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, 2020 , included in our final Prospectus. 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. OverviewZymergen partners with Nature to design, develop and commercialize bio-based breakthrough products that can deliver value to customers in a broad range of industries. Our goal is to create new products with a proprietary platform that unlocks the design and manufacturing efficiency of the biological processes with technology's ability to rapidly iterate and control diverse functions. We call our process biofacturing and we expect it will create better products faster, cheaper and more sustainably than traditional chemistry by engineering microbes to make novel biomolecules that are the key ingredients in those products. Substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements aimed at developing, testing and validating our biofacturing platform by providing custom services for use only by the collaboration partner. Over the next few years, we seek to grow our product sales and commercialize our products and generate revenue from these products. Our long-term objective is to generate revenue from the sale of numerous breakthrough products across a variety of industries. Recent Developments Assessment of our Product Delivery Timeline and Revenue Projections We recently became aware of issues with our commercial product pipeline that impact our product delivery timeline and revenue projection for Hyaline and potentially other products in our pipeline. The commercial opportunity for Hyaline is smaller than we expected and the product qualification process for Hyaline is likely to take longer than we originally expected. We may experience similar delays for other product launches that also require a product qualification process. We no longer expect product revenue in 2021, and expect product revenue to be immaterial in 2022. During the quarter, several key target customers encountered technical issues in implementing Hyaline into their manufacturing processes typical of new product and process development learnings. We have made significant progress towards addressing these challenges and believe there are no intrinsic technical issues with Hyaline. However, our commercial ramp is delayed. We are also continuing to evaluate emerging data on the total addressable market for foldable display applications, which indicate a smaller near-term market opportunity that is growing less rapidly than anticipated, as well as its impact on our sales forecast. We are currently conducting a full assessment of our target markets and the fit of the products in our pipeline to those markets, including exploring adjacent opportunities that could potentially provide for new revenue sources, among other activities. We are also developing a plan to align our costs to our delayed revenue ramp, including potentially restructuring some of our expenses, including lease expenses. We expect that we will have to reduce our workforce in connection with these efforts. Following these activities, we will develop a new strategic plan with clear milestones and goals. Acquisition ofLodo Therapeutics Corporation OnMay 16, 2021 , the Company completed a nontaxable acquisition of 100% of the equity interests ofLodo Therapeutics Corporation ("Lodo"), a privately-held company which uses its proprietary bacterial metagenomics discovery platform to develop novel therapeutics from nature. The acquisition was accounted for as a business combination. The purchase price for the acquisition was$25.3 million , substantially all of which was non-cash consideration. The non-cash consideration consisted of 774,402 shares of the Company's common stock. For more information, refer to Note 3 in the "Notes to Condensed Consolidated Financial Statements" in Part I, Item 1, above. 23
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Components of Results of OperationsRevenue
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 biofacturing 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 Revenue. Our collaboration 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.
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.
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 are currently developing a plan to reduce our expenses to align with our
delayed revenue ramp, among other activities; however, we expect increased
non-recurring expenses in the near-term, which may include consultancy fees and
restructuring expenses, as we implement cost-saving measures.
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. We plan to invest in
sales and marketing initiatives to generate consumer awareness and sales of our
new product launches.
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.
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 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.
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Other income (expense), net
Other income (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 of the 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.
Results of Operations for the Three Months Ended June 30, 2021 and 2020
The following table set forth our results of operations for the periods (in
thousands):
Three Months Ended
June 30, Change
2021 2020 $ %
Revenues from research and development service
agreements $ 4,879 $ 771 $ 4,108 532.8 %
Collaboration revenue 1,008 445 563 126.5 %
Total revenues 5,887 1,216 4,671 384.1 %
Cost and operating expenses:
Cost of service revenue 21,829 18,098 3,731 20.6 %
Research and development 50,152 17,481 32,671 186.9 %
Sales and marketing 7,904 4,582 3,322 72.5 %
General and administrative 23,661 16,610 7,051 42.5 %
Total cost and operating expenses 103,546 56,771 46,775 82.4 %
Operating loss (97,659) (55,555) (42,104) 75.8 %
Other income (expense):
Interest income 12 42 (30) (71.4) %
Interest expense (2,767) (2,729) (38) 1.4 %
Gain (loss) on change in fair value of warrant
liabilities (430) (1,166) 736 (63.1) %
Other expense, net (5) (31) 26 (83.9) %
Total other expense (3,190) (3,884) 694 (17.9) %
Loss before income taxes (100,849) (59,439) (41,410) 69.7 %
(Provision for) benefit from income taxes 16 (1) 17 (1,700.0) %
Net loss $ (100,833) $ (59,440) $ (41,393) 69.6 %
Revenue
Revenue from research and development service agreements increased by $4.1
million , or 533%, for the quarter ended June 30, 2021 compared to the same
period of the prior year. This increase was primarily due to the following:
•a $3.0 million increase from new and acquired contracts, including $1.6 million
that was recognized at a point in time;
•a $1.3 million increase compared to the three months ending June 30, 2020 as a
result of temporary lab closures in 2020 due to the COVID-19 pandemic. The
appropriate functioning of our labs are essential to deliver the R&D services to
our customers; and
•a $0.3 million increase of additional revenue recognized at a point in time due
to contract milestones.
Off-set by:
•a $0.5 million decrease from contracts ending in 2020.
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Collaboration revenue increased by $0.6 million , or 127%, for the quarter ended
June 30, 2021 compared to the same period of the prior year. This increase was
due to the increased research activity under the partnership agreement with
Sumitomo Chemical.
Cost of Revenue
Cost of service revenue increased by $3.7 million , or 21%, for the quarter ended
June 30, 2021 compared to the same period of the prior year. This increase was
primarily due to:
•an increase of approximately $1.9 million in consumables, reflecting the lower
use of consumables when labs were closed in the period mid-March through
approximately June 1, 2020 , due to the COVID-19 pandemic;
•an increase in rent allocation of approximately $1.4 million due to an
expansion of our real estate costs, including the addition of a new company
headquarters, which is currently under development;
•an increase of approximately $0.8 million in other expenses of which $0.4
million is due to an increase in insurance expenses and the remainder is largely
due to the cost of returning to labs and office space following the close down
in 2020, due to the COVID-19 pandemic;
•an increase of approximately $0.6 million in stock compensation, partly due to
an increase in the fair value of the shares underlying options with
service-based vesting conditions, the vesting of awards under the ESPP adopted
in connection with the IPO and the impact of the issuance of options with
market-based vesting conditions; and
•an increase in the use of contract research resources of $0.5 million due
mainly to the engagement of contract research resources to accelerate a client
early stage development project.
This was offset by:
•a decrease of $1.5 million in labor cost associated with a shift of resources
from performing research and development activities for third parties to
performing research and development activities on our own products. This is net
of the impact of annual salary and bonus increases that went into effect on
January 1, 2021 to reflect current market trends.
Operating Expenses
Research and development
Research and development expense increased by $32.7 million , or 187%, in the
quarter ended June 30, 2021 compared to the same period of the prior year. The
overall increase is primarily due to:
•the increase in resources allocated to our own product development from
customer research and development activities, along with the further development
of Hyaline and other products in our product pipeline. Continuing from the first
quarter of 2021, the principal focus in the second quarter of 2021 was work on
Hyaline to progress toward full-scale production; and
•the increase reflects the expenses incurred post acquisition of Lodo
Therapeutics , of approximately $1.4 million primarily relating to personnel and
consumables.
This resulted in:
•a $15.0 million increase in manufacturing and lab consumables, largely
attributable to the development of Hyaline, ZYM0107 (optical film) and ZYM0101
(optical film) products;
•a $7.8 million increase in labor costs due to an expansion of resources focused
on R&D activities (including the Lodo personnel), and the impact of annual
salary and bonus increases that went into effect on January 1, 2021 to reflect
current market trends;
•further, there has been a $3.7 million increase in allocated rent due to an
expansion of our real estate costs, including the addition of a new company
headquarters, which is currently under development; and
•a $1.1 million increase in expense related to utilization of subcontractors in
developmental activities; and
In addition there was:
•an increase of approximately $2.1 million in stock compensation, partly due to
the increased resources, an increase in the fair value of the shares underlying
options with service-based vesting conditions, the vesting of awards under the
ESPP adopted in connection with the IPO, the impact of the issuance of options
with market-based vesting conditions, and the impact of the RSUs issued in
relation to the Lodo Therapeutics acquisition for post acquisition services;
•a $1.6 million increase in depreciation attributable to new equipment and
leasehold improvements entered into service throughout 2020 and 2021; and
•an increase of approximately $1.1 million in other expenses, of which
approximately $0.6 million is due to an increase in insurance expenses and the
remainder is largely due to the cost of returning to labs and office space
following the close down in 2020, due to the COVID-19 pandemic.
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Sales and marketing
Sales and marketing expense increased by $3.3 million , or 73%, in the quarter
ended June 30, 2021 compared to the same period of the prior year. This increase
was primarily due to:
•a $1.7 million increase in expense related to subcontractors. This was largely
due to an increase in customer and brand marketing activities;
•an increase of approximately $0.7 million in labor costs due to the expansion
of the sales and marketing resources, along with the impact of annual salary and
bonus increases that went into effect on January 1, 2021 to reflect current
market trends; and
•a $0.3 million increase in allocated rent.
General and administrative
General and administrative expense increased by $7.1 million or 42%, in the
quarter ended June 30, 2021 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 $2.7 million in stock compensation, partly due to
increased headcount, an increase in the fair value of the shares underlying
options with service-based vesting conditions, the impact of the issuance of
options with market-based vesting conditions and the vesting of awards under the
ESPP adopted in connection with the IPO;
•a $2.6 million increase in legal, strategy, investor relations and accounting
service fees, mainly associated with the IPO, offset by a reduction of
allocation of headcount to G&A as a result of the end of the COVID-19 lab
closures in 2020;
•a $1.6 million increase in rent and facilities costs. This was largely driven
by the increase in the property costs year on year, including the commencement
of the lease for our new headquarters in mid-February 2021 . This property is
under development and is expected to be available for occupancy in early 2022;
•a $0.6 million increase in labor costs, due to an expansion of resources to
meet the requirements of being a public company, and the impact of annual salary
and bonus increases that went into effect on January 1, 2021 to reflect current
market trends; and
•an increase of approximately $0.5 million in other expenses, of which
approximately $0.3 million is due to an increase in insurance expenses and the
remainder is largely due to the cost of returning to labs and office space
following the close down in 2020, due to the COVID-19 pandemic.
This was offset by:
•a decrease of approximately $0.7 million in depreciation and software costs and
a decrease of approximately $0.2 million in consumables.
Interest income (expense)
Interest income and interest expense was flat in the quarter ended June 30, 2021
compared to the same period of the prior year.
Gain (loss) on change in fair value of warrant liability
A loss on change in fair value of warrant liability of $0.4 million was recorded
in the quarter ended June 30, 2021 , compared to a loss of $1.2 million in the
same period of the prior year, a change in the fair value of warrant liability
of $0.8 million . The change in the fair value of the warrant liability is driven
by the difference in valuation methodologies between the two periods. The
warrants were exercised in connection with the IPO in April 2021 and were at
that time remeasured to their intrinsic value. Throughout 2020, the warrant
value was influenced by the change in the value of the underlying Series C
preferred stock which increased significantly during the second quarter of 2020
with the expectation of Series D fund-raising closing, and hence providing a
better runway for the Company to achieve its product goals.
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Results of Operations for the Six Months Ended June 30, 2021 and 2020
The following table set forth our results of operations for the periods (in
thousands):
Six Months Ended
June 30, Change
2021 2020 $ %
Revenues from research and development service
agreements $ 7,493 $ 2,675 $ 4,818 180.1 %
Collaboration revenue 2,129 1,495 634 42.4 %
Total revenues 9,622 4,170 5,452 130.7 %
Cost and operating expenses:
Cost of service revenue 42,959 42,674 285 0.7 %
Research and development 89,963 39,283 50,680 129.0 %
Sales and marketing 14,776 10,123 4,653 46.0 %
General and administrative 42,992 30,303 12,689 41.9 %
Total cost and operating expenses 190,690 122,383 68,307 55.8 %
Operating loss (181,068) (118,213) (62,855) 53.2 %
Other income (expense):
Interest income 55 419 (364) (86.9) %
Interest expense (5,494) (5,413) (81) 1.5 %
Gain (loss) on change in fair value of warrant
liabilities 1,849 (1,616) 3,465 (214.4) %
Other expense, net (768) (63) (705) 1,119.0 %
Total other expense (4,358) (6,673) 2,315 (34.7) %
Loss before income taxes (185,426) (124,886) (60,540) 48.5 %
(Provision for) benefit from income taxes 8 106 (98) (92.5) %
Net loss $ (185,418) $ (124,780) $ (60,638) 48.6 %
Revenue
Revenue from research and development service agreements increased by $4.8
million , or 180%, for the six months ended June 30, 2021 compared to the same
period of the prior year. This increase was primarily due to the following:
•a $3.8 million increase from new and acquired contracts, including $1.6 million
that was recognized at a point in time and an additional $0.6 million of which
was recognized at a point in time for work performed in fourth quarter of 2020
but recognized in first quarter of 2021, due to a delay in contract signing
until first quarter of 2021;
•a $1.5 million increase compared to the six months ended June 30, 2020 as a
result of temporary lab closures in 2020 due to the COVID-19 pandemic. The
appropriate functioning of our labs are essential to deliver the R&D services to
our customers; and
•a $0.6 million increase of additional revenue recognized at a point in time due
to contract milestones.
Off-set by:
•a $1.1 million decrease from contracts ending in 2020.
Collaboration revenue increased by $0.6 million , or 42%, for the six months
ended June 30, 2021 compared to the same period of the prior year. This increase
was due to the increased research activity under the partnership agreement with
Sumitomo Chemical.
Cost of Revenue
Cost of service revenue increased by $0.3 million , or 1%, in the six months
ended June 30, 2021 compared to the same period of the prior year. This was
primarily due to the following:
•an increase of approximately $1.6 million in rent allocation due to an
expansion of our real estate costs, including the addition of a new company
headquarters, which is currently under development;
•an increase of approximately $1.2 million in consumables, reflecting lower use
of consumables when the labs were closed in the period mid-March through
approximately June 1 2020, due to the COVID-19 pandemic;
•an increase in the use of contract research resources of $0.9 million due
mainly to the engagement of contract research resources to accelerate a client
early stage development work;
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•an increase of approximately $0.5 million in other expenses, of which $0.4
million is due to an increase in insurance expenses and the remainder is largely
due to the cost of returning to labs and office space following the close down
in 2020, due to the COVID-19 pandemic; and
•an increase of approximately $0.5 million in stock compensation, partly due to
increased headcount, an increase in the fair value of the shares underlying
options with service-based vesting conditions, the impact of the issuance of
options with market-based vesting conditions and the vesting of awards under the
ESPP adopted in connection with the IPO.
This was offset by:
•a $4.4 million decrease in labor cost associated with a shift of resources from
performing research and development activities for third parties to performing
research and development activities on our own products. This is net of the
impact of annual salary and bonus increases that went into effect on January 1,
2021 to reflect current market trends.
Operating Expenses
Research and development
Research and development expense increased by $50.7 million , or 129%, in the six
months ended June 30, 2021 compared to the same period of the prior year. The
overall increase is primarily due to:
•the increase in resources allocated to our own product development from
customer research and development activities, along with the further development
of Hyaline and other products in our product pipeline; and
•the increase reflects the expenses incurred post acquisition of Lodo
Therapeutics , of approximately $1.4 million primarily relating to personnel and
consumables.
This resulted in:
•a $22.5 million increase in manufacturing and lab consumables, largely
attributable to the development of Hyaline, ZYM0107 (optical film) and ZYM0101
(optical film) products;
•a $12.1 million increase in labor costs due to an expansion of resources
focused on R&D activities (including the Lodo personnel), and the impact of
annual salary and bonus increases that went into effect on January 1, 2021 to
reflect current market trends;
•a $5.1 million increase in allocated rent due to an expansion of our real
estate costs, including the addition of a new company headquarters, which is
currently under development; and
•a $4.5 million increase in expense related to utilization of subcontractors in
developmental activities.
In addition, there was:
•an increase of approximately $2.6 million in stock compensation, partly due to
increased headcount, an increase in the fair value of the shares underlying
options with service-based vesting conditions, the impact of the issuance of
options with market-based vesting conditions, the vesting of awards under the
ESPP adopted in connection with the IPO and the impact of the RSUs issued in
relation to the Lodo Therapeutics acquisition for post acquisition services;
•a $2.2 million increase in depreciation attributable to new equipment and
leasehold improvements entered into service throughout 2020 and 2021; and
•an increase of approximately $1.4 million in other expenses, of which
approximately $0.7 million is due to an increase in insurance expenses and the
remainder is largely due to the cost of returning to labs and office space
following the close down in 2020, due to the COVID-19 pandemic.
Sales and marketing
Sales and marketing expense increased by $4.7 million , or 46%, in the six months
ended June 30, 2021 compared to the same period of the prior year. This increase
was primarily due to:
•a $2.7 million increase in expense related to subcontractors. This was largely
due to an increase in customer and brand marketing activities;
•an increase of approximately $1.1 million in labor costs due to the expansion
of sales and marketing resources, along with the impact of annual salary and
bonus increases that went into effect on January 1, 2021 to reflect current
market trends;
•a $0.5 million increase in allocated rent; and
•an increase of approximately $0.3 million in stock compensation, partly due to
increased headcount, an increase in the fair value of the shares underlying
options with service-based vesting conditions and the vesting of awards under
the ESPP adopted in connection with the IPO.
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General and administrative
General and administrative expense increased by $12.7 million or 42%, in the six
months ended June 30, 2021 compared to the same period of the prior year. The
increase in general and administrative expenses was primarily attributable to
the following:
•a $5.2 million increase in legal, strategy, investor relations and accounting
service fees, mainly associated with becoming a public company;
•an increase of approximately $3.3 million in stock compensation, partly due to
increased headcount, an increase in the fair value of the shares underlying
options with service-based vesting conditions, the impact of the issuance of
options with market-based vesting conditions and the vesting of awards under the
ESPP adopted in connection with the IPO;
•a $2.4 million increase in labor costs due to an expansion of resources to meet
the requirements of being a public company and the impact of annual salary and
bonus increases that went into effect on January 1, 2021 to reflect current
market trends, offset by a reduction of allocation of headcount to G&A as a
result of the end of the COVID-19 lab closures in 2020;
•a $2.4 million increase in rent and facilities costs. This was largely driven
by the increase in the property costs year on year, including the commencement
of the lease for our new headquarters in mid-February 2021 . This property is
under development and is expected to be available for occupancy in early 2022;
and
•an increase of approximately $0.4 million in other expenses, of which
approximately $0.3 million is due to an increase in insurance expenses and the
remainder is largely due to the cost of returning to labs and office space
following the close down in 2020, due to the COVID-19 pandemic.
This was offset by:
•a decrease of approximately $0.7 million in depreciation and software costs and
a decrease of approximately $0.3 million in consumables.
Interest income (expense)
Interest income decreased by $0.4 million , or 87%, in the six months ended
June 30, 2021 compared to the same period of the prior year. This decrease was
primarily due to a reduction in the principal balance held in certain money
market funds combined with a decrease in overall market interest rates.
Interest expense was flat in the six months ended June 30, 2021 compared to the
same period of the prior year.
Gain (loss) on change in fair value of warrant liability
A gain on change in fair value of warrant liability of $1.8 million was recorded
in the six months ended June 30, 2021 , compared to a loss of $1.6 million in the
same period of the prior year, a change in the fair value of warrant liability
of $3.4 million .
The gain in the fair value of the warrant liability in the six months ended
June 30, 2021 , was primarily due to the assumption used in the valuation of the
warrants which as of March 31, 2021 used a weighted average derived from a
Black-Scholes (BSM) option model with a term consistent with the time to the
expected IPO date as of March 31, 2021 based on the expectation that the warrant
would be exercised at the IPO (conditioned upon the consummation of a public
offering of the Company's common stock on or prior to June 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 ended March 31, 2021 . In the
subsequent quarter ending June 30, 2021 , there was a partial reversal of the
gain of $0.4 million when the warrants were exercised in connection with the IPO
in April 2021 and were at that time remeasured to their intrinsic value.
Throughout 2020, the warrant value was influenced by the change in the value of
the underlying shares of Series C preferred stock which increased significantly
during the six months ending June 30, 2020 , with the expectation of Series D
closing and hence providing a better runway for the Company to achieve its
product goals. The increase in fair value of the warrant liability resulted in a
loss of $1.6 million in that period.
Other expense
Other expense increased by $0.7 million in the six months ended June 30, 2021
compared to the same period of the prior year. This increase was primarily due
to an unrealized loss on a currency balance following a strengthening of the US
dollar primarily against the Japanese Yen.
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Income Taxes
Income taxes increased by $0.1 million in the six months ended June 30, 2021
compared to the same period of the prior year, this was due to the impact of the
tax credit arising from the enEvolv acquisition in the first quarter of 2020.
Liquidity, Capital Resources and Plan of Operations
From our inception through June 30, 2021 we have incurred significant operating
losses and negative cash flows from our operations as we developed our
biofacturing platform.
We have not yet generated revenue from product sales (except for nominal revenue
related to the sale of samples of Hyaline), do not expect to generate revenue
from product sales in 2021 and expect product revenue to be immaterial in 2022.
Our first product, Hyaline, is still in the qualification process with
customers. We recently became aware of issues with our commercial product
pipeline that impact our product delivery timeline and revenue projection for
Hyaline and potentially other products in our pipeline. We are developing a plan
to align our costs to our delayed revenue ramp, including potentially
restructuring some of our expenses, including lease expenses. We expect that we
will have to reduce our workforce in connection with these efforts. If we are
unable to reduce our costs to align with our delayed revenue ramp, we may need
additional funds to meet operational needs and capital requirements for product
development and commercialization.
To date, we have financed our operations primarily with proceeds from the sale
of shares through our initial public offering, the sale of convertible preferred
shares, proceeds from debt arrangements and revenue from R&D service and
collaboration arrangements. We had unrestricted cash and cash equivalents as of
June 30, 2021 of $577.7 million .
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 may also
pursue acquisitions, investments, joint ventures and other strategic
transactions.
We may 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 arrangements to fund operations, we
expect to use proceeds from the issuance of additional equity, debt financings
or other capital 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. 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.
Our Perceptive Credit Agreement provides that a material adverse change
constitutes an event of default. The lender has not invoked the material adverse
change clause to date. The occurrence of any default will cause the interest
rate to increase during the period of such default, could permit acceleration of
such indebtedness with a prepayment premium and could result in a material
adverse effect on us. Any required repayment of our indebtedness as a result of
acceleration or otherwise would lower our current cash on hand such that we
would not have those funds available for use in our business or for payment of
other outstanding indebtedness.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Six Months Ended
June 30,
2021 2020
Net cash used in operating activities
Net Cash Used in Operating 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. Cash used in operating activities for the six months endedJune 30, 2021 of$167.1 million primarily related to our net loss of$185.4 million , adjusted for non-cash charges of$17.8 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, 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 31 -------------------------------------------------------------------------------- TABLE OF CONTENTS leases, particularly for the new company headquarters, along with tenant improvement allowances received in the period, a$0.9 million increase in accounts payable, accrued expenses and other liabilities resulting primarily from an increase in vendor balances, and an increase in deferred revenue of$0.1 million . 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 . Cash used in operating activities for the six months endedJune 30, 2020 of$117.8 million primarily related to our net loss of$124.8 million , adjusted for non-cash charges of$13.8 million and net cash outflows of$6.7 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment and stock-based compensation. The main drivers of the changes in operating assets and liabilities were a$8.5 million decrease in accounts payable, accrued expenses and other liabilities resulting primarily from a pay down of vendor balances; an increase of$0.5 million in accounts receivable (billed and unbilled) resulting primarily from timing differences in customer billings and cash receipts, and an increase in inventories of$0.5 million . In addition there was a$1.0 million inflow resulting from an increase in the deferred rent balance resulting from the straight-line impact of leases, a$1.0 million decrease in deferred revenue and a$0.7 million decrease in prepaid expenses.Net Cash Used in Investing Activities Cash used in investing activities was$18.3 million for the six months endedJune 30, 2021 related to the purchase of property and equipment, of which a substantial majority related to purchases of laboratory equipment and facilities improvements, and the acquisition ofLodo Therapeutics . Net cash used in investing activities was$13.1 million for six months endedJune 30, 2020 related to the purchase of property and equipment, of which a substantial majority related to purchases of laboratory equipment and facilities improvements. Net Cash Provided by Financing Activities Net cash provided by financing activities was$554.7 million for six months endedJune 30, 2021 , which consisted primarily of a net$533.3 million of proceeds from the initial public offering,$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. Net cash provided by financing activities was$1.8 million for the six months endedJune 30, 2020 , which consists primarily of proceeds from the exercise of common stock options. Off Balance Sheet Arrangements As ofJune 30, 2021 and 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off balance sheet arrangements or other purposes. Critical Accounting Policies 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 Prospectus, except as described below. Stock-Based Compensation Our stock-based compensation is accounted for in accordance with the provisions issued by the Accounting Standard Codification principles for stock compensation and share-based arrangements. Under the fair value recognition provisions of this statement, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award, taking into consideration actual forfeitures. 32 -------------------------------------------------------------------------------- TABLE OF CONTENTS Determining the appropriate fair value and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, risk free interest rates, expected dividends and expected life. We estimate the fair value of stock options with service-based vesting conditions and employee stock purchase plan purchases on the date of grant using the Black-Scholes-Merton option-valuation model. The grant-date fair value of option awards is based upon the fair value of our common stock as of the date of grant, as well as estimates of the expected term of the awards, expected common stock price volatility over the expected term of the option awards, risk-free interest rates and expected dividend yield. RSUs granted are valued at the market price of our common stock on the date of grant. Options with Market-based Vesting Conditions We estimate the fair value of stock options with a market-based vesting condition on the date of grant using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. The assumptions for stock price volatility, contractual term, dividend yield, and stock price used in theMonte Carlo simulations are determined using the same methodology as described above. The exception is that with respect to the stock price volatility used for theMonte Carlo simulations, we took into consideration the capital structure of each comparable company comprising the benchmark to isolate each comparable company's equity volatility without the effect of leverage and then re-levered using our capital structure. Additionally, we utilized an assumption for cost of capital in the Monte Carlo simulation that relied on market data due to the lack of our own publicly traded stock price history. The Monte Carlo simulation also calculates a derived service period for each of the vesting tranches, which is the measure of the expected time to achieve the market conditions. We recognize the cost of these options by accounting for each tranche as a discrete award and recognizing the cost over the requisite service period with respect to each award using the accelerated attribution method, regardless of whether the market conditions are achieved. We determine the requisite service period by comparing the derived service period to achieve the market-based condition and the implicit service-based condition, if any, using the longer of the two service periods as the requisite service period. Determination of the fair value of common stock on grant dates The estimated fair values of the shares of our common stock underlying options granted prior to the date of our IPO were determined by members of our board of directors as of the grant date, with input from management, considering our most recently available independent third-party valuation of our common stock and our directors' 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 the IPO, the fair market value of our common stock is determined based on the quoted market price of our common stock. Prior to the IPO 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 R&D 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 relevant industry sectors, as well as recently completed mergers and acquisitions of peer companies; •any external market conditions affecting relevant industry sectors; •the likelihood of achieving a liquidity event, 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 comparable companies. In valuing our common stock, the fair value of our business was determined using various valuation methods, including combinations of income approach (discounted cash flow method) and market approach (public company market multiple method) with input from management. We also used the option pricing model to backsolve the value of the security from our 33 -------------------------------------------------------------------------------- TABLE OF CONTENTS most recent round of financing, which implies a total equity value as well as a per share common stock value, when applicable for the valuation date. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenues and costs. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple was determined, which was applied to our operating results to estimate the enterprise value of our company. Once the enterprise value was determined under the market approach, we used the option pricing model to allocate that value among the various classes of securities to arrive at the fair value of the common stock. In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties and whether the transactions involved investors with access to our financial information. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level ofU.S. interest rates, particularly because our cash equivalents are primarily invested in short-termU.S. Treasury obligations, and our term loan bears interest at a variable rate. Our term loan bears a variable interest rate which is the sum of 9.25% plus the greater of the one-month LIBOR and 2.25%. Accordingly, increases in LIBOR could increase our interest payments under the term loan. An increase of 100 basis points in the interest rate of the term loan would not have a material impact on our financial position or results of operations. Foreign Currency Risk We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors. Our operations may be subject to fluctuations in foreign currency exchange rates in the future. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic and current reports that we file with theSEC is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 34 -------------------------------------------------------------------------------- TABLE OF CONTENTS Limitations on Effectiveness of Controls and Procedures In designing and evaluating the controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 35
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