DRS/A 1 filename1.htm DRS/A
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Amendment No. 4 to draft registration statement as submitted for confidential review with the Securities and Exchange Commission on September 11, 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.

Peter M. Lamb, Esq.

Christopher J. Austin, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the 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.

 

 

 


Table of Contents

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 18 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  

Summary consolidated financial information

     15  

Risk factors

     18  

Special note regarding forward-looking statements

     55  

Industry and market data

     57  

Use of proceeds

     58  

Dividend policy

     60  

Capitalization

     61  

Dilution

     63  

Selected consolidated financial data

     66  

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

     69  

Business

     92  

Management

     124  

Executive compensation

     136  

Certain relationships and related party transactions

     151  

Principal stockholders

     156  

Description of capital stock

     159  

Shares eligible for future sale

     164  

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

     166  

Underwriting

     170  

Legal matters

     181  

Experts

     181  

Where you can find more information

     181  

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.

“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 to industrialize the engineering of biology. The core of our platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have combined this technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to create an integrated technology platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We are leveraging our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next generation sample preparation, and antibody libraries for drug discovery and development. Additionally, we believe our platform will enable new value-add opportunities, such as discovery partnerships for biologic drugs, and will enable new applications for synthetic DNA, such as digital data storage, which will drive growth in the market for our products. We sell our synthetic DNA and synthetic DNA-based products to a customer base of over 600 customers across a broad range of industries.

DNA is the fundamental building block of biology. The ability to design DNA and engineer biology, a field known as synthetic biology, is growing rapidly, and we believe this field represents one of the most exciting areas of growth and technological innovation in the 21st century. The ability to modify DNA to serve different purposes is leading to a broad range of applications for synthetic DNA and synthetic DNA-based products 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 new and existing specialty chemicals and materials, such as spider silk, nylon, rubber, fragrances, food flavors and food additives;

 

 

agriculture for more effective and sustainable crop production;

 

 

academic research for a broad range of applications; and

 

 

technology for potential use as an alternative long-term data storage medium.

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 for synthetic DNA and synthetic DNA-based products. 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.

 

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The applications of our DNA synthesis platform are broad. Our mission is to be the leading provider of synthetic genes, which are comprised of strands of synthetic DNA, and to leverage the versatility of our platform to expand our portfolio to include other synthetic DNA-based products and address additional market opportunities, including next generation sequencing sample preparation, biological drug discovery and development and digital data storage.

In April 2016, we launched the first applications of our platform, synthetic genes and high diversity collections of oligonucleotides, or oligo pools, to 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. Between September 30, 2015 and June 30, 2018, the Company sold its products to more than 600 customers. In fiscal 2017, we served 286 customers including $0.3 million in sales to seven of the top 20 pharmaceutical companies by revenue, $4.3 million in sales to Ginkgo Bioworks, Inc., or Ginkgo Bioworks (which we believe is the largest global purchaser of synthetic DNA), $0.3 million in sales to three of the largest agricultural biotechnology companies, $2.7 million in sales to over 100 academic research institutions worldwide, and $7.3 million in sales to 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.

In the nine months ended June 30, 2018, we served 539 customers as follows: 50% to industrial chemicals, 47% to academic research, 2% to agriculture and 1% to healthcare sectors. Sales to industrial chemicals, academic research, agriculture and healthcare sectors accounted for 73%, 25%, 2% and 0.1% of the total $17.0 million revenues for the nine months ended June 30, 2018. Sales to Ginkgo Bioworks amounted to $5.5 million, or 32% and sales to customers other than Ginkgo Bioworks was $11.5 million, or 68%, for the nine months ended June 30, 2018; an increase in revenue of 89% and 162%, respectively, as compared to the nine months ended June 30, 2017.

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 February 2018, we launched an innovative and comprehensive sample preparation kit for next generation sequencing at the Advances in Genome Biology and Technology conference. Our kit leverages our platform to precisely synthesize oligo pools and uniformly amplify the desired target DNA segments, considerably improving the accuracy of the downstream sequencing analysis. We have also commercialized a custom DNA library solution which enables more effective biologic drug discovery and development for our customers. We believe we can further leverage our platform to develop other proprietary tools, such as our anti-G-protein coupled receptor, or GPCR, library and antibody optimization solution, to provide an end-to-end solution in biologics drug discovery and early development, from target to investigational new drug, or IND, application, adding value as a partner to biotechnology and pharmaceutical companies. We also aim to explore development of DNA as a digital data storage medium via internal research and industry partnerships.

 

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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. We believe that current estimates understate our market potential 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.

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 targeting synthetic DNA customers, a direct sales force focusing on the NGS market 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 biologics drug discovery though a relationship with Distributed Bio, Inc., or Distributed Bio, 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 286 customers (up from 97 customers in 2016), (ii) extending the scope of our relationship with Microsoft Corporation and the University of Washington, (iii) entering into an agreement to supply thousands of genes for public benefit through the BioBricks Foundation, (iv) successfully achieving industry-leading volumes of synthetic DNA shipped every month, (v) becoming an OEM supplier of synthetic DNA to four synthetic DNA manufacturers that also compete with us, (vi) launching our e-commerce platform to existing customers in October 2017, and (vii) shipping over 38,000 genes in the fourth quarter of fiscal 2017 compared to approximately 7,600 for the fourth quarter of fiscal 2016, which represents 400% year-over-year growth.

 

 

In 2018, we continued to experience revenue growth greater than the estimated rate of growth of the synthetic biology market, expanded into new market opportunities for next-generation sequencing and antibody biologics discovery, and enhanced our global distribution capabilities by (i) launching our e-commerce platform to the general public, (ii) launching our NGS target enrichment solutions at a major

 

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medical conference, (iii) completing a private financing with funds reserved for building Chinese operations, (iv) signing international distributors in Asia Pacific, (v) expanding our management team to support our entry into the biologics drug discovery and early development, (vi) signing a new agreement with Ginkgo Bioworks to deliver up to approximately 1.3 billion base pairs over a period of four years and (vii) shipping 19,794 genes in the third quarter of fiscal 2018 compared to 8,297 for the third quarter of fiscal 2017, which represents 139% year-over-year growth, and compared to shipping 2,650 genes in the third quarter of fiscal 2016.

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. In addition, we generated revenue of $7.3 million and $17.0 million in the nine months ended June 30, 2017 and 2018, representing 133% period-over-period growth, while incurring net losses of $42.3 million and $51.4 million in the nine months ended June 30, 2017 and 2018.

Our headquarters and manufacturing facilities are located in San Francisco, California. As of June 30, 2018, we had 221 full-time employees worldwide, including three locations in the San Francisco Bay Area and an international location in Tel Aviv, Israel. We also utilize a team of 14 dedicated commercial consultants across the European Union and the United Kingdom and five dedicated commercial consultants across Asia. We also recently received private funding to establish production facilities and commercial operations in Asia. We plan in begin operations in Asia in 2019. As of August 31, 2018, we have raised a total of $291.5 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. Synthetic biology is the engineering of biology to build new biological systems or re-design existing biological systems. The ability to design DNA and engineer biology is creating advances and benefits for a broad and growing range of applications for synthetic DNA and synthetic DNA-based products 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 new and existing specialty chemicals and materials, such as spider silk, nylon, rubber, fragrances food flavors and food additives;

 

 

agriculture for more effective and sustainable crop production;

 

 

academic research for a broad range of applications; and

 

 

technology for potential use as an alternative long-term data storage medium.

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. 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, the 96-well plate method and the microarray method, each having production limitations that we believe make these technologies sub-optimal to satisfy the rapidly growing demand for synthetic DNA. In addition, because the synthesis of oligos can introduce errors in the sequence order, all DNA synthesis methods require a process called cloning to produce many identical copies of a strand of DNA, such as a clonal gene. Today, all of our competitors use one of these two primary methods of DNA synthesis and require cloning for clonal genes.

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.

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.

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

 

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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.

 

LOGO

We believe that buyers of DNA 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 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.

  

•  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

 

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      Customer desires    Twist Bioscience advantages
  

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.

  

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 for genes between 300 and 1,800 base pairs in length. 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 20 million oligonucleotides per month that can be combined into high-precision oligo pools of various sizes. These oligonucleotides can be used to create multiple products including more than 45,000 genes per month, which we believe is the highest in the industry. We have agreed to supply up to approximately 1.3 billion base pairs to Ginkgo Bioworks over a period of four years, which we believe is the largest volume supply commitment in the industry to date.

 

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.

  

•  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 genes 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 substantial portion of the market for synthetic DNA today. We expect to offer genes of up to 10,000 base pairs in the

 

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      Customer desires    Twist Bioscience advantages
     

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 that tracks orders from placement to delivery 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, such as pharmaceutical biologics drug discovery and digital data storage in DNA.

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

 

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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.

Pharmaceutical biologics 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 custom 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 custom DNA libraries instead of them producing their own. In addition to our custom DNA libraries, we are also developing other proprietary tools, such as a wholly-owned anti-GPCR library and an antibody optimization solution, that we believe will enable us to provide an end-to-end solution in biologics drug discovery and early development, from target to investigational new drug, or IND, application, and adding value as a partner to biotechnology and pharmaceutical companies. These partnerships may include upfront, milestone and royalty payments.

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 Corporation, 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. We have strategic relationships with Microsoft Corporation and the University of Washington through which we have demonstrated the feasibility of storing data on DNA and the unique benefits of longevity, density, and universality of this format. We believe that in three to five years, new DNA technologies and cost efficiencies could surpass mature information technology hardware solutions to allow data storage in DNA to become cost competitive with traditional storage media and enable us to target several large markets within data storage. The market for digital data storage is more than $35 billion and we believe DNA can address several segments within this market.

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 synthetic DNA-based product markets in which we have a competitive advantage. We intend to accomplish this objective by executing on the following:

 

 

Maintain and expand our position as the provider of choice for high-quality, affordable synthetic genes and DNA to customers across multiple industries;

 

 

Become a leading supplier of NGS sample preparation products;

 

 

Conduct antibody therapeutic discovery and optimization for our current customers and future partners;

 

 

Continue to explore development of DNA as a digital data storage medium via internal research and government and industry partnerships; and

 

 

Expand our global presence.

Beyond these opportunities, we are working with industry partners to create new markets for our products by leveraging the versatility of our platform.

 

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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;

 

 

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 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

 

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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.

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 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, expand our sales and marketing capabilities in the U.S. and in other geographies, including China, develop and expand into the biologics drug discovery and DNA data storage markets, and for working capital and general corporate purposes. While we have no current agreements, commitments or understandings for any specific strategic acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes. 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.”

 

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.

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 annual 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 to our audited annual consolidated financial statements), 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.

 

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Except as otherwise indicated, all information in this prospectus is based upon 213,961,940 shares of our common stock (including 1,452,917 unvested shares of restricted common stock subject to our repurchase right) outstanding as of June 30, 2018, and excludes:

 

 

24,000,608 shares of our common stock issuable upon exercise of stock options outstanding as of June 30, 2018, having a weighted-average exercise price of $0.81 per share;

 

 

            shares of our common stock issuable upon exercise of stock options granted after June 30, 2018, 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 the 2018 Plan (which includes 9,347,391 shares of our common stock as of June 30, 2018 reserved for future grant under our 2013 Stock Plan, or the 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 the 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 June 30, 2018, 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, or SVB, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 182,045,056 shares of common stock;

 

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the automatic conversion of warrants to purchase an aggregate of 786,594 shares of 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 June 30, 2018;

 

 

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. We have derived the unaudited condensed consolidated statements of operations data for the nine months ended June 30, 2017 and 2018, and the unaudited condensed consolidated balance sheet data as of June 30, 2018, from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on a basis consistent with our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements. 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, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

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      Years ended September 30,     Nine months ended June 30,  
(in thousands, except share and per share data)    2016     2017     2017     2018  

Consolidated statements of operations data:

        

Revenues

   $ 2,269     $ 10,767     $ 7,301     $ 17,020  

Operating expenses:

        

Cost of revenues

     9,421       24,020       17,191       23,096  

Research and development

     18,230       19,169       14,318       14,282  

Selling, general and administrative

     18,274       26,060       17,651       30,497  
  

 

 

 

Total operating expenses

     45,925       69,249       49,160       67,875  
  

 

 

 

Loss from operations

     (43,656     (58,482     (41,859     (50,855

Interest income

     241       412       225       590  

Interest expense

     (746     (905     (657     (927

Other income (expense), net

     73       (55     151       (76
  

 

 

 

Loss before income taxes

     (44,088     (59,030     (42,140     (51,268

Provision for income taxes

           (280     (161     (166
  

 

 

 

Net loss attributable to common stockholders

   $ (44,088   $ (59,310   $ (42,301   $ (51,434
  

 

 

 

Other comprehensive loss

        

Change in unrealized gain (loss) on investments

     9       (9     (25      

Foreign currency translation adjustment

           33       6       35  
  

 

 

 

Comprehensive loss

   $ (44,079   $ (59,286   $ (42,320   $ (51,399
  

 

 

 

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

   $ (2.38   $ (2.47   $ (1.80   $ (1.91
  

 

 

 

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

     18,511,202       23,982,605       23,556,612       26,921,301  
  

 

 

 

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

     $ (0.39     $ (0.28
    

 

 

     

 

 

 

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

       152,397,059         185,949,305  

 

 

 

(1)   See Note 16 of the notes to our audited annual consolidated financial statements and Note 11 of the notes to our unaudited interim condensed 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 June 30, 2018  
(In thousands)    Actual     Pro
forma(2)
    Pro forma as
adjusted(3)
 

Consolidated balance sheet data:

      

Cash, cash equivalents, and short-term investments

   $ 92,499     $ 92,499    

Working capital

     85,688       85,688    

Total assets

     122,665       122,665    

Total liabilities

     26,919       26,209    

Convertible preferred stock

     278,505       —      

Additional paid-in capital

     8,226       287,441    

Accumulated deficit

     (191,053     (191,053  

Total stockholders’ equity (deficit)

     (182,759     96,456    

 

 

 

(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 182,045,056 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. Our revenue for the nine months ended June 30, 2017 and 2018, was $7.3 million and $17.0 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 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, and a net loss of $51.4 million for the nine months ended June 30, 2018. As of June 30, 2018, we had an accumulated deficit of $191.1 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 $191.1 million and working capital of $85.7 million as of June 30, 2018. 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, and $49.5 million for the nine months ended June 30, 2018. 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. And, as of the nine months ended June 30, 2018, we had working capital of $85.7 million and capital resources consisting of cash, cash equivalents and short-term investments of $92.5 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

 

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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 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, or AICPA, 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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If we are unable to expand into adjacent addressable markets, our business may be materially and adversely affected.

Our future revenue growth and market potential may depend on our ability to leverage our DNA synthesis platform together with our custom libraries and other proprietary tools, such as our anti-GPCR library and antibody optimization solution, in adjacent businesses such as pharmaceutical biologics drug discovery and digital data storage in DNA. However, we may not be able to validate that our antibody libraries will accelerate the lead identification and lead optimization steps of antibody discovery or will allow us to discover more effective antibody drugs. In addition, our technology may not develop in a way that allows data storage in DNA to become cost competitive with traditional data storage media or in a way that otherwise enables us to address the markets opportunities that we believe exist. If we are unable to expand into adjacent addressable markets, our business, financial position and results of operations could be negatively impacted.

A significant portion of our sales depends on customers’ 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 have long-term contracts with our customers requiring them to purchase any specified quantities from us.

We generally do not have long-term contracts with our customers requiring them to purchase any specified quantities from us and without such contracts our customers are not obligated to order or reorder our products. As a result, we cannot accurately predict our customers’ decisions to reduce or cease purchasing our

 

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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 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 synthetic DNA products.

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

Our financial results are dependent on strengthening our core business while diversifying into other developing sectors such as pharmaceutical biologics drug discovery and data storage. Substantially all of our revenue generated to date is from our synthetic DNA products.

 

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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 synthetic DNA products. These initiatives will be substantially dependent on our ability to generate revenue from our synthetic DNA products and obtain other funding necessary to support these initiatives. Our inability to continue these initiatives and initiate new research and development efforts could result in a failure to develop new products, improve upon existing products such that sectors like pharmaceutical biologics drug discovery and data storage may never be fully developed, and expand our addressable market which could have a material and adverse impact on our sales, business, financial position and results of operations.

We 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 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. Agilent has considerable resources available to it; 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 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 one single-source supplier for a critical component for our DNA synthesis process. The loss of this supplier or its failure to supply us with the necessary component on a timely basis, could cause delays in the future capacity of our DNA synthesis process and adversely affect our business.

We depend on one single-source supplier for a critical component for our DNA synthesis process. We do not currently have the infrastructure or capability internally to manufacture this component. Although we have a substantial reserve of supplies and although alternative suppliers exist for this critical component of our synthesis process, our existing DNA synthesis manufacturing process has been designed based on the functions, limitations, features and specifications of the components that we currently utilize. We have a supply agreement in place with this component supplier. However, there can be no assurance that our supply of this component will not be limited, interrupted, or of satisfactory quality or continue to be available at acceptable prices. Additionally, we do not have any control over the process or timing of the acquisition or manufacture of materials by our manufacturer, and cannot ensure that it will deliver to us the component we order on time, or at all.

The loss of this component provided by this supplier could require us to change the design of our manufacturing process based on the functions, limitations, features and specifications of the replacement components.

 

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

 

 

our supplier may cease or reduce production or deliveries, raise prices or renegotiate terms;

 

 

we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all;

 

 

if there is a disruption to our single-source supplier’s operations, and if we are unable to enter into arrangements with alternative suppliers, we will have no other means of completing our synthesis process until they restore the affected facilities or we or they procure alternative manufacturing facilities or sources of supply;

 

 

delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects; and

 

 

our ability to progress our DNA synthesis products could be materially and adversely impacted if the single-source supplier upon which we rely were to experience a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, issues relating to other customers such as regulatory or quality compliance issues, or other financial, legal, regulatory or reputational issues.

Moreover, to meet anticipated market demand, our single-source supplier may need to increase manufacturing capacity, which could involve significant challenges. This may require us and our supplier to invest substantial additional funds and hire and retain the technical personnel who have the necessary experience. Neither we nor our supplier may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all. 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.

 

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A deterioration of our relationship with any of our suppliers, or problems experienced by these suppliers, could lead to shortages in our production capacity for some or all of our products. In such case, we may not be able to fulfill the demand of existing customers or supply new customers. 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. And, for the nine months ended June 30, 2017 and 2018, our cost of raw materials accounted for approximately 29% 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 accounted for 30% and 40% of our revenue for the years ended September 30, 2016 and 2017. Ginkgo Bioworks also accounted for 40% and 32% of our revenue for the nine months ended June 30, 2017 and 2018, respectively. 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 was a 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.

 

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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 SVB. 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;

 

 

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, SVB 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

 

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competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output. Our industry, particularly in the San Francisco Bay Area, is characterized by high demand and intense competition for talent, and the turnover rate can be high. We compete for qualified management and scientific personnel with other life science companies, academic institutions and research institutions, particularly those focusing on genomics. Many of these employees could leave our company with little or no prior notice and would be free to work for a competitor. If one or more of our senior executives or other key personnel were unable or unwilling to continue in their present positions, we 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 synthetic DNA product, 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

 

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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 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

 

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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 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 such as GenScript Biotech Corporation, GENEWIZ, Integrated DNA Technologies, Inc., DNA 2.0 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), Promega Corporation, OriGene Technologies, Inc., Blue Heron Biotech, LLC and others. Additionally, we compete with both large and emerging providers in the life sciences tools and diagnostics industries focused on sample preparation for next generation sequencing such as Thermo Fisher Scientific Inc., Illumina, Inc., Integrated DNA Technologies, Inc., Agilent, and Roche NimbleGen, Inc. In the antibody discovery market, we compete with clinical research organizations, such as LakePharma (mouse hybridoma, llama immune libraries, XOMA phage display library) and Aldevron, LLC (genetic mouse immunization coupled with hybridoma), and antibody discovery biotechnology companies, such as Iontas (human phage display libraries, human phage display library focused on ion channels), Adimab (human synthetic yeast display libraries), and Distributed Bio (human synthetic phage display library, lead optimization libraries). In the field of DNA digital data storage, we compete with Catalog Technologies, Inc., ETH Zurich, Helixworks, Iridia, Inc., North Shore Bio and Roswell. 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.

 

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Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our technology.

Our products may be used to create DNA sequences of humans, agricultural crops and other living organisms. Our products could be used in a variety of applications, which may have underlying ethical, legal and social concerns. Governmental authorities could, for safety, social or other purposes, impose limits on or implement regulation of the use of gene synthesis. Such concerns or governmental restrictions could limit the use of our DNA synthesis products, which could have a material adverse effect on our business, financial condition and results of operations. In addition, public perception about the safety and environmental hazards of, and ethical concerns over, genetically engineered products and processes could influence public acceptance of our technologies, products and processes. These concerns could result in increased expenses, regulatory scrutiny, delays or other impediments to our programs.

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

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

 

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more resulting legal penalties, restraints on our business or reputational damage could have material adverse effects on our business and financial condition.

Third parties may use our products in ways that could damage our reputation.

After our customers have received our products, we do not have any control over their use and our customers may use them in ways that are harmful to our reputation as a supplier of synthetic DNA products. In addition, while we have established a biosecurity program designed to comply with biosafety and biosecurity requirements and perform export control screening in an effort to ensure that third parties do not obtain our products for malevolent purposes, we cannot guarantee that these preventative measures will eliminate or reduce the risk of the domestic and global opportunities for the misuse of our products. Accordingly, in the event of such misuse, our reputation, future revenue and operating results may suffer.

Any damage to our reputation or brand may materially and adversely affect our business, financial condition and results of operations.

We believe that developing and maintaining our brand is important to our success and that our financial success is influenced by the perception of our brand by our customers. Furthermore, the importance of our brand recognition may become even greater to the extent that competitors offer more products similar to ours. Many factors, some of which are beyond our control, are important to maintaining our reputation and brand. These factors include our ability to comply with ethical, social, product, labor and environmental standards. Any actual or perceived failure in compliance with such standards could damage our reputation and brand.

Because we are subject to existing and potential additional governmental regulation, the markets for our products may be narrowed.

We are subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. For example, 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

 

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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 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

 

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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 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. During the nine month period ended June 30, 2018, approximately 29% 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

 

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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 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, or the Tax Act, 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.

 

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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. The average days sales outstanding of our trade receivables as of June 30, 2018 was 60 days. If our customers’ cash flow, working capital, financial conditions or results of operations deteriorate, they may be unable or even unwilling to pay trade receivables owed to us promptly or at all. As a result, we could be exposed to a certain level of credit risk. If a major customer experiences, or a significant number of customers experience, financial difficulties, the effect on us could be material and have an adverse effect on our business, financial condition and results of operations.

Risks related to being a public company

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business.

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.

 

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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 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 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 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.

 

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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 June 30, 2018, we own nine issued U.S. patents and two issued international patents in China. There are 81 pending patent applications, including 39 in the United States, 31 international applications and 11 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 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, or the USPTO, 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 USPTO 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.

 

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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 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

 

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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;

 

 

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

 

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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 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.

 

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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 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.

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 USPTO 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

 

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information from the USPTO, 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 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.

 

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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 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

 

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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 2.0. Thus, these patents and patent applications are not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting and/or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

Our rights to use the technology we license is subject to the validity of the owner’s intellectual property rights. Enforcement of our licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated against the owners of the intellectual property that we license. Even if we are not a party to these legal actions, an adverse outcome could harm our business because it might prevent these other companies or institutions from continuing to license intellectual property that we may need to operate our business.

Our licenses contain or will contain provisions that allow the licensor to terminate the license upon specific conditions. Our rights under the licenses are subject to or will be subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.

Risks related to doing business in China

The People’s Republic of China, or the PRC, government has the ability to exercise significant influence and control over our proposed wholly owned foreign entity in China.

The PRC plays a significant role in regulating industrial development by imposing business regulations. It also exercises significant control over the country’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

Additional factors that we may experience in connection with setting up operations in China that may adversely affect our business and results of operations include:

 

 

our inability to enforce or obtain a remedy under our agreements;

 

 

PRC restrictions on foreign investment that could impair our ability to conduct our business or acquire or contract with other entities in the future;

 

 

restrictions on currency exchange that may limit our ability to use cash flow most effectively or to repatriate our investments;

 

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fluctuations in currency values;

 

 

increased challenges of defending our intellectual property;

 

 

cultural, language and managerial differences that may reduce our overall performance; and

 

 

political instability in China.

We may not be able to enforce our rights in China.

China’s legal and judicial system may negatively impact foreign investors. The legal system in China is evolving rapidly, and enforcement of laws is inconsistent. It may be impossible to obtain swift and equitable enforcement of laws or enforcement of the judgment of one court by a court of another jurisdiction. China’s legal system is based on civil law or written statutes and a decision by one judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political changes.

There are substantial uncertainties regarding the interpretation and application to our business of PRC laws and regulations, since many of the rules and regulations that companies face in China are not made public. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on the proposed business of our wholly foreign owned entity.

China is a developing nation governed by a one-party communist government and susceptible to political, economic, and social upheaval that could disrupt the economy.

China is a developing country governed by a one-party government. China is also a country with an extremely large population, wide income gaps between rich and poor and between urban and rural residents, minority ethnic and religious populations, and growing access to information about the different social, economic, and political systems found in other countries. China has also experienced extremely rapid economic growth over the last decade, and its legal and regulatory systems have had to change rapidly to accommodate this growth. If China experiences political or economic upheaval, labor disruptions or other organized protests, nationalization of private businesses, civil strife, strikes, acts of war and insurrections, this may disrupt China’s economy and could materially and adversely affect the financial performance of our proposed wholly foreign owned entity.

If relations between China and the U.S. deteriorate, our business in China may be materially and adversely affected.

The relationship between China and the U.S. is subject to periodic tension. Relations may also be compromised if the U.S. becomes a more active advocate of Taiwan or pressures the PRC government regarding its monetary, economic or social policies. Changes in political conditions in China and changes in the state of China-U.S. relations are difficult to predict and could adversely affect the operations or financial condition of our proposed wholly owned foreign owned entity. In addition, because of our involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that might cause our products to become less attractive. A proposed enhancement of U.S. export controls is expected to apply to U.S. technology exports to China and Chinese companies. We cannot predict what effect any changes

in China-U.S. relations may have on the proposed business of our proposed wholly foreign owned entity.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Chinese currency, Renminbi, into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange

 

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regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, in practice sometimes payment of current account items may be subject to delay and other restrictions. Furthermore, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

In light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. Therefore, if we receive revenues in Renminbi by our proposed wholly foreign owned entity or otherwise, due to China’s foreign exchange control, such revenues may not be converted to foreign currency and remitted out of China in a timely manner.

Risks relating to owning our common stock and this offering

Our share price may be volatile, and you maybe 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;

 

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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.

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.

 

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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 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 203,420,957 shares of common stock, or 95.1% based on shares outstanding on an as-converted basis as of June 30, 2018, 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 the 2018 Plan, the 2013 Plan and the 2018 ESPP. Both the 2018 Plan and the 2018 ESPP 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, expand our sales and marketing capabilities in the U.S. and in other geographies, including China, develop and expand into the biologics drug discovery and DNA data storage markets, and for working capital and general corporate purposes. While we have no current agreements, commitments or understandings for any specific strategic acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these 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

 

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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 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 our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover attempt or delay changes in control;

 

   

prohibiting cumulative voting in the election of directors;

 

   

providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

prohibiting the adoption, amendment or repeal of our amended and restated bylaws or the repeal of the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors without the required approval of at least 66.67% of the shares entitled to vote at an election of directors;

 

   

prohibiting stockholder action by written consent;

 

   

limiting the persons who may call special meetings of stockholders; and

 

   

requiring advance notification of stockholder nominations and proposals.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions of Section 203 of the Delaware General Corporate Law, or the DGCL, govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

 

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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.”

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

As of June 30, 2018, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 35.1% 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 DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

 

 

We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. 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.

 

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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 and the federal district courts of the United States will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated certificate of incorporation 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 to any provisions of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws to be in effect upon completion of this offering, any action or proceeding asserting a claim as to which the Delaware General Corporation Law confers jurisdiction upon the Court of Chancery of the State of Delaware or any action asserting a claim against us that is governed by the internal affairs doctrine, subject in each case to the Court of Chancery having personal jurisdiction over the parties named as defendants therein. The 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.

Our amended and restated certificate of incorporation to be in effect upon completion of this offering further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

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 opportunities;

 

 

our expectations regarding our ability to increase DNA production, reduce turnaround times and drive cost reductions for our customers;

 

 

our ability to effectively manage our growth;

 

 

our ability to successfully enter new markets and manage our international expansion;

 

 

our ability to protect our intellectual property, including our proprietary DNA synthesis platform;

 

 

costs associated with defending intellectual property infringement and other claims;

 

 

the effects of increased competition in our business;

 

 

our ability to keep pace with changes in technology and our competitors;

 

 

our ability to successfully identify, evaluate and manage any future acquisitions of businesses, solutions or technologies;

 

 

the success of our marketing efforts;

 

 

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 June 30, 2018, we had cash, cash equivalents and short-term investments of $92.5 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 as follows:

 

   

Approximately $         million to $         million to improve and update our platform and core technologies by investing in equipment, expanding our research and development capabilities and establishing new and scalable operation facilities;

 

   

Approximately $         million to $         million to expand our sales and marketing capabilities in the U.S., Europe and Asia;

 

   

Approximately $         million to $         million to develop our manufacturing operations in China;

 

   

Approximately $         million to $         million to develop and expand into the biologics drug discovery and DNA data storage markets; and

 

   

Any proceeds not applied to the foregoing will be used for working capital and general corporate purposes.

We believe opportunities may exist from time to time to expand our current business through strategic acquisitions or in-licenses of complementary companies or technologies. While we have no current agreements, commitments or understandings for any specific strategic 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 of the date of this prospectus, we cannot predict with certainty all of the particular uses for the proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

 

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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 June 30, 2018 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 June 30, 2018 into 213,961,940 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 June 30, 2018  
(In thousands, except share and per share data)    Actual     Pro forma     Pro forma as
adjusted(1)
 

Cash, cash equivalents and short-term investments

   $ 92,499     $ 92,499     $            

Long-term debt

   $ 9,535     $ 9,535     $    

Convertible preferred stock warrant liabilities

     710       —      

Convertible preferred stock, $0.00001 par value: 150,231,568 shares authorized, 189,110,349 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     278,505       —      

Stockholders’ equity (deficit):

      

Common stock, $0.00001 par value: 275,000,000 shares authorized, 31,916,884 shares issued and outstanding, actual; 275,000,000 shares authorized, 213,961,940 shares issued and outstanding, pro forma;                 shares authorized,                 shares issued and outstanding, pro forma as adjusted

     —         2    

Additional paid-in capital

     8,226       287,439    

Accumulated other comprehensive income

     68       68    

Accumulated deficit

     (191,053     (191,053  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (182,759     96,456    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 122,665     $ 122,665     $    

 

 

 

(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 213,961,940 shares of our common stock outstanding on a pro forma basis as of June 30, 2018, and excludes:

 

 

1,452,917 unvested shares of restricted common stock subject to our repurchase right;

 

 

24,000,608 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of June 30, 2018, with a weighted-average exercise price of $0.81 per share;

 

 

                shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted after June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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:

 

   

9,347,391 shares of common stock reserved for future grants under the 2013 Plan as of June 30, 2018, which shares will be added to the shares to be reserved under the 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 the 2018 Plan, which will become effective upon completion of this offering; and

 

   

            shares of common stock reserved for future issuance under the 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 June 30, 2018 was $(187.1) million, or $(5.86) 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 June 30, 2018. Our pro forma net tangible book value at June 30, 2018, before giving effect to this offering, was $92.1 million, or $0.43 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 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 June 30, 2018 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 June 30, 2018

   $ (5.86)     

Pro forma increase in net tangible book value per share attributable to automatic conversion of convertible preferred stock

     6.29     

Pro forma net tangible book value per share as of June 30, 2018 before giving effect to this offering

     0.43     

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

 

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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 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 June 30, 2018, 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      Weighted
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.

If all of the outstanding options and warrants noted below were exercised, (1) the number of shares of our common stock held by existing stockholders would be increased to              shares, or     % of the total number of shares of our common stock outstanding after this offering, and the percentage of shares of common stock held by new investors participating in the offering would be decreased to     % of the total number of shares of our common stock outstanding after this offering, (2) the consideration paid by existing stockholders would be increased to $        million, or     % of the total consideration paid by stockholders after this offering, and the percentage of consideration paid by new investors participating in the offering would be decreased to     % of the total consideration paid by stockholders after this offering, and (3) the average price per share paid by existing stockholders would decrease to $         per share.

Assuming the exercise of all of our outstanding options and warrants as of             , the amounts set forth

in the table immediately above would change as follows:

 

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

Existing stockholders

            %      $                  %      $            

New investors

        %      $          %      $    

Total

        100.0%           100.0%     

 

 

 

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The total number of shares of our common stock reflected in the discussion and table above is based upon 213,961,940 shares of our common stock outstanding on a pro forma basis as of June 30, 2018 and excludes:

 

 

1,452,917 unvested shares of restricted common stock subject to our repurchase rights;

 

 

24,000,608 shares of our common stock issuable upon exercise of stock options outstanding as of June 30, 2018, having a weighted-average exercise price of $0.81 per share;

 

 

            shares of our common stock issuable upon exercise of stock options granted after June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, 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:

 

   

9,347,391 shares of common stock reserved for future grants under the 2013 Plan as of June 30, 2018, which shares will be added to the shares to be reserved under the 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 the 2018 Plan, which will become effective upon completion of this offering; and

 

   

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

To the extent that any outstanding options or warrants 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. We have derived the unaudited condensed consolidated statements of operations data for the nine months ended June 30, 2017 and 2018, and the unaudited condensed consolidated balance sheet data as of June 30, 2018, from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on a basis consistent with our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements. 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, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

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      Years ended September 30,     Nine months ended June 30,  
(in thousands, except share and per share data)    2016     2017     2017     2018  

Consolidated statements of operations data:

      

Revenues

   $ 2,269     $ 10,767     $ 7,301     $ 17,020  

Operating expenses:

        

Cost of revenues

     9,421       24,020       17,191       23,096  

Research and development

     18,230       19,169       14,318       14,282  

Selling, general and administrative

     18,274       26,060       17,651       30,497  
  

 

 

 

Total operating expenses

     45,925       69,249       49,160       67,875  
  

 

 

 

Loss from operations

     (43,656     (58,482     (41,859     (50,855

Interest income

     241       412       225       590  

Interest expense

     (746     (905     (657     (927

Other income (expense), net

     73       (55     151       (76
  

 

 

 

Loss before income taxes

     (44,088     (59,030     (42,140     (51,268

Provision for income taxes

           (280     (161     (166
  

 

 

 

Net loss attributable to common stockholders

     (44,088     (59,310     (42,301     (51,434
  

 

 

 

Other comprehensive loss:

        

Change in unrealized gain (loss) on investments

     9       (9     (25      

Foreign currency translation adjustment

           33       6       35  
  

 

 

 

Comprehensive loss

     (44,079     (59,286     (42,320     (51,399
  

 

 

 

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

     (2.38     (2.47     (1.80     (1.91
  

 

 

 

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

     18,511,202       23,982,605       23,556,612       26,921,301  
  

 

 

 

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

       (0.39       (0.28
    

 

 

     

 

 

 

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

       152,397,059         185,949,305  

 

 

 

(1)   See Note 16 of the notes to our audited annual consolidated financial statements and Note 11 of the notes to our unaudited interim condensed 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,     As of June 30,  
(in thousands)                  2016     2017     2018  

Consolidated balance sheet data:

    

Cash, cash equivalents, and short-term investments

   $ 55,920     $ 62,204     $ 92,499  

Working capital

     50,361       58,392       85,688  

Total assets

     76,463       85,657       122,665  

Total liabilities

     19,037       19,382       26,919  

Convertible preferred stock

     134,037       199,633       278,505  

Additional paid-in capital

     3,689       6,228       8,226  

Accumulated deficit

     (80,309     (139,619     (191,053

Total stockholders’ deficit

     (76,611     (133,358     (182,759

 

 

 

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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 to industrialize the engineering of biology. The core of our platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have combined this technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to create an integrated technology platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We are leveraging our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next generation sample preparation, and antibody libraries for drug discovery and development. Additionally, we believe our platform will enable new value-add opportunities, such as discovery partnerships for biologic drugs, and will enable new applications for synthetic DNA, such as digital data storage. We sell our synthetic DNA and synthetic DNA-based products to a customer base of over 600 customers across a broad range of industries.

We launched the first application of our platform, synthetic genes and oligo pools, in April 2016 to disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete.

From inception to June 30, 2018, we have sold our products to more than 600 customers. In fiscal 2017, we served 286 customers including $0.3 million in sales to seven of the top 20 pharmaceutical companies by revenue, $4.3 million in sales to Ginkgo Bioworks, Inc., or Ginkgo Bioworks (which we believe is the largest global purchaser of synthetic DNA), $0.3 million in sales to three of the largest agricultural biotechnology companies, $2.7 million in sales to over 100 academic research institutions worldwide, and $7.3 million in sales to 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.

In the nine months ended June 30, 2018, we served 539 customers as follows: 50% to industrial chemicals, 47% to academic research, 2% to agriculture and 1% to healthcare sectors. Sales to industrial chemicals, academic research, agriculture and healthcare sectors accounted for 73%, 25%, 2% and 0.1% of the total $17.0 million revenues for the nine months ended June 30, 2018. Sales to Ginkgo Bioworks amounted to $5.5 million, or 32% and sales to customers other than Ginkgo Bioworks was $11.5 million, or 68%, for the nine months ended June 30, 2018; an increase in revenue of 89% and 162%, respectively, as compared to the nine months ended June 30, 2017.

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 February 2018, we launched an innovative and

 

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comprehensive preparation kit for next generation sequencing at the Advances in Genome Biology and Technology conference. Our kit leverages our platform to precisely synthesize oligo pools and uniformly amplify the desired target DNA segments, considerably improving the accuracy of the downstream sequencing analysis. We have also commercialized a custom DNA library solution which enables more effective biologic drug discovery and development for our customers. We believe we can further leverage our platform to develop other proprietary tools, such as our anti-GPCR library and antibody optimization solution, to provide an end-to-end solution in biologics drug discovery and early development, from target to Investigational New Drug (IND) application, adding value as a partner to biotech and pharmaceutical companies. We also aim to explore development of DNA as a digital data storage medium via internal research and industry partnerships.

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. In order to address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force targeting synthetic DNA customers, a direct sales force focusing on the NGS market and an e-commerce platform. 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.

We generated revenues of $7.3 million in the nine months ended June 30, 2017, and $17.0 million in the nine months ended June 30, 2018, while incurring net losses of $42.3 million and $51.4 million in the nine months ended June 30, 2017 and 2018, respectively. 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 and commercialization of additional products in the synthetic biology industry. Our net loss was $42.3 million and $51.4 million for the nine months ended June 30, 2017 and 2018, respectively. As of June 30, 2018, we had an accumulated deficit of $191.1 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 June 30, 2018, we had $92.5 million in cash, cash equivalents and short-term investments. In calendar year 2017, we received net cash proceeds of $65.6 million from the sale of shares of Series D convertible preferred stock, and as of August 31, 2018, we received additional net cash proceeds of $90.8 million from the sale of additional 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.”

 

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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, on acceptable terms, or at all. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses. As a result, we have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern. 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, turnaround time, 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 selling and marketing our products and solutions in geographies where we have limited experience. We are in the process of establishing a wholly owned foreign entity in China which will enable us to expand our manufacturing capacity into China and grow our sales organization in China. Also, we are expanding our Asia Pacific and European sales and marketing organizations which will include hiring new personnel and recruiting distributors to serve local markets. 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 biologics discovery and development and data storage. 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 can 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. We are planning to consolidate our manufacturing operations into a new facility in South San Francisco, U.S. and

 

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expand into new geographies including China. Our ability to achieve and enhance profitability is dependent upon growing our revenue and further increasing our manufacturing efficiency, successful knowledge transfer, recruiting and retaining personnel 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 goods 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 quarterly growth in the value of orders received from customers other than Ginkgo Bioworks, which has increased by approximately 15.5 times from the quarter ended June 30, 2016 to the quarter ended June 30, 2018.

Since commercially launching our product in April 2016, orders from customers have rapidly increased over the last nine quarters. Commencing with our Beta Access program, we believe we have successfully achieved industry-leading volumes of synthetic DNA orders. In 2018, we launched our e-commerce platform to enable customers to conveniently order our products online. These steps have contributed to outstanding order growth over the last nine quarters, which is illustrated in the table below.

 

 

LOGO

 

     Three months ended  
(in thousands, except
percentages)
  June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
 

Customers other than Ginkgo Bioworks

  $ 494       $737     $ 1,153     $ 2,707     $ 2,682     $ 3,686     $ 4,893     $ 6,704     $ 8,167  

Percentage change from prior quarter

          49%       56%       135%       (1%     37%       33%       37%       22%  

 

 

 

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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, including Ginkgo and non-Ginkgo orders, during the periods indicated:

 

     Three months ended   
(in thousands)  

June 30,

2016

    September 30,
2016
    December 31,
2016
    March 31,
2017
   

June 30,

2017

    September 30,
2017
    December 31,
2017
    March 31,
2018
   

June 30,

2018

 

Order value

  $ 753     $ 2,307     $ 2,732     $ 4,207     $ 4,432     $ 6,186     $ 7,393     $ 8,517     $ 10,673  

 

 

Number of customers

We believe that the number of customers who have purchased from us since inception is representative of our ability to drive adoption of our products and convert DNA Makers to DNA Buyers. We define customers as separate legal entities or persons who have purchased and directly paid for our products. This means that if a parent company is a customer of ours, it is counted as one customer, and if its subsidiary also purchases our products from us, and the subsidiary makes a payment directly to us, we count the subsidiary as a separate customer. We apply this methodology of counting customers because it is not possible for our e-commerce platform and other data tracking software to distinguish accurately between affiliated purchasers.

Percentage of revenue from new 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 or person, has not previously purchased any products or services from us. We define a repeat customer as any customer who, as a separate legal entity or person, 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.

The table below represents sales to individual customers. We shipped products to 97 customers in fiscal 2016 and 286 customers in fiscal 2017. In the nine months ended June 30, 2017, we shipped product to 208 customers and in the nine months ended June 30, 2018, we shipped product to 539 customers. Between September 30, 2015 and June 30, 2018, we sold products to more than 600 customers.

 

        Years ended September 30,      Nine months ended June,  
                2016              2017              2017              2018  

Percentage of revenue from repeat customers

              63%        74%        91%  

Percentage of revenue from new customers

       100%        37%        26%        9%  

 

    

 

 

    

 

 

 

Financial overview

The following table summarizes certain selected historical financial results:

 

      Years ended September 30,     Nine months ended June,  
(in thousands)              2016               2017               2017               2018  

Revenues

   $ 2,269     $ 10,767     $ 7,301     $ 17,020  

Loss from operations

     (43,656     (58,482     (41,859     (50,855

Net loss attributable to common stockholders

     (44,088     (59,310     (42,301     (51,434

 

   

 

 

   

 

 

 

 

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Revenues

We generate revenue from sales of synthetic genes, oligo pools, 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,      Nine months ended June 30,  
(in thousands, except percentages)    2016     

%

     2017     

%

     2017      %      2018      %  

United States

   $ 1,769        78%      $ 8,252        77%      $ 5,723        78%      $ 12,011        71%  

EMEA

     459        20%        2,059        19%        1,342        18%        4,116        24%  

APAC

     41        2%        259        2%        105        2%        740        4%  

North America

            0%        197        2%        131        2%        153        1%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 2,269        100%      $ 10,767        100%      $ 7,301        100%      $ 17,020        100%  

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Revenues by products

The table below sets forth revenues by products:

 

      Years ended September 30,      Nine months ended June 30,  
(in thousands, except percentages)    2016      %      2017      %      2017      %      2018      %  

Synthetic genes

   $ 1,087        48%      $ 8,122        75%      $ 5,379        74%      $ 11,903        70%  

Oligo pools

     862        38%        2,056        19%        1,512        21%        2,146        13%  

DNA libraries

     320        14%        517        5%        410        5%        1,208        7%  

NGS tools

                   72        1%                      1,763        10%  
  

 

 

 

Total revenues

   $ 2,269        100%      $ 10,767        100%      $ 7,301        100%      $ 17,020        100%  

 

 

Revenues by industry

Revenues by industry were as follows:

 

      Years ended September 30,      Nine months ended June 30,  
(in thousands, except
percentages)
   2016      %      2017      %      2017      %      2018      %  

Industrial chemicals

   $ 960        42%      $ 6,702        62%      $ 5,237        72%      $ 12,350        73%  

Academic research

     830        37%        2,709        25%        2,019        28%        4,223        25%  

Healthcare

     461        20%        1,226        12%        4               25         

Agriculture

     18        1%        130        1%        41               422        2%  
  

 

 

 

Total revenues

   $ 2,269        100%      $ 10,767        100%      $ 7,301        100%      $ 17,020        100%  

 

 

 

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Revenues and accounts receivable concentration

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

 

      Years ended September 30,      Nine months ended June 30,  
          2016          2017          2017          2018  

Customer A

     30%        40%        26%        18%  

Customer B

     11%        *        16%        *  

 

    

 

 

 

 

*   less than 10 percent

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

 

      Years ended September 30,      Nine months ended June 30,  
          2016          2017          2017          2018  

Customer A

     41%        35%        40%        32%  

 

 

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 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.

 

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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,
    Nine Months ended
June 30,
 
(in thousands)    2016     2017     2017     2018  

Revenues

   $ 2,269     $ 10,767     $ 7,301     $ 17,020  

Operating expenses:

        

Cost of revenues

     9,421       24,020       17,191       23,096  

Research and development

     18,230       19,169       14,318       14,282  

Selling, general and administrative

     18,274       26,060       17,651       30,497  
  

 

 

 

Total operating expenses

     45,925       69,249       49,160       67,875  
  

 

 

 

Loss from operations

     (43,656     (58,482     (41,859     (50,855

Interest income

     241       412       225       590  

Interest expense

     (746     (905     (657     (927

Other income (expense), net

     73       (55     151       (76

Provision for income taxes

           (280     (161     (166
  

 

 

 

Net loss attributable to common stockholders

   $ (44,088   $ (59,310   $ (42,301   $ (51,434

 

 

Comparison of Nine Months Ended June 30, 2017 and 2018

Revenues

 

      Nine months ended
June 30,
     Change  
(in thousands, except percentages)    2017      2018      $      %  

Revenues

   $ 7,301      $ 17,020      $ 9,719        133%  

 

 

In the nine months ended June 30, 2017, we generated revenue of $7.3 million from shipments of our synthetic DNA products, primarily oligonucleotides, clonal and non-clonal synthetic genes, and DNA libraries. Revenues from customers in the United States was 78% and 22% outside the United States.

Revenues increased $9.7 million or 133% to $17.0 million in the nine months ended June 30, 2018 driven by revenues from synthetic genes of $11.9 million and NGS tools of $1.8 million. Revenues from customers other than Ginkgo Bioworks increased $7.1 million or 162% from $4.4 million to $11.5 million and revenue from Ginkgo Bioworks increased $2.6 million, an increase of 89% from $2.9 million to $5.5 million versus the prior

 

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nine months ended June 30, 2017. Revenue from repeat customers increased $10.0 million or 186% from $5.4 million to $15.4 million in the nine months ended June 30, 2017 and 2018, respectively.

Cost of revenues

 

      Nine months ended
June 30,
     Change  
(in thousands, except percentages)    2017      2018      $      %  

Cost of revenues

   $ 17,191      $ 23,096      $ 5,905        34%  

 

 

Cost of revenues increased by $5.9 million, or 34%, from $17.2 million in the nine months ended June 30, 2017 to $23.1 million in the nine months ended June 30, 2018, due to the increase in revenues. Cost of revenues was $17.2 million in the nine months ended June 30, 2017, driven by additional ramp up of production capacity. Cost of revenues was primarily related to payroll of $5.9 million, consumption of reagents and production materials of $5.5 million, information technology and facilities costs of $2.8 million, depreciation expense of $1.4 million, consulting and outside services of $0.7 million, and other production related costs of $0.9 million.

In the nine months ended June 30, 2018, total cost of revenues increased to $23.1 million, primarily from $8.5 million of payroll expenses driven by an increase in headcount, consumption of reagents and production materials of $7.3 million, information technology and facilities costs of $3.6 million, consulting and outside services of $1.3 million, $1.7 million of depreciation expense related to additional equipment for increased production capacity, and other production related costs of $0.7 million.

Research and development expenses

 

      Nine months ended
June 30,
     Change  
(in thousands, except percentages)    2017      2018      $     %  

Research and development

   $ 14,318      $ 14,282      $ (36     0%  

 

 

For the nine months ended June 30, 2017 and June 30, 2018, research and development expenses remained relatively flat and the total expense amounted to $14.3 million for both periods. An increase in payroll, IT and facilities cost and stock compensation expenses were offset by lower material and laboratory supplies costs. Research and development cost was $14.3 million in the nine months ended June 30, 2017, primarily related to payroll of $6.5 million, production and laboratory supplies of $2.6 million, information technology and facilities costs of $2.2 million, and other research expenses of $3.0 million. Research and development cost was $14.3 million in the nine months ended June 30, 2018, primarily related to payroll of $6.9 million, production and laboratory supplies of $1.7 million, information technology and facilities costs of $2.3 million, and other research expenses of $3.4 million.

Selling, general and administrative expenses

 

      Nine months ended
June 30,
     Change  
(in thousands, except percentages)    2017      2018      $      %  

Selling, general and administrative

   $ 17,651      $ 30,497      $ 12,846        73%  

 

 

Selling, general and administrative expenses increased by $12.8 million, or 73%, from $17.7 million in the nine months ended June 30, 2017 to $30.5 million in the nine months ended June 30, 2018, primarily due to increases in payroll related to increased headcount, advertising and marketing expenses, professional and legal expenses, stock compensation expenses and information technology related charges.

 

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Selling, general and administrative expenses increased by $12.8 million, or 73%, from $17.6 million as of June 30, 2017 to $30.5 million as of June 30, 2018 primarily due to increases in payroll related to increased headcount, advertising and marketing expenses, professional and legal expenses, stock compensation expenses and information technology related charges. Selling, general and administrative expenses was $17.7 million as of June 30, 2017 primarily due to headcount costs of $6.6 million, professional and legal fees of $7.9 million, advertising and marketing expenses of $0.7 million, online services expenses of $0.9 million, stock compensation expense of $0.7 million and other selling and administrative expenses of $1.0 million. Selling, general and administrative expenses was $30.5 million as of June 30, 2018 primarily due to headcount related costs of $11.3 million, professional and legal fees of $12.7 million, advertising and marketing expenses of $1.9 million, online services expenses of $1.2 million, stock compensation expense of $1.1 million and other selling and administrative expenses of $2.3 million.

Interest, and other income (expense), net

 

      Nine months
ended June 30,
    Change  
(in thousands, except percentages)    2017     2018     $     %  

Interest income

   $ 225     $ 590     $ 365       162%  

Interest expense

     (657     (927     (270     (41 )% 

Other income (expense)

     151       (76     (227     (150 )% 
  

 

 

 

Total interest, and other income (expense), net

   $ (281   $ (413   $ (132     (47 )% 

 

 

Interest income was $0.2 million in the nine months ended June 30, 2017, and $0.6 million in the nine months ended June 30, 2018, 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 the nine months ended June 30, 2017, and $0.9 million in the nine months ended June 30, 2018, related to our outstanding debt. Stock warrant expense was $0.2 million in the nine months ended June 30, 2017, and $0.1 million in the nine months ended June 30, 2018.

Provision for income taxes

 

      Nine months
ended June 30,
    Change  
(in thousands, except percentages)    2017     2018     $     %  

Provision for income taxes

   $ (161   $ (166   $ (5     (3%

 

 

We recorded a provision for income taxes of $0.2 million in the nine months ended June 30, 2017 and $0.2 million in the nine months ended June 30, 2018.

Comparison of Years Ended September 30, 2016 and 2017

Revenues

 

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

Revenues

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

 

 

We commenced selling our products in April 2016. In 2016, we generated revenue of $2.3 million from 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.

 

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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.

Since launching our products in April 2016, we have seen increased adoption by the market and our customer base has grown. In reviewing year-over-year results, our first commercial shipment was in April 2016 as compared to a full year of product shipments to customers in 2017. Revenue from synthetic genes, oligo pools, NGS tools and DNA libraries increased $8.5 million from $2.3 million in 2016 to $10.8 million in 2017, primarily driven by increases in the volume of orders and new customers. Additionally, revenue for 2017 included approximately $4.0 million from new customers, because our customer base increased from 97 customers in 2016 to 286 customers in 2017. In addition, the increase in 2017 revenue was also due to an increase from sales to Ginkgo Bioworks of $3.6 million in revenue from $0.7 million in 2016 to $4.3 million in 2017.

Cost of revenues

 

      Years ended
September 30,
     Change  
(in thousands, except percentages)    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, consumption of reagents and production materials 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, except percentages)            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 2016 to $19.2 million in 2017. This was primarily due to increased development activities for new product offerings, materials costs, and information technology and facilities costs. In 2017, information technology and facilities costs increased by $0.9 million compared to 2016 primarily due to the signing of lease agreements for additional facilities located in San Francisco and South San Francisco. Additional research and development expenses of $3.4 million were also incurred in 2017 in connection with the acquisition of Genome Compiler Corporation in the prior fiscal year. In 2016, we received $2.4 million Defense Advanced Research Projects Agency, or DARPA, payments, whereas in 2017 there were no DARPA payments to offset expenses. In 2017, laboratory materials used in research and development increased $0.5 million from $2.7 million to $3.2 million and allocations from facilities and information technology increased $0.9 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, information technology and facilities. Salaries and related costs increased by $1.9 million in 2017, as a result of increases in sales headcount. In addition, professional and legal expenses increased by $5.2 million due to commercial expansion of our products.

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 outstanding 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.

Quarterly Results of Operations

The following table shows unaudited quarterly consolidated statement of operations data for each of the last seven quarters. In the opinion of management, the information for each of these quarters has been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in accordance with generally accepted accounting principles. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be achieved in future periods, and operating results for quarterly periods are not necessarily indicative of operating results for a full year. You should read this unaudited consolidated statement of operations data in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

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     Three months ended  
(in thousands)   December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
 

Revenues

  $ 1,692     $ 2,433     $ 3,176     $ 3,466     $ 4,313     $ 6,166     $ 6,541  

Operating expenses:

             

Cost of revenues

  $ 4,987     $ 5,984     $ 6,220     $ 6,829     $ 7,498     $ 8,095     $ 7,503  

Research and development

    4,332       4,709       5,277       4,851       4,303       4,711       5,268  

Selling, general and administrative

    5,740       5,992       5,919       8,409       9,263       9,978       11,256  
 

 

 

 

Total operating expenses

  $ 15,059     $ 16,685     $ 17,416     $ 20,089     $ 21,064     $ 22,784     $ 24,027  
 

 

 

 

Loss from operations

  $ (13,367   $ (14,252   $ (14,240   $ (16,623   $ (16,751   $ (16,618   $ (17,486

Interest income

    59       50       116       187       158       148       284  

Interest expense

    (192     (199     (266     (248     (273     (317     (337

Other income (expense), net

    (3     11       143       (206     (19     (43     (14
 

 

 

 

Loss before income taxes

  $ (13,503   $ (14,390   $ (14,247   $ (16,890   $ (16,885   $ (16,830   $ (17,553

Provision for income taxes

    (33     (58     (70     (119     (52     (43     (71
 

 

 

 

Net loss attributable to common stockholders

  $ (13,536   $ (14,448   $ (14,317   $ (17,009   $ (16,937   $ (16,873   $ (17,624

 

 

For the three months ended December 31, 2017, we shipped 44,784 genes via 964 shipments compared to the three months ended September 30, 2017, a 18% growth in the number of genes shipped. For the three months ended March 31, 2018, we shipped 71,246 genes via 1,251 shipments, a 59% growth in the number of genes shipped over the prior quarter. For the three months ended June 30, 2018, we shipped 60,252 genes via 1,694 shipments compared to the three months ended March 31, 2018, a decrease of 15% in the number of genes shipped.

Shipments and number of genes shipped in the three months ended September 30, 2017, December 31, 2017, March 31, 2018, and June 30, 2018 were as follows:

 

      Three months ended  
(in thousands, except shipments)    September 30,
2017
     December 31,
2017
     March 31,
2018
     June 30,
2018
 

Number of genes shipped

     38,023        44,784        71,246        60,252  

Number of shipments

     751        964        1,251        1,694  

 

 

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.

 

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Since our inception on February 4, 2013 and through June 30, 2018, we have received an aggregate of $278.5 million in gross proceeds from the issuance of equity securities and an aggregate of $13.8 million from debt. As of June 30, 2018, we had a balance of $90.9 million of cash and cash equivalents and $1.6 million of short-term investments.

Preferred stock financings

As of June 30, 2018, we had raised $278.5 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. On March 19, 2018 and May 29, 2018, we issued 23,302,418 and 9,320,967 shares of Series D convertible preferred stock for an aggregate purchase price of approximately $50.0 million and $20.0 million, respectively. On July 2, 2018 and July 3, 2018, we issued 5,126,530 and 466,048 shares of Series D convertible preferred stock for an aggregate purchase price of $11.0 million and $1.0 million, respectively.

Debt financings

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

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 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; however, the draw periods for the second and third tranches under this agreement have expired. 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 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. We had the ability to draw

 

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down the additional second and third advances of the loan and security agreement, subject to achieving various revenue milestones, through January 31, 2018 and June 30, 2018, respectively. In addition, we obtained a revolving facility from SVB in September 2017 as part of the Fourth Loan and the facility allows us to borrow up to $10.0 million. The principal amount outstanding under the revolving line accrues interest at a floating per annum rate equal to one percentage point (1.00%) above the prime rate, which interest shall be payable monthly. The amounts available under the revolving line are limited by an advance rate which is a percentage of our account receivables balance.

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 June 30, 2018, as part of the Fourth Loan, all rights, title and interest to our personal property with the exception of our intellectual property, have been pledged as collateral, including cash and cash equivalents, short-term investments, accounts receivable, contractual rights to payment, license agreements, general intangibles, inventory and equipment. We were in compliance with all covenants under the loan and security agreement as of September 30, 2017 and June 30, 2018.

Future maturities of the loan as of June 30, 2018 are as follows:

 

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

2018

   $      $ 204      $ 204  

2019

     2,500        743        3,243  

2020

     3,333        485        3,818  

2021

     3,333        214        3,547  

2022

     834        11        845  
  

 

 

 
     10,000        1,657        11,657  
  

 

 

 

Less: Interest

           (1,657

Total amount of loan principal

           10,000  

Less unamortized debt discount

           (629

Add accretion of final payment fee

           164  
        

 

 

 
         $ 9,535  

 

 

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

 

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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. 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. As of June 30, 2018, we had $1.8 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,
    Nine months ended
June 30,
 
(in thousands)    2016     2017     2017     2018  

Net cash used in operating activities

   $ (38,592   $ (51,301   $ (39,843   $ (49,468

Net cash provided by (used in) investing activities

     (33,345     (9,870     4,461       26,902  

Net cash provided by financing activities

     69,648       63,802       62,740       82,239  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (2,289   $ 2,631     $ 27,358     $ 59,673  

 

   

 

 

   

 

 

 

Operating activities

Net cash used in operating activities was $39.8 million in the period ended June 30, 2017, and consisted primarily of a net loss of $42.3 million adjusted for non-cash items including depreciation and amortization expenses of $3.8 million, stock-based compensation expense of $1.0 million, net decrease in operating assets and liabilities of approximately $2.7 million, and other non-cash items of $0.4 million.

Net cash used in operating activities was $49.5 million in the period ended June 30, 2018, and consisted primarily of a net loss of $51.4 million adjusted for non-cash items including depreciation and amortization expenses of $4.4 million, stock-based compensation expense of $1.9 million, a net decrease in operating assets and liabilities of approximately $4.8 million, and a net increase of non-cash items of $0.4 million.

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.

 

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Investing activities

In the nine months ended June 30, 2017, our investing activities provided net cash of $4.5 million. Investing activities included the purchases and maturity of investments and purchases of laboratory property, equipment and computers.

In the nine months ended June 30, 2018, our investing activities provided net cash of approximately $26.9 million. Investing activities included the purchases and maturity of investments and purchases of laboratory property, equipment and computers.

In 2016, our investing activities used net cash of $33.3 million. The investing activity included the purchases of investments, 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, equipment and computers.

Financing activities

Net cash provided by financing activities was $62.7 million in the nine months ended June 30, 2017, which consisted of $65.2 million from the issuance of convertible preferred stock, partially offset by the repayment of $2.4 million of debt.

Net cash provided by financing activities was $82.2 million in the nine months ended June 30, 2018, which consisted of $78.9 million from the issuance of convertible preferred stock, $5.0 million advance receipt of proceeds for convertible preferred stock to be issued, $2.0 million in payment of deferred offering costs, and $0.3 million from the issuance of common stock and exercise of stock options.

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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements other than our indemnification agreements as described in Note 5 of the condensed consolidated financial statements included elsewhere in this prospectus.

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      $  

 

 

 

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The following table summarizes our outstanding contractual obligations as of the payment due date by period as of June 30, 2018:

 

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

Contractual obligations

              

Future minimum operating lease payments

   $ 28,643      $ 540      $ 6,431      $ 7,368      $ 14,304  

Long-term debt obligations

     11,657        203        7,062        4,392         
  

 

 

 

Total

   $ 40,300      $ 743      $ 13,493      $ 11,760      $ 14,304  

 

 

In September 2016, we entered into a collaboration agreement with Distributed Bio to offer therapeutic antibody design and optimization services, as well as an exclusive G-protein coupled receptor targeting library to our customers. Upon successful commercialization, our agreement with Distributed Bio requires us to pay $0.3 million to Distributed Bio. In addition, we also agreed on a profit-sharing and license arrangement for an Antibody Optimization Software and GPCR-Targeting Antibody Library which includes royalty payments for pharmaceutical discovered products up to 50% of net income or 20% of revenue on annual sales less than $5.0 million. For annual sales in excess of $5.0 million, we are obligated to make royalty payments ranging from 20% to 35% of net annual revenue on the antibody software and GPCR Antibody Library revenue under the collaboration agreement.

In March 2018, we entered into a stock purchase agreement related to the sale of additional shares of our Series D convertible preferred stock for the amount of $70.0 million. Pursuant to a side letter to the stock purchase agreement, we have committed, subject to certain conditions, to using commercially reasonable efforts to invest up to $5.0 million, $10.0 million and $10.0 million over three years in connection with the incorporation, business and/or operations of a wholly owned foreign enterprise in the PRC.

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 $55.9 million and $90.9 million as of June 30, 2017 and 2018, respectively. We had short-term investments totaling $20.1 million and $1.6 million as of June 30, 2017 and 2018, 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

Substantially all of our revenues and operating expenses are denominated in U.S. dollars, therefore, we do not believe that our exposure to foreign currency exchange risk is material to our business, financial condition or results of operations. If a significant portion of our revenue or operating expenses were to become denominated in currencies other than U.S. dollars, we may not be able to effectively manage this risk, and our business, financial condition and results of operations could be adversely affected by translation and by transactional foreign currency conversions.

 

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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 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

 

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delivery of the product, there are no remaining performance obligations. Our shipping and handling activities are performed before the customer obtains control of the goods and therefore are considered a fulfillment cost. We have elected to exclude all sales and value added taxes from the measurement of the transaction price. We have not adjusted the transaction price for significant financing since the time period between the transfer of goods and payment is less than one year.

We 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 of not disclosing the consideration allocated to remaining performance obligations and an explanation of when those amounts are expected to be recognized as revenue since the duration of our contracts is less than one year.

We do not have any contract assets or contract liabilities as of September 30, 2017 and June 30, 2018. 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

Total stock-based compensation expense recognized was as follows:

 

      Years ended
September 30,
     Nine months
ended June 30,
 
(in thousands)    2016      2017      2017      2018  

Cost of revenues

   $ 112      $ 202      $ 95      $ 275  

Research and development

     261        575        272        521  

Selling, general and administrative

     484        1,114        660        1,079  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 857      $ 1,891      $ 1,027      $ 1,875  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended June 30, 2017, we granted stock options to employees and non-employees to purchase 625,000 shares of common stock with a weighted average grant date fair value of $0.57. During the nine months ended June 30, 2018, we granted stock options to employees and non-employees to purchase 8,126,217 shares of common stock with a weighted average grant date fair value of $0.72. We recognized stock-based compensation expense of $1 million and $1.9 million, for the nine months ended June 30, 2017 and 2018, respectively. As of June 30, 2018, there was $10.2 million of total unrecognized compensation expense related to non-vested stock options under the 2013 Plan that is expected to be recognized over a weighted-average period of 3.3 years. As of June 30, 2018, there was $0.8 million of total unrecognized compensation expense related to restricted stock under the 2013 Plan that is expected to be recognized over a weighted-average period of 1.9 years.

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

 

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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 the 2013 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 the 2013 Plan that is expected to be recognized over a weighted-average period of 2.5 years.

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 expected volatility, expected term, risk-free interest rate, expected dividend yield and the fair value of our common stock.

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 with terms approximately equal to the expected life of the option. The expected dividend yield is zero as we currently have no history or expectation of declaring cash dividends on our common stock. The fair value of our common stock is described below under “Determination of the fair value of common stock on grant dates”.

The grant date fair value of options granted during the years ended September 30, 2016 and 2017 and nine months ended June 30, 2017 and 2018 were calculated using the weighted average assumptions set forth below:

 

      Years ended
September 30,
     Nine months ended
June 30,
 
          2016     2017      2017      2018  

Expected term (years)

     6.25       6.25        6.25        6.25  

Expected volatility

     64.4     65.5%        65.5%        66.4%  

Risk-free interest rate

     1.44     2.02%        2.02%        2.81%  

Dividend yield

     0     0%        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 June 30, 2018, options (vested and unvested) to purchase 24,000,608 shares of our common stock were outstanding. The aggregate intrinsic value of these options was $                , 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, which was calculated based on the following:

 

      Shares
available
     Options
outstanding
    

Weighted
average
exercise price

per share

     Weighted average
remaining contractual
term
 

Outstanding as of September 30, 2015

     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  

Outstanding as of June 30, 2018

     9,347,391        24,000,608      $ 0.81        8.78  

Vested or expected to vest and become exercisable as of June 30, 2018

        24,000,608      $ 0.81        8.78  

 

 

 

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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 and/or our compensation committee as of the grant date, with input from management, considering our most recently available independent third-party valuation of our common stock and our board of directors’ and/or compensation committee’s assessment of additional objective and subjective factors that it believed were relevant and which may have changed between the effective date of the most recent valuation and the date of the grant. Following the consummation of this offering, the fair market value of our common stock will be determined based on the quoted market price of our common stock. The independent third-party valuations have generally been performed quarterly in accordance with the guidance outlined in the AICPA 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

management’s 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;

 

 

arms-length transactions involving recent rounds of preferred stock financings;

 

 

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.

The independent third-party valuations utilized market-based valuation approaches, including the option pricing method, or OPM, the Probability-Weighted Expected Return Method, or PWERM, and a hybrid methodology utilizing both OPM and PWERM.

The OPM treats the rights of the holders of preferred and common stock as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of preferred stock, as well as their rights to participation and conversion. Under OPM, the value of a company’s common stock is determined by estimating the value of its portion of each of these call option rights.

Under the PWERM, the value of a company’s common stock is estimated based upon an analysis of values for the company assuming various possible future events: IPO, strategic merger or sale, dissolution/no value to common and private company. The per share value of the company’s common stock is based upon the probability-weighted present value of expected future equity values, under each of the possible future event scenarios, as well as the rights and preferences of each share class.

 

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Under the hybrid method, the per share values calculated under the OPM and PWERM are weighted appropriately to arrive at a final per share fair value of the company’s common stock before the discount for lack of marketability is applied.

The independent third-party valuations covering fiscal year 2016 through March 31, 2017 were prepared utilizing the OPM as the primary valuation method. The material assumptions used in the OPM include recent rounds of preferred stock financing, estimated future revenues, and the valuation of peer companies.

Subsequent to March 31, 2017, the independent third-party valuations were prepared utilizing a hybrid allocation methodology (with both OPM and PWERM used) as the primary allocation method, with the same steps discussed above being applied. The material assumptions used in the hybrid method consist of the weighting of values determined under the OPM and PWERM. The weighting of the value determined under the PWERM in the hybrid method has increased as the likelihood of an IPO has increased. The material assumptions used in the PWERM include the estimated value, timing and weighting of potential liquidity events.

All of our independent third-party valuations also included appropriate discounts to the value of our common stock for lack of marketability.

Recently issued accounting pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our unaudited interim condensed 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 to industrialize the engineering of biology. The core of our platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have combined this technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to create an integrated technology platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We are leveraging our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next generation sample preparation, and antibody libraries for drug discovery and development. Additionally, we believe our platform will enable new value-add opportunities, such as discovery partnerships for biologic drugs, and will enable new applications for synthetic DNA, such as digital data storage, which will drive growth in the market for our products. We sell our synthetic DNA and synthetic DNA-based products to a customer base of over 600 customers across a broad range of industries.

DNA is the fundamental building block of biology. The ability to design DNA and engineer biology, a field known as synthetic biology, is growing rapidly and we believe this field represents one of the most exciting areas of growth and technological innovation in the 21st century. The ability to modify DNA to serve different purposes is leading to a broad range of applications for synthetic DNA and synthetic DNA-based products 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 new and existing specialty chemicals and materials, such as spider silk, nylon, rubber, fragrances, food flavors and food additives;

 

 

agriculture for more effective and sustainable crop production;

 

 

academic research for a broad range of applications; and

 

 

technology for potential use as an alternative long-term data storage medium.

Our mission is to be the leading provider of synthetic genes, which are comprised of strands of synthetic DNA, and to leverage the versatility of our platform to expand our portfolio to include other synthetic DNA-based products and address additional market opportunities. As a leading synthetic DNA provider, we produce an array of different synthetic DNA-based products targeting multiple market opportunities. The following chart represents our target market opportunities:

 

 

LOGO

 

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1   Products addressing this market include clonal, non-clonal genes (gene fragments), oligo pools and DNA libraries
2   Products addressing this market include NGS exome capture and NGS custom capture
3   Products addressing this market include custom DNA libraries, our proprietary GPCR-targeting antibody library and our antibody optimization solution

Synthetic genes, DNA libraries and oligo pools

In April 2016, we launched the first applications of our platform, synthetic genes and oligo pools, to disrupt the gene synthesis market and make legacy DNA synthesis methods obsolete. Soon thereafter, we added DNA libraries for drug discovery and development. We estimate the market for synthetic DNA was approximately $1.3 billion in calendar year 2016. 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. In fiscal 2016, our revenue from synthetic genes was $1.0 million, or approximately 48% of our total revenue, and our revenue from oligo pools was $0.9 million, or approximately 38% of our total revenue.

In fiscal 2017, we served 286 customers including $0.3 million in sales to seven of the top 20 pharmaceutical companies by revenue, $4.3 million in sales to Ginkgo Bioworks which we believe is the largest global purchaser of synthetic DNA, $0.3 million in sales to three of the largest agricultural biotechnology companies, $2.7 million in sales to over 100 academic research institutions worldwide, and $7.3 million in sales to 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. To date, we have served over 600 customers across a broad range of industries. In fiscal 2017, our revenue from synthetic genes was $8.1 million, or approximately 75% of our total revenue, and our revenue from oligo pools was $2.0 million, or approximately 19% of our total revenue. In the nine months ended June 30, 2018, our revenue from synthetic genes was $11.9 million, or approximately 70% of our total revenue, and our revenue from oligo pools was $2.1 million, or approximately 13% of our total revenue.

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 entered into a new agreement with Ginkgo Bioworks in March 2018 (the 2018 Agreement), after the agreement entered into by the parties in 2017 expired pursuant to its terms, and we are obligated to deliver to Ginkgo Bioworks synthesized DNA sequences that meet certain agreed upon sequence guidelines pursuant to purchase orders placed by Ginkgo Bioworks during the term of the 2018 Agreement. Under the 2018 Agreement, should Ginkgo Bioworks place an order, they shall provide us with genetic sequences to be synthesized. The 2018 Agreement can only be terminated (i) upon mutual agreement of both parties, (ii) by Ginkgo Bioworks upon a specified change of control, (iii) upon a material breach of the contract by either party, or (iv) unilaterally by us in the event that Ginkgo Bioworks fails to place more than a certain percentage of their required quarterly minimums under the agreement for two consecutive quarters. The purchase minimums in the 2018 Agreement are considered to create an enforceable obligation only in conjunction with each purchase order.

Next Generation Sequencing sample preparation

Synthetic DNA is a key product used for target enrichment during sample preparation in NGS applications. We launched an innovative and comprehensive sample preparation kit for NGS at the Advances in Genome Biology and Technology conference in February 2018. Our kit leverages our platform to precisely synthesize oligo pools and uniformly amplify the desired target DNA segments, considerably improving the accuracy of the

 

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downstream sequencing analysis. Our proprietary technology also allows us to quickly and cost-effectively customize our NGS kits and simplify the sequencing workflow. This enables our customers to analyze more samples per sequencing run, without sacrificing accuracy, saving them time and money. We estimate this market opportunity to be approximately $500 million in calendar year 2016.

Biological drug discovery and development

We believe we can leverage our DNA synthesis platform together with our custom libraries and other proprietary tools, such as our anti-GPCR library and antibody optimization solution, to provide an end-to-end solution in biologics drug discovery and early development, from target to IND application, adding value as a partner to biotechnology and pharmaceutical companies.

Custom DNA libraries

We are developing custom DNA libraries, collections of DNA fragments, which are primarily used by pharmaceutical companies during biological drug discovery and development. Our platform allows customers to customize every antibody variation and construct a library systematically to target the entire region of therapeutic interest, which we believe represents a significant advantage over current methodologies and can accelerate drug development and generate new antibody therapeutics.

GPCR drug discovery and early development

Together with Distributed Bio using in silico design, we have developed a proprietary GPCR-targeting antibody library. GPCRs are cell surface receptors that traditionally have been difficult to target with antibodies or other biological drugs. We believe our proprietary library improves antibody drug discovery against this difficult class of targets. We plan to partner with biotechnology and pharmaceutical companies to discover antibodies against GPCRs or out-license the proprietary library to them.

Antibody optimization solution

Coupling our unique DNA synthesis platform with proprietary software developed by one of our partners, we are now creating and validating a comprehensive antibody optimization solution that may allow us to form value add partnerships with academic institutions as well as biotechnology and pharmaceutical companies to improve their antibody drug candidates. In addition, this solution may allow us to discover “bio-better” antibody drugs, which are antibody therapeutics that are similar to an existing antibody with improved tolerability, clinical and/or commercial properties.

With our custom DNA libraries, proprietary GPCR-targeting antibody library and antibody optimization solutions, we are targeting the biologic drug development market which we believe to be a large market opportunity.

DNA as a data storage media

Due to the explosion of data across many industries, finding efficient long-term storage solutions has become more important. Through the Semiconductor Research Corporation, 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 long-term, compact form of data storage with very low energy maintenance requirements and universal read technology that will last hundreds of years. We have strategic relationships with Microsoft Corporation and the University of Washington through which we have demonstrated the feasibility of storing data on DNA and the unique benefits of longevity, density, and universality of this format. We believe that over time our technology will develop to allow data storage in DNA to become cost competitive with traditional data storage media, which is necessary to enable us to target several large markets opportunities. The market for digital data storage is more than $35 billion and we believe DNA can address several segments of this market.

 

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We believe the growth of the synthetic DNA market is analogous to the trends seen in the next generation sequencing (NGS) market, where rapid innovation is resulting in the declining costs of sequencing, increased adoption, development of 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 for synthetic DNA and synthetic DNA-based products. Therefore, we believe that market estimates understate the potential for our products 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 experiencing rapid growth for synthetic DNA and synthetic DNA-based products 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, and many additional potential customers of our NGS library preparation products today. In order to address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force targeting synthetic DNA customers, a direct sales force focusing on the NGS market and an e-commerce platform. Our sales force is focused on customer acquisition, support, and management across industries, and is highly trained on both the technical aspects of our platform and how synthetic DNA can be used in a wide range of industries. 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, and enable them to receive real-time customized quotes for their products and track their order status through the manufacturing and delivery process. This is a critical part of our strategy to address our large market and diverse customer base, as well as drive commercial productivity, enhance the customer experience, and promote loyalty.

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 biologics 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 286 customers (up from 97 customers in 2016), (ii) extending the scope of our relationship with Microsoft Corporation and the University of Washington, (iii) entering into an agreement to supply thousands of genes for public benefit through the BioBricks Foundation, (iv) successfully achieving industry-leading volumes of synthetic DNA shipped every month, (v) becoming an OEM supplier of synthetic DNA to four synthetic DNA manufacturers that also compete with us, (vi) launching our e-commerce platform to existing customers in October 2017 and (vii) shipping over 38,000 genes in the fourth quarter of fiscal 2017 compared to approximately 7,600 for the fourth quarter of fiscal 2016, which represents 400% year-over-year growth.

 

 

In 2018, we continued to experience revenue growth greater than the estimated rate of growth of the synthetic biology market, expanded into new market opportunities for next-generation sequencing and

 

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antibody biologics discovery, and enhanced our global distribution capabilities by (i) launching our e-commerce platform to the general public, (ii) launching our NGS target enrichment solutions at a major medical conference, (iii) completing a private financing with funds reserved for building Chinese operations, (iv) signing international distributors in Asia Pacific, (v) expanding our management team to support our entry into the biologics drug discovery and early development, (vi) signing a new agreement with Ginkgo Bioworks to deliver up to approximately 1.3 billion base pairs over a period of four years, and (vii) shipping 19,794 genes in the third quarter of fiscal 2018 compared to 8,297 for the third quarter of fiscal 2017, which represents 139% year-over-year growth, and compared to shipping 2,650 genes in the third quarter of fiscal 2016.

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. In addition, we generated revenue of $7.3 million and $17.0 million in the nine months ended June 30, 2017 and 2018, representing 133% period-over-period growth, while incurring net losses of $42.3 million and $51.4 million in the nine months ended June 30, 2017 and 2018.

Our headquarters and manufacturing facilities are located in San Francisco, California. As of June 30, 2018, we had 221 full-time employees worldwide, including three locations in the San Francisco Bay Area and an international location in Tel Aviv, Israel. We also utilize a team of 14 dedicated commercial consultants across the European Union and the United Kingdom and five dedicated commercial consultants across Asia. We also recently received private funding to establish production facilities and commercial operations in Asia. We plan in begin operations in Asia in 2019. As of June 30, 2018, we have raised a total of $279.5 million in gross proceeds from the sale of equity securities.

Industry overview

Engineering of Biology Enables Multiple Market Opportunities

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 and this emerging field is enabling advances across a broad range of end markets and consumers. For example, in healthcare, synthetic biology is being used to develop and enable new drugs, via tools such as CRISPR, 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 spider silk. In agricultural biotechnology, synthetic biology is being used to improve nutritional content of agricultural goods, 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 continued innovation, our growing understanding of biology, and access to tools allowing us to modify and build biological systems.

The understanding of, and the ability to use, synthetic biology continues to vastly improve, accelerated by the adoption of modern research tools, 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.

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

 

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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 biotechnology 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 digital data storage.

Our platform provides flexibility to pursue opportunities across all of these segments. For example, our synthetic gene offering is considered an enabling technology, but our NGS products are considered an enabled product.

Synthetic DNA is the fundamental building block of synthetic biology. 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 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.