ZYMERGEN INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited Consolidated Financial Statements and related notes thereto for the year endedDecember 31, 2021 , included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . In this section, the terms "we," "our," "ours," "us," and "the Company" refer collectively toZymergen Inc. and its consolidated direct and indirect subsidiaries. This discussion contains forward-looking statements that involve risks and uncertainties reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section of this Quarterly Report on Form 10-Q titled "Risk Factors". Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake any obligation to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. Recent Developments
Proposed Merger
OnJuly 24, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Ginkgo Bioworks Holdings, Inc., aDelaware corporation ("Ginkgo"), andPepper Merger Subsidiary Inc. , aDelaware corporation and an indirect wholly owned subsidiary of Ginkgo ("Merger Sub"), providing for the merger of Merger Sub with and into our company (the "Merger"), with our company surviving the Merger as a wholly owned subsidiary of Ginkgo. Under the terms of the Merger Agreement, at the effective time of the Merger, each share of our common stock that is issued and outstanding as of immediately prior to such time (other than certain excluded shares specified in the Merger Agreement) will be automatically cancelled, extinguished and converted into the right to receive 0.9179 shares of Class A common stock, par value$0.0001 per share, of Ginkgo ("Ginkgo Class A Shares") and cash in lieu of any fractional Ginkgo Class A Shares, without interest. The obligation of the parties to consummate the Merger is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, including, among others, that: (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock, (ii) the expiration or termination of the waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and, if a merger control inquiry is initiated or commenced by a governmental authority outside ofthe United States , approval in that jurisdiction, (iii) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger, (iv) Ginkgo's registration statement on Form S-4 having been declared effective in accordance with the provisions of the Securities Act, (v) authorization and approval of the Ginkgo Class A Shares for listing on theNew York Stock Exchange (or any successor inter-dealer quotation system or stock exchange thereto), (vi) no material adverse effect has occurred on the other party since the signing of the Merger Agreement that is continuing and (vii) certain other customary conditions relating to the other party's representations and warranties in the Merger Agreement and the performance of its respective obligations. Ginkgo's obligation to consummate the Merger is also subject to the satisfaction or waiver of the condition that (i) we have not incurred or otherwise become liable for additional costs, expenses or liabilities with respect to our leased real property not contemplated under a specified schedule outlining our real estate plans and (ii) certain specified litigation matters are not reasonably expected to result in future money damages payable by us (in excess of any applicable insurance deductible and coverage amounts), where the aggregate of the amounts contemplated by clauses (i) and (ii) exceeds$25,000,000 . We cannot predict with certainty whether or when any of the required closing conditions will be satisfied or whether another uncertainty may arise, and we cannot assure you that we will be able to successfully consummate the proposed Merger as currently contemplated under the Merger Agreement or at all. We are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, with customary exceptions for superior proposals. The foregoing summary of the Merger Agreement and the proposed Merger is not complete and is qualified in its entirety by reference to (i) the more detailed discussion included in Note 14 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and (ii) the full text of the Merger Agreement, a copy of which is incorporated by reference as Exhibit 2.1 to this Quarterly Report on Form 10-Q. 25
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2022 Restructuring
OnJuly 25, 2022 , we announced a reduction in force as part of our efforts to continue to execute on our previously announced strategic plan, including managing costs and conserving cash resources. We executed the initial phase of this reduction in force onJuly 26, 2022 , which resulted in the termination of approximately 80 employees. We currently estimate that we will incur cash-based severance costs of approximately$4.0 million related to the initial phase of this reduction in force, as well as stock-based compensation and employee restructuring costs, the amount of which has not yet been estimated.
Program Updates
OnJuly 25, 2022 , we announced that, together with our partner Sumitomo Chemical Co. Ltd. ("Sumitomo Chemical"), we have determined to pause work on our Z1 electronics film program, as we had not received a sufficiently strong demand signal from the market to continue this work in the near-term. Our collaboration agreement with Sumitomo Chemical remains in effect, and we are exploring opportunities for the biomolecules created under the collaboration and other potential opportunities. We are also continuing to evaluate potential strategic alternatives for our advanced materials and drug discovery businesses. Overview We partner with Nature to design, develop and commercialize microbes, molecules, and materials for diverse end markets. Our goal is to create new products with our proprietary platform that unlocks the design and manufacturing efficiency of biological processes with technology's ability to rapidly iterate and control diverse functions. We believe our process will create better products, a better way, for a better world. Our platform revolves around three key capabilities: our collection of accessible biomolecules, our software and data science technology and our data driven microbe optimization processes. We have one of the world's largest collections of accessible biomolecules. This physical and DNA sequence database has within it the potential to create hundreds of thousands of small molecules, millions of natural products and hundreds of millions of proteins. This provides novel starting points for the creation of interesting molecules, materials, enzymes, and potential therapeutics. Our software and data science platform informs, guides, and records our experiments forming the infrastructure for the virtuous learning cycle that continually enriches our processes. Once a promising biomolecule is selected, using our strain engineering capabilities we can work across organisms and employ numerous strategies to optimize performance, cost, and scalability to meet an unmet market need. Throughout our work, we power and scale the science with high-throughput automation.
Using our platform we are pursuing multiple markets:
1.Advanced Materials. For advanced materials we seek to employ bio-advantaged
molecules or microbes to develop and deliver high performance products and are
currently focused on four markets: agriculture, water repellency, advanced
polymers, and healthcare. In agriculture, our most advanced product aims to
improve crop nutrient uptake for significant markets, including corn, wheat, and
sorghum. In the water repellency program, we are developing a family of
molecules that improve the water repellency characteristics of cellulosic
substrates. Our advanced polymers products include use of our Z2 polymer (the
basis for Hyaline, which we have discontinued) for 3D printing applications.
Finally, in healthcare materials, we have achieved the target technical
specifications for two enzymes that are critical to produce mRNA vaccines,
namely 2'-O'-Methyltransferase ("2'-O-MT") and Vaccinia Capping Enzyme ("VCE")
and are exploring various options, including potential licensing or sale.
2.Drug Discovery. In drug discovery we leverage our differentiated access to
natural products as a source of diverse chemical matter provided by our unified
metagenomics database ("UMDB").
3.Automation. Our automation products offer proven automation technology to organizations interested in improving the throughput, efficiency, and reliability of their lab operations.
Our products are in various stages of development ranging from concept to pilot
stage. We have not yet generated revenue from product sales (except for nominal
revenue related to the sale of samples and automation hardware and related
services). However, most of these programs leverage data and learnings from our
earlier work, which we believe enables our teams to move more quickly and
precisely with each new program, and ultimately helps power our platform and
make it more robust over time. For example, as part of our review of our product
pipeline we researched market adjacencies for molecules we have already
developed, including molecules that were the basis for Hyaline. Stemming from
those efforts, we identified opportunities for using Z2 polymer in
high-performance 3D printing applications.
With our platform and building blocks derived from Nature, we believe we can
design, develop, and manufacture high-performance products more cleanly and with
less waste than traditional chemicals and materials companies. Our goal is to
utilize our proprietary platform to make products that will not clog our
waterways or pollute our oceans. Consumers, regulators and customers are all
demanding solutions to these problems. We believe that by partnering with Nature
we can make better products, a better way, for a better world.
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Components of Results of Operations
Revenue
Research and Development Service Agreements Revenue. To date, we have earned
revenue by engaging in R&D services primarily to help our customers develop
bio-based products. In addition, the R&D services provided to our customers test
and validate our platform. We account for R&D service contracts when we have
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. The research term of the
contracts spans typically over several quarters and the contract term for
revenue recognition purposes is determined based on the customer's rights to
terminate the contract for convenience. Over the longer-term, as and to the
extent we grow our product sales and commercialize products, we expect revenue
from R&D services to represent a smaller component of our total revenue.
Collaboration and Other Revenue. Our collaboration and other revenue relates
primarily to our collaboration agreement with Sumitomo Chemical. Our agreement
with Sumitomo Chemical includes provision of R&D services by us through the
joint innovation of certain materials and applications of strategic interest to
Sumitomo Chemical. Under this arrangement R&D costs are shared equally between
the parties with settlement of such amounts on a quarterly basis. Amounts
received for those services are classified as collaboration revenue as those
services are being rendered because those services are considered to be part of
our ongoing major operations.
Automation Revenue. Our automation revenue generally consists of fees earned
from the sale of automation products for laboratory operations, web-based
software services, support services or the combinations of products and
services. Automation products generally include third party lab equipment
hardware, customized enclosures and other elements for our reconfigurable
automation cart ("RAC") system. Services may include one-time service events,
such as installation, consultation or design services or software subscription
and support services performed over time. Our subscription arrangements are
considered service contracts, and the customer does not have the right to take
possession of the software.
Grant Revenue. Our grant revenue represents research and development activities
performed under our grant agreement with the Bill & Melinda Gates Foundation to
endeavor to discover potential natural product hits for malaria, tuberculosis,
and COVID-19 targets. Revenue is recognized when the donor-imposed conditions
are met, which is as the research and development activities are performed.
Cost of Service Revenue
Cost of service revenue represents costs we incur to service our contract research efforts pursuant to our R&D service contracts, as well as certain costs allocable to our Sumitomo Chemical collaboration arrangement. Costs include both internal and third party fixed and variable costs including labor, materials and supplies, facilities and other overhead costs.
Cost of Automation Revenue
Cost of automation revenue includes third-party equipment cost as well as internal costs of labor, materials and supplies, facilities and other overhead costs incurred in the delivery of the subscription, support and other service elements of our automation revenues.
Operating Expenses
Our operating expenses are classified in the following categories: research and development, sales and marketing and general and administrative. For each of these categories, the largest component is personnel costs, which includes salaries, employee benefit costs, bonuses and stock-based compensation expenses. We have recently implemented several measures designed to reduce our cost structure with a goal to extend our cash runway. Research and development. Uncertainties inherent in the research and development of customer products preclude us from capitalizing such costs. Research and development expenses include personnel costs, the cost of consultants, materials and supplies associated with research and development projects as well as various laboratory studies. Indirect research and development costs include depreciation, amortization and other indirect overhead expenses.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, costs of general marketing activities and promotional activities, travel-related expenses and other indirect overhead costs.
General and administrative. Our general and administrative expenses consist
primarily of personnel costs for our executive, finance, corporate and other
administrative functions, intellectual property and patent costs, facilities and
other allocated expenses, other expenses for outside professional services,
including legal, human resources, audit and accounting services and insurance
costs.
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Restructuring charges. Our restructuring charges consist primarily of costs associated with employee termination benefits, contract terminations, restructuring-related consulting fees and long-lived asset impairments.
Interest income
Interest income consists of income earned from our cash, cash equivalents and short-term investments.
Interest expense
Interest expense consists of interest incurred from our term loan along with the amortization of loan initiation fees, accretion of end-of-term payment and lender warrant expense.
Change in fair value of warrant liability
The change in the fair value of the warrant liability is due to the change in the value of the underlying shares of Series C Preferred Stock. The change in value reflects the change in fair value of the underlying shares of Series C Preferred Stock during the applicable period.
Other expense, net
Other expense, net relates to miscellaneous other income and expense and foreign currency gains and losses.
Provision for Income Taxes Provision for income taxes consists primarily of minimum tax payments at the state level and income taxes paid outside ofthe United States for our overseas subsidiaries. The factors that most significantly impact our effective tax rate include realizability of deferred tax assets, changes in tax laws, variability in the allocation of our taxable earnings among multiple jurisdictions, the amount and characterization of our research and development expenses, the levels of certain deductions and credits, acquisitions and licensing transactions. We have various federal and state net operating loss carryforwards as well as federal and state research and development tax credit carryforwards. Utilization of some of the federal and state net operating loss and research and development tax credit carryforwards are subject to annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. 28
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Results of Operations for the Three Months Ended
The following table sets forth our results of operations for the periods (in
thousands):
Three Months Ended
June 30, Change
2022 2021 $ %
Revenues from research and development service
agreements $ 1,191 $ 4,846 $ (3,655) (75.4) %
Collaboration and other revenue 746 1,008 (262) (26.0) %
Automation revenue 480 - 480 n.m.
Grant revenue 217 - 217 n.m.
Total revenues 2,634 5,854 (3,220) (55.0) %
Cost and operating expenses:
Cost of service revenue 9,095 21,829 (12,734) (58.3) %
Cost of automation revenue 637 - 637 n.m.
Research and development 31,186 50,152 (18,966) (37.8) %
Sales and marketing 3,158 7,904 (4,746) (60.0) %
General and administrative 24,294 23,661 633 2.7 %
Goodwill impairment charge 40,645 - 40,645 n.m.
Restructuring charges (benefit) (185) - (185) n.m.
Total cost and operating expenses 108,830 103,546 5,284 5.1 %
Operating loss (106,196) (97,692) (8,504) 8.7 %
Other income (expense):
Interest income 2 12 (10) (83.3) %
Interest expense (9,378) (2,767) (6,611) 238.9 %
Gain (loss) on change in fair value of warrant
liabilities - (430) 430 (100.0) %
Other expense, net (885) (5) (880) 17,600.0 %
Total other expense (10,261) (3,190) (7,071) 221.7 %
Loss before income taxes (116,457) (100,882) (15,575) 15.4 %
Benefit from (provision for) income taxes (11) 16 (27) (168.8) %
Net loss $ (116,468) $ (100,866) $ (15,602) 15.5 %
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n.m.: Not meaningful
Revenue
Revenue from research and development service agreements decreased by
•a$3.2 million decrease from contracts ending in 2021; •a$0.4 million decrease due to the termination of a customer contract in the first quarter of 2022; and •a$0.3 million decrease due to the timing of deliverables under fixed fee contracts. This was offset by:
•a
Collaboration and other revenue decreased by
Automation revenue of$0.5 million was recognized in the quarter endedJune 30, 2022 , all related to the sale of automation hardware and related services. No automation revenue was recognized in the same period of the prior year. Grant revenue of$0.2 million was recognized in the quarter endedJune 30, 2022 , all of which was related to theBill & Melinda Gates Foundation grant agreement. No grant revenue was recognized in the same period of the prior year. 29
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Cost of Revenue
Cost of service revenue decreased by
•a decrease of$6.1 million in labor cost associated with the impact of the restructuring initiative implemented in 2021 and a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products following the termination of certain customer contracts, net of the impact of salary increases that went into effect in 2022 to reflect current market trends; •decreases of approximately$2.4 million in consumables,$1.2 million in depreciation and$1.8 million in allocated rent, all due to a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products and cessation of certain customer agreements. The decrease in allocated rent was also partially attributable to a consolidation of our real estate footprint as we prepare to move into our new company headquarters, which is currently under development; •a decrease of approximately$0.6 million in other costs, primarily related to decreases in insurance costs, office supplies and transportation costs; and •a decrease in the use of contract research resources of$0.4 million due mainly to the decreased external resource need for development work for an early stage customer that we pursued in 2021.
Cost of Automation Revenue
Cost of automation revenue was$0.6 million in the quarter endedJune 30, 2022 , which was comprised of the cost of hardware delivered to and accepted by the customer and the cost of services related to both installation and our subscription and support services. No cost of automation revenue was recognized in the same period of the prior year.
Operating Expenses
Research and development
Research and development expense decreased by
•a$15.6 million decrease in manufacturing and lab consumables and subcontractors expenses, largely attributable to the discontinued development of Hyaline and our insect repellent products during 2021. The decrease was partially offset by increased spend on other internally developed programs in our drug discovery pipeline as well as the application of our Z2 polymer for 3D printing; and •a decrease of approximately$5.2 million in labor costs associated with the impact of the restructuring initiative implemented in 2021, which was offset by an expansion of resources focused on research and development activities, and the impact of salary increases that went into effect in 2022 to reflect current market trends. This was offset by: •a$1.1 million increase in depreciation attributable to the increased amortization from developed technology intangibles after the acquisition ofLodo Therapeutics in the second quarter of 2021, as well as a higher allocation of depreciation and amortization costs as a result of the shift in focus of employees to the development of our own products following the termination of certain customer contracts; and •an increase of approximately$0.7 million in stock-based compensation expense, partly due to the RSUs awarded in connection with a retention program in 2021 as well as refresh, promotion and new hire grants made in 2022 in the ordinary course of business, offset by a decrease in the cost associated with options with a market-based vesting condition after the separation of an executive in the fourth quarter of 2021 and the impact of forfeitures of employee stock option awards.
Sales and marketing
Sales and marketing expense decreased by$4.7 million , or 60%, in the quarter endedJune 30, 2022 compared to the same period of the prior year. This decrease was primarily due to: •a decrease of approximately$2.3 million in labor costs attributable to the impact of the restructuring initiative and personnel attrition, which was partially offset by the impact of salary increases that went into effect in 2022 to reflect current market trends; and •a$2.3 million decrease in expense related to subcontractors. This was largely due to reduced public relations and marketing spend compared to 2021 which was driven by high customer and brand marketing activities in 2021 before and after our initial public offering ("IPO") inApril 2021 . 30
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General and administrative
General and administrative expense increased by$0.6 million , or 3%, in the quarter endedJune 30, 2022 compared to the same period of the prior year. The increase in general and administrative expenses was primarily attributable to the following: •an increase of approximately$1.1 million in stock compensation expense due to RSUs granted in a retention program and options with service-based vesting and RSUs granted to executives hired in 2021, including awards granted to our Acting CEO offset by a decrease in costs associated with options with a market-based vesting condition after the forfeiture of a portion of those options by our previous CEO upon his separation during the third quarter of 2021; •a$0.8 million increase in expense related to professional services fees. This was largely due to an increased spend on legal and consulting services during the due diligence process leading up to the signing of the Merger Agreement inJuly 2022 ; •an increase of approximately$0.5 million in consumables due to the termination fee incurred related to a vendor contract; and •an increase of approximately$0.3 million in rent attributable to the impact of the restructuring initiative which resulted in a higher proportion of rent being allocated to general and administrative personnel. This increase was partially offset by an overall decrease in the rent costs due to a consolidation of our real estate footprint as we prepare to move into our new company headquarters, which is currently under development.
This was offset by:
•a$1.8 million decrease in labor costs attributable to the impact of the restructuring initiative and personnel attrition, which was partially offset by the impact of salary increases that went into effect in 2022 to reflect current market trends; and •a$0.3 million decrease in depreciation and software costs associated with a reduced spend on IT and computer related supplies.
We recorded a goodwill impairment charge of$40.6 million in the quarter endedJune 30, 2022 . We estimated the fair value of our reporting unit using a combination of income-based and market-based methods, including a discounted cash flow method, a market-based revenue multiple method and a probability-weighted scenario of a potential merger transaction based on the terms and information available as of the measurement date,June 30, 2022 . The result of the interim impairment test in the second quarter of 2022 indicated that the estimated fair value of the reporting unit was less than its carrying value.
We did not record any goodwill impairment charge in the corresponding prior year period.
Restructuring charges We recorded a benefit of$0.2 million in restructuring charges in the quarter endedJune 30, 2022 , and we did not record any restructuring charges in the corresponding prior year period. The benefit mainly resulted from the release of an accrual for a terminated contract manufacturing contract previously included in restructuring charges. Interest income (expense)
Interest income was flat in the quarter ended
Interest expense increased by$6.6 million , or 239%, in the quarter endedJune 30, 2022 compared to the same period of the prior year. This increase was primarily due to theOctober 2021 amendment of our term loan, which resulted in the accretion of an end-of-term payment, additional discount amortization and acceleration of debt discount amortization.
Gain (loss) on change in fair value of warrant liability
No change in fair value of warrant liability was recorded in the quarter endedJune 30, 2022 , as all warrants were exercised effective with our IPO inApril 2021 . The gain of$0.4 million in the same period of the prior year was a result of the warrants being remeasured to intrinsic value immediately prior to the IPO inApril 2021 . 31
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Results of Operations for the Six Months Ended
The following table sets forth our results of operations for the periods (in
thousands):
Six Months Ended
June 30, Change
2022 2021 $ %
Revenues from research and development service
agreements $ 4,412 $ 7,460 $ (3,048) (40.9) %
Collaboration and other revenue 2,079 2,129 (50) (2.3) %
Automation revenue 480 - 480 n.m.
Grant revenue 454 - 454 n.m.
Total revenues 7,425 9,589 (2,164) (22.6) %
Cost and operating expenses:
Cost of service revenue 21,550 42,959 (21,409) (49.8) %
Cost of automation revenue 637 - 637 n.m.
Research and development 59,925 89,963 (30,038) (33.4) %
Sales and marketing 6,796 14,776 (7,980) (54.0) %
General and administrative 47,999 42,992 5,007 11.6 %
Goodwill impairment charge 40,645 - 40,645 n.m.
Restructuring charges (315) - (315) n.m.
Total cost and operating expenses 177,237 190,690 (13,453) (7.1) %
Operating loss (169,812) (181,101) 11,289 (6.2) %
Other income (expense):
Interest income 53 55 (2) (3.6) %
Interest expense (17,423) (5,494) (11,929) 217.1 %
Gain (loss) on change in fair value of warrant
liabilities - 1,849 (1,849) (100.0) %
Other expense, net (1,417) (768) (649) 84.5 %
Total other expense (18,787) (4,358) (14,429) 331.1 %
Loss before income taxes (188,599) (185,459) (3,140) 1.7 %
(Provision for) benefit from income taxes 15 8 7 87.5 %
Net loss $ (188,584) $ (185,451) $ (3,133) 1.7 %
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n.m.: Not meaningful
Revenue
Revenue from research and development service agreements decreased by
•a
This was offset by:
•a$0.8 million increase in revenues due to the recognition of previously received consideration that was not yet recognized as revenue, as well as termination consideration upon the termination of a customer contract; •a$0.7 million increase from a contract acquired during the second quarter of 2021; •a$0.2 million increase due to the timing of deliverables under fixed fee contracts; and •a$0.1 million increase due to increased fixed fees for an extended legacy customer contract.
Collaboration and other revenue was flat for the six months ended
Automation revenue of
Grant revenue of
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Cost of Revenue
Cost of service revenue decreased by$21.4 million , or 50%, for the six months endedJune 30, 2022 compared to the same period of the prior year. This decrease was primarily due to: •a decrease of$11.8 million in labor cost associated with the impact of the restructuring initiative implemented in 2021 and a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products following the termination of certain customer contracts, net of the impact of salary increases that went into effect in 2022 to reflect current market trends; •decreases of approximately$3.6 million in consumables,$2.0 million in depreciation and$2.4 million in allocated rent, all due to a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products and cessation of certain customer agreements. The decrease in depreciation was offset by increased amortization from developed technology intangibles after the acquisition ofLodo Therapeutics in the second quarter of 2021. The decrease in allocated rent was partially offset by an increase in overall rent due to the expansion of our real estate footprint, including the addition of a new company headquarters, which is currently under development; •a decrease in the use of contract research resources of$1.0 million due mainly to the decreased external resource need for development work for an early stage customer that we pursued in 2021; and •a decrease in other expenses of$0.6 million due to a shift of allocated facilities and transportation costs due to a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products and cessation of certain customer agreements. Cost of Automation Revenue Cost of automation revenue was$0.6 million in the six months endedJune 30, 2022 , which was comprised of the cost of hardware delivered to and accepted by the customer and cost of services related to both installation and our subscription and support services. No cost of automation revenue was recognized in the same period of the prior year.
Operating Expenses
Research and development
Research and development expense decreased by$30.0 million , or 33%, in the six months endedJune 30, 2022 compared to the same period of the prior year. The overall decrease was primarily due to: •a$28.7 million decrease in manufacturing and lab consumables and subcontractors expenses, largely attributable to discontinued development of Hyaline and our insect repellent products during 2021. The decrease was partially offset by increased spend on other internally developed programs in our drug discovery pipeline as well as our water repellency programs and the application of our Z2 polymer for 3D printing; and •a decrease of approximately$8.7 million in labor costs associated with the impact of the restructuring initiative implemented in 2021 which was offset by an expansion of resources focused on research and development activities, and the impact of salary increases that went into effect in 2022 to reflect current market trends. This was offset by: •a$3.1 million increase in depreciation attributable to an increased amortization from developed technology intangibles after the acquisition ofLodo Therapeutics in the second quarter of 2021, as well as a higher allocation of depreciation and amortization costs as a result of the shift in focus of employees to the development of our own products following the termination of certain customer contracts; •an increase of approximately$2.3 million in stock-based compensation expense, partly due to the increase in resources allocated to our own product development from customer research and development activities, the impact of the issuance of options with market-based vesting conditions inApril 2021 and RSUs awarded in connection with a retention program in 2021 as well as RSUs issued as refresh or promotion grants during 2022; •a$1.7 million increase in allocated rent due to the expansion of our real estate footprint, including the addition of a new company headquarters, which is currently under development, and a higher allocation of rent costs as a result of a shift in focus of employees to research and development activities for our own products following the termination of some customer contracts; and •a$0.3 million increase in other expenses. 33
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Sales and marketing
Sales and marketing expense decreased by$8.0 million , or 54%, in the six months endedJune 30, 2022 compared to the same period of the prior year. This decrease was primarily due to: •a decrease of approximately$4.1 million in labor costs attributable to the impact of the restructuring initiative and personnel attrition, which was partially offset by the impact of salary increases that went into effect in 2022 to reflect current market trends; and •a$4.2 million decrease in expense related to subcontractors. This was largely due to reduced public relations and marketing spend compared to 2021 which was driven by high customer and brand marketing activities, including brand marketing activities leading up to our IPO inApril 2021 .
This was offset by:
•an increase of approximately$0.3 million in stock-based compensation expense, partly due to awards issued in relation to a retention program and options with service-based vesting conditions issued to executives hired in 2021.
General and administrative
General and administrative expense increased by$5.0 million , or 12%, in the six months endedJune 30, 2022 compared to the same period of the prior year. The increase in general and administrative expenses was primarily attributable to the following: •an increase of approximately$4.0 million in stock compensation expense due to RSUs granted in a retention program and options with service-based vesting and RSUs granted to executives hired in 2021, including awards granted to our Acting CEO as well as RSU awards granted as refresh, promotion and new hire grants in 2022, offset by a decrease in expense related to options with a market-based vesting condition due to the forfeiture of such options by our preceding CEO upon his termination inAugust 2021 ; •an increase of approximately$1.8 million in allocated rent due to an increase in our overall real estate cost mainly due to the addition of a new company headquarters, which is currently under development; •a$0.7 million increase in expense related to professional services fees. This was largely due to legal and consultancy spend during the due diligence process leading up to the signing of the Merger Agreement inJuly 2022 and legal costs related to the shareholder litigation matter described under Part II, Item 1 of this Quarterly Report on Form 10-Q, offset by a decrease in consultancy spend after our IPO inApril 2021 , decreased spend related to patent filings and a decrease in recruitment fees following the 2021 executive hires; •a$0.6 million increase in other expenses mainly related to an increase in insurance costs; and •an increase of approximately$0.5 million in consumables due to the termination fee incurred related to a vendor contract.
This was offset by:
•a$2.4 million decrease in labor costs attributable to the impact of the restructuring initiative and personnel attrition, which was partially offset by the impact of salary increases that went into effect in 2022 to reflect current market trends.Goodwill impairment charge We recorded a goodwill impairment charge of$40.6 million in the six months endedJune 30, 2022 . We estimated the fair value of our reporting unit using a combination of income-based and market-based methods, including a discounted cash flow method, a market-based revenue multiple method and a probability-weighted scenario of a potential merger transaction based on the terms and information available as of the measurement date,June 30, 2022 . The result of the interim impairment test in the second quarter of 2022 indicated that the estimated fair value of the reporting unit was less than its carrying value.
We did not record any goodwill impairment charge in the corresponding prior year period.
Restructuring charges We recorded a benefit of$0.3 million in restructuring charges in the six months endedJune 30, 2022 , and we did not record any restructuring charges in the corresponding prior year period. The benefit mainly resulted from the release of an accrual for a terminated contract manufacturing contract previously included in restructuring charges. Interest income (expense)
Interest income was flat in the six months ended
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Interest expense increased by$11.9 million , or 217%, in the six months endedJune 30, 2022 compared to the same period of the prior year. This increase was primarily due to theOctober 2021 amendment of our term loan, which resulted in the accretion of an end-of-term payment, additional discount amortization and acceleration of debt discount amortization.
Gain (loss) on change in fair value of warrant liability
No change in fair value of warrant liability was recorded in the six months endedJune 30, 2022 , as all warrants were exercised effective with our IPO inApril 2021 . The gain in the fair value of the warrant liability in the six months endedJune 30, 2021 was primarily due to the assumption used in the valuation of the warrants which as ofMarch 31, 2021 used a weighted average value derived from a Black-Scholes-Merton ("BSM") option model with a term consistent with the time to the expected IPO date as ofMarch 31, 2021 based on the expectation that the warrant would be exercised at the IPO (conditioned upon the consummation of a public offering of our common stock on or prior toJune 30, 2021 ) and the value derived from the option pricing model with a term consistent with the remaining term until a future liquidity event, other than the IPO scenario described above. This change in assumption led to a gain on change in fair value of warrant liability of$2.3 million in the quarter endedMarch 31, 2021 . In the subsequent quarter endingJune 30, 2021 , there was a partial reversal of the gain of$0.4 million when the warrants were exercised in connection with the IPO inApril 2021 and were at that time remeasured to their intrinsic value.
Liquidity, Capital Resources and Plan of Operations
From our inception through
We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples and automation hardware and related services) and expect product revenue to be immaterial in 2022. We have implemented measures to reduce our costs to extend our cash runway, including conducting two reductions in force that resulted in the elimination of approximately 220 positions during 2021 and restructuring some of our expenses. InJuly 2022 , we announced an additional reduction in force, the initial phase of the 2022 Restructuring. This resulted in the termination of approximately 80 employees, and we are planning additional actions to reduce operating cash burn. As a result of these activities we believe that we will have sufficient cash to continue to fund our operations to the middle of 2023. However, we expect we will need additional funds to meet operational needs and capital requirements for product development and commercialization, and our negative cash flows and current lack of financial resources raise substantial doubt as to our ability to continue as a going concern. See Note 1 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. To date, we have financed our operations primarily with proceeds from the sale of shares through our IPO, the sale of convertible preferred stock, proceeds from debt arrangements and revenue from R&D service and collaboration and other arrangements. We had unrestricted cash and cash equivalents as ofJune 30, 2022 of$213.6 million . Capital expenditures were$13.1 million in the six months endedJune 30, 2022 and were related primarily to the purchases of facilities improvements and laboratory equipment. We expect capital expenditures to increase on an absolute dollar basis in the short term as we continue to build out our new headquarters inEmeryville, CA. Our primary uses of capital are, and we expect will continue to be for the near future, personnel costs, product pipeline development and commercialization costs, platform development costs, laboratory and related supplies, legal, patent and other regulatory expenses and general overhead costs. We are also continuing to evaluate strategic alternatives for our advanced materials and drug discovery businesses, and may pursue joint ventures and other strategic transactions. 35
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If we are unable to complete our proposed Merger with Ginkgo on the timing we
anticipate or at all, we will need substantial additional funding to pursue our
growth strategy and support continuing operations. Until such time as we can
generate significant revenue from product sales or other customer or
collaboration arrangements to fund operations, we expect to require additional
capital to fund our operations, which may include capital from the issuance of
additional equity, debt financings or other capital-raising transactions. We may
be unable to increase our revenue, raise additional funds or enter into such
other agreements or arrangements when needed on favorable terms, or at all. Our
ability to obtain additional funding will depend on a variety of factors, many
of which are unpredictable and beyond our control, including general conditions
in the global economy and in the global financial markets, which have been and
may continue to be impacted by interruptions, delays and/or cost increases
resulting from the ongoing COVID-19 pandemic, political instability or
geopolitical tensions, such as the Ukraine War, economic weakness, inflationary
pressures, or other factors. If the equity and credit markets deteriorate
further, including as a result of economic weakness, a resurgence of COVID-19,
political unrest or war, including the Ukraine War, or any other reason, such
deterioration may make any necessary equity or debt financing more difficult to
obtain in a timely manner and on favorable terms, if at all, and, if obtained,
such financing may be more costly or more dilutive. If we are unable to raise
capital when needed, we will need to delay, reduce or terminate planned
activities to reduce costs. Doing so will likely harm our ability to execute our
business plans. In addition, pending the completion of our proposed Merger with
Ginkgo, the Merger Agreement contains covenants that restrict our ability to
incur indebtedness or engage in certain other capital-raising transactions
without the approval of Ginkgo, which may further limit our ability to raise
capital.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Six Months Ended
June 30,
2022 2021
Net cash used in operating activities $ (99,575) $ (167,104)
Net cash used in investing activities$ (12,859) $
(18,325)
Net cash (used in) provided by financing activities
The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of operating assets and liabilities, which are generally attributable to timing of payments, and the related effect on certain account balances, operational and strategic decisions and contracts to which we may be a party. Net cash used in operating activities for the six months endedJune 30, 2022 of$99.6 million primarily related to our net loss of$188.6 million , adjusted for non-cash charges of$88.5 million and net cash inflows of$0.5 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment, stock-based compensation, non-cash lease expense, non-cash interest expense related to the amortization of the debt discount and accretion of the end-of-term payment related to our credit and guaranty agreement, as amended and restated, withPerceptive Credit Holdings II, LP and PCOF EQ AIV II, LP (the "Perceptive Credit Agreement") and the impairment of our goodwill in the second quarter of 2022. The main drivers of the changes in operating assets and liabilities were a decrease in operating lease right-of-use assets of$2.7 million and a$3.9 million increase in accounts payable and accrued liabilities. These changes resulted in a cash inflow and were partially offset by an increase in prepaid expenses of$5.7 million and a$1.0 million increase in deferred revenue. Net cash used in operating activities for the six months endedJune 30, 2021 of$167.1 million primarily related to our net loss of$185.5 million , adjusted for non-cash charges of$17.8 million and net cash outflows of$0.5 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment, stock-based compensation, and gain on fair value change of warrant liability. The main drivers of the changes in operating assets and liabilities were an increase of$11.9 million in deferred rent, largely as a result of the straight-line impact of leases, particularly for the new company headquarters, along with tenant improvement allowances received in the period, an increase of$0.9 million in accounts payable, accrued expenses and other liabilities resulting primarily from an increase in vendor balances, and an increase of$0.1 million in deferred revenue. These changes resulted in a cash inflow and were partially offset by cash outflows resulting from an increase in prepaid expenses of$6.7 million , mainly due to insurance costs related to being a public company, an increase in accounts receivable (billed and unbilled) of$3.3 million and an increase in inventories of$1.0 million . 36
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Net cash used in investing activities was$12.9 million for the six months endedJune 30, 2022 and mainly related to the purchase of property and equipment, of which a substantial majority related to purchases of facilities improvements and laboratory equipment.
Net cash used in investing activities was
Net cash used in financing activities was$57.8 million for the six months endedJune 30, 2022 , which consisted primarily of the$58.5 million repayment of borrowings under the Perceptive Credit Agreement and related end-of-term payment, partially offset by proceeds from the exercise of common stock options and the purchases under our ESPP. Net cash provided by financing activities was$554.7 million for the six months endedJune 30, 2021 , which consisted primarily of a net$533.3 million of proceeds from the IPO,$15.0 million from the exercise of Series C warrants,$4.4 million from the exercise of common stock options and$1.9 million in proceeds from the repayment of non-recourse loans.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
We have prepared our financial statements in accordance with GAAP. Our
preparation of these financial statements requires us to make estimates,
assumptions, and judgments that affect the reported amounts of assets,
liabilities, expenses, and related disclosures at the date of the financial
statements, as well as revenue and expenses recorded during the reporting
periods. We evaluate our estimates and judgments on an ongoing basis. We base
our estimates on historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results could therefore
differ materially from these estimates under different assumptions or
conditions.
There have been no material changes to our critical accounting policies from
those described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in our Annual Report on Form 10-K for the
year ended December 31, 2021 , except as described below.
Goodwill is not amortized, but is evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We perform our annual goodwill impairment test in the fourth quarter. The inputs to our business are primarily comprised of a collection of accessible biomolecules, our software and data science technology, and our data driven microbe optimization processes which enable our platform to deliver products and services to our customers. Additionally, we manage our platform based on entity wide metrics and consolidated financial results. Therefore, we have determined that there is a single reporting unit for the purpose of conducting our goodwill impairment assessment. Factors we consider important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the use of the acquired assets or our overall business strategy, significant negative industry or macroeconomic trends, a significant decline in our stock price for a sustained period, or a significant reduction of our market capitalization relative to net book value. The economic and capital market volatility in 2022 and our business plan which required continued funding, resulted in the sustained decrease in our share price. As a result, we identified that a possible indicator of impairment was present as of the second quarter of 2022. 37
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To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value, not to exceed the recorded amount of goodwill. We estimated the fair value of the reporting unit using a combination of income-based and market-based, including a discounted cash flow method, a market-based revenue multiple method and a probability-weighted scenario of a potential merger transaction. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting unit beyond the cash flows from the discrete projection period. This approach incorporates significant estimates and assumptions related to the forecasted results including, but not limited to, estimates and assumptions regarding revenues, expenses, capital expenditures, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization, as well as certain other financial inputs from a selection of comparable publicly-traded companies with product offerings similar to those of the reporting unit. Under the market multiple approach, we estimate the fair value based on comparable companies' market multiples of revenues. Lastly, we incorporated the potential merger transaction under negotiation as of the end of the quarter based on status of negotiation and terms known as of the end of the second quarter of 2022. Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. We amortize acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. In addition to the acquired intangible assets, our long-lived assets (other than goodwill) relate to our major operations to design and develop microbes, molecules, and materials for diverse end markets which consist primarily of leasehold improvements and laboratory equipment as well as operating lease right-of-use assets. These assets are grouped for impairment testing in one or more asset groups which represent the lowest level of aggregation for which independent cash flows exist. The Company's platform provides the lowest level of identifiable independent cash flows. Therefore, for purposes of evaluating potential impairment of the Company's long-lived assets, a single entity-wide asset group exists. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, such impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Leases
We adopted FASB ASC 842 onJanuary 1, 2022 . We determine if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether we have the right to control the identified asset. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We have a variety of different types of operating leases, the specific terms and conditions of which vary from lease to lease. Certain operating lease agreements include terms such as: (i) renewal and early termination options; (ii) tenant improvement allowances; and (iii) rent escalation clauses. The lease agreements also include provisions for the maintenance of the leased asset and payment of lease related costs. We review the specific terms and conditions of each lease and, as appropriate, renewal or termination options reasonably certain to be exercised are included in the Company's lease terms.. Our leases do not contain any residual value guarantees. Our lease agreements include rental payments that may be adjusted in the future based on economic conditions and others include rental payments adjusted periodically for inflation. Variable lease expense is disclosed for the adjusted portion of such payments. Lease income, attributable to subleases, is recognized in Cost and operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss, as the sublease activity is outside our normal business operations.
Currently, our sole underlying asset class is real estate.
Lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the non-cancelable lease term. Right-of-use assets are recognized for the amount of the lease liability, adjusted for any lease payments made prior to or on lease commencement, lease incentives received and initial direct costs incurred, as applicable. As most of our operating leases do not provide an implicit rate, as such, we use an estimated incremental borrowing rate based on information available at the date of adoption and subsequent lease commencement dates in calculating the present value of its operating lease liabilities. The incremental borrowing rate is determined using the our synthetic credit rating, adjusted for a credit premium, historical recovery rates of secured debt, and the respective tenor's risk-free rates determined usingU.S. Treasury rates. 38
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