraries/museums.

Commercial strategy, sales and distribution

We have built a scalable commercial platform with a multi-channel strategy designed to address a diverse customer base consisting of an estimated more than 100,000 synthetic DNA users today. This platform is comprised of a direct sales force and an e-commerce platform.

Our sales force is focused on customer acquisition, support, and management and is highly trained on both the technical aspects of our platform and how synthetic DNA is used in a wide range of industries. Their goal is to articulate our value proposition, drive pilot programs and increase the adoption of our product offerings while maintaining close working relationships with customers.

 

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In September 2017, we initiated our multi-channel commercial strategy through a limited launch of our proprietary, innovative, and easy-to-use e-commerce platform to current customers. We expect that this e-commerce platform will enhance the productivity of our sales force and expand our customer reach by allowing customers to design, validate, and place on-demand orders of customized DNA online. We have built our e-commerce platform to allow our customers to receive real-time customized quotes for their sequence as well as track their order status through the manufacturing and delivery process, providing them improved flexibility to plan their budgets and internal timelines. This platform is a critical part of our strategy to address our potential large 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 and which is separate from our synthetic DNA sales force. We launched early commercial access for our NGS sample preparation tools to select customers in August 2017. Our direct NGS sales representatives are focused on supporting our early adopters and providing a high level of service in order to familiarize customers with our product offering. In fiscal year 2018, we plan to initiate a full commercial launch for NGS customers including a specific application of our e-commerce platform for customized orders in order to drive adoption by the broader diagnostic community.

Our customers

Our products serve the needs of customers across multiple growing end markets. We categorize our customers as follows:

 

 

Healthcare companies include pharmaceutical, biotechnology and diagnostics companies that utilize synthetic biology in target discovery, target validation, drug discovery, drug development, manufacturing, clinical trial stratification, DNA sequencing and diagnostics.

 

 

Industrial Chemical companies that apply synthetic biology to increase the use of cost-effective and sustainable, specialty chemicals and raw materials, as well as new protein-based and protein-inspired chemicals and materials that are inaccessible through traditional industrial organic chemistry.

 

 

Agriculture customers include companies that apply synthetic biology to improve crop traits, increase resistance to existing and emerging diseases, increase resistance to extremes of weather and replace oil and natural gas-derived fertilizer with synergistic bacteria, leading to better food security and nutrition.

 

 

Academic Research customers include institutions that perform research across a wide range of applications, both basic and applied. For purposes of financial reports, we consider the customers we are working with to develop permanent data storage applications using DNA as part of this category.

 

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As of fiscal 2017, the composition of our revenue by customer type was as follows: Healthcare revenue of $1.2 million, Industrial chemicals revenue of $6.7 million, Agriculture revenue of $0.1 million and Academic research revenue of $2.7 million.

 

 

LOGO

The benefits and versatility of our platform are exemplified by our expanding relationships with various partners across a variety of customers and end markets, for example:

Ginkgo Bioworks

We believe Ginkgo Bioworks is the largest purchaser of synthetic DNA globally. Ginkgo Bioworks, the organism company, is bringing biotechnology to consumer goods markets, enabling fragrance, cosmetic, nutrition, food, agriculture and pharmaceuticals to make better products. Ginkgo Bioworks also recently partnered with Bayer to form a new company focused on sustainable agriculture. We began working with Ginkgo Bioworks as one of our initial commercial customers in 2015. In March 2016, we signed an agreement with Ginkgo Bioworks to supply up to 100 million base pairs of DNA, which we believe accounted for approximately 10% of the total synthetic DNA market at the time. In 2017, we agreed to terms to supply one billion base pairs to Ginkgo Bioworks over a period of three years, which we believe is the largest volume supply commitment in the industry.

Top 3 pharmaceutical company

For the last two years we have been working closely with one of the top three pharmaceutical companies by revenue, generating bespoke synthetic antibody libraries with ratio controlled amino acid representation at defined positions. Workflow optimization has enabled us to bring the turn-around time for library delivery down to four weeks with no compromise on quality. Outsourcing to us has freed up valuable researcher time for the pharmaceutical company’s collaborators, enabling downstream assay development to occur in parallel to library synthesis. In addition, our platform has allowed this company to avoid library enrichment with carry over parental template during the selection process, which can present an issue with more traditional methods of primer-based amplification and assembly.

Syngenta AG

In 2016, Syngenta AG, or Syngenta, a leading agricultural technology company, placed an order to purchase both genes and libraries for research into pesticide resistance. We have been able to offer these genes and libraries at very competitive prices while maintaining high-quality standards that allow Syngenta to improve their research and development process. Syngenta has continued to increase the volume and diversity of products they order from us, consistent with our increase in capabilities.

 

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Case studies demonstrating conversion of makers to buyers

Centre for the Commercialization of Antibodies and Biologics

Since August 2016, we have been working with the Centre for the Commercialization of Antibodies and Biologics (CCAB), which is taking promising therapeutic compounds and providing initial validation and scale-up services for these molecules prior to licensing them to biotechnology companies. CCAB was attracted to us because of our low price for their genes of interest and our ability to supply these genes in CCAB’s own vector systems. Importantly, CCAB decided not to hire additional staff for cloning, given their satisfaction with our products, which allowed them to focus staffing resources on other aspects of development within their lab. Given their positive experience, CCAB has continued to expand their business with us and has referred other Toronto academic laboratories to us.

Antibody drug development company

We are working with an antibody drug development company that develops fully human antibody drugs, who uses our synthetic genes for some of its antibody discovery and development. They find that they are able to make better therapeutics using a targeted synthetic approach and have switched to buying synthetic DNA from us. They continue to order larger quantities of our DNA over time.

Competition

Our markets are characterized by significant technological changes, frequent new product introductions and enhancements, and evolving customer demands. We face competition from a broad range of providers of core synthetic biology products such as GenScript Biotech Corporation, GENEWIZ, Inc., IDT DNA Technologies, Inc., DNA Twopointo Inc. d/b/a ATUM, GeneArt (owned by Thermo Fisher Scientific Inc.), Eurofins Genomics LLC, Sigma-Aldrich Corporation (an indirect wholly owned subsidiary of Merck & Company, Inc.), Promega Corporation and others. Additionally, we compete with both large and emerging providers in the life sciences tools and diagnostics industries focused on sample preparation for next generation sequencing such as Thermo Fisher Scientific Inc., Illumina, Inc., IDT DNA Technologies, Inc., Agilent Technologies Inc., and Roche NimbleGen, Inc.

Many of our competitors have greater financial, technical, research and/or other resources than we do. They may also have larger and more established manufacturing capabilities and marketing, sales, and support functions. The competition is intense within this market and we believe that the principal defining factors driving competition in our market will continue to be quality, cost, throughput and scalability, turnaround time, product offering and complexity, reliability, e-commerce capabilities, customer satisfaction and convenience.

We believe that we compete favorably against our competitors based on our proprietary, integrated DNA synthesis platform, which enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost as compared to our competitors.

In order for us to successfully compete against others in our industry, we will need to continue to demonstrate that our products deliver superior performance and value as a result of these key differentiators, and continue to expand the breadth and depth of current and future products and applications.

We also believe that as a large-scale participant in the industry, we have gained experience and brand recognition across the sectors in which we operate, and have achieved a competitive advantage over existing market participants and new entrants. These advantages include:

 

 

Substantial capital investment—As of September 30, 2017, we had raised a total of $200.3 million in gross proceeds from the sale of equity securities and we have in turn made substantial capital investments in our

 

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disruptive DNA synthesis platform. We believe we are the first and only company to harness the highly scalable production and processing infrastructure of the semiconductor industry to industrialize the production of a wide range of synthetic DNA-based products, we believe we are significantly ahead of current and future competitors.

 

 

Economies of scale—Customers are usually price sensitive and economies of scale allow providers to reduce production costs which result in lower pricing for customers. When more genes are produced on a larger scale yet with fewer input costs, as we are able to do with our DNA synthesis technology, economies of scale are achieved.

 

 

Accumulated technical know-how and operational expertise—The synthetic biology industry is characterized by rapid and significant changes in technologies and requires precision, years of accumulated technical know-how and operational expertise. Our senior executive team has an average of 23 years of experience across the synthetic biology, semiconductor, software and pharmaceutical industries.

 

 

Biotechnology expertise and research and development talent—Because the synthetic biology industry requires continuous innovation to keep up with emerging new technologies, the productivity and success of providers’ research and development is highly dependent on the quality and quantity of the employees and consultants recruited and the ability of executive management.

 

 

Strong brand and market recognition—Customers generally select well-recognized providers with proven technology for large-scale and technically-demanding projects.

 

 

Customer experience—Customers value an intuitive, seamless e-commerce experience to simplify and automate the purchase process as well as electronic integration to their own procurement systems. Customers also value quality customer service which we believe we satisfy with our multi-channel commercial approach and direct sales force.

 

 

Patents—We have developed a comprehensive portfolio of issued patents and patent applications that cover our commercial products and technologies in development. Our patent strategy includes each aspect of our technology, from hardware to e-commerce to DNA storage, in order to create robust intellectual property barriers to entry for competitors.

Suppliers

We procure the raw materials we utilize in our production process from a number of different suppliers. Although most of the raw materials required for our business are typically readily available, we rely on certain single source suppliers for two critical components of our production process.

Pursuant to a supply agreement, Fujifilm Dimatix, Inc., one of our single source suppliers, provides us with specialized print heads and related jetting assemblies which we use as part of our DNA synthesis platform. Pursuant to a license agreement, Novici Biotech, LLC, another single source supplier, provides us with certain Novici technology and raw materials which enable us to perform gene production.

We do not have long-term supply agreements with most of our suppliers but secure our raw materials on a purchase order basis. Because most of the raw materials used in our business are readily available in the market from many suppliers, we believe that we can within a reasonable period of time make satisfactory alternative arrangements in the event of an interruption of supply from any vendor.

We procure various raw materials such as reagents, plastic lab ware, and spare parts for use in our DNA synthesis process and we use reagents, plastic lab ware, and packaging in our gene production service.

 

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For fiscal 2016 and fiscal 2017, our cost of raw materials accounted for approximately 27% and 30%, respectively, of the total cost of sales.

Our procurement department manages our raw materials inventory levels by monitoring our sales orders, production and manufacturing output, purchase orders and e-commerce requests. We typically advise our suppliers of our needs one to three months in advance and we procure raw materials on a monthly basis while maintaining one to two months’ worth of inventory. We procure raw materials for our customized services and products on an as-needed basis.

We select our suppliers based on the following: technology, quality, delivery, cost, and service. Performance of raw materials from suppliers is monitored at least every six months using data from incoming inspection, non-conformance reports, service reports, on-time delivery reports and customer complaints. Any quality or performance issues are addressed via a quality management conference call or an on-site supplier audit.

We pay for our purchases in cash or on credit and in some cases we prepay for our purchases. Credit terms with our suppliers range between 30 and 90 days.

Manufacturing

Our manufacturing facilities are located at our headquarters in San Francisco and in South San Francisco, California. We currently manufacture all of our products and multiple sub-assemblies at these facilities. As of September 30, 2017, we had 79 employees dedicated to manufacturing our synthetic genes, oligo pools, NGS tools, and DNA libraries.

All of our products originate from synthetic DNA obtained from nanostructured clusters fabricated on our proprietary silicon technology platform. As of September 30, 2017, we have the capacity to synthesize oligos on more than 184,000 nanostructured clusters per month, which corresponds to approximately 230,000 96-well plates on the legacy equipment used by our competitors. Our DNA synthesis process has been meticulously fine-tuned to yield high-quality DNA. In September 2017, we had an average error rate, of one error per 1,000 DNA bps, which we believe is a significantly lower rate than our competitors.

We have also built a large-scale parallel process that transforms nanostructured clusters into synthetic genes (clonal and non-clonal) using a mix of proprietary and over-the counter-laboratory equipment. Synthetic genes are an on-demand product for which customers increasingly demand fast turnaround time. We have enhanced our manufacturing capabilities and we expect to reduce turnaround time on large commercial quantities of genes (i.e., orders of over 15,000 per month) to 10 business days.

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 of more than 45,000 genes per month to address the growing demand of scalable, high-quality, affordable synthetic genes. In December 2017, we only utilized approximately a third of this production capacity for synthetic genes and oligos.

In addition to synthetic genes, we are combining nanostructured clusters into oligo pools. If our production was dedicated entirely to the oligos, we currently have the capacity to produce more than 20 million high-quality oligos per month that can be combined into high-precision oligo pools of various sizes. The pooling process has been fully automated through a mixture of custom proprietary and over-the-counter liquid handling equipment. We are currently only utilizing approximately a third of this production capacity for synthetic genes and oligos. 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.

 

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The manufacturing process for our NGS tools is highly flexible and scalable and requires minimal fixed costs and direct labor 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, which began operation in October 2017. We plan to have the full NGS workflow International Organization for Standardization 13,485 certified in 2018 to comply with diagnostic industry regulatory requirements.

Over time, to further improve our production process, we intend to outsource various sub-assemblies to third-party manufacturers.

Research and development

As of September 30, 2017, we had 57 employees dedicated to research and development. Of these employees, 31 hold advanced degrees in engineering and biology or other sciences, including either a Ph.D., M.D. or D.V.M. We incurred expenses of $19.2 million expenses for the year ended September 30, 2017 on research and development activities. Our primary research and development operations are located in leased laboratory facilities in San Francisco and South San Francisco, California.

Intellectual property

Our core technology originated as a collaboration between two of our co-founders, Bill Banyai, Ph.D., and Bill Peck, Ph.D., based on the idea that the synthetic DNA market could be revolutionized through a new oligonucleotide synthesis and gene assembly technology. Applying their engineering expertise, Drs. Banyai and Peck conceived—and later refined through collaboration with several of our other accomplished researchers and engineers—innovative silicon-structure based technologies and other innovations for synthesizing nucleic acids that allowed for the manufacture of DNA at greater yields than existing technology allowed.

Our patent strategy is to seek broad patent protection on new developments in nucleic acid synthesis technology and then later file patent applications covering new implementations of the technology and downstream applications utilizing the technology. As part of our strategy, we include each aspect of our technology, from hardware to e-commerce to DNA storage, in order to create robust intellectual property barriers to entry for competitors. As these technologies are implemented, we file new patent applications covering scientific methodology enabled by our technology. Additionally, where appropriate, we file new patent applications covering instrumentation and software that are used in conjunction with our systems for oligo synthesis and gene assembly.

We have developed our own comprehensive portfolio of issued patents and patent applications that cover each step of our commercial products and technologies in development. For example, in part because of our pioneering development efforts in the field of nucleic acid libraries, we have six issued patents and many patent applications pending relating to different aspects of our technology including our devices, our low error rate for oligo synthesis, our large, accurate nucleic acid libraries and their synthesis. We have additional patent filings directed to nucleic acid design and ordering, devices for low error rate nucleic acid synthesis, nucleic acid based data storage, and diversified biologics encoding libraries.

As of September 30, 2017, we own four issued U.S. patents and two issued international patents in China. We have 58 pending patent applications, including 34 in the United States, 15 international applications and nine applications filed under the Patent Cooperation Treaty. The U.S. issued patents expire between 2034 and 2036. The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the date of filing the non-provisional application or PCT application. In the United States, a patent’s term may be lengthened by

 

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patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or USPTO, in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-expiring patent.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our patents may not enable us to obtain or keep any competitive advantage. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Any patents we have obtained or do obtain may be challenged by re-examination, opposition or other administrative proceeding, or may be challenged in litigation, and such challenges could result in a determination that the patent is invalid. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, 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. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

In addition to pursuing patents on our technology, we have taken 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.

Legal proceedings

On February 3, 2016, Agilent Technologies, Inc., or Agilent, filed a lawsuit against us and our Chief Executive Officer, Ms. Emily Leproust, in the Superior Court of California, Santa Clara County, or the Court. The complaint also names Does 1 through 20, which are fictitious placeholder defendants. It is possible that Agilent may seek to amend its complaint to name other defendants.

Agilent’s complaint alleges three claims: (1) alleged breach of contract, related to the use of confidential information and alleged breach of non-solicitation obligations against Ms. Leproust; (2) alleged breach of a duty of loyalty against Ms. Leproust; and (3) alleged misappropriation of trade secrets under the California Uniform Trade Secrets Act, or CUTSA, against all defendants.

On September 23, 2016, we and Ms. Leproust filed a demurrer and motion to strike Agilent’s original complaint, arguing among other things that Agilent’s duty of loyalty claim was preempted by the CUTSA. Rather than oppose the demurrer, Agilent filed its First Amended Complaint, or FAC, on October 31, 2016, amending the allegations underlying its claims. On January 30, 2017, we and Ms. Leproust filed an Answer to the FAC denying all of Agilent’s claims and asserting affirmative defenses.

On September 9, 2016, Agilent served its California Code of Civil Procedure Section 2019.210 disclosure of alleged trade secrets on us and Ms. Leproust. We and Ms. Leproust argued that the disclosure contained significant deficiencies and did not comply with the requirements of California law, and first requested that all of Agilent’s outstanding discovery be stayed, a request which the Court granted on October 3, 2016. We and Ms. Leproust then filed a motion for protective order to continue the discovery stay until Agilent fully complied with California Code of Civil Procedure Section 2019.210. On November 18, 2016, the Court granted our motion

 

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for protective order in its entirety. The Court also ruled that Agilent must provide a new trade secret disclosure that remedied deficiencies in the original disclosure. On December 21, 2016, Agilent provided an amended 2019.210 disclosure. Since that time, the parties have engaged in motions practice and met and conferred numerous times regarding the trade secret disclosure and identification, with subsequent amendments being made by Agilent, and the Court maintained the discovery stay as to all of Agilent’s claims until lifting the stay in a February 1, 2018 tentative order. The Court has not yet set dates for, among other deadlines, the close of fact discovery, for hearing dispositive motions, or for trial.

We and Ms. Leproust currently believe that we have substantial and meritorious defenses to these claims and intend to vigorously defend our position. The outcome of any litigation is inherently uncertain and there can be no assurance that the outcome of the case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business.

We are also subject to various other 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.

Government regulation

The synthetic biology industry and our current product portfolio is largely unregulated by the FDA. However, in the future we may be subject to a variety of specialized regulatory requirement, including potential regulation by the FDA, any of which could have a material effect on the business.

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.

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 a previously 510(k) cleared device are categorized as Class III. These devices typically require submission and approval of a Premarket Approval Application, or PMA. 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.

In vitro diagnostics, or 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 research use only, or 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

 

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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 presently contemplated, none of our IVD products are intended for clinical or diagnostic use, and we market them to academic institutions, life sciences and clinical research laboratories that conduct research, and biopharmaceutical and biotechnology companies for non-diagnostic and non-clinical purposes. Our current IVD products are marketed and labeled as RUO, and are provided to our customers solely for their internal research use. Accordingly, we believe that our current IVD products are subject only to limited regulation with respect to labeling by the FDA, and we have not sought clearance or approval from the FDA to market our products.

In November 2013, the FDA issued final guidance indicating that 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. We do not believe any of these circumstances apply to our current product portfolio.

While we believe that none of our current IVD products require FDA approval or clearance, we may in the future develop and commercialize a subset of our products or related applications that could become subject to additional regulation by the FDA. If we market our products for use in performing clinical diagnostics, thus subjecting them to additional regulation by the FDA, including premarket and post market control as medical devices, we would be required to obtain either prior 510(k) clearance or prior pre-market approval from the FDA before commercializing the product, unless an exemption applies.

International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. Outside of the European Union, or EU, regulatory approval needs to be sought on a country-by-country basis in order to market medical devices.

FSAP.    The federal Centers for Disease Control and Prevention and the Animal and Plant Health Inspection Service administer requirements of the Federal Select Agent Program, or FSAP. FSAP requirements govern 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. It is our policy generally not to produce or otherwise work with material that is subject to FSAP requirements.

Export controls.    International shipments of DNA sequences that we produce are potentially licensable under export controls, although in our experience so far exports of DNA sequences that we have produced have not required licenses.

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.

Facilities

Our principal executive offices are located in San Francisco, California, where we lease approximately 13,000 square feet under a lease that expires in September 30, 2019. We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available as and when needed.

 

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Our team

As of September 30, 2017, we had 187 full-time employees and a team of 10 dedicated commercial consultants across the European Union and United Kingdom. Of these full-time employees, 57 employees are engaged in research and development activities. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

 

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Management

Executive officers and directors

The names and ages of our executive officers and directors as of December 31, 2017, are as follows:

 

Name    Age      Position(s)

Executive officers:

     

Emily M. Leproust

     44      President, Chief Executive Officer and Director

William Banyai

     63      Chief Operating Officer and Director

Kenton D. Chow

     53      Interim Chief Financial Officer

Mark Daniels

     55      General Counsel, Secretary and Chief Ethics and Compliance Officer

Paula Green

     50      Vice President of Human Resources

Patrick Finn

     46      Vice President of Sales and Marketing

Patrick Weiss

     47      Vice President of Operations

Bill Peck

     57      Chief Technology Officer

Non-Employee directors:

     

Robert Chess

     60      Director

Paul A. Conley

     49      Director

Keith Crandell

     57      Director

Fredrick Craves

     72      Director

Robert Ragusa

     58      Director

 

 

(1)   Member of audit committee

 

(2)   Member of compensation committee

 

(3)   Member of nominating and governance committee

Executive officers

Emily M. Leproust, Ph.D. has served as our President and Chief Executive Officer and as a member of our board of directors since April 2013. Prior to co-founding Twist Bioscience, Ms. Leproust served in various positions at Agilent Technologies, Inc., most recently as its Director, Applications and Chemistry R&D from February 2009 to April 2013. Ms. Leproust holds a M.Sc. in Industrial Chemistry from the Lyon School of Industrial Chemistry and a Ph.D. in Organic Chemistry from the University of Houston. Our board of directors believes that Ms. Leproust is qualified to serve as a director because of her operational and historical expertise gained from serving as our President and Chief Executive Officer, and her extensive professional and educational experience in the biotechnology industry.

William Banyai, Ph.D. has served as our Chief Operating Officer and as a member of our board of directors since February 2013. Prior to co-founding Twist Bioscience, from April 2006 to March 2013, Mr. Banyai was the Vice President of Hardware Engineering at Complete Genomics Inc., a life sciences company that developed and commercialized a platform for sequencing and analyzing human genomes. Mr. Banyai was also previously a director at Glimmerglass Networks, a supplier of SDN enabled Intelligent Optical Switching and Optical Network

 

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Management solutions. Mr. Banyai holds a B.S. in Physics and an M.S. in Electrical Science from the University of Michigan, an Engineer of Electrical Engineering degree from the University of Southern California and a Ph.D. in Optical Science from the University of Arizona. Our board of directors believes that Mr. Banyai’s experience as our Chief Operating Officer and extensive executive and professional experience in the biotechnology industry, as well as his previous director experience and expertise in corporate governance, qualify him to serve as a director.

Kenton D. Chow has served as our interim Chief Financial Officer since November 2017. Prior to joining us, Mr. Chow has been a Partner with FLG Partners, LLC, a financial service firm since October 2015. Prior to that, from April 2013 to September 2015, Mr. Chow was the Chief Operating Officer at RetailNext, Inc., a big data analytics software developer for retailers. Before RetailNext, Mr. Chow held various chief financial officer positions, including Wine.com, Aurora Networks, Inc., and Cobalt Networks, Inc., where he led Cobalt’s IPO and subsequent sale to Sun Microsystems. Mr. Chow holds a B.S. of Science in Commerce in Finance and a M.B.A., both from Santa Clara University. He is also a licensed CPA in the State of California on inactive status.

Mark Daniels has served as our General Counsel since August 2016, as our Chief Ethics and Compliance Officer since May 1, 2017 and as our Secretary since              2018. Prior to joining the Company, from January 2013 to May 2016, Mr. Daniels was at Broadcom Corporation, a semiconductor manufacturer and producer of wireless and broadband products, where his most recent position was Vice President, Law and Deputy Chief Corporate Compliance Officer. Before that, he spent 20 years in positions of increasing responsibility in the legal department at Amgen, Inc., a producer of biopharmaceuticals, where his last role was Vice President and Associate General Counsel. Mr. Daniels received his B.S. with honors in Industrial and Labor Relations from Cornell University and a J.D., cum laude, from Harvard Law School.

Patrick Finn has served as our Vice President of Sales and Marketing since March 2015. Prior to joining us, Mr. Finn was Vice President of Sales at Enzymatics Inc., a developer, manufacturer, and marketer of enzymes for molecular biology applications, sold predominantly to manufacturers in research and diagnostic markets from January 2012 to March 2015. Mr. Finn holds a B.Sc. in Chemistry from Heriot-Watt University and a Ph.D. in Chemistry from the University of Southampton.

Paula Green has served as our Vice President of Human Resources since March 2016. Prior to joining us, Ms. Green was Vice President of Human Resources at Qiagen, N.V., a provider of sample and assay technologies for molecular diagnostics, applied testing, academic and pharmaceutical research from March 2001 to September 2015. Ms. Green holds a B.S. Organizational Behavior from the University of San Francisco.

Bill Peck has been our Chief Technology Officer since February 2013. Prior to co-founding Twist Bioscience, Mr. Peck was the Director of Fluidic Systems at Complete Genomics Inc. from April 2008 to February 2013. Mr. Peck holds a B.Sc., M.Sc., and Ph.D. in Mechanical Engineering from the University of Alberta.

Patrick Weiss has served as our Vice President of Operations since January 2014. Prior to joining us, between April 2010 and December 2013, Mr. Weiss served as an outside consultant to various technology companies. Mr. Weiss holds an M.Sc. in Chemistry from E.T.H. Zurich.

Non-employee directors

Robert Chess has served on our board of directors since July 2014. Mr. Chess is Chairman of the board of directors of Nektar Therapeutics, a public therapeutics company. He has served on the board of Nektar Therapeutics as either CEO and/or Chairman since 1992 and has held the Chairman position since 1999. Mr. Chess has also served on the board of directors of Pharsight Corp., a public company that provides software and scientific consulting services to pharmaceutical and biotechnology companies, and CoTherix, Inc., a public biopharmaceutical company. Mr. Chess currently serves as a lecturer at the Stanford Graduate School of

 

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Business, a position he has held since 2004. Mr. Chess holds a B.S. in Engineering with Honors from the California Institute of Technology and an M.B.A. from Harvard University. Our board of directors believes that Mr. Chess brings extensive board and executive experience managing operations of biotechnology companies, and his service on a number of public company boards provide important industry and corporate governance experience, which qualify him to serve as one of our directors.

Keith Crandell has served on our board of directors since October 2013. Mr. Crandell is the Managing Director of Arch Venture Corporation, a venture capital firm focused on early-stage technology companies, since 1994. Mr. Crandell is a director of several private companies and he also serves on the board of directors of Adesto Technologies Corp., a provider of low power, smart non-volatile memory products which is a publicly traded company and Quanterix, a publicly traded life science instrument company. Mr. Crandell holds a B.S. in Chemistry and Mathematics from St. Lawrence University, an M.S. in Chemistry from the University of Texas, Arlington, and an M.B.A. from the University of Chicago. Our board of directors believes that Mr. Crandell brings extensive experience in the technology industry and that his service on a number of boards provides an important perspective on operations, finance and corporate governance matters which qualify him to serve as one of our directors.

Frederick Craves, Ph.D. has served on our board of directors since May 2014. Mr. Craves is the Founder of Bay City Capital, one of the world’s premier life science investment firms, and has been Managing Director since its founding in September 1996. Over the course of his career, Mr. Craves has worked in executive management of a multinational pharmaceutical company and founded and managed several biotech companies. He previously served on the boards of several private and public companies, including Reliant Pharmaceuticals, Medarex Pharmaceuticals and Incyte Pharmaceuticals. His current board memberships include two public companies, Madrigal Pharmaceuticals, Inc., a clinical stage biopharmaceutical company, where he is lead director and Dermira, Inc. a dermatological biotechnology company. Mr. Craves holds a B.S. in Biology from Georgetown University, an M.S. in Biochemical Pharmacology from Wayne State University, and a Ph.D. in Pharmacology and Toxicology from the University of California, San Francisco. Our board of directors believes that in addition to his educational background, Mr. Craves brings extensive experience in the biotechnology industry and his service on a number of boards of public and private companies provides an important perspective on operations and corporate governance matters which qualifies him to serve as one of our directors.

Paul A. Conley, Ph.D. has served on our board of directors since July 2013. Mr. Conley is a Partner and Managing Director at Paladin Capital Group, a prominent venture capital investment firm, a position he has held since November 2007. Mr. Conley also serves on the board of directors of many companies, several in the biotechnology and related fields, including 10x Genomics, Inc., TOMA Bioscience, Inc., and General Automation Laboratory Technologies, Inc. Mr. Conley holds a B.S. in Mechanical Engineering and an M.S. in Mechanical & Aerospace from the University of Virginia, an M.S. in Bioengineering and a Ph.D. in Applied Physics from the University of California, San Diego. Our board of directors believes that Mr. Conley brings extensive experience in the biotechnology industry and his service on a number of boards provides an important perspective on operations and corporate governance matters, as well as his education in biotechnology, qualifies him to serve as one of our directors.

Robert Ragusa has served on our board of directors since February 2017. Mr. Ragusa is currently the Senior Vice President, Global Quality and Operations, at Illumina, Inc., a strategic commercial partner of Twist Bioscience Corporation and a publicly traded corporation, where he has worked since December 2013. Prior to joining Illumina, Inc., from April 2010 to November 2013, Mr. Ragusa was Executive Vice President, Global Operations and Service at Accuray Incorporated, a radiation oncology company that develops, manufactures, sells and supports cancer treatment solutions. Mr. Ragusa holds a B.S. in Biomedical and Electrical Engineering and an M.B.A. from the University of Connecticut, and an M.S. in Biomedical and Electrical Engineering from Carnegie-Mellon University. Our board of directors believes that Mr. Ragusa brings extensive experience in important

 

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ecosystem partners and managing operations of large public companies, and this, in addition to his education in biotechnology, finance and management, qualifies him to serve as one of our directors.

There are no family relationships among any of our directors or executive officers.

Code of business conduct and ethics

We have adopted a code of business conduct and ethics that will apply to all of our employees, officers and directors beginning on the effective date of the registration statement of which this prospectus forms a part. Immediately prior to the effectiveness of this offering, the full text of our code of business conduct and ethics will be posted on the investor relations section of our website at www.twistbioscience.com. We expect that any amendment to the code, or any waivers of its requirements, will be disclosed on our website to the extent required by the applicable rules and exchange requirements. The inclusion of our website in this prospectus does not include or incorporate by reference the information on our website into this prospectus.

Board of directors

Our board of directors is currently comprised of seven members. Our amended and restated bylaws permit our board of directors to establish by resolution the authorized number of directors, and seven directors are currently authorized. Upon completion of this offering our board of directors will consist of                 members,                  of whom will qualify as “independent” under the Listing Standards of The Nasdaq Global Market.

Voting arrangements

The election of the members of our board of directors is currently governed by the amended and restated stockholders agreement that we entered into with certain holders of our common stock and certain holders of our convertible preferred stock in January 2016, as amended in March 2017, and the related provisions of our amended and restated certificate of incorporation. Pursuant to the stockholders agreement and these provisions, Messrs. Banyai, Chess, Conley, Crandell, Craves and Ragusa and Ms. Leproust have been designated to serve on our board of directors.

 

 

Mr. Crandell was designated by ARCH Ventures Fund VII, LP and elected by the holders of our Series A convertible preferred stock;

 

 

Mr. Craves was designated by Tao Invest LLC, and elected by the holders of our Series B convertible preferred stock;

 

 

Mr. Ragusa was designated by Illumina, Inc., and elected by the holders of our Series C convertible preferred stock;

 

 

Mr. Conley was designated by the holders of a majority of the holders of our Series D convertible preferred stock and subject to the approval of the holders of a majority of our common stock;

 

 

Mr. Banyai was elected to the board of directors by the holders of our common stock;

 

 

Mr. Chess was elected to the board of directors by a majority the holders of our common stock and convertible preferred stock, each voting as a single class; and

 

 

Ms. Leproust was elected to the board of directors as our chief executive officer.

The holders of shares of our common stock and convertible preferred stock who are parties to our stockholders agreement are obligated to vote for such designees indicated above. The provisions of this stockholders agreement will terminate upon the closing of this offering and our certificate of incorporation will be amended and restated, after which there will be no further contractual obligations or charter provisions regarding the election of our directors.

 

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Our directors hold office until their successors have been elected and qualified or appointed, or the earlier of their death, resignation or removal.

Classified board

In connection with the closing of this offering, we will file our amended and restated certificate of incorporation which will provide that our board of directors will be divided into three classes, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes of directors continuing for the remainder of their respective three-year terms. Upon the expiration of the term of a class of directors, a director in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

Our directors will be divided among the three classes as follows:

 

 

the Class I directors will be     ,             and     , and their terms will expire at the annual meeting of stockholders to be held in 2019;

 

 

the Class II directors will be                ,     and     , and their terms will expire at the annual meeting of stockholders to be held in 2020; and

 

 

the Class III directors will be     ,      and     , and their terms will expire at the annual meeting of stockholders to be held in 2021.

In addition, our amended and restated bylaws and amended and restated certificate of incorporation will provide that (i) only the board of directors may fill vacancies on the board of directors until the next annual meeting of stockholders and (ii) the number of our directors shall be fixed from time to time by a resolution of the majority of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

This classification of the board of directors and the provisions described above may have the effect of delaying or preventing changes in our control or management. See “Description of capital stock—Anti-takeover effects of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws.”

Role of the board in risk oversight

One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through its standing committees that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure. Our audit committee is responsible for reviewing and discussing our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies with respect to risk assessment and risk management. Our audit committee also monitors compliance with legal and regulatory requirements, in addition to oversight of the performance of our external audit function. Our nominating and governance committee monitors the effectiveness of our governance guidelines. Our compensation committee reviews and discusses the risks arising from our compensation philosophy and practices applicable to all employees that are reasonably likely to have a materially adverse effect on us.

Director independence

In connection with this offering, we intend to list our common stock on The Nasdaq Global Market. Under the rules of The Nasdaq Global Market, independent directors must comprise a majority of a listed company’s board

 

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of directors within a specified period of time after completion of such company’s initial public offering. In addition, the rules of require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating committees be independent. Under the rules of Nasdaq Global Market, a director will only qualify as an “independent” director if, in the determination of that company’s board of directors, that director does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director with the listed company.

Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, each member of the audit committee of a listed company may not, other than in his or her capacity as a member of such committee, the board of directors, or any other board committee: (i) accept, directly or indirectly, any consulting, advisory, or other compensatory fees from the listed company or any of its subsidiaries; or (ii) be an affiliated person of the listed company or any of its subsidiaries.

Our board of directors has undertaken a review of its composition, the composition of its committees, and the independence of each director and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based on information provided by each director concerning his or her background, employment, and affiliations, including family relationships, our board of directors has determined that each of             ,             ,             ,              and                 does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the Securities and Exchange Commission, and the listing standards of The Nasdaq Global Market. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in the section titled “Certain relationships and related party transactions.”

Committees of the board of directors

Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee. The composition and responsibilities of each committee are described below. Immediately prior to the closing of this offering, copies of the charters for each committee will be available on the investor relations portion of our website at www.twistbioscience.com. Members serve on these committees until their resignations or removal. The inclusion of our website in this prospectus does not include or incorporate by reference the information on our website into this prospectus.

Audit committee

Our audit committee is comprised of Messrs. Chess, Conley and Craves, and, effective upon the completion of this offering, our audit committee will consist of             ,              and             , with              serving as audit committee chairperson. Our board of directors has determined that each of the members of our audit committee satisfies the requirements for independence and financial literacy under the current listing standards of The Nasdaq Global Market and Securities and Exchange Commission rules and regulations, including Rule 10A-3. Our board of directors has also determined that              and              are each an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K of the Securities Act.

 

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Our audit committee will be responsible for, among other things:

 

 

selecting a qualified firm to serve as independent registered public accounting firm to audit our financial statements;

 

 

helping to ensure the independence and performance of the independent registered public accounting firm;

 

 

discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

 

 

establishing policies and procedures for the receipt and retention of accounting related complaints and concerns, including a confidential, anonymous mechanism for the submission of concerns by employees;

 

 

periodically reviewing legal compliance matters, including securities trading policies, periodically reviews significant accounting and other financial risks or exposures to our company and reviewing and, if appropriate, approving all transactions between our company or its subsidiaries and any related party (as described in Item 404 of Regulation S-K);

 

 

establishing policies for the hiring of employees and former employees of the independent registered public accounting firm;

 

 

reviewing related party transactions and proposed waivers of the code of conduct;

 

 

considering the adequacy of our internal accounting controls and audit procedures;

 

 

reviewing our policies on risk assessment and risk management;

 

 

approving all audit and non-audit services other than de minimis non-audit services, to be performed by the independent registered public accounting firm; and

 

 

reviewing the audit committee report required by Securities and Exchange Commission rules to be included in our annual proxy statement.

Our audit committee will operate under a written charter, to be effective on the date of this offering, which satisfies the applicable rules of the Securities and Exchange Commission and the listing standards of The Nasdaq Global Market, and which will be available on our website upon completion of this offering. All audit services to be provided to us and all permissible non-audit services, other than de minimis non-audit services, to be provided to us by our independent registered public accounting firm will be approved in advance by our audit committee.

Compensation Committee

Our compensation committee is comprised of Messrs. Chess, Crandell and Craves, and, effective upon the completion of this offering, our compensation committee will consist of                ,             and             with             serving as compensation committee chairperson. Our board of directors has determined that each member of the compensation committee is a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act. Our board has determined that                ,      and                  meet the requirements for independence under the listing standards of The Nasdaq Global Market and Securities and Exchange Commission rules and regulations. Our compensation committee will be responsible for, among other things:

 

 

reviewing and approving the compensation of our chief executive officer and other executive officers;

 

 

reviewing the compensation paid to our directors and making recommendations to our board of directors;

 

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administering our equity incentive plans and other benefit programs;

 

 

reviewing, adopting, amending, and terminating, incentive compensation and equity plans, severance agreements, bonus plans, change-of-control protections, and any other compensatory arrangements for our executive officers;

 

 

reviewing, evaluating, and recommending to our board of directors succession plans for our executive officers; and

 

 

establishing our general compensation policies and practices.

Our compensation committee will operate under a written charter, to be effective on the date of this offering, which satisfies the applicable rules of the Securities and Exchange Commission and the listing standards of The Nasdaq Global Market and that will be available on our website upon completion of this offering. In accordance with and pursuant to Section 10A(i)(3) of the Exchange Act, our board of directors has delegated to                the authority to pre-approve any auditing and permissible non-auditing services to be performed by our registered independent public accounting firm, provided that all such decisions to pre-approve an activity are presented to the full audit committee at its first meeting following any such decision.

Nominating and governance committee

Effective upon the completion of this offering, our nominating and governance committee will consist of Messrs.             ,              and             , each of whom is a non-employee member of our board of directors, with Mr.                 serving as the nominating and governance committee chairperson. Our board of directors has determined that     ,                 and                 meet the requirements for independence under the listing standards of The Nasdaq Global Market and Securities and Exchange Commission rules and regulations.

Our nominating and governance committee will be responsible for, among other things:

 

 

identifying, evaluating and selecting, or making recommendations to our board of directors regarding, nominees for election or our board of directors and its committees;

 

 

considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

 

reviewing succession planning for our chief executive officer and other executive officers and evaluating potential successors;

 

 

reviewing and assessing the adequacy of our corporate governance guidelines and recommending any proposed changes to our board of directors;

 

 

evaluating the performance of our board of directors and of individual directors.

The nominating and governance committee will operate under a written charter, to be effective on the date of this offering, which satisfies the applicable listing requirements and rules of The Nasdaq Global Market, and which will be available on our website upon completion of this offering.

Our board of directors may from time to time establish other committees.

Compensation committee interlocks and insider participation

During fiscal 2017, our compensation committee consisted of Messrs. Chess, Crandell and Craves. None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or during fiscal 2017 has served, as a member of our board of directors or

 

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the compensation committee (or other board committee performing equivalent functions) of any entity that has one or more of its executive officers who served on our board of directors or our compensation committee during fiscal 2017.

Director compensation

Historically, we have neither had a formal compensation policy for our non-employee directors, nor have we had a formal policy of reimbursing expenses incurred by our non-employee directors in connection with their board service. However, we have reimbursed our non-employee directors for reasonable expenses incurred in connection with their attendance at board of directors or committee meetings and occasionally granted stock options. Other than as described below, we did not provide our non-employee directors, in their capacities as such, with any cash, equity or other compensation in fiscal 2017. Neither Emily Leproust, our President and Chief Executive Officer, nor William Banyai, our Chief Operating Officer, received separate compensation for services as a director. Ms. Leproust and Mr. Banyai’s compensation is discussed in the section titled “Executive compensation.” Although we have not yet done so, we intend to implement a compensation policy for non-employee directors that will be effective shortly after the date of this prospectus.

The following table sets forth certain information regarding the compensation of our non-employee directors for fiscal 2017:

 

Name    Option
awards
($)(1)(2)
     Total
($)
 

Robert Chess

     75,264        75,264  

Paul A. Conley

             

Keith Crandell

             

Frederick Craves

             

Robert Ragusa

             

 

 

 

(1)   The amount reported in this column represents the aggregate grant date fair value for financial statement reporting purposes of stock options granted in fiscal 2017 under our 2013 Plan, as determined in accordance with FASB ASC Topic 718. This amount reflects our accounting expense for these stock options and does not represent the actual economic value that may be realized by each non-employee director. There can be no assurance that this amount will ever be realized. For information on the assumptions used in valuing this award, refer to Note 15 to the consolidated financial statements included elsewhere in this prospectus.

 

(2)   The number of shares underlying outstanding stock options held by each non-employee director as of September 30, 2017 was as follows: Mr. Chess (70,340); Mr. Conley (0); Mr. Crandell (0); Mr. Craves (0); and Mr. Ragusa (0). In addition, as of September 30, 2017, Mr. Chess held 167,894 shares of restricted common stock subject to a repurchase right in favor of the Company that he received in connection with the exercise of a stock option that was immediately exercisable upon grant, or “early exercisable” and 523,421 additional shares of common stock.

Board diversity

Upon consummation of this offering, our nominating and governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, may take into account many factors, including, but not limited to, diversity of personal and professional background, perspective and experience; personal and professional integrity, ethics and values; experience in corporate management, operations or finance; experience relevant to our industry and with relevant social policy concerns; experience as a board member or executive officer of another publicly held company; relevant academic expertise or other proficiency in an area of our operations; practical and mature business judgment; and any other relevant qualifications, attributes or skills.

 

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Currently, our board of directors evaluates, and following the consummation of this offering will evaluate, each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

Limitation of liability and indemnification of directors and officers

Our amended and restated certificate of incorporation, which will become effective upon the closing of this offering, will contain provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for the following:

 

 

any breach of their duty of loyalty to our company or our stockholders;

 

 

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

 

unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

 

 

any transaction from which they derived an improper personal benefit.

Our amended and restated bylaws, which will become effective upon the closing of this offering, will provide that we shall indemnify, to the fullest extent permitted by law, any person who is or was a party or is threatened to be made a party to any action, suit or proceeding, by reason of the fact that he or she is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. Our amended and restated bylaws will provide that we may indemnify to the fullest extent permitted by law any person who is or was a party or is threatened to be made a party to any action, suit or proceeding, by reason of the fact that he or she is or was one of our employees or agents or is or was serving at our request as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Our amended and restated bylaws will also provide that we must advance expenses incurred by or on behalf of a director or officer in advance of the final disposition of any action or proceeding, subject to very limited exceptions.

Prior to the closing of this offering, we intend to obtain insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and officers against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these officers and directors pursuant to our indemnification obligations or otherwise as a matter of law.

Prior to the closing of this offering, we intend to enter into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements may also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

The underwriting agreement provides for indemnification by the underwriters of us and our officers, directors and employees for certain liabilities arising under the Securities Act, or otherwise.

 

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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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Executive compensation

Overview

As an emerging growth company, we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act.

Our named executive officers for fiscal 2017 were:

 

 

Emily M. Leproust, our President, Chief Executive Officer and Secretary;

 

William Banyai, our Chief Operating Officer; and

 

Patrick Weiss, our Senior Vice President, Global Operations.

Summary compensation table

The following table sets forth certain information regarding the compensation of our named executive officers for fiscal 2017:

 

Name and principal position    Year     Salary
($)(1)
    Bonus
($)
    Option
awards
($)(2)
    Non-equity
incentive  plan
compensation
($)(3)
   

All other

compensation
($)

    Total
($)
 

Emily M. Leproust
President, Chief Executive Officer and Secretary

     2017       340,001             2,445,057       87,150             2,872,208  

William Banyai
Chief Operating Officer

     2017       317,501             1,615,700       58,848             1,992,049  

Patrick Weiss
Senior Vice President, Global Operations

     2017       314,994             1,070,000       44,136             1,429,130  

 

 

 

(1)   The amounts reported in this column represent salary earned by each of our named executive officers in fiscal 2017.

 

(2)   The amounts reported in this column reflect the aggregate grant date fair value for financial statement reporting purposes of stock options granted in fiscal 2017 as determined in accordance with FASB ASC Topic 718. These amounts reflect our accounting expense for these stock options and do not represent the actual economic value that may be realized by each named executive officer. There can be no assurance that these amounts will ever be realized. For information on the assumptions used in valuing these awards, refer to Note 15 to the consolidated financial statements included elsewhere in this prospectus.

 

(3)   Represents annual bonuses earned by each named executive officer under our annual cash incentive plan for executive officers for fiscal 2017. The amounts reported represent performance-based cash incentives earned by each named executive officer based on the achievement of certain revenue goals and strategic objectives and the named executive officer’s target incentive compensation amount.

 

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Outstanding equity awards as of September 30, 2017

The following table provides information regarding the unexercised stock options and restricted stock awards held by each of our named executive officers as of September 30, 2017:

 

             Option awards(1)     Stock awards(1)  
Name    Grant date    

Number of
securities
underlying
unexercised
options (#)
exercisable

(2)

    Number of
securities
underlying
unexercised
options (#)
unexercisable
(3)
    Option
exercise
price
($)(4)
    Option
expiration
date
   

Number of
shares or
units of
stock that
have not
vested

(#) (5)

   

Market
value of
shares or
units of
stock that
have not
vested

($) (6)

 

Emily M. Leproust

     9/29/2015 (7)      500,000       500,000       0.60       9/28/2025              
     9/29/2017 (8)      228,510       2,056,590       0.89       9/28/2027              

William Banyai

     9/29/2015 (7)      500,000       500,000       0.60       9/28/2025              
     9/29/2017 (8)      151,000       1,359,000       0.89       9/28/2027              

Patrick Weiss

     4/1/2014 (9)                              9,875    
     6/19/2014 (10)                              86,415    
     9/29/2015 (11)      250,000       250,000       0.60       9/28/2025              
     9/29/2017 (8)      100,000       900,000       0.89       9/28/2027              

 

 

 

(1)   All awards were granted under our 2013 Plan.

 

(2)   Because all stock options granted to our named executive officers under the 2013 Plan are early exercisable, and early exercised shares are subject to a repurchase right in favor of the Company which lapses as the option vests, this column reflects the number of options held by our named executive officers that were exercisable and vested as of September 30, 2017.

 

(3)   Because all stock options granted to our named executive officers under the 2013 Plan are early exercisable, and early exercised shares are subject to a repurchase right in favor of the Company which lapses as the option vests, this column reflects the number of options held by our named executive officers that were exercisable and unvested as of September 30, 2017.

 

(4)   This column represents the fair market value of a share of our common stock on the date of grant, as determined by our board of directors.

 

(5)   The shares in this column represent shares of restricted stock issued upon the early exercise of stock options, in each case that remained unvested as of September 30, 2017. We have a right to repurchase any unvested shares subject to each such award if the holder of the award ceases to provide services to us prior to the applicable vesting dates.

 

(6)   The market value of our common stock is based upon the assumed initial public offering price of $                per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

 

(7)   The option grant is subject to a 4-year vesting schedule, with 25% of the shares vesting on September 1, 2016 and 1/48th of the shares vesting monthly thereafter, subject to continuous service through each applicable vesting date. The option grant is also subject to a 50% single trigger acceleration provision and a 100% double trigger acceleration provision (in each case, as described below).

 

(8)   The option grant is subject to a 4-year vesting schedule, with 10% of the shares vesting on September 29, 2017, 15% of the shares vesting on September 28, 2018 and 1/48th of the shares vesting monthly thereafter, subject to continuous service thr