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As filed with the Securities and Exchange Commission on March 26, 2021.
Registration No. 333-254612
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Zymergen Inc.
(Exact name of registrant as specified in its charter)
Delaware
8731
46-2942439
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
5980 Horton Street, Suite 105
Emeryville CA 94608
(415) 801-8073
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Josh Hoffman
Chief Executive Officer
5980 Horton Street, Suite 105
Emeryville, CA 94608
(415) 801-8073
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
Sarah K. Solum
Pamela L. Marcogliese
Freshfields Bruckhaus Deringer US LLP
2710 Sand Hill Road
Menlo Park, CA 94025
(650) 618-9250
Mina Kim
Zymergen Inc.
5980 Horton Street, Suite 105
Emeryville, CA 94608
(415) 801-8073
Rezwan D. Pavri
Andrew T. Hill
Andrew S. Gillman
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐ .
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated March 26, 2021
PROSPECTUS
     Shares

Common Stock
This is Zymergen Inc.’s initial public offering. We are offering     shares of our common stock to be sold in this offering.
We expect the public offering price to be between $    and $    per share of common stock. Prior to this offering, there has been no public market for our common stock. We will apply to list our common stock on the Nasdaq Global Select Market under the symbol “ZY.”
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”
 
Per Share
Total
Initial public offering price
     
     
Underwriting discounts and commissions(1)
 
 
Proceeds to Zymergen Inc., before expenses
 
 
(1)
See the section titled “Underwriting” for a description of the compensation payable to the underwriters.
The underwriters may also exercise an option to purchase up to an additional     shares of common stock from us, at the public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 19 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares of common stock will be ready for delivery on or about     , 2021.
J.P. Morgan
Goldman Sachs & Co. LLC
 
 
 
 
BofA Securities
Cowen
UBS Investment Bank
Lazard
The date of this prospectus is      , 2021.


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Page
Through and including     , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
We are responsible for the information contained in this prospectus. We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf. We and the underwriters take no responsibility for any other information that others may provide you. We are offering to sell and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and future growth prospects may have changed since that date.
For investors outside of the United States: We and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of common stock and the distribution of this prospectus outside of the United States. See “Underwriting.”
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PROSPECTUS SUMMARY
This summary highlights selected information discussed in this prospectus. The summary is not complete and does not contain all of the information you should consider before investing in our common stock. Therefore, you should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes included elsewhere in this prospectus, before making a decision to purchase shares of our common stock. Some of the statements in this summary constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
In this prospectus, unless we indicate otherwise or the context requires, “Zymergen Inc.,” “Zymergen,” “the Company,” “our company,” “the registrant,” “we,” “our,” “ours” and “us” refer to Zymergen Inc. and its consolidated subsidiaries.
Overview
We partner with Nature to design, develop, and commercialize bio-based breakthrough products that deliver extraordinary value to customers in a broad range of industries. Our first innovations include films designed for electronics companies to use in new categories of smart devices, including rollable tablets and naturally derived UV protection. Our goal is to create new products with a proprietary platform that unlocks the design and manufacturing efficiency of 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. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver, which would allow us to address a wide array of commercial applications. Based on our experience and expectations with our first four products which are electronic films and insect repellent products, and subject to any regulatory requirements, which could lead to longer timelines and increased cost, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. We founded Zymergen in the belief that biofacturing will lead to better products with better economics and a better world.
The demand for innovative materials has never been greater.
Human civilization is material. The materials in the things we use, the clothes we wear, the rooms where we live, the vehicles that take us from place to place, as well as the inputs that grow the food we eat, are the products of a half dozen chemical building blocks invented over the last several decades, mostly derived from cracking hydrocarbons.
We believe the chemicals and materials companies that make these materials have struggled to innovate because they employ a limited molecular palette and have substantial capital expenditures. In addition, they are among the planet’s worst industrial polluters. Recently, synthetic biology companies suggested a better alternative, where microorganisms are coaxed to produce chemicals, but most synthetic biology companies have struggled to manufacture novel molecules at industrial scales. Yet while the traditional chemical industry is stagnant and synthetic biology companies have disappointed, the demand for materials that solve important problems and are environmentally sustainable has never been greater.
Biofacturing creates better products faster, cheaper and more sustainably.
Biofacturing is the design, development and commercialization of bio-based breakthrough products, economically, at industrial scale, where microorganisms create the biomolecules that are the key ingredients in those products. A traditional chemical factory’s tons of steel and concrete are functionally replaced by a tiny, flexible, easily reproduced, but incredibly valuable engineered cell. Our goal is to make our biomolecules by fermentation, where all biofacturing reactions occur inside the engineered cell in standard fermentation vats, rather than the expensive, purpose-built chemical plants used in synthetic chemistry. However, in some cases, so that we may achieve commercial launch faster, we may initially launch products using molecules that are first produced with non-fermentation based methods, which is a strategy we refer to as “Launch Acceleration.” Additionally, since cells naturally make tens of thousands of different molecules, their genetic pathways can be reprogrammed to carry out any number of biofacturing reactions, and they can produce a vast array of biomolecules with unique properties that petrochemicals do not possess. Our pioneering biofacturing process is designed to flexibly and cost effectively create products with unique characteristics that possess the diversity and power of Nature's own inventions, such as adhesives stronger than leading products on the market, or an optical film as clear and thin as a dragonfly’s wing.
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Our product development journey starts with our business development personnel working with a customer to define a set of properties for a material that our customer would find highly valuable. We then design and develop engineered microbes that manufacture the novel biomolecule that will be the key ingredient in a breakthrough product. Next, we leverage Contract Manufacturing Organizations (“CMOs”) to manufacture the product for us. Finally, once we have launched our product, we use our own sales force and marketing capabilities to contract with customers and sell our products to them. For instance, through our global direct sales force and a team of application sales engineers, we launched our first product Hyaline in December 2020 to customers in the electronics industry, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product.
Our biofacturing platform discovers biomolecules and engineers microbes that can produce those biomolecules at an industrial scale.
Our biofacturing platform, a unique end-to-end fusion of biology, chemistry and technology, is built on a stack that integrates techniques in molecular biology, chemistry, materials science, lab automation systems, software applications, unique databases and machine learning algorithms. Our biofacturing platform is designed to:
1.
Identify and create novel biomolecules that are the basis of new materials with engineered characteristics that possess improved performance compared to existing products;
2.
Insert genes into a host microbe that produces the desired biomolecules; and
3.
Develop and scale up a production process, including optimizing the microbe to produce biomolecules economically at scale, while retaining product functionality via time-and-cost efficient optimization, leading to commercialization at attractive margins.
Our biofacturing platform is designed to deliver breakthrough products with unique performance that traditional chemistry cannot. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver, which would allow us to address a wide array of commercial applications. Based on our experience and expectations with our first four products which are electronic films and insect repellent products, and subject to any regulatory requirements, which could lead to longer timelines and increased cost, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. We estimate that the first step can be accomplished in roughly one-two years and at a typical cost of approximately $5 million, the second step in roughly one year and at a typical cost of approximately $5 million and the third step in roughly three years and at a typical cost of approximately $40 million. Our biofacturing platform is flexible, allowing for each step to be completed in parallel or independently. The platform is designed to accelerate launch of our products, satisfying customer needs more rapidly and increasing the returns of our pipeline investments. Further, our machine learning workflows improve over time as each round of product design and genome optimization generates more proprietary data, further enhancing our algorithms and deepening our proprietary data moat. As we continue to gather more data and experience with working through regulatory approvals and introducing new products into the market, we hope to launch products even faster and cheaper. These economics in turn allow us to target a large volume of product launches.
By contrast, traditional chemicals and materials companies have struggled to create novel materials that satisfy end-market demand. Many of the materials we use today were invented decades ago—cellophane was invented in the 1920s, nylon in the 1930s, Teflon in the 1960s, Kevlar in the 1970s. DuPont spent over 10 years and around $500 million (on a non-inflation-adjusted basis) (according to Delaware Online) in the late 1960s and early 1970s developing Kevlar. Although we do not have current plans to commercialize products that compete with Kevlar (Aramid), we believe the example of Kevlar provides a useful point of comparison for the typical time and cost expended by incumbent chemicals and materials companies to develop and commercialize novel polymer materials. While Kevlar was commercialized in the 1970s, this can be considered a relatively recent example of a novel polymer because, according to IHS Markit Report on Specialty Chemicals Update Program, only six major polymers have been commercially launched since about 1980. In addition to Kevlar being a novel polymer, we also chose Kevlar specifically because (a) it has application across multiple verticals like our optical films and (b) it is well documented.
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Additional information on commercialization time and cost of other products reinforces that Kevlar is representative of the fact that it has typically taken incumbents more than 10 years and hundreds of millions of dollars to develop and commercialize a novel polymer material. For example, Kolon took from 2006 to 2016 to develop colorless polyimides. Sirrus took from 2009 to 2020 to commercialize methylene malonate. The National Research Council concluded that “[t]he process of developing and commercializing materials is a lengthy one, often requiring 10 years or even longer.”
Information on the cost to commercialize novel materials is typically not publicized directly but information is available on polymer manufacturing capacity in general. This is necessarily an underestimate as it excludes the cost of direct R&D or scale-up costs. These sources corroborate that commercial-scale plants cost hundreds of millions to billions of dollars to construct. For example, in 2010, GE Plastics (now SABIC), completed the construction of a PEI resin plant in Spain for EUR300 million. DuPont recently announced an expansion of capacity for its polyimide film franchise of $220 million to meet growing global demand. In 2018 Covestro announced an investment of $1.7 billion into a methylene diphenyl diisocyanate production capacity.
We have one product in the market and others in development.
We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. Hyaline is the first in a franchise of optical films, designed for electronics companies to use for display touch sensors in personal devices and other applications. Hyaline will allow our customers to make robust foldable touchscreens and high density flexible printed circuits. Hyaline uses a biomolecule that was identified through our biofacturing platform. In order to accelerate product launch and meet customer demand, we launched Hyaline with a non-fermentation produced biomolecule sourced from a third party. We are in the process of converting to a fermentation-produced molecule for Hyaline by using a microbe that has a demonstrated ability to produce the molecule through fermentation. We are currently developing commercial scale processes so we can produce the molecule through fermentation at sufficient volumes and costs to support commercial manufacturing. We expect this process to be complete in 2022.
We have 10 other products in development, consisting of three in electronics, four with consumer care applications and three in agriculture. ZYM0107, which we plan to launch in 2022, is the next product in our films franchise and is a high-performance optical film like Hyaline. ZYM0101, planned for launch in 2023, is a breakthrough film for flexible electronics, which is designed to be used to build foldable and rollable phones and personal devices, as insulation for antennas to deliver 5G data speeds and as a coating for transparent monitors. Our consumer products include ZYM0201, a naturally derived non-DEET insect repellent, and we plan on partnering to create a microbial alternative to synthetic nitrogen fertilizer. We expect our biofacturing platform to be an engine of innovation and revenue generation, as we seek to develop new products in the same or adjacent sectors. We are also pursuing new markets for future growth.
Our materials are more environmentally friendly than those made with petrochemicals.
A new biological century, where life sciences will have the impact that synthetic chemistry had during the industrial age and digital technologies have had in the last half of the 20th century, demands a new way of manufacturing that is environmentally sustainable. Using new tools and building blocks derived from Nature, we believe we can manufacture high-performance materials more cleanly and with less waste. Our vision is that biofacturing can allow us to make products that won’t clog our waterways or pollute our oceans. Biofacturing can potentially even help clean up existing pollution, like turning plastic waste into high value products or capturing atmospheric carbon. Consumers, regulators and customers are all demanding solutions to these problems. We believe that partnering with Nature to make biomolecules is the inevitable future and will also create a better world.
Our Revenue Model
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, as we seek to grow our product sales and
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commercialize additional products, we expect revenue from R&D and collaboration arrangements to represent a smaller component of our total revenue. However, in the near term, we expect to continue generating revenue from R&D service agreements and collaborations and may in fact pursue additional arrangements with new or existing partners as we seek to enter new industry verticals.
Our biofacturing platform enables three major capabilities that we describe in detail in “Business—Our Platform.” These capabilities are: Design Product, Create Microbe, Scale Production. As part of our overall strategy of getting products to market as quickly as possible, each step may be completed in parallel or independently. We may also in-license technologies for use in product development and launch and we may launch with non-fermentation based products by using our Launch Acceleration strategy described below. This is the basis of our R&D service contracts and collaboration agreements where we typically engage with partners to offer one of these three major capabilities as a stand-alone service. For example, our partnership with a multinational food processing company that focused on the improvement of a commercial production microbe used in the processing of an animal feed component was focused exclusively on offering the “Scale Production” capability. Our contract with the Defense Advanced Research Project Agency (“DARPA”) leveraged our “Create Microbe” capability across a broad range of target biomolecules and an earlier deployment of our “Design Product” capability. Other R&D partnerships are similar.
Our long-term objective is to generate revenue from the sale of numerous breakthrough products across a variety of industries. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver, which would allow us to address a wide array of commercial applications. Using our biofacturing platform, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. We estimate that the first step of our process described in detail in “Business—Our Platform” can be accomplished in roughly one-two years and at a typical cost of approximately $5 million, the second step in roughly one year and at a typical cost of approximately $5 million and the third step in roughly three years and at a typical cost of approximately $40 million. Our biofacturing platform is flexible, allowing for each step to be completed in parallel or independently. Once we have launched a product, we begin a product qualification process with customers which typically lasts 6-18 months, or longer, depending on the customer and end device requirements. We only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product, which is typically done on a purchase order basis rather than a long-term contractual commitment. Although there is variability in timelines and costs for launching a product between individual products, our estimated costs and timelines for launch are based on our experience to date with Hyaline and our expectations for each stage of the development process with three of our other early products, which are electronic films and insect repellent products. In addition, our costs and timelines expectations may be greater where regulatory requirements lead to longer timelines, which could apply to certain of our products, including, for example, our agriculture products.
Launching fermentation-produced products or products with fermentation-produced components or ingredients is a key element of our strategy for lowering manufacturing costs and launching products desirable to our customers more quickly. In some cases, we may initially launch products using molecules we have identified during the design phase but which are first produced with non-fermentation based methods. We refer to this strategy as Launch Acceleration and expect to achieve commercial launch 12-24 months faster where this is possible. Launch Acceleration typically results in a higher cost of production than can be achieved with fermentation-based production. We temporarily absorb this cost as it is outweighed by the benefit of faster product launch. Our strategy is to use Launch Acceleration only where we believe we will be able to replace these non-fermentation produced biomolecules or components with fermentation-produced versions in 12-24 months. We have used Launch Acceleration successfully on our first product, Hyaline, which we have launched with a non-fermentation produced biomolecule sourced from a third party and are executing on a process to convert to a fermentation-produced molecule, which we expect to occur in 2022. In the context of our first three strategic verticals, we expect to use Launch Acceleration frequently for our electronics pipeline but rarely in consumer care or agriculture. As we expand into additional verticals, we will evaluate the benefits of Launch Acceleration on a case by case basis.
Following the launch of Hyaline, our global direct sales force and a team of application sales engineers are now working with customers on the sale qualification process in which customers are able to validate the product and qualify it as a standard component in their final electronic devices. During this time, we are providing customers with samples of our products to be tested for use in their own products so they can determine whether to purchase our product. Based on our experience to date since the launch of Hyaline in December 2020, we expect the sale
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qualification process of our products (including Hyaline) to last 6-18 months, or longer, depending on the customer and end device requirements. We only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product, which is typically done on a purchase order basis rather than a long-term contractual commitment. In the case of Hyaline, we expect to begin generating revenue in the second half of 2021, which will be prior to the time we expect to convert the non-fermentation produced biomolecule to the fermentation-produced molecule, which we expect to occur in 2022. We do not expect our estimated revenue from Hyaline to be meaningfully impacted by the conversion to the fermentation-produced molecule. We expect other electronics products, including ZYM0101, which we expect to launch in 2023, to follow a similar 6-18 month qualification process following which we expect to generate revenue. For many of our consumer care and agriculture products, including ZYM0201 which we expect to launch in 2023, a product qualification process will not be similarly necessary because we intend to launch and sell those products directly to the end-user and expect to generate revenue upon launch. For our other products in development for which we do not currently have an anticipated launch date, we cannot predict when we expect to begin generating revenue from such products.
As we ramp the sale of new products, we expect to initially experience negative product gross margins. Material manufacturing process changes, including using our Launch Acceleration strategy, could also result in reduced or possibly negative margins. We expect our cost of product revenue to increase over time in absolute dollars and our gross margins will vary based on the volume and mix of products sold. We expect the timing for achieving positive gross margins for any product will depend on the pace at which we achieve commercial scale for that product, which could take one year or more from when we begin generating revenue from such product. We may not achieve the product gross margins that we anticipate.
We plan to grow our business in several ways. First, we plan to grow as we increase the market penetration of our launched products. Next, we plan to grow by launching additional products in our chosen verticals of electronics, consumer care and agriculture and by continuing to add new products to our pipeline in these verticals. Finally, we plan to grow by entering new markets. We plan to partner with industry leaders to enter these markets, as we believe this approach de-risks and accelerates our time to product launch. Today, we are working with various industry leaders and our strategy is to enter into partnerships with these leaders in the future.
We generally target products with a market opportunity that if successful, at scale, could support annual sales of greater than $150 million. We also expect that some portion of those products could be breakthrough products, but it is very hard in the materials market to predict beforehand which products those would be. In the long term, our goal is to launch multiple breakthrough products every year. We believe that our strategy will drive strong future revenue growth as our revenues from launched products increase and revenues from new product launches stack on top of each other.
Our Market Opportunity
The market opportunity addressable by our biofacturing platform is enormous and diverse. Our bottom-up, industry-by-industry, application-by-application, analysis suggests that our total market opportunity is at least $1.2 trillion across 20 separate industries for our potential products, all ripe for disruption, and that the market opportunity of the first three industries we will pursue, electronics, consumer care and agriculture, is approximately $150 billion. In particular, we estimate that the display market alone for Hyaline was over $1 billion in 2020 and according to Transparency Market Research, the global market for insect repellents is over $1.5 billion across sprays and other traditional formats. In addition, our consumer survey, which asked 2,750 adults between 18 and 65 years of age in the United States and an additional 6,000 consumers in five global markets as a follow up about their concerns about insects, their current behavior with insect protection and their interest in better insect repellent products, found that consumer need to repel insects is global, big and likely to get bigger with current solutions being unsatisfactory, suggesting that there is a large latent demand for better products and therefore we believe that the true market opportunity is much larger. We anticipate deploying our innovation engine to create decades of disruptive breakthrough products using a rigorous discipline to select new opportunities where there’s demand for new materials, where bio-based products have an advantage and where industries rapidly adopt new products.
Our Methodology
We estimated the total opportunity for our platform using IHS Markit Materials and similar market data. We also consulted industry experts to corroborate market analyses, especially where less granular market data was available. We first estimated the size of the total materials market by compiling a comprehensive set of market size data. 2020
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“full year” data were prioritized in all cases. We then excluded materials or applications where our biofacturing platform is not applicable or would appear not to be competitive. We also excluded low-end markets (e.g., commodity plastics) where we will not compete based on our strategy which is to pursue high-value performance-driven opportunities. We then determined the proportion of each materials sales that were attributable to each of 20 industry verticals, using generally accepted definitions in all cases (e.g., electronics). We refer to the resulting grid of materials across industry verticals and the corresponding market sizes as total market opportunity.
Our Competitive Strengths
Our competitive strengths include:
1.
Biofacturing Platform: Our biofacturing platform, which is the engine that enables product innovation, is our most important asset.
Better, faster, cheaper products are the key focus of Zymergen as a company. Our biofacturing platform is flexible, allowing for each step to be completed in parallel or independently. The platform is designed to accelerate launch of our products, satisfying customer needs more rapidly and increasing the returns of our pipeline investments. In addition to enabling product innovation, our biofacturing platform changes the economics of the chemicals and materials industry. The lower estimated cost of our biofacturing platform compared to traditional chemicals and materials companies is enabled by both the speed of our early product development and the lower capital expenditures made possible by biofacturing.
2.
Data Moat: Our biofacturing platform continuously improves as it generates more data.
During both product development and host microbe optimization, we perform iterative rounds of experimentation, each of which generates proprietary data:
Product development yields structure:function data derived from iteratively formulating materials using bio-based molecules and subsequently testing their physical, chemical and other performance properties; and
Production microbe development yields genotype:phenotype data derived from iteratively applying genomic library types to the genome of the microbial host and assaying the impact on key production phenotypes such as titer and productivity.
Both of these activities generate large, valuable and highly proprietary datasets. When combined with our machine learning algorithms, the datasets enable faster and more productive product innovation and faster and more efficient production microbe development.
3.
Pipeline: We plan on years of breakthrough products.
We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. We have 10 other products in development, consisting of three in electronics, four with consumer applications and three in agriculture. If customer trials are successful, we believe Hyaline suggests the willingness and ability of customers to rapidly incorporate our products into their supply chains. Seamless integration and adoption with customers’ supply chains is a key commercial principle for all our product development. We are targeting product launches in 2022 and 2023 and more in following years in electronics, consumer care, agriculture and other markets. Our pipeline of products has been designed with rapid market adoption in mind. In addition, these products demonstrate our biofacturing platform’s ability to develop commercially relevant products across multiple major distinct chemical classes. We expect to continue to grow our product pipeline due to our biofacturing platform.
4.
Partners and Customers: Our business relationships are collaborations in innovation.
We have been commercially active with major companies since 2014 and have established a broad network of business relationships, including partnerships and customers, who are our most important source of ideas about market demand for breakthrough products. For example, today we partner with Sumitomo Chemical in the area of
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optical films, have partnerships with other companies in other industries or application areas and are working with businesses in the electronics industry on uses for Hyaline. Our business relationships are an important source for intelligence on market demand for breakthrough products and key process improvements. Our partnerships continue to deepen the richness of our data moat and strengthen our technical capabilities.
5.
Team: We have created an organization of mission-driven scientists, engineers and business professionals.
We have built a large, deep team of biologists and biochemists, material scientists and chemists, automation engineers, software engineers and data scientists and business and industry professionals all working together and speaking the same language. As of December 31, 2020, approximately 25% of our employees are in engineering roles and approximately 30% have PhDs. The integration of scientific, engineering and professional cultures, once achieved, creates an environment that fosters the creation of breakthrough innovations and becomes a magnet for additional talent. Additionally, our senior management benefits from long experience in industry and relevant technical disciplines.
6.
Sustainability: We believe that our biofacturing process is better for the environment than anything made with petrochemistry.
Our goal is to make our biomolecules by fermentation, which we believe is a safer process than making products with petrochemistry. Using new tools and building blocks derived from Nature, we believe we can manufacture high-performance materials more cleanly and with less waste. Biofacturing can potentially even help clean up existing pollution, like turning plastic waste into high value products or capturing atmospheric carbon.
Our Growth Strategy
We intend to focus on the following strategies to grow our business:
1.
Leverage our biofacturing platform for value and speed. Our business strategy is to design, make, and sell bio-differentiated breakthrough products. Our products are designed to create substantial economic value for our customers with performance that existing materials cannot offer, because that performance solves problems for our customer’s customer. We are initially focused on electronics, consumer care and agriculture. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver. We believe this would allow us to access a large universe of product opportunities that traditional players are generally unable or unwilling to pursue. Based on our experience and expectations with our first four products, which are electronic films and insect repellent products, and subject to any regulatory requirements, which could lead to longer timelines and increased cost, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. The platform is designed to accelerate launch of our products, satisfying customer need more rapidly and increasing the returns of our pipeline investments.
2.
Invest in our biofacturing platform to extend our lead. While we believe our biofacturing platform today gives us an advantage over industry incumbents, we believe that improving the platform will allow us to better satisfy customer demand. Consequently, we intend to continue investing in our biofacturing platform to reduce the time from product concept to product launch, broaden the scope of opportunities we pursue and reduce the cost per product launch.
3.
Expand into new verticals and applications. Today, we are focused on electronics, consumer care and agriculture, but in time we intend to expand to other industries and other applications suited to our biofacturing platform. Our biofacturing platform allows us to build a larger portfolio of on-market products than is typical for biopharma companies. We estimate that our total market opportunity is at least $1.2 trillion and we believe that we will ultimately benefit from the diversification of providing products across many industries and applications. We intend to expand in a structured and disciplined manner using three business tools: defined criteria to identify and qualify new opportunity areas of interest; preference for strategic adjacencies and R&D and commercial synergies; and use of partnerships to de-risk opportunities.
4.
Own customer relationships and product design. Our close customer relationships give us insight into market needs, which we can then rapidly translate to novel products with differentiated performance using
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our biofacturing platform. Another important counterpoint to the chemicals and materials industry is that we can cost-effectively outsource manufacturing and other intermediate steps. We believe that our focus on product innovation, low capital expenditures and customer relationships will be a powerful disruptor in the chemicals and materials industry.
Our Markets
The chemicals and materials sectors are large and diverse and play an essential part in producing most of the material goods we interact with on a daily basis. We believe that our ability to make better products faster and cheaper than incumbents positions us to disrupt large swaths of these legacy markets. We estimate that our total market opportunity is at least $1.2 trillion across 20 separate industries, all ripe for disruption, and that the market opportunity of the first three industries we will pursue, electronics, consumer care and agriculture, is approximately $150 billion.
Because we could pursue so many markets, we have initially prioritized three large market industries that justify meaningful investment using rigorously applied criteria:
Electronics
Suppliers into this vertical need to provide ever improving high-performance materials within short cycle times to enable rapid product evolution, and this needs to be done at a competitive cost.
Our focus in the near term is on optical films for smartphones, tablets and notebooks, with a variety of use cases that we are currently targeting across all those devices. We believe our opportunity across optical films is large and growing, with a market size of $25 billion for specialty films (which include optical films) in 2019, according to IHS Markit Report on Specialty Chemicals Industry. Beyond these initial uses, we see a broad opportunity in applications as diverse as adhesives and coatings, substrates for printed electronics, wearables, transparent heaters and sensors. We believe the use cases and applications for our electronics pipeline products are important to the product differentiation for the Original Equipment Manufacturers (“OEM”).
Consumer Care
The consumer care market is fragmented across a range of product categories spanning personal care, such as skin care, hair care and hygiene (over $400 billion in 2019, according to Statista Report on Beauty & Personal Care) and home care, which includes laundry detergent and softener, dish soap and household cleaners (over $150 billion in 2019, according to Statista Report on Home & Laundry Care). There is an ongoing shift in demand for a new type of product that is not made with the same chemicals that have been used in the market for the past century. Consumers have demonstrated a clear preference for consumer care products that are natural, non-toxic, environmentally sustainable and provide superior performance.
We believe our novel bio-based consumer products will tackle key challenges and unmet needs, with the goal of positively impacting consumer lives and the environment. We believe that biofacturing is the natural path to novel bioactive and functional ingredients that will unlock access to sustainable alternatives to products otherwise traditionally chemically synthesized or extracted from plants.
Products can be launched quickly and directly into the consumer market typically with low or no regulatory hurdles. Product differentiation is enabled by better ingredients that possess more desirable characteristics, and this feature of the market will allow us to build our brand and the brands of our products, ingredients and partners.
Agriculture
We believe we have multiple opportunities to bring new products to market in this sector, and on shorter timelines than are typical in the industry.
According to the IHS Markit Report on the Seed Sector, over $400 billion is spent on agricultural inputs each year, half of which we estimate comes from fertilizers and crop protectants. We estimate that our market opportunity across agricultural products for which we can develop solutions is more than $45 billion across nutrient use efficiency enhancers and crop protection alone.
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New Markets
Beyond these three markets, we plan to enter additional markets over time. We believe we will find synergies in our material innovations: polymers and products created for one use or industry will likely have applications in another. As appropriate, we will partner with large, established players, both to reduce risks and make product development and entry into the market more efficient.
Products and Pipeline
Our pipeline is currently organized around our three core strategic verticals:
Electronics
Our electronics portfolio consists of four products, including, Hyaline, which we launched in December 2020, beginning the expected 6-18 month product qualification process with customers. ZYM0107 and ZYM0101 are also high-performance optical films and are targeted to launch in 2022 and 2023, respectively. ZYM0103 is expected to provide our first adhesive product.
Consumer Care
Our consumer care pipeline consists of four programs. Our most advanced program is ZYM0201, a naturally derived insect repellent that we are targeting for launch in 2023. In addition, we have earlier stage programs to develop a naturally derived UV protectant (ZYM0205), a bio-based sustainable film former (ZYM0206) and another undisclosed program (ZYM0207).
Agriculture
In agriculture, the rate of yield growth has been slowing, while climate, environmental pressures and consumer demand for more nutritious, healthy food have continued to increase the need for better products. We believe we are well positioned to transform the discovery of novel microbes and products, including proteins and natural products.
Our most advanced agricultural product is focused on improving crop nutrient uptake for significant markets, including corn and wheat. We are also exploring various crop protection opportunities in areas such as pesticides and herbicides. Consistent with our mission of partnering with Nature, we are exploring naturally derived compounds to achieve this performance. Some of these programs are being undertaken in partnership with mature companies who may assist with commercialization.
New Markets
We are focused on developing products for unmet needs in additional end-markets that are aligned to our strategy and technology strengths. As appropriate, we will partner with large, established players, both to reduce risks and make product development and entry into the market more efficient.
We expect to announce partnerships and new product development milestones across areas as diverse as food proteins, healthcare consumables, animal nutrition and health, natural resource extraction or remediation, packaging and many more. These sectors all have meaningful unmet needs, where existing solutions are either inefficient or too expensive for practical use, or at odds with regulatory mandates and sustainability goals. We have more than three programs underway with partners across new industry verticals.
For example, we are researching how we could improve the quality and efficiency of both human and animal nutrition. Using microbial fermentation, we can utilize various feedstocks to produce end products that increase availability of critical nutrients, while using significantly fewer inputs.
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Zymergen’s pipeline of products in electronics, consumer care and agriculture.1
Our Business Challenges
Because of our limited operating history, our business currently faces a number of challenges. Although our current business model is premised on innovating and producing new products rapidly and at lower costs than traditional methods and achieving results that may only be obtained through leveraging biology, 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, as we seek to grow our product sales and commercialize our products, we expect revenue from R&D and collaboration arrangements to represent a smaller component of our total revenue. However, in the near term, we expect to continue generating revenue from R&D service agreements and collaborations and may in fact pursue additional arrangements with new or existing partners as we seek to enter new industry verticals. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the impact of market acceptance of our products, product and biofacturing platform development, our ability to develop and commercialize new products in a timely manner, our ability to scale our manufacturing capacity, our ability to manufacture products with a fermentation-produced biomolecule and our market penetration and margins.
Launching fermentation-produced products or products with fermentation-produced components or ingredients is a key element of our strategy for lowering manufacturing costs and launching products desirable to our customers more quickly. In some cases, we may initially launch products using molecules we have identified during the design phase but which are first produced with non-fermentation based methods. We refer to this strategy as Launch Acceleration and expect to achieve commercial launch 12-24 months faster where this is possible. Launch Acceleration typically results in a higher cost of production than can be achieved with fermentation-based production. We temporarily absorb this cost as it is outweighed by the benefit of faster product launch. Our strategy is to use Launch Acceleration only where we believe we will be able to replace these non-fermentation produced biomolecules or components with fermentation-produced versions in 12-24 months. We have used Launch Acceleration successfully on our first product, Hyaline, which we have launched with a non-fermentation produced biomolecule sourced from a third party and are executing on a process to convert to a fermentation-produced molecule, which we expect to occur in 2022. In the context of our first three strategic verticals, we expect to use Launch Acceleration frequently for our electronics pipeline but rarely in consumer care or agriculture. As we expand into additional verticals, we will evaluate the benefits of Launch Acceleration on a case by case basis. If we do not successfully develop fermentation-produced versions of our products that lower the costs of manufacturing, we may not be able
1
*Reflects target launch dates for these products. **In order to accelerate product launch and meet customer demand, we launched Hyaline with a non-fermentation produced biomolecule sourced from a third party. We are currently developing commercial scale processes so we can produce the molecule through fermentation at sufficient volumes and costs to support commercial manufacturing. We expect this process to be complete in 2022.
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to achieve anticipated product margins in future periods and may lose our anticipated competitive advantage, each of which could have an adverse result on our business, results of operations and financial condition. Also, while the use of the non-fermentation produced monomer can accelerate product launch, it may result in consumer confusion or misperceptions about the characteristics of our products, as well as the features that differentiate our products and company from others in the marketplace.
We do not have our own commercial scale manufacturing capability. Currently we contract with CMOs to manufacture Hyaline and our other electronic films primarily in Japan but we have established a CMO site for Hyaline in the United States. However, our U.S. CMO has informed us that we only have committed supply through the end of 2021. If we do not find and qualify an alternate source of manufacturing, are unable to obtain or increase capacity at our existing CMOs in Japan, or do not invest in our U.S. CMO to support and increase production, acquire our U.S. CMO or otherwise manufacture Hyaline and our other films products on our own, we may not have the manufacturing capacity required to meet our commercial needs after the end of this year. We currently contract with our Japanese CMOs under purchase orders, and do not have agreements in place that contractually require such CMOs to supply us with product on an ongoing basis. Our existing CMOs in Japan may not be able to meet our increased demand or may not do so at a reasonable cost or in a timely fashion. Identifying a suitable replacement CMO is a burdensome and time-consuming process that could take up to 24 months and requires us to become satisfied with their quality control, responsiveness and service, financial stability, security and labor and other ethical practices. Even if we are able to identify an alternative CMO, we may encounter delays in product development, production and added costs as a result of the time it takes to train a new CMO in our methods, products and quality control standards. From time to time, product owners invest in their manufacturers to support production. We may consider doing so, including through an equity investment or acquisition. If we invest in or acquire any manufacturing capability, we may experience increased costs and reduced margins, and delays as we ramp up our own manufacturing capabilities without prior experience doing so. Any adverse developments affecting manufacturing of Hyaline or our pipeline products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in the supply of Hyaline and our pipeline products or enforcement actions by regulatory authorities. We may also have to take inventory write-offs and incur other charges and expenses for Hyaline and our pipeline products that fail to meet specifications or undertake costly remediation efforts. Accordingly, failures, difficulties or delays faced at any level of our manufacturing capabilities could adversely affect our business and delay or impede the development and commercialization of Hyaline or any of our pipeline products or products and could have an adverse effect on our business, financial condition, results of operations and prospects.
We have entered into an amended and restated credit agreement and guaranty agreement with Perceptive Credit Holdings II, LP and PCOF EQ AIV II, LP (the “Perceptive Credit Agreement”) pursuant to which the secured lender agreed to provide us with a $100 million credit facility. As of December 31, 2020, our debt under this credit facility totaled $85 million in principal amount outstanding. The Perceptive Credit Agreement provides our secured lender with liens on substantially all of our assets, including our intellectual property, and contains financial covenants and other restrictions on our actions, which may cause significant risks to our stockholders and may impact our ability to pursue certain transactions and operate our business. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required, to meet our revenue targets or cure any deficiency in our revenue targets within 30 days of the end of a fiscal quarter, would generally result in events of default under such instruments. During the course of 2020, we sought and obtained various default waivers and amendments under this agreement due to our inability to comply with certain of our covenants. Although we have obtained waivers from the lender of certain defaults in 2020, there can be no assurance that the lender would be willing to grant such waivers in the future. See Note 8 to our consolidated financial statements for more information on these waivers.
Our consolidated financial statements contain a going concern qualification. The audit report with respect to our audited financial statements for the year ended December 31, 2020 includes an explanatory paragraph stating that there are material uncertainties which caused substantial doubt about our ability to continue as a going concern, in the absence of additional financing and cost reduction or cost management measures. We are subject to various covenants related to the Perceptive Credit Agreement and given the substantial doubt about our ability to continue as a going concern there is a risk that we may not meet our covenants in the future. Although we expect the proceeds we receive as part of our initial public offering to be sufficient for us to continue as a going concern, if they are not sufficient, we may need to raise additional cash through debt, equity or other forms of financing to fund future operations, which may not be available on acceptable terms, or at all.
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Risk Factors
Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” beginning on page 19. These risks include, but are not limited to, the following:
We have a history of operating losses and we do not expect to be profitable for the foreseeable future.
We have a limited operating history, which may make it difficult to evaluate the prospects for our future viability and predict our future performance.
We do not today have revenue from product sales, and we may not be able to successfully commercialize our products, including Hyaline, which we launched in December 2020, as our first product.
The COVID-19 pandemic has had, and is expected to continue to have, an impact on our business, results of operations and financial condition.
We may not be successful in our efforts to use and improve our proprietary biofacturing platform to build a pipeline of products.
It is difficult to predict the time and cost of development of our pipeline products, which are produced by or based on a relatively novel and complex technology and are subject to many risks, any of which could prevent or delay revenue growth and adversely impact our market acceptance, business and results of operations.
The market, including customers and potential investors, may be skeptical of the viability and benefits of our pipeline products because they are based on a relatively novel and complex technology.
Even if we are successful in expanding our biofacturing platform, rapidly changing technology and extensive competition in the synthetic biotech and petrochemical industries could make the products we are developing and producing obsolete or non-competitive unless we continue to develop and manufacture new and improved products and pursue new market opportunities.
The success of our business relies heavily on the performance of our products and developing new products at lower costs and faster development timelines.
Consistent with our strategy, we have recently launched Hyaline, and may in the future launch other products, with a non-fermentation produced biomolecule and, if we are not successful in our efforts to convert to the fermentation-produced version of our products, our products may not be commercially successful.
We do not have our own commercial scale manufacturing capability and any disruptions or interruptions in our biofacturing capacity, may prevent us from launching products or producing current and future products at necessary volumes to meet commercial demand, which may result in lost revenue opportunities.
The manufacture of our products is complex, and we may be unable to secure necessary talent to establish and scale our manufacturing and supply chain to the extent necessary to make a profit or sustain and grow our current business.
Our revenue, results of operations, cash flows and reputation in the marketplace may suffer upon the loss of a significant customer.
If we are unable to obtain and maintain sufficient intellectual property protection for our products and technology, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products may be impaired.
Governmental trade controls, including export and import controls, sanctions, customs requirements and related regimes, could subject us to liability or loss of contracting privileges or limit our ability to compete in certain markets.
Channels for Disclosure of Information
Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the SEC, the investor relations page on our website, press releases, public conference calls, webcasts and our corporate blog at www.zymergen.com/blog.
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The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media and others to follow the channels listed above and to review the information disclosed through such channels.
Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.
Corporate Information
We were incorporated in Delaware in 2013. Our principal executive offices are located at 5980 Horton Street, Suite 105, Emeryville, CA 94608, and our telephone number (415) 801-8073. Our corporate website address is www.zymergen.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.
“Zymergen,” our logo and our other registered or common law trademarks, service marks, or trade names appearing in this prospectus are the property of Zymergen Inc. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.
Public Benefit Corporation Status
In connection with our initial public offering, we plan to convert to a public benefit corporation incorporated in Delaware as a demonstration of our long-term commitment to our mission to displace the petrochemicals that pollute the Planet by designing, developing, and commercializing bio-based materials that deliver better performance than existing products, at attractive costs. We make products with broad applications and global reach that are safer for the people who manufacture them healthier for the people who use them, and better for the environment. Public benefit corporations are intended to produce a public benefit and to operate in a responsible and sustainable manner. Under the Delaware General Corporation Law (the “DGCL”), public benefit corporations are required to identify in their certificate of incorporation the public benefit or benefits they will promote. Public benefit corporation directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct and the specific public benefit or public benefits identified in the public benefit corporation’s certificate of incorporation.
We do not believe that an investment in the stock of a public benefit corporation differs materially from an investment in a corporation that is not designated as a public benefit corporation. We believe that our ongoing efforts to achieve our public benefit goals will not materially affect the financial interests of our stockholders. Holders of our common stock will have voting, dividend and other economic rights that are the same as the rights of stockholders of a corporation that is not designated as a public benefit corporation. See “Risk Factors—Risks Related to Being a Public Benefit Corporation.
Our public benefit, as provided in our certificate of incorporation, is: to displace the petrochemicals that pollute the Planet by designing, developing, and commercializing bio-based materials that deliver better performance than existing products, at attractive costs. We make products with broad applications and global reach that are safer for the people who manufacture them, healthier for the people who use them and better for the environment.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For so long as we remain an emerging growth company we are permitted and currently intend to rely on the following provisions of the JOBS Act that contain exceptions from disclosure and other requirements that otherwise are applicable to companies that conduct initial public offerings and file periodic reports with the Securities and Exchange Commission (the “SEC”). These provisions include, but are not limited to:
being permitted to present only two years of audited financial statements in this prospectus and only two years of related “Management’s Discussion and Analysis of Financial Condition and results of operations” in our periodic reports and registration statements, including as incorporated by reference in this prospectus;
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (“SOX”);
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reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including in this prospectus; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than what you might receive from other public reporting companies in which you hold equity interests.
We have elected to avail ourselves of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies.
We may take advantage of these exemptions until such time that we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the completion of this offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the date on which we are deemed to be a large accelerated filer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30; and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We may choose to take advantage of some but not all of these reduced disclosure obligations in future filings. If we do, the information that we provide to stockholders may be different than you might get from other public companies in which you hold stock. For additional information, see the section of this prospectus titled “Risk Factors—Risks Related to Our Initial Public Offering and Ownership of Our Common Stock—We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.”
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THE OFFERING
Common stock offered by us
     shares
Option to purchase additional shares
We have granted the underwriters an option to purchase up to      additional shares of common stock from us. The underwriters can exercise the option at any time within 30 days of the date of this prospectus.
Common stock outstanding immediately after this offering
     shares of common stock (or      shares of common stock if the underwriters exercise in full their option to purchase additional shares).
Use of proceeds
We estimate that the net proceeds from this offering will be approximately $    million, or $    million if the underwriters exercise in full their option to purchase additional shares of our common stock, at an assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds to us from this offering primarily for working capital and other general corporate purposes, which we currently expect will include continued investment in commercializing our existing products, launching products in our pipeline and furthering the development of our biofacturing platform and technology. We do not currently have specific planned uses for the proceeds of this offering.
We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in businesses, assets or technologies, although we do not currently have any commitments for any such acquisitions or investments. See “Use of Proceeds.”
Dividend policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. See “Dividend Policy.”
Risk factors
You should carefully read and consider the information set forth in the section entitled “Risk Factors” beginning on page 19, together with all of the other information set forth in this prospectus, before deciding whether to invest in our common stock.
Proposed Nasdaq symbol
“ZY”
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The     shares of common stock to be outstanding after this offering is based on 38,437,001 shares of common stock outstanding as of December 31, 2020, and excludes:
726,970 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2020, with a weighted average exercise price of $1.04 per share;
2,650,000 shares of common stock issuable upon the exercise of outstanding warrants to purchase Series C preferred stock as of December 31, 2020, with a weighted average exercise price of $5.66 per share (the warrants to purchase shares of preferred stock will become warrants to purchase shares of common stock upon the closing of this offering);
16,497,013 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020, under our 2014 Stock Plan, with a weighted-average exercise price of $2.22 per share;
4,950,165 shares of common stock issuable upon the exercise of stock options granted from January 1, 2021 to March 15, 2021, under our 2014 Stock Plan, with a weighted-average exercise price of $8.98 per share;
201,722 shares of common stock issuable upon the vesting of non-vested stock granted as part of the Radiant acquisition as of December 31, 2020;
12,060,188 shares of common stock that are reserved for issuance under our 2014 Stock Plan as of December 31, 2020;
    shares of common stock that are reserved for issuance under our 2021 Incentive Award Plan, that will become effective in connection with this offering; and
    shares of common stock that are reserved for issuance under our 2021 Employee Stock Purchase Plan that will become effective in connection with this offering.
Upon the effectiveness of the 2021 Incentive Award Plan, we will cease granting awards under the 2014 Stock Plan and any remaining shares available for issuance under the 2014 Stock Plan will be added to the shares reserved for issuance under the 2021 Incentive Award Plan. Our 2021 Incentive Award Plan and Employee Stock Purchase Plan each provides for annual automatic increases in the number of shares reserved thereunder, and our 2021 Incentive Award Plan also provides for increases to the number of shares of common stock that may be granted thereunder based on shares underlying any awards under our 2014 Stock Plan that expire, are forfeited or otherwise terminate, as more fully described in the section titled “Executive Compensation — Equity Incentive Arrangements — 2021 Incentive Award Plan.”
Unless otherwise indicated, all information in this prospectus assumes or gives effect to:
the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws upon the closing of this offering;
the conversion of all outstanding shares of convertible preferred stock into an aggregate of 204,346,437 shares of common stock upon the closing of this offering;
the conversion of all warrants to purchase preferred stock into warrants to purchase shares of common stock upon the closing of this offering;
no exercise or termination of outstanding options or warrants after December 31, 2020; and
no exercise by the underwriters of their option to purchase up to     additional shares of common stock in this offering.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following tables summarize our consolidated financial and other data. We derived the summary consolidated statement of operations data for the years ended December 31, 2019 and 2020 and consolidated balance sheet data as of December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.
When you read this summary consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.
 
Year ended December 31,
 
2019
2020
 
(in thousands, except per share and
share data)
Product revenue
$
$2
Revenue from research and development service agreements
13,234
9,788
Collaboration revenue
2,185
3,494
Total revenue
15,419
13,284
Costs and operating expenses:
 
 
Cost of service revenue(1)
102,640
84,818
Research and development(1)
50,717
90,852
Sales and marketing(1)
24,138
18,627
General and administrative(1)
61,247
60,076
Loss on lease termination
13,790
Total costs and operating expenses
252,532
254,373
Loss from operations
(237,113)
(241,089)
Interest income
4,921
492
Interest expense
(2,943)
(10,960)
Loss on change in fair value of warrant liability
(10,229)
Loss on extinguishment of debt
(1,810)
Other income (expense), net
150
(457)
Loss before income taxes
(236,795)
(262,243)
Income taxes
(8)
49
Net loss and comprehensive loss
$(236,803)
$(262,194)
Net loss per share attributable to common stockholders, basic and diluted
$(7.31)
$(7.15)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
32,375,409
36,654,165
(1)
Includes stock-based compensation expense as follows:
 
Year ended December 31,
 
2019
2020
 
(in thousands)
Cost of service revenue
$919
$1,179
Research and development
669
1,343
Sales and marketing
904
468
General and administrative
1,520
1,839
Total
$4,012
$4,829
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As of December 31, 2020
 
Actual
Pro Forma(1)
Pro Forma,
as adjusted(2)(3)
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
Cash and cash equivalents
$210,205
$210,205
 
Working capital(4)
107,116
107,116
    
Total assets
304,921
304,921
    
Short-term debt, net(5)
79,331
79,331
    
Warrant liabilities
14,231
    
Convertible preferred stock
900,798
 
Accumulated deficit
(773,740)
(773,740)
    
Total stockholders’ deficit
$(743,736)
171,293
    
(1)
The pro forma column reflects: (i) the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws upon the closing of this offering; (ii) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 204,346,437 shares of common stock upon the closing of this offering; and (iii) the conversion of all warrants to purchase preferred stock into warrants to purchase shares of common stock upon the closing of this offering.
(2)
The pro forma as adjusted column further reflects the receipt of $    million in net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $    per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
(3)
Each $1.00 increase or decrease in the assumed initial public offering price of $    per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets, and total stockholders’ deficit by $    million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets, and total stockholders’ deficit by approximately $    million, assuming the initial public offering price of $    per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.
(4)
Working capital is defined as current assets less current liabilities.
(5)
Due to the substantial doubt about our ability to continue operating as a going concern and the material adverse change clause in the loan agreement with our lender, the amounts outstanding as of December 31, 2020 have been classified as current in the consolidated financial statements. The lender has not invoked the material adverse change clause as of the date of issuance of these financial statements.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business
We have a history of operating losses and we do not expect to be profitable for the foreseeable future.
We have incurred significant operating losses in each period since our inception. Our operating losses reflect the substantial investments we made to develop our biofacturing platform and our products. We incurred net losses of $236.8 million and $262.2 million for the years ended December 31, 2019 and 2020, respectively. As of December 31, 2019 and 2020, we had an accumulated deficit of $511.5 million and $773.7 million, respectively. We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. In addition, we expect our losses to continue for the foreseeable future as we continue to invest significant additional funds toward ongoing R&D as we develop new products through investments in our biofacturing platform and product pipeline and toward the timely commercialization of new products and improved versions of existing products. We also expect that our operating expenses will increase as a result of becoming a public company and will continue to increase as we grow our business. As we ramp the sale of new products, we expect to initially experience negative product gross margins. Material manufacturing process changes, including using our Launch Acceleration strategy, could also result in reduced or possibly negative margins. We expect our cost of product revenue to increase over time in absolute dollars and our gross margins will vary based on the volume and mix of products sold. We expect the timing for achieving positive gross margins for any product will depend on the pace at which we achieve commercial scale for that product, which could take one year or more from when we begin generating revenue from such product. We may not achieve the product gross margins that we anticipate. If our revenue and gross profit does not increase sufficiently to keep pace with our investments and expenses, our net losses may not decline, and we may not attain profitability in the future. Further, our limited operating history makes it difficult to effectively plan for and model future growth, revenue and operating expenses. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the impact of market acceptance of our products, product and biofacturing platform development, our ability to develop and commercialize new products in a timely manner, our ability to scale our manufacturing capacity, our ability to manufacture products with a fermentation-produced biomolecule and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or sustain profitability. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
We have a limited operating history, which may make it difficult to evaluate the prospects for our future viability and predict our future performance.
We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). In the case of Hyaline, we expect to begin generating revenue in the second half of 2021, which will be prior to the time we expect to convert the non-fermentation produced biomolecule to the fermentation-produced molecule, which we expect to occur in 2022. We do not expect our estimated revenue from Hyaline to be meaningfully impacted by the conversion to the fermentation-produced molecule. We expect other electronics products, including ZYM0101, which we expect to launch in 2023, to follow a similar 6-18 month qualification process following which we expect to generate revenue. For many of our consumer care and agriculture products, including ZYM0201 which we expect to launch in 2023, a product qualification
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process will not be similarly necessary because we intend to launch and sell those products directly to the end-user and expect to generate revenue upon launch. For our other products in development for which we do not currently have an anticipated launch date, we cannot predict when we expect to begin generating revenue from such 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. We are now shifting our business focus to develop products that we will offer to a wider market. Our prospects must be considered in light of the uncertainties, risks, expenses and difficulties frequently encountered by companies in their early stages of operations, and following shifts in business models. We have not yet achieved market acceptance for our products, generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline), produced our products at scale, scaled our manufacturing capabilities to meet potential demand at a reasonable cost, established a sales model or conducted sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability are highly uncertain and may not be as accurate as they could be if we had a longer operating history or a company history of successfully developing, commercializing and generating revenue from products for a mass market.
Our long-term objective is to generate revenue from the sale of numerous breakthrough products across a variety of industries. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver, which would allow us to address a wide array of commercial applications. Using our biofacturing platform, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. Based on our experience to date since the launch of Hyaline in December 2020, we expect the sale qualification process of our products (including Hyaline) to last 6-18 months, or longer, depending on the customer and end device requirements. Once we have launched a product, we begin a product qualification process with customers which typically lasts 6-18 months, or longer, depending on the customer and end device requirements. We only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product, which is typically done on a purchase order basis rather than a long-term contractual commitment. Although there is variability in timelines and costs for launching a product between individual products, our estimated costs and timelines for launch are based on our experience to date with Hyaline and our expectations for each stage of the development process with three of our other early products, which are electronic films and insect repellent products. In addition, our costs and timelines may be greater where regulatory requirements lead to longer timelines, which could apply to certain of our products, including, for example, our agriculture products.
In addition, as a business with a limited operating history, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown obstacles. We will eventually need to transition from a company with a focus on deriving revenue from R&D service contracts and collaboration agreements to a company capable of developing and commercializing its own products as well, and we may not be successful in such a transition. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in emerging and rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations, and our business, financial condition and results of operations could be adversely affected.
The COVID-19 pandemic has had, and is expected to continue to have, an impact on our business, results of operations and financial condition.
The full impact of the continuing COVID-19 pandemic and related public health measures on our business will depend largely on future developments, including the duration and severity of the pandemic, which remains highly uncertain. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 caused by a novel strain of coronavirus as a pandemic, which continues to spread throughout the United States and around the world. Since then, extraordinary actions have been taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on our operations, particularly as a result of preventive and precautionary measures that we, other businesses, and governments are taking. For example, as part of these efforts and in accordance with applicable government directives, we initially
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reduced and then temporarily suspended on-site operations at our facilities in Emeryville and Boston in late March 2020. In addition, we began restricting non-essential travel and temporarily reduced salaries of our executives. As a result of the travel restrictions, we limited in-person sales and marketing activities. We have continued to operate within the rules applicable to our business; however, a continuing implementation of these governmental mandates could further impact our ability to operate effectively and conduct ongoing R&D or other activities.
Governmental mandates related to COVID-19, other infectious diseases or public health crises, have impacted and we expect them to continue to impact, our personnel and personnel at third-party manufacturing facilities in the United States and other countries. The pandemic has caused substantial disruption in global supply chains. We have experienced shortages in some of our key supplies, including materials required in our labs. In addition, the inability to travel has delayed the establishment of our Hyaline manufacturing capacity and delayed the process of selecting and vetting CMOs for our ZYM0201 insect repellent product. For example, we experienced delays of approximately three months at our new U.S. CMO site for our Hyaline product and at a key supplier of a raw material for Hyaline and ZYM0107. As a result of the restrictions, we experienced a partial suspension in servicing our R&D services contracts and the development of our own products. This occurred for the duration of the suspension of our on-site operations and for a period afterward as we ramped the operation back up and adopted the new work practices. This resulted in an approximate reduction in R&D services revenue of $0.7 million from existing contracts, not recognized before the year ended December 31, 2020. In addition, we suffered a delay in establishing our Japan manufacturing capacity, which in turn led to delays in launching Hyaline. We have also suffered a delay in the establishment of our U.S. manufacturing capacity for Hyaline. However, Hyaline production became fully operational in Japan in December 2020 and we have continued to develop our product sales pipeline, despite the restrictions on travel and the restrictions on in-person meetings. Following the launch of Hyaline, we have also experienced delays in the product qualification process due to the limitations on travel and the restrictions on work practices. Difficulties and delays such as those we have experienced and may experience in the future may prevent us from meeting our operating and financial goals, both in general and within our targeted timelines, and may cause our revenues and operating results to fluctuate from period to period.
The COVID-19 pandemic has also had an adverse effect on our ability to attract, recruit, interview and hire at the pace we would typically expect to support our rapidly expanding operations. To the extent that any governmental authority imposes additional regulatory requirements or changes existing laws, regulations and policies that apply to our business and operations, such as additional workplace safety measures, our product development plans may be delayed, and we may incur further costs in bringing our business and operations into compliance with changing or new laws, regulations and policies.
Further, the effect of the COVID-19 pandemic and mitigation efforts on our customers’ and on consumer demand for their products could materially and adversely affect us, particularly to the extent our customers experience declines in demand for their goods that contain our products.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to sudden change. We are following and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. We are continuing to monitor the potential impact of the pandemic, including on global supply chains for some of our lab materials and manufacturing capacity, but we cannot be certain what the overall impact will be on our business, financial condition, results of operations and prospects on a go-forward basis.
We may not be successful in our efforts to use our proprietary biofacturing platform to build a pipeline of products.
A key element of our strategy is to use our experienced management, engineering and scientific teams to build a pipeline of products through our biofacturing platform and develop those pipeline products into commercially viable products faster and cheaper than traditional materials. Although our R&D efforts to date have resulted in potential pipeline products, we may not be able to continue to identify and develop additional pipeline products through the use of our biofacturing platform.
Even if we are successful in continuing to build our product pipeline through the use of our biofacturing platform, not all potential pipeline products we identify will be suitable for development and use in commercial products. Machine learning and automation, generally, remain in the early stages of development. Although we expect machine learning and automation to improve over time, the operation of our biofacturing platform will continue to require significant human interaction which introduces risks of error and requires us to recruit highly
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skilled employees in a competitive market. Identifying and developing commercially viable pipeline products may require us to make continued advancements in our biofacturing platform to lower costs, reduce development time or otherwise more quickly identify pipeline products See the risk factor titled “—Even if we are successful in expanding our biofacturing platform, rapidly changing technology and extensive competition in the synthetic biotech and petrochemical industries could make the products we are developing and producing obsolete or non-competitive unless we continue to develop and manufacture new and improved products and pursue new market opportunities.”. If we are unable to use our biofacturing platform to successfully identify and develop pipeline products, our business, results of operations and financial condition may be adversely and materially affected.
It is difficult to predict the time and cost of development of our pipeline products, which are produced by or based on a relatively novel and complex technology and are subject to many risks, any of which could prevent or delay revenue growth and adversely impact our market acceptance, business and results of operations.
We have concentrated our R&D efforts to date on a select number of pipeline products based on technical feasibility and market opportunity. We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We have 10 other products in development, consisting of three in electronics, four with consumer applications and three in agriculture.
The typical development cycle of new pipeline products can be lengthy and may require new scientific discoveries or advancements and the development and engineering of complex technology, including improvements or modifications to our biofacturing platform. As we ramp the sale of new products, we expect to initially experience negative product gross margins. Material manufacturing process changes, including using our Launch Acceleration strategy, could also result in reduced or possibly negative margins. We expect our cost of product revenue to increase over time in absolute dollars and our gross margins will vary based on the volume and mix of products sold. We expect the timing for achieving positive gross margins for any product will depend on the pace at which we achieve commercial scale for that product, which could take one year or more from when we begin generating revenue from such product. We may not achieve the product gross margins that we anticipate.
Further, the variety of our products and different industries as well as pricing pressures and other factors, leads to challenges in scaling production across the portfolio as well as adapting our biofacturing platform to solve different development problems arising in the development process. We also may depend on third parties for the supply of key inputs and various components and for manufacturing capacity, making our ability to develop new pipeline products complex and subject to risks and uncertainties regarding commercial feasibility, timing and satisfactory technical performance of pipeline products. For example, the inability to travel delayed the establishment of our Hyaline manufacturing capacity and delayed the process of selecting and vetting CMOs for our ZYM0201 insect repellent product. We experienced delays of approximately three months at our new U.S. CMO site for our Hyaline product and at a key supplier of a raw material for Hyaline and ZYM0107. If we experience problems or delays in developing our pipeline products, we may be subject to unanticipated costs, including the loss of customers. Additionally, even after the incurrence of significant costs to develop a product, we may not be able to solve development problems or develop a commercially viable product at all. If we do not achieve the required technical specifications or successfully manage our new product development processes, or if development work is not performed according to schedule, then our revenue growth from new pipeline products may be prevented or delayed, and our business and operating results may be harmed.
The market, including customers and potential investors, may be skeptical of the viability and benefits of our pipeline products because they are based on a relatively novel and complex technology.
The market, including customers and potential investors, may be skeptical of the viability and benefits of our pipeline products because they are based on a relatively novel and complex technology. There can be no assurance that our products will be understood, approved, or accepted by customers, regulators and potential investors or that we will be able to sell our products profitably at competitive prices and with features sufficient to establish demand. In order for novel materials to get designed into new electronics products, dialogue across the relevant supply chain is needed. For example, the display market has a range of players that span component makers, subsystem assemblers, panel makers and the device manufacturers. While the ultimate customers for our films may only be specific parts of the display value chain, relationships with all parts of the chain are important in order to gain visibility into market trends and feature and specification requirements, and in order to get designed into the end devices. Another example of the need for new materials to enable next generation technologies is in microLEDs,
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however we cannot predict whether such products can or will successfully integrate our products. If we are unable to convince these potential customers, including the consumers who purchase end-products containing our products and the customers of our direct-to-consumer products, of the utility and value of our products or the end products in which they are a component or that our products are superior to the products they currently use, we will not be successful in entering these markets and our business and results of operations will be adversely affected. If potential investors are skeptical of the success of our pipeline products, our ability to raise capital and the value of our stock may be adversely affected.
Even if we are successful in expanding our biofacturing platform, rapidly changing technology and extensive competition in the synthetic biotech and petrochemical industries could make the products we are developing and producing obsolete or non-competitive unless we continue to develop and manufacture new and improved products and pursue new market opportunities.
The synthetic biotech and, to a lesser extent, the petrochemical industries, are characterized by rapid and significant technological changes, frequent new product introductions and enhancements and evolving industry demands and standards. Our future success will depend on our ability to develop and launch new products that address the evolving needs of our customers on a timely and cost-effective basis, to continually improve the products we are developing and producing and to pursue new market opportunities that develop as a result of technological and scientific advances. Due to the significant lead time involved in launching a new product, we are required to make a number of assumptions and estimates regarding the commercial feasibility of a new product, including assumptions and estimates regarding the size of an emerging product category and demand for those products, our ability to penetrate that emerging product category, customer adoption of a downstream product, the existence or non-existence of products being simultaneously developed by competitors, potential market penetration and obsolescence As a result, it is possible that we may introduce a new product that has been displaced by the time of launch, addresses a market that no longer exists or is smaller than previously thought, that end-consumers do not like or otherwise is not competitive at the time of launch, in each case after the incurrence of significant costs to develop such product. For example, Hyaline is specifically designed for the flexible electronic device market, which is an emerging and fast-moving product category. Another example of the need for new materials to enable next generation technologies is in microLEDs, however we cannot predict whether such products can or will successfully integrate our products. The ultimate success of our films, even if successful in meeting the technical needs of our customers, is dependent on the success of the flexible electronics device market, microLED market and our customers within that market which, in each case, may not reach the size anticipated by us or may be replaced by another emerging product category.
There is extensive competition in the synthetic biotech and, to a lesser extent, the petrochemical industries, and our future success will depend on our ability to maintain a competitive position with respect to technological advances. Technological development by others may result in our technologies, as well as products developed using our technologies, becoming obsolete. Our ability to compete successfully will depend on our ability to develop proprietary technologies and products that are technologically superior to, otherwise differentiated from, and/or are less expensive than our competitors’ technologies and products. Our competitors may be able to develop competing and/or superior technologies and processes and compete more aggressively and sustain that competition over a longer period of time due to greater human and financial resources, longer operating histories, track records for product development and existing market share. If we are unable to continue to successfully develop and manufacture new and improved products and successfully commercialize our products at scale, our business and results of operations will be adversely impacted.
The success of our business relies heavily on the performance of our products and developing new products at lower costs and faster development timelines.
To date our revenue has primarily been derived from relationships with partners where we seek to test and validate the ability of our biofacturing platform to improve or optimize our clients’ products through biofacturing. However, our future profitability will depend on our ability to successfully execute and maintain a sustainable business model and generate continuous streams of revenue through the sale of our products across industries. We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this
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qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. Our current business model is premised on innovating and producing new products rapidly and at lower costs than traditional methods and achieving results that may only be obtained through leveraging biology. While we may launch bio-based versions of existing products or existing molecules that are too expensive to utilize in products today, biofacturing of previously unavailable, superior molecules and materials is key to our long-term success. However, if we are unable to successfully transition into becoming a biofacturer of new products and create novel products at lower costs and on accelerated development timelines, our business and results of operations will be adversely affected.
Consistent with our strategy, we have recently launched Hyaline, and may in the future launch other products, with a non-fermentation produced biomolecule and, if we are not successful in our efforts to convert to the fermentation-produced version of our products, our products may not be commercially successful.
During the design phase of our development cycle, we identify molecules capable of production through fermentation. We then identify the microbe to be used for fermentation-based production of these biomolecules and develop commercial scale processes for manufacturing the end product. In some cases, we may initially launch products using molecules we have identified during the design phase but which are first produced with traditional, non-fermentation based methods. We will do this when use of the non-fermentation produced biomolecules allows for faster commercial launch, even if the cost of production of these molecules is more expensive than can be achieved with fermentation-based production. We plan to do this only where we believe we will be able to replace these non-fermentation produced biomolecules or components with fermentation-produced versions in 12-24 months. We expect fermentation-produced molecules will drive better economics or improved margins. For example, we have used Launch Acceleration successfully on our first product, Hyaline, which we have launched with a non-fermentation produced biomolecule sourced from a third party and are executing on a process to convert to a fermentation-produced molecule, which we expect to occur in 2022. While the use of the non-fermentation produced monomer can accelerate product launch, it may result in consumer confusion or misperceptions about the characteristics of our products, as well as the features that differentiate our products and company from others in the marketplace. Launching fermentation-produced products or products with fermentation-produced components or ingredients is a key element of our strategy for lowering manufacturing costs and launching products desirable to our customers more quickly. If we do not successfully develop fermentation-produced versions of our products that lower the costs of manufacturing, we may not be able to achieve anticipated product margins in future periods and may lose our anticipated competitive advantage, each of which could have an adverse result on our business, results of operations and financial condition.
We do not have our own commercial scale manufacturing capability and any disruptions or interruptions in our biofacturing capacity, may prevent us from launching products or producing current and future products at necessary volumes to meet commercial demand, which may result in lost revenue opportunities.
We do not have our own commercial scale manufacturing capability. Currently we contract with CMOs to manufacture Hyaline and our other electronic films primarily in Japan but we have established a CMO site for Hyaline in the United States. However, our U.S. CMO has informed us that we only have committed supply through the end of 2021. If we do not find and qualify an alternate source of manufacturing, are unable to obtain or increase capacity at our existing CMOs in Japan, or do not invest in our U.S. CMO to support and increase production, acquire our U.S. CMO or otherwise manufacture Hyaline and our other films products on our own, we may not have the capacity required to meet our commercial needs after the end of this year. We currently contract with our Japanese CMOs under purchase orders, and do not have agreements in place that contractually require such CMOs to supply us with product on an ongoing basis. Our existing CMOs in Japan may not be able to meet our demand or may not do so at a reasonable cost or in a timely fashion. Identifying a suitable replacement CMO is a burdensome and time-consuming process that could take up to 24 months and requires us to become satisfied with their quality control, responsiveness and service, financial stability, security and labor and other ethical practices. Even if we are able to identify an alternative CMO, we may encounter delays in product development, production and added costs as a result of the time it takes to train a new CMO in our methods, products and quality control standards. From time to time, product owners invest in their manufacturers to support production. We may consider doing so, including through an equity investment or acquisition. If we invest in or acquire any manufacturing capability, we may experience increased costs and reduced margins, and delays as we ramp up our own manufacturing capabilities without prior experience doing so.
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Process development is a key component of product R&D to enable the biofacturing of products at scale. If we cannot attract, develop and retain product leaders and process engineers with the necessary expertise to drive process development of our manufacturing for our pipeline of products, we will be unable to achieve commercially viable volumes of our pipeline products to meet customer demand. Further, we will need the biofacturing ecosystem to continue its emergence as we launch production at commercial scale, a process we are just beginning and have not done in the past. If we are having difficulties in accessing pilot plant facilities with the required downstream processing equipment to enable our process development, we may face delays in our time-to-market and increased R&D costs relative to our targets. If the biofacturing ecosystem and overall capacity does not grow enough to provide the volumes we need to satisfy anticipated commercial needs, we may face delays in scaling our production of bioproducts which could cause delays, increase costs in scaling manufacture of our bioproducts, and negatively impact our financial position.
Any adverse developments affecting manufacturing of Hyaline or our pipeline products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in the supply of Hyaline and our pipeline products or enforcement actions by regulatory authorities. We may also have to take inventory write-offs and incur other charges and expenses for Hyaline and our pipeline products that fail to meet specifications or undertake costly remediation efforts. Accordingly, failures, difficulties or delays faced at any level of our manufacturing capabilities could adversely affect our business and delay or impede the development and commercialization of Hyaline or any of our pipeline products or products and could have an adverse effect on our business, financial condition, results of operations and prospects.
The manufacture of our products is complex and we may be unable to secure necessary talent to establish and scale our manufacturing and supply chain to the extent necessary to make a profit or sustain and grow our current business.
The manufacture of our products is complex and to commercialize our products requires significant expertise in a variety of specialties and capital investment, including the development of advanced manufacturing techniques and process controls. We are targeting market opportunities in a wide variety of industries, and plan to initially focus product development in the electronics, consumer care an agriculture industries. Given the wide range of products we are developing and the even greater range of products we expect to develop in the future, biofacturing processes, including the necessary equipment for biofacturing, for one product may not be translatable to other products and, therefore, we may need to identify and recruit additional internal talent to develop products and coordinate manufacturing techniques and process controls required for the variety of pipeline products in the various industries we are targeting. We may also require multiple facilities and partners in order to commercialize various products and to meet the volumes we need to satisfy our anticipated commercial needs. For example, Hyaline and our other electronic films are manufactured in different facilities than our consumer care products and require completely separate supply chains and manufacturing facilities. If we are unable to successfully establish adequate manufacturing capacity for all of our products and pipeline products, we may not have the capacity required to meet our commercial needs. See the risk factor titled “—We do not have our own commercial scale manufacturing capability and any disruptions or interruptions in our biofacturing capacity, may prevent us from launching products or producing current and future products at necessary volumes to meet commercial demand, which may result in lost revenue opportunities.
We must continue to secure and maintain sufficient and stable supplies of disposable lab equipment, raw materials and synthetic biology materials and services.
The COVID-19 pandemic has caused substantial disruption in global supply chains. As a result, we have experienced shortages in some of our key supplies, including materials required in our labs and may continue to do so in the future as a result of the pandemic, or otherwise. We may also experience price increases due to unexpected material shortages, services disruptions and other unanticipated events, which may adversely affect our supply of disposable lab equipment, raw materials and synthetic biology materials and services. We typically do not enter into long-term agreements with our suppliers but secure our materials and services on a purchase order basis. Our suppliers may reduce or cease their supply of materials or services to us at any time in the future. If the supply of materials or services is interrupted, our production processes may be delayed.
A deterioration of our relationship with any of our suppliers, or problems experienced by these suppliers, could lead to shortages in our production capacity for the development or biofacture of some or all of our products. Therefore, we may not be able to cost-effectively develop new products or fulfil the demand of existing customers
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or supply new customers. In addition, as we grow, our existing suppliers may not be able to meet our increasing demand, and we may need to find additional suppliers. In some cases, we are purchasing the consumables, materials or services where the use, for our purposes, is not a commodity and obtaining such materials and services requires lead time. We may not be able to secure suppliers who provide materials at, or services to, the specification, quantity and quality levels that we demand (or at all) or be able to negotiate acceptable fees and terms of services with any such suppliers. Identifying a suitable supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability, security and labor and other ethical practices. Even if we are able to expand existing sources, we may encounter delays in product development, production and added costs as a result of the time it takes to train new suppliers in our methods, products and quality control standards. If any of the above events occur, our operations and results of operations may be adversely affected.
We cannot assure you that any instability or other issues relating to the manufacture of any of our products or pipeline products will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. For example, the COVID-19 pandemic has caused substantial disruption in global supply chains. We have experienced shortages in some of our key supplies, including materials required in our labs. Any future impact of the COVID-19 pandemic on our ability to procure sufficient supplies for the development of our pipeline products will depend on the duration of the pandemic and the mitigation actions undertaken to contain COVID-19 or treat its effects.
For the year ended December 31, 2019, our cost of disposable lab equipment, raw materials and synthetic biology materials and services accounted for a significant portion of our total cost of revenue. In the event of significant price increases by suppliers, we may have to pass the increased costs to our customers. However, we may not be able to raise the prices of our products sufficiently to cover increased costs resulting from increases in the cost of our materials and services, overcome the interruption of a sufficient supply of materials or services for our pipeline products or products, or adequately reduce supplier costs to increase profitability. As a result, materials and services costs, including any price increase for our materials and services may negatively impact our business, financial condition and results of operations.
We depend on a limited number of suppliers for critical components of development and manufacturing of our pipeline products. The loss of any one or more of these suppliers or their failure to supply us with the necessary components on a timely basis, could cause delays in our production capacity and adversely affect our business.
We depend on a limited number of suppliers for critical components, including lab consumables, for the development and manufacturing of our pipeline products. The pandemic has caused substantial disruption in global supply chains. We have experienced shortages in some of our key supplies, including lab consumables. We do not currently have the infrastructure or capability internally to manufacture these components. Although we have a reserve of supplies and although alternative suppliers exist for some of these critical components, our existing manufacturing process has been designed based on the functions, limitations, features and specifications of the components that we currently utilize. While we work with a variety of domestic and international suppliers, our suppliers may not be obligated to supply product or our arrangements may be terminated with relative short notice periods. Our supply of these components could be limited, interrupted, or of unsatisfactory quality or cease to be available at acceptable prices. Additionally, we do not have any control over the process or timing of the acquisition or manufacture of materials by our manufacturers and cannot ensure that they will deliver to us the components we order on time, or at all.
The loss of these components provided by these suppliers could require us to change the design of our development and manufacturing processes based on the functions, limitations, features and specifications of the replacement components or seek out a new supplier to provide these components, or seek out a new supplier to provide these components.
However, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort to qualify a new supplier could result in additional costs, diversion of resources or reduced manufacturing yields, any of which would negatively impact our operating results. Further, we may be unable to obtain critical components on commercially reasonable terms, which could have a material adverse impact on our business, financial condition and results of operations.
In addition, some disposable lab equipment, synthetic biology materials and other supplies and materials that we purchase are purchased from single-source or preferred suppliers, which limits our negotiating leverage and our
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ability to rely on additional or alternative suppliers for these products. Our dependence on these single-source and preferred suppliers exposes us to certain risks, including the following:
our suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms;
we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all;
if there is a disruption to our single-source or preferred suppliers’ operations, and if we are unable to enter into arrangements with alternative suppliers, we will have no other means of completing our manufacturing process until they restore the affected facilities or we or they procure alternative manufacturing facilities or sources of supply;
delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects; and
our ability to progress the development and production of our pipeline products could be materially and adversely impacted if the single-source or preferred suppliers upon which we rely were to experience a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, issues relating to other customers such as regulatory or quality compliance issues, or other financial, legal, regulatory or reputational issues.
Moreover, to meet anticipated market demand, our single-source and preferred suppliers may need to increase manufacturing capacity, which could involve significant challenges. This may require us and our suppliers to invest substantial additional funds and hire and retain the technical personnel who have the necessary experience. Neither we nor our suppliers may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all.
Growth and a change to our business focus may place significant demands on our management and our infrastructure.
We have experienced an expansion of our business and a change in focus as we continue to make efforts to develop and commercialize our products. While substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements, we launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. Our growth and diversified operations have placed, and may continue to place, significant demands on our management and our operational and financial infrastructure. Managing our growth and change in business focus will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows and changes, our business, financial condition and results of operations would be adversely impacted.
Loss of key personnel and/or failure to attract, train and retain additional key personnel could delay our product development programs and harm our R&D efforts and our ability to meet our business objectives.
Our business involves complex, global operations across a variety of markets and requires a management team and employee workforce that is knowledgeable in the many areas in which we operate. Our future success depends upon our ability to attract, train, retain and motivate highly qualified management, scientific, engineering, information technology, and sales personnel, among others. In addition, the market for qualified personnel is very competitive because of the limited number of people available who have the necessary technical skills and understanding of our technology and products and the nature of our industry which requires certain of our technical personnel to be on-site in our facilities. We compete for qualified scientific and information technology personnel with other life sciences and information technology companies as well as academic institutions and research institutions in the markets in which we operate, including the San Francisco Bay Area, California and Boston, Massachusetts. In addition, we are expanding our international operations and will increasingly need to recruit qualified personnel outside the United States. However, doing so may also require us to comply with laws to which we are not currently subject, which could cause us to allocate or divert capital, personnel and other resources from our organization, which could adversely affect our business, financial condition, results of operations, prospects and reputation. Establishing international operations and recruiting personnel has and may continue to be impacted by COVID-19 travel and operational restrictions. Our senior management team is critical to our vision, strategic direction, product development and commercialization efforts. Our employees, including members of our management team, could leave our company with little or no prior notice and would be free to work for a competitor.
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We also do not maintain “key man” life insurance on any of our employees. The departure of one or more of our senior management team members or other key employees could be disruptive to our business until we are able to hire qualified successors.
Our continued growth and ability to successfully transition from a company primarily focused on development to commercialization depends, in part, on recruiting and retaining highly-trained personnel across our various target industries and markets with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our failure to successfully hire and integrate these key personnel into our business could adversely affect our business. To attract top talent, we believe we will need to offer competitive compensation and benefits packages, including equity incentive programs, which may require significant investment. If we are unable to offer competitive compensation this may make it more difficult for us to attract and retain key employees. Moreover, if the perceived value of our equity awards declines, it may adversely affect our ability to attract and retain key employees. If we do not maintain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that adversely affect our ability to support our internal R&D programs and operations.
In addition, some of our scientific personnel are qualified foreign nationals whose ability to live and work in the United States is contingent upon the continued availability of appropriate visas. Due to the competition for qualified personnel in the key markets in which we operate, we expect to continue to utilize foreign nationals to fill part of our recruiting needs. As a result, changes to United States immigration policies have and could further restrain the flow of technical and professional talent into the United States and adversely affect our ability to hire qualified personnel.
We are subject to risks related to our reliance on collaboration arrangements to fund development and commercialization of many of our pipeline products, and our financial results may be adversely impacted if such collaborations do not lead to the commercialization of products.
Substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements. Over the next few years, as we seek to grow our product sales and commercialize additional products, we expect revenue from R&D and collaboration arrangements to represent a smaller component of our total revenue. However, in the near term, we expect to continue generating revenue from R&D service agreements and collaborations and may in fact pursue additional arrangements with new or existing partners as we seek to enter new industry verticals. For example, we have entered into a collaboration agreement with Sumitomo Chemical which has led to launch of Hyaline. Collaborations with strategic partners are necessary to successfully commercialize our existing and future products. The terms of our collaboration agreements typically include one or more of the following: joint ownership of the new intellectual property, assignment of the new intellectual property to either us or the collaborator, either exclusive or non-exclusive licenses to the new intellectual property to us or the collaborator and other restrictions on our sole use of developments, such as non-competes and rights of first refusal. Our collaboration agreements also typically include one or more of the following: payments for the R&D services to be performed, milestone payments to be received upon the achievement of the milestone events defined in the agreements, revenue-sharing and royalty payments upon the commercialization of the molecules in which we share in the customer’s profits. See “Business—Intellectual Property—Collaborative Research and Development.”
These exclusivity, revenue-sharing and other similar terms limit our ability to commercialize our products and technology and may impact the size of our business or our profitability in ways that we do not currently envision. The competition for collaborators is intense, and the negotiation process is time-consuming and complex. Any new collaboration may be on terms that are not optimal for us, and we may not be able to maintain any new collaboration. Any such collaboration may require us to incur non-recurring or other charges, increase our near- and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business. These transactions would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention to manage a collaboration, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business.
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Many factors may impact the success of such collaborations, including our ability to perform our obligations, our collaborators’ satisfaction with our products and services, our collaborators’ participation and interest in supporting commercialization of products, and exposure to the risks of our collaborators. Like us, many of our collaborators are exposed to a number of risks, any of which could impact their ability to fulfil their obligations under our collaboration agreements, which in turn would adversely impact our ability to derive the anticipated benefits from these collaboration agreements. In addition, most of these agreements do not affirmatively obligate the other party to purchase specific quantities of any products or require funding all R&D costs necessary to bring products to market. We may encounter numerous uncertainties and difficulties in developing, manufacturing and commercializing any new products subject to these collaboration arrangements that may delay or prevent us from realizing their expected benefits or enhancing our business, including uncertainties on the feasibility of taking new molecules to commercial-scale. Further, we have in the past and may in the future have disputes with our collaborators, which may harm these relationships or require us to settle the disputes on unfavorable terms. It is possible that these agreements could result in restrictions on our ability to use molecules which have been discovered through the collaborations, which could restrict our ability to commercialize certain products in the future. For example, Hyaline and other film-related pipeline products were developed through our collaboration with Sumitomo Chemical. In that agreement, we agreed to exclusive cooperation activities with Sumitomo Chemical within the defined field, as well as a right of first offer for Sumitomo Chemical to use Sumitomo Chemical technology or items developed for Sumitomo Chemical outside of the defined field. However, Sumitomo Chemical is not obligated to commercialize or support commercialization of any products developed through our collaboration. For additional information on our agreement with Sumitomo Chemical, please see “Collaborative Research and Development.” Sumitomo Chemical's continued interest and support in developing pipeline products, scaling up manufacturing for existing and new pipeline products, evaluating the market opportunity, providing potential sales channels or access to customers, and conducting sales and marketing activities will have an effect on the commercialization of jointly developed film and our ability to access this market.
Any failure or difficulties in maintaining existing collaboration arrangements, establishing new collaboration arrangements, or building up or retooling our operations to meet the demands of our collaboration partners could have a significant negative impact on our business, including our ability to commercialize or achieve commercial viability for our products, lead to the inability to meet our contractual obligations, and could cause us to allocate or divert capital, personnel and other resources from our organization which could adversely affect our business, financial condition, results of operations, prospects and reputation.
We expect to face competition for our products from established enterprises and new companies, particularly in China, and if we cannot compete effectively against these companies, products or prices, we may not be successful in bringing our products to market.
We expect that our products will compete with both the traditional products that are currently being used in our target markets and with the alternatives to these existing products that established enterprises and new companies are seeking to produce. For example, we expect that our insect repellent will compete against DEET-based products as well as new insect repellents. In the markets that we are entering, and in other markets that we may seek to enter in the future, we will compete primarily with the established providers of components currently used in products or finished products in these markets. Producers of these incumbent products include global agricultural companies, large international chemical and materials companies, international personal care companies and companies specializing in specific products.
Some of our current competitors are large publicly-traded companies, or are divisions of or established contractors to large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:
greater name and brand recognition;
greater financial and human resources;
larger R&D departments;
broader product lines;
larger sales forces and more established distributor networks;
substantial intellectual property portfolios;
larger and more established customer bases and relationships;
the leverage to enter into contracts on more favorable terms; and
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better established, larger scale and lower cost manufacturing capabilities.
With the emergence of many new companies seeking to produce products from renewable sources, we may face competition from such companies in bringing new products to market. Some of these companies may develop products that are disruptive to ours or may be able to establish production capacity and commercial partnerships to compete with us.
There are risks that the Chinese government may, among other things, provide government funding or support to Chinese companies to produce new technology, require the use of local suppliers in place of non-Chinese suppliers like us, compel companies that do business in China to partner with local companies to conduct business, provide incentives to government-backed local customers to buy from local suppliers, thereby creating a significant competitive advantage for Chinese companies and creating obstacles for us. Any such actions taken by China (or similar actions taken by other foreign governments) could significantly harm our competitive position and adversely affect our business and results of operations.
We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from products and technologies introduced by our existing or future competitors, companies entering our markets or developed by our customers internally. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours or that are able to run comparable experiments at a lower total experiment cost. Any failure to compete effectively could materially and adversely affect our business, financial condition and results of operations.
International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
We currently operate our business through various international subsidiaries. Further, because we and our collaborators currently conduct business and market our products outside of the United States and may market future products outside of the United States, if cleared, authorized or approved, our business is subject to risks associated with doing business outside of the United States, including an increase in our expenses and diversion of our management’s attention from the development of future products. Accordingly, we are subject to a variety of risks inherent in doing business internationally, and our exposure to these risks will increase as we continue to expand our operations, user base and advertiser base globally. These risks include:
political, social and economic instability;
fluctuations in currency exchange rates;
higher levels of credit risk, corruption and payment fraud;
enhanced difficulties of integrating any foreign acquisitions;
regulations that might add difficulties in repatriating cash earned outside the United States and otherwise prevent us from freely moving cash;
import and export controls and restrictions and changes in trade regulations;
compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other jurisdictions;
multiple, conflicting and changing laws and regulations such as privacy, security and data use regulations, tax laws, trade regulations, economic sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements, reimbursement or payor regimes and other governmental approvals, permits and licenses;
failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our products in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
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logistics and regulations associated with shipping samples and customer orders, including infrastructure conditions and transportation delays;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises, on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism and political unrest, and outbreak of disease;
breakdowns in infrastructure, utilities and other services;
boycotts, curtailment of trade and other business restrictions; and
the other risks and uncertainties described in this prospectus.
Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.
Changes in government regulations and trade policies may materially and adversely affect our sales and results of operations.
The markets where we sell our products are heavily influenced by foreign, federal, state and local government regulations and policies. The U.S. or foreign governments may take administrative, legislative, or regulatory action that could materially interfere with our ability to sell products in certain countries and/or to certain customers, particularly in China. The uncertainty regarding future standards and policies may also affect our ability to develop our products or to license our technologies to third parties and to sell products to our end customers, which could have a material adverse effect on our business, financial condition and results of operations.
An escalation of recent trade tensions between the U.S. and China has resulted in trade restrictions that could harm our ability to participate in Chinese markets and numerous additional such restrictions have been threatened by both countries. The U.S. government, for example, has recently implemented stringent export license requirements on U.S.-origin and certain foreign-origin items going to or being used by certain Chinese technology companies. The United States and China have imposed a number of tariffs and other restrictions on items imported or exported between the United States and China. We cannot predict what actions may ultimately be taken with respect to tariffs or trade relations between the United States and China or other countries, what products may be subject to such actions, or what actions may be taken by the other countries in retaliation. The institution of trade tariffs both globally and between the United States and China specifically carries the risk of negatively impacting China’s overall economic condition, which could have negative repercussions for our business. Our products are and may continue to be subject to export license requirements or restrictions, particularly in respect of China.
In addition, changes in U.S. trade policy more generally could trigger retaliatory actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce or discourage purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased costs of manufacturing our products and higher prices for our products in foreign markets. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products, cause our sales to decline and adversely impact our ability to compete, which could materially and adversely impact our business, financial condition and results of operations.
In addition, the Chinese economic, legal and political landscape differs from other countries in many respects, including the level of government involvement and regulation, control of foreign exchange and allocation of resources and uncertainty regarding the enforceability and scope of protection for intellectual property rights. The laws, regulations and legal requirements in China are also subject to frequent changes and the exact obligations under and enforcement of laws and regulations are often subject to unpublished internal government interpretations and policies which makes it challenging to ascertain compliance with such laws.
We use biological and hazardous materials that require considerable expertise and expense for handling, storage and disposal and may result in claims against us.
We work with chemical and biological materials that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products, and we largely contract with third parties for the disposal of these products. Federal, state and local laws and regulations govern the use,
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generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental laws and regulations may restrict our operations. If we do not comply with applicable regulations, we may be subject to fines and penalties.
In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or wastes, which could cause an interruption of our commercialization efforts, R&D programs and business operations, as well as environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations, as well as potential reputational damage. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. While we do carry a pollution legal liability policy, this policy may not fully cover costs arising from contamination from hazardous and biological products and the resulting cleanup, or claims arising from the handling, storage or disposal of hazardous materials. Accordingly, in the event of contamination or injury, we could be liable for damages or penalized with fines in an amount exceeding our resources and our operations could be suspended or otherwise adversely affected.
Our revenue, results of operations, cash flows and reputation in the marketplace may suffer upon the loss of a significant customer.
Substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements. We have derived, and may continue to derive, a significant portion of our revenue from a limited number of large customers. In 2019, we had three customers that each represented more than 10% of our total revenue, including two customers that each represented over 20% of our total revenue. In 2020, we had three customers that each represented more than 10% of our total revenue, including one customer that represented over 35% of our total revenue. Due to the significant time required to develop and commercialize new pipeline products, or to acquire new customers, the loss of any one or more of these customers, or the loss of any other significant customer or a significant reduction in the amount of product ordered by a significant customer would adversely affect our revenue, results of operations, cash flows and reputation in the marketplace.
In addition, we generally do not have long-term contracts with our customers requiring them to purchase any specified quantities from us and without such contracts our customers are not obligated to order or reorder our products. As a result, we cannot accurately predict our customers’ decisions to reduce or cease purchasing our products. Even where we enter into contracts with our customers, there is no guarantee that such agreements will be negotiated on terms that are commercially favorable to us in the long-term. Our customers may buy less of our products depending on their own technological developments, end-user demand for our products and internal budget cycles. In addition, existing customers may choose to produce some or all of the products they purchase from us internally by using or developing manufacturing capabilities organically or by using capabilities from acquisitions of assets or entities from third parties with such capabilities. Therefore, if our customers were to substantially reduce their transaction volume or cease ordering products from us, this could materially and adversely affect our financial performance.
Our pipeline products may cause undesirable side effects or environmental effects which may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.
Undesirable side effects from our future consumer care or other pipeline products could arise either during development or after product has been marketed. Similarly, undesired environmental effects from agricultural or other pipeline products could arise after a pipeline product is commercialized. The results of future safety or environmental studies may show that our pipeline products cause undesirable side effects or environmental harm, which could interrupt, delay or halt the development and commercialization of our products, resulting in delay of, or failure to obtain, marketing approval from applicable regulatory authorities.
If any of our pipeline products cause undesirable side effects or environmental effects or suffer from quality control issues:
regulatory authorities may impose a hold or risk evaluation and mitigation strategies which could result in substantial delays, significantly increase the cost of development and/or adversely impact our ability to continue development of the product;
regulatory authorities may require the addition of statements, specific warnings, or contraindications to the product label;
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we may be required to conduct additional safety, or environmental studies;
we may be required to implement a risk minimization action plan, which could result in substantial cost increases and have a negative impact on our ability to commercialize the product;
we may be subject to limitations on how we promote the product;
we may, voluntarily or involuntarily, initiate product recalls;
sales of the product and interest in collaborations may decrease significantly;
regulatory authorities may require us to take our product off the market;
we may be subject to litigation or product liability claims; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected pipeline products, cause injury to our reputation, or substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our products.
Our products, or the end products of which they are components, could have defects or errors, which may give rise to claims against us or delays in production and adversely affect our business, financial condition and results of operations.
Some applications of our technology or products are components of end products and therefore our success is tied to the success of such end products. We cannot assure you that material performance problems, defects, errors or delays will not arise in our products or the end products in which they are components, and as we commercialize our products, these risks may increase. We expect to provide warranties that our products will meet performance expectations and will be free from defects. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins.
In manufacturing our products, we depend upon third parties for the supply of our instruments and various components, many of which require a significant degree of technical expertise to produce. If our suppliers fail to produce our product components to specification or provide defective products to us and our quality control tests and procedures fail to detect such errors or defects, or if we or our suppliers use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.
If our products or the end products of which they are components, contain defects or are delayed, we may experience:
a failure to achieve market acceptance for our products or expansion of our products sales;
the development of new technology rendering our products, or the end products of which they are components, obsolete;
loss of customer orders and delay in order fulfilment;
damage to our brand reputation;
increased warranty and customer service and support costs due to product repair or replacement;
product recalls or replacements;
inability to attract new customers and collaboration opportunities;
diversion of resources from our manufacturing and R&D departments into our service department; and
legal and regulatory claims against us, including product liability claims, which could be costly, time consuming to defend, result in substantial damages and result in reputational damage.
We may become subject to lawsuits or indemnity claims in the ordinary course of business, which could materially and adversely affect our business and results of operations.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, indemnity claims and other legal proceedings. These actions may seek, among other things, compensation for alleged product liability, personal injury, employment discrimination, breach of contract, property damage and other losses or
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injunctive or declaratory relief. See the risk factors titled “—Theft, loss, or misuse of personal data about our employees, customers, or other third parties could increase our expenses, damage our reputation, or result in legal or regulatory proceedings,” and “—Our use of open source software could compromise our ability to use our biofacturing platform and subject us to possible litigation for a discussion of intellectual property infringement lawsuits.
The marketing, sale and use of our products and services could lead to the filing of product liability claims were someone to allege that our products or services failed to perform as designed or intended or caused injury or other harms. A product liability claim could result in substantial damages and be costly and time-consuming for us to defend.
Regardless of merit or eventual outcome, product liability claims may result in:
decreased demand for any products that we have developed or may develop;
loss of revenue;
substantial monetary payments;
significant time and costs to defend related litigation;
the inability to commercialize any products that we have developed or may develop; and
injury to our reputation and significant negative media attention.
In the event that such actions, claims or proceedings are ultimately resolved unfavorably to us at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our business and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position. We maintain product liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability claims. Any product liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause current collaborators to terminate existing agreements or potential collaborators to seek other companies, any of which could impact our business and results of operations.
We may face risks relating to the use of our genetically modified organisms and microorganisms and if we are not able to secure regulatory approval or if we face material ethical, legal and social concerns about use of our GMO or GMM technology, our business could be adversely affected.
Our technologies and products involve the use of genetically modified organisms (“GMOs”) and genetically modified microorganisms (“GMMs”). The use of GMOs and GMMs is subject to laws and regulations in many countries, some of which are new and some of which are still evolving. In the United States, the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA) and the U.S. Department of Agriculture (USDA) are the primary agencies that regulate the use of GMOs, GMMs, as well as potential products or substances derived from GMOs or GMMs. If regulatory approval of the GMOs, GMMs, or resulting products or substances is not secured, our business operations, financial condition and our ability to grow as a business could be adversely affected. We expect to encounter GMO and GMM regulations in most if not all of the countries in which we may seek to establish production capabilities or sell our products and the scope and nature of these regulations will likely be different from country to country. Governmental authorities could, for safety, social or other purposes, impose limits on, or implement regulation of, the use of GMOs or GMMs. If we cannot meet the applicable requirements in other countries in which we intend to produce or sell our products, or if it takes longer than anticipated to obtain such approvals, our business could be adversely affected.
In addition, public attitudes about the safety and environmental hazards of and ethical concerns over, genetic research, GMOs and GMMs could influence public acceptance of our technology and products. These concerns could result in increased expenses, regulatory scrutiny, delays or other impediments to our programs. The use of GMOs and GMMs has in the past received negative publicity, which could lead to greater regulation or restrictions on imports of our products. Such concerns or governmental restrictions could limit the use of GMOs or GMMs in our products, which could have a material adverse effect on our business, financial condition and results of operations.
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We may engage in strategic transactions, including acquisitions, that could disrupt our business, cause dilution to our stockholders, reduce our financial resources, or prove not to be successful.
From time to time, we have entered, and may in the future enter, into transactions to acquire other businesses, products or technologies, and our ability to do so successfully cannot be ensured. In December 2017, we acquired Radiant Genomics, Inc. which allowed us to add desired technology and talent related to metagenomics and associated building of metagenomic libraries. In March 2020, we acquired EnEvolv, Inc., which allowed us to acquire desired technology and talent related to the development and use of biosensors in development of pipeline products. We are actively considering the acquisition of several businesses to support our strategy, although we do not currently have any commitments for such acquisitions. One or more of these acquisitions could include the payment of the purchase price in whole or in part using our Common Stock, which would have a dilutive impact on existing holders. Even if we identify suitable opportunities, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by customers or investors. We may decide to incur debt in connection with an acquisition or issue our common stock or other equity securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that are not covered by any indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management attention from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. In addition, we may not be able to fully recover the costs of such acquisitions or be successful in leveraging any such strategic transactions into increased business, revenue or profitability. We also cannot predict the number, timing or size of any future acquisitions or the effect that any such transactions might have on our operating results.
Accordingly, although there can be no assurance that we will undertake or successfully complete any acquisitions, any transactions that we do complete may be subject to the foregoing or other risks and have a material and adverse effect on our business, financial condition, results of operations and prospects. Conversely, any failure to pursue any acquisition or other strategic transaction that would be beneficial to us could delay the development and potential commercialization of our products.
The Perceptive Credit Agreement provides our secured lender with liens on substantially all of our assets, including our intellectual property, and contains financial covenants and other restrictions on our actions, which may cause significant risks to our stockholders and may impact our ability to pursue certain transactions and operate our business.
In December 2019, we entered into and in February 2021, we amended and restated a credit and guaranty agreement with Perceptive Credit Holdings II, LP and PCOF EQ AIV II, LP pursuant to which the secured lender agreed to provide us with a $100 million credit facility. As of December 31, 2020, our debt under this credit facility totaled $85 million in principal amount outstanding. During the course of 2020, we sought and obtained various default waivers and amendments under this agreement due to our inability to comply with certain of our covenants relating to the treatment of our acquisition of EnEvolv as a permitted transaction under the terms of the Perceptive Credit Agreement, the achievement of quarterly revenue milestones, the timing for consummation of specified debt or equity transactions and the timing for delivery of audited financials for the year ending December 31, 2019. As a result of the amendments to the Perceptive Credit Agreement, we are currently in compliance with all covenants under the agreement, and following the completion of this offering, we do not expect to seek additional waivers or amendments. See Note 8 to our consolidated financial statements for more information on these default waivers. We may be required to generate cash from operations or raise additional working capital through future financings to enable us to repay this indebtedness as it becomes due. There can be no assurance that we will be able to do so. If we do not generate additional cash or working capital, we may be required to delay, limit, reduce or terminate our product development or operations or grant to others rights to develop and market products that we would otherwise prefer to develop and market ourselves, to enable us to repay this indebtedness as it becomes due.
In addition, in association with the secured debt, we have granted liens on substantially all of our assets, including our intellectual property, as collateral, and have agreed to significant covenants, including covenants that require us to achieve quarterly revenue milestones and covenants that materially limit our ability to take certain actions, including our ability to pay dividends, make certain investments and other payments, incur additional indebtedness, undertake certain mergers and consolidations, encumber and dispose of assets and customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events,
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certain cross defaults and judgements and insolvency. For example, the Perceptive Credit Agreement contains restrictions on our ability to purchase or dispose of assets and has other affirmative and negative covenants that impact how we run our business. A failure to comply with the covenants and other provisions of the Perceptive Credit Agreement, including any failure to make a payment when required, to meet our revenue targets or cure any deficiency in our revenue targets within 30 days of the end of a fiscal quarter, would generally result in events of default under such instruments. Although we have obtained waivers from the lender of certain defaults in 2020, there can be no assurance that the lender would be willing to grant such waivers in the future. The Perceptive Credit Agreement also 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, which could permit acceleration of such indebtedness and could result in a material adverse effect on us. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness, permitting acceleration of a substantial portion of our indebtedness. 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.
If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness, or obtain additional financing. There can be no assurance that we would be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us, if at all. Any debt financing that is available could cause us to incur substantial costs and subject us to covenants that significantly restrict our ability to conduct our business. If we seek to complete additional equity financings, the interests of existing equity holders may be diluted.
If we are unable to make payment on our secured debt instruments when due, our secured lender may foreclose on and sell the assets securing such indebtedness, which includes substantially all of our property, to satisfy our payment obligations, which could prevent us from accessing those assets for our business and conducting our business as planned. Our business, financial condition, prospects and results of operations could be materially adversely affected as a result of any of these events.
Our headquarters and other facilities are located in active earthquake and tsunami or in active hurricane or wildfire zones, and an earthquake, tsunami, hurricane, wildfire or other type of natural disaster affecting us or our suppliers could cause resource shortages, disrupt our business and harm our results of operations.
We conduct our primary R&D operations in the San Francisco Bay Area in an active earthquake and tsunami zone, and certain of our suppliers conduct their operations in the same region or in other locations that are susceptible to natural disasters. In addition, California and some of the locations where certain of our suppliers and manufacturers are located have experienced shortages of water, electric power and natural gas from time to time. The occurrence of a natural or other disaster, such as an earthquake, tsunami, hurricane, drought, flood, wildfire or any potential effects of climate change or localized extended outages of critical utilities or transportation systems, or any critical resource shortages, affecting us or, our suppliers or manufacturers could cause a significant interruption in our business, damage or destroy our facilities, production equipment or inventory or those of our suppliers and cause us to incur significant costs or result in limitations on the availability of our raw materials, any of which could harm our business, financial condition and results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.
We depend on sophisticated information technology and equipment systems, and any failure of these systems could harm our business.
We depend on various information technology and equipment systems, including services licensed, leased or purchased from third parties such as cloud computing infrastructure, operating systems and artificial intelligence platforms, for significant elements of our operations.
We use complex software processes to manage samples and evaluate sequencing result data. These software processes are subject to initial design challenges and may require ongoing modifications, each of which may result in unanticipated issues, leading to service disruptions or errors, resulting in liability.
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We have installed and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including systems handling human resources, financial controls and reporting, contract management, regulatory compliance and other infrastructure operations. In addition to these business systems, we have installed and intend to extend, the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions and the network design of our technical systems. These information technology and telecommunications systems support a variety of functions, including data and cybersecurity, laboratory operations, quality control, R&D activities and general administrative activities. In addition, our third-party billing and collections provider depends upon technology and telecommunications systems provided by outside vendors.
Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious acts and natural disasters. In addition to traditional computer “hackers”, malicious code (such as viruses and worms), employee theft or misuse, and denial-of-service attacks, sophisticated nation-state and nation-state supported actors also now engage in attacks (including advanced persistent threat intrusions), each of which could impair our ability to prevent the theft or misappropriation of our intellectual property, know-how or technologies. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we take to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of these systems or those used by our collaborators or subcontractors could prevent us from conducting our operations. Any disruption or loss of information technology or telecommunications software and systems on which critical aspects of our operations depend could have an adverse effect on our business, our reputation, and we may be unable to regain or repair our reputation in the future.
Our use of open source software could compromise our ability to use our biofacturing platform and subject us to possible litigation.
We use open source software in connection with our biofacturing platform. Use of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide support, updates, warranties, or other contractual protections regarding infringement claims or the quality of the code, and the wide availability of source code to components used in our products could expose us to security vulnerabilities. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or commercialize our products. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, develop technologies that are similar to or better than ours. Any of the foregoing could harm our business, financial condition, results of operations and prospects.
Our consolidated financial statements contain a going concern qualification.
The audit report with respect to our audited financial statements for the year ended December 31, 2020 includes an explanatory paragraph stating that there are material uncertainties which caused substantial doubt about our ability to continue as a going concern, in the absence of additional financing and cost reduction or cost management measures. We are subject to various covenants related to the Perceptive Credit Agreement and given the substantial doubt about our ability to continue as a going concern there is a risk that we may not meet our covenants in the future. See Note 1 to our consolidated financial statements appearing elsewhere in this prospectus for additional information. In the future, we will need to raise adequate capital to pursue our growth strategy and support continuing operations. Although we expect the proceeds we receive as part of our initial public offering to be sufficient for us to continue
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as a going concern, if they are not sufficient, we may need to raise additional cash through debt, equity or other forms of financing to fund future operations, which may not be available on acceptable terms, or at all. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses. Further, if we cannot continue as a going concern, we may be forced to discontinue operations and liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, which would cause our shareholders to lose some or all of their investment.
Risks Related to Our Intellectual Property
Our proprietary rights may not adequately protect our technologies and pipeline products.
Our commercial success will depend substantially on our ability to obtain patents and maintain adequate legal protection for the intellectual property we may own solely or jointly with, or license from, third parties, including our technologies and pipeline products in the United States and other countries. Our ability to protect our proprietary rights from unauthorized use by third parties relies on our ability to obtain and maintain valid and enforceable patents covering our proprietary technologies and future products and to maintain the confidentiality of information and technology that we maintain as either confidential or as trade secrets.
We apply for patents covering both our technologies and pipeline products, as we deem appropriate. However, filing, prosecuting, maintaining and defending patents in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less robust than those in the United States. We may also fail to apply for patents on important technologies or pipeline products in a timely fashion, or at all. Our existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from designing products around our patents or otherwise developing competing products or technologies. In addition, the breadth of protections offered by patents is highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Additional uncertainty may result from legal decisions by the United States Federal Circuit and Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws or from legislation enacted by the U.S. Congress. For instance, the availability of patent protection with respect to software and claims reciting abstract ideas, laws of nature, natural phenomena and/or natural products, regardless of whether the claimed subject matter is otherwise novel and inventive, is uncertain and subject to change. The patent situation outside of the United States is also changing and difficult to predict. As a result, the validity and enforceability of patents cannot be predicted with certainty.
We do not know whether any of our pending patent applications or any pending patent applications that we license from others will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our technology or pipeline products. The patents we own or take licenses to and those that may be issued in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology even when patented. Such third parties may then try to import products made using our inventions into the United States or other territories. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, that we will be able to predict the breadth, validity and enforceability of the claims upheld in those patents.
If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor or other third party, absent patent protection, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. If any of our confidential information or trade secrets were to be disclosed to or independently discovered by a competitor or other third party, it could harm our business, financial condition, results of operations and prospects.
If competitors are able to copy and use our technology, our ability to compete effectively could be harmed. Others may independently develop and obtain patents for technologies that are similar to, or superior to, our technologies. If that happens, their owners may demand that we take a license, or refuse to grant us a license on reasonable terms or an exclusive license, if at all, which could cause harm to our business.
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We have pursued in the past and may pursue additional U.S. Government contracting and subcontracting opportunities in the future, and as a U.S. Government contractor and subcontractor, we would be subject to a number of procurement rules and regulations.
We have entered into agreements with governmental entities and contractors in the past to serve as a U.S. Government contractor or subcontractor and may do so again in the future. U.S. Government procurement contractors and subcontractors must comply with specific procurement regulations and other requirements. These requirements, although customary in U.S. Government contracts, could impact our performance and compliance costs, including by limiting or delaying our ability to share information with business partners, customers and investors. The U.S. Government has in the past and may in the future demand contract terms that are less favorable than standard arrangements with private sector customers and may have statutory, contractual, or other legal rights to terminate contracts with us for convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition and results of operations. In addition, changes in U.S. Government budgetary priorities could lead to changes in the procurement environment, affecting availability of U.S. Government contracting, subcontracting or funding opportunities, which could lead to modification, reduction or termination of our U.S. Government contracts or subcontracts. If and to the extent such changes occur, they could impact our results and potential growth opportunities.
In addition, failure by us, our employees, representatives, contractors, channel partners, agents, intermediaries or other third parties to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, claims for damages, refund obligations, the assessment of civil or criminal penalties and fines, loss of exclusive rights in our intellectual property and temporary suspension or permanent debarment from government contracting, all of which could negatively impact our results of operations and financial condition. See the risk factor titled “—We do not have exclusive rights to intellectual property we develop under U.S. federally funded research grants and contracts, including with DARPA, and we could ultimately share or lose the rights we do have under certain circumstances.” Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could result in reduced sales of our products, reputational damage, penalties and other sanctions, any of which could harm our business, reputation and results of operations.
We rely in part on trade secrets to protect our products and technology, and our failure to obtain or maintain trade secret protection, or a competitor independently developing technology we protect through trade secrets, could adversely affect our competitive business position.
Others may attempt to copy or otherwise improperly obtain and use our products or technology and trade secrets. We seek to preserve the integrity and confidentiality of our confidential proprietary information and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. Monitoring unauthorized access and use is difficult, and we cannot be certain that the steps we have taken will prevent that, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover, in some cases our ability to determine if our intellectual property is being unlawfully used by a competitor may be limited.
We rely heavily on confidentiality agreements and confidentiality terms in our other agreements to protect unpatented trade secrets, know-how and confidential technology including parts of our biofacturing platform, molecule identity and production organisms, which help us maintain our competitive position. This is particularly relevant where patent protection may not be available, for example, aspects of our biofacturing platform that are naturally occurring. We regularly enter into agreements to maintain and protect our intellectual property and proprietary technology, including confidentiality agreements, non-disclosure agreements with our employees, consultants, academic institutions, corporate partners and when needed, our advisers. However, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure, which could adversely impact our ability to establish or maintain a competitive advantage in the market.
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Trade secrets and know-how can be difficult to maintain and protect. Monitoring unauthorized disclosure is difficult, and despite the steps we have taken and the employee education we also conduct, we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third party had improperly obtained and was using our trade secrets, the lawsuit would be expensive and time-consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
We face risks related to cybersecurity threats and incidents, as well as significant disruptions of our information technology systems or data security incidents that could result in significant financial, legal, regulatory, business and reputational harm.
We may face attempts by others to gain unauthorized access through the Internet or to introduce malicious software, to our IT systems. Additionally, individuals or organizations, including malicious hackers, state-sponsored organizations, insider threats including employees and third-party service providers or intruders into our physical facilities, may attempt to gain unauthorized access and try to steal our technology and data. We are also a potential target of malicious attackers who: attempt to gain access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products, employees and customers; interrupt our systems and services or those of our customers or others; or demand ransom to return control of such systems and services. Such attempts by malicious attackers in general are increasing in number and in technical sophistication, and if successful, expose us and the affected parties to risk of loss or misuse of proprietary or confidential information or disruptions of our business operations, including our technology operations. Furthermore, malicious online actors may employ false pretenses or technical measures in an attempt to induce our employees to use IT systems in a manner contrary to our benefit, such as, by authorizing payment of false bills or to run software that would encrypt our information in such a way that it cannot be used by us without paying ransom. While we have implemented security measures and employee training programs intended to protect our information technology systems and infrastructure, there can be no assurance that such measures will successfully prevent service interruptions or further security incidents. We have also outsourced elements of our operations (including elements of our information technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who may or could have access to our computer networks or our confidential information. Many of those third parties in turn subcontract or outsource some of their responsibilities to third parties. These providers can experience breaches of their systems and products that impact the security of our systems and our proprietary or confidential information.
Our information systems may also experience interruptions, delays, or cessations of service or produce errors in connection with system integration, software upgrades, or system migration work that takes place from time to time. While all information technology operations are inherently vulnerable to inadvertent or intentional security breaches, incidents, attacks and exposures, the size, complexity, accessibility and distributed nature of our information technology systems, and the large amounts of sensitive information stored on those systems, make such systems potentially vulnerable to unintentional or malicious, internal and external attacks on our technology environment. While we have implemented security measures intended to protect our information technology systems and infrastructure, there can be no assurance that such measures will successfully prevent service interruptions or further security incidents.
Should we fail to maintain required security qualifications, we may face regulatory concerns or be in breach of contract, which may trigger regulatory action, litigation and/or damages, reputational harm, or loss of certain contracts. While we actively work to manage our information security compliance program, we cannot guarantee that we will always meet the certification standard going forward.
We may encounter intrusions or unauthorized access to our network, services or infrastructure. Any such incidents, whether or not successful, could result in our incurring significant costs related to, for example, rebuilding internal systems, implementing additional threat protection measures, defending against litigation, responding to regulatory inquiries or actions, paying damages, providing customers with incentives to maintain the business relationship, or taking other remedial steps with respect to third parties, as well as reputational harm. In addition, these threats are constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures. While we seek to detect and investigate all unauthorized attempts and attacks against our network, products and services and to prevent their recurrence where practicable through changes to our internal processes and tools and changes or updates to our products and services, we may not be successful in doing so and remain potentially vulnerable to additional known or unknown threats. In some instances, we, our customers and the users of our products and services can be unaware of an incident or its magnitude and effects.
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While we maintain cyber liability insurance with coverage we believe adequate to cover our risk profile, we cannot guarantee that tail risks, should they occur, would not cause us to incur significant losses or liabilities resulting from data security incidents. Any litigation or regulatory review arising from these types of data security incidents could result in significant legal exposure to us. In addition, information technology system disruptions, whether from attacks on our technology environment or from computer viruses or malware, natural disasters, terrorism, war and telecommunication and electrical failures, could result in a material disruption of our facilities, R&D activities and general business operations. Any event that leads to unauthorized access to, use or disclosure of personal information could, among other consequences, disrupt our business, harm our reputation and/or compel us to comply with applicable federal and/or state breach notification laws and foreign law equivalents. In addition, failure to maintain effective internal accounting controls related to security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.
Theft, loss, or misuse of personal data about our employees, customers, or other third parties could increase our expenses, damage our reputation, or result in legal or regulatory proceedings.
The theft, loss, or misuse of personal data collected, used, stored or transferred by us to run our business could result in significantly increased business and security costs or costs related to defending legal claims or implementing remedial or punitive measures. Global privacy legislation, enforcement and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant and noncompliance could expose us to significant monetary penalties, damage to our reputation, suspension of online services or sites in certain countries, mandatory changes in business processes and even criminal sanctions. Even our inadvertent failure to comply with federal, state, or international privacy-related or data-protection laws and regulations could result in audits, regulatory inquiries or proceedings against us by governmental entities or other third parties.
Breaches of physical security systems and/or theft of physical materials could result in significant financial, legal, regulatory, business and reputational harm to us.
We seek to preserve the integrity and confidentiality of our and our partners’, suppliers’ and customers’ data, trade secrets, proprietary chemical and biological materials (e.g., genetically modified host microbes) by maintaining physical security of our premises, biological materials storage systems and information technology systems. While we have confidence in these physical security systems, they may in the future be breached. In addition, we use third party vendors for certain services (e.g., DNA synthesis and sequencing or archiving of samples of engineered organisms) that require us to send or receive physical samples of materials that may constitute or contain proprietary or confidential information, and such third-party vendors may experience breaches. We also exchange physical samples of materials that may constitute or contain proprietary or confidential information with our customers and business partners. In many cases, these customers, partners, and third-party vendors are located internationally, sometimes in areas that are particularly susceptible to malicious physical security breaches.
Any breach of our own physical security, or that of a third party supplier, customer, or business partner, could adversely affect our business operations and/or result in the loss, misappropriation and/or unauthorized access to, or use or disclosure of, confidential or proprietary information (including trade secrets), which could result in financial and reputational harm to us, significant legal exposure to us, and/or compel us to comply with applicable federal and/or state breach notification laws and foreign law equivalents.
See also the risk factor titled, “—We face risks related to cybersecurity threats and incidents, as well as significant disruptions of our information technology systems or data security incidents that could result in significant financial, legal, regulatory, business and reputational harm.
We may need to commence or defend litigation to enforce our intellectual property rights, which would divert resources and management’s time and attention and the results of which would be uncertain.
Any litigation arising from our enforcement of claims that a third party is infringing, misappropriating or otherwise violating our proprietary rights without permission or defending claims by a third party that we are infringing, misappropriating or otherwise violating their proprietary rights without permission would be expensive, time consuming and uncertain. There can be no assurances that we would prevail in any suit brought by us or against us by third parties, or successfully settle or otherwise resolve those claims. Significant litigation would have substantial costs, even if the eventual outcome is favorable to us, and would divert management’s attention from our business objectives.
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Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products or use our technologies, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs and expenses if we are found to have willfully infringed. In the event of a successful claim against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third parties, or be prohibited from selling certain products or using certain technologies. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all. In addition, we could encounter delays in product or service introductions while we attempt to develop alternative or redesign existing products or technologies to avoid or resolve these claims. Our loss in any lawsuit or failure to obtain a license, could prevent us from commercializing the products or using the technologies (or, in the case of a suit we make against a third party, our failure to prevent their commercialization of product or use of technologies we believe to be in violation of our intellectual property rights) and the prohibition of sale of any of our products or use of technologies (or our failure to prohibit a third party’s sales of competitive products or use of competing technologies) could materially affect our business, our ability to gain market acceptance for our products and our ability to use our technologies for the development of our pipeline products.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties if they become involved in infringement claims that target our products, services or technologies, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties even if we are not obligated to do so if we determine it would be important to our business relationships to do so. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition.
Furthermore, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States or apply differing rules concerning effective assignment of intellectual property rights. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. We may encounter similar difficulties, particularly as we expand to work with foreign employees and contractors and expand sales into foreign markets. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents by foreign holders and other intellectual property protection, particularly those relating to biotechnology and bioindustrial technologies. This could make it difficult for us to stop the infringement of our patents or misappropriation or other violation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business.
We do not have exclusive rights to intellectual property we develop under U.S. federally funded research grants and contracts, including with DARPA, and we could ultimately share or lose the rights we do have under certain circumstances.
Some of our intellectual property has been or may be developed during the course of research funded by the U.S. government, including under our agreements with DARPA. As a result, the U.S. government may have certain rights to intellectual property that we use in our current or future products pursuant to the Bayh-Dole Act of 1980, as amended (the “Bayh-Dole Act”). Under the Bayh-Dole Act, U.S. Government rights in certain “subject inventions” developed under a government-funded program include a non­exclusive, non-transferable and irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us, or an assignee or exclusive licensee to such inventions, to grant licenses to any of these inventions to the government or a third party if the government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; (iii) government action is necessary to meet requirements for public use under federal regulations; or (iv) the right to use or sell such inventions is exclusively licensed to an entity within the United States and substantially manufactured outside the United States without the U.S. government’s prior approval. Additionally, we may be restricted from granting exclusive licenses for the right to use or sell our inventions created pursuant to such agreements unless the licensee agrees to comply with relevant Bayh-Dole Act restrictions (e.g., manufacturing substantially all of the invention in the United States)
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and reporting requirements. The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government or fail to file an application to register for a patent for the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed. Certain technology and inventions are also subject to transfer restrictions during the term of these agreements with the U.S. government and for a period thereafter. These restrictions may limit sales of products or components, transfers to foreign subsidiaries for the purpose of the relevant agreements and transfers to certain foreign third parties. If any of our intellectual property becomes subject to any of the rights or remedies available to the U.S. government or third parties pursuant to the Bayh-Dole Act, this could impair the value of our intellectual property and could adversely affect our business.
We use naturally occurring materials that are not patentable and changes to patent laws in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either the patent laws or interpretation of patent laws in the United States, could increase the uncertainties and costs surrounding the prosecution of our owned and in-licensed patent applications and the maintenance, enforcement or defense of our owned and in-licensed issued patents. The Leahy-Smith Act also included changes that affect the way patent applications are prosecuted, redefine prior art, provide more efficient and cost-effective avenues for competitors to challenge the validity of patents, and enable third-party submission of prior art to the United States Patent and Trademark Office (“USPTO”) during patent prosecution and additional procedures to attack the validity of a patent at USPTO-administered post-grant proceedings, including post-grant review, inter partes review and derivation proceedings. As such, the Leahy-Smith Act and its continued implementation could continue to increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, the patent positions of companies in the development and commercialization of software and biologics are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents once obtained. Depending on future actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our patent rights and our ability to protect, defend and enforce our patent rights in the future.
Patent terms may be inadequate to protect our competitive position on our products and technologies for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent and the protection it affords, is limited. Even if patents covering our products and technologies are obtained, once the patent life has expired, we may be open to competition from products leveraging the proprietary technologies described in our patents. Given the amount of time required for the development, testing and, in some cases, regulatory review of new products, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products, or using technologies, similar or identical to ours.
We may be subject to claims by third parties asserting that our employees, consultants, or contractors have wrongfully used or disclosed confidential information of third parties, or we have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Certain of our employees, consultants and contractors were previously employed at universities or other software or biopharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims.
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In addition, while it is our policy to require that our employees, consultants and contractors who may be involved in the development of intellectual property, execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our intellectual property assignment agreements with them may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could have a material adverse effect on our competitive business position and prospects. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to use or commercialize our technology or products, which license may not be available on commercially reasonable terms, or at all. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and employees.
Our collection, use and disclosure of personal information, including health and employee information, is subject to U.S. state and federal privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
The privacy and security of personal information stored, maintained, received or transmitted, including electronically, is a major issue in the United States and abroad. Numerous federal and state laws and regulations govern the collection, dissemination, use and confidentiality of personal information, including genetic, biometric and health information, including state privacy, data security and breach notification laws, federal and state consumer protection and employment laws, the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and the Genetic Information Nondiscrimination Act of 2008. These laws and regulations are increasing in complexity and number, may change frequently and sometimes conflict. Penalties for violations of these laws vary, but can be severe.
While we strive to comply with all applicable privacy and security laws and regulations, including our own posted privacy policies, these laws and regulations continue to evolve and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose customers, which could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about the data-collection activities of various government agencies and in the number of private privacy-related lawsuits filed against companies. Concerns about our practices with regard to the collection, use, retention, disclosure or security of personal information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.
Data collection outside of the United States may be governed by restrictive regulations governing the use, processing and cross-border transfer of personal information.
In the event we decide to conduct business or grow our business in certain territories outside the United States, we may be subject to additional privacy restrictions. For example, the EU General Data Protection Regulation (“GDPR”) regulates certain business activities involving the collection, use, storage, disclosure, transfer or other processing of personal data regarding individuals in the EEA. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data. If we expand our business activities involving the personal data of EEA residents, it may increase our cost of doing business or require us to change our business practices. Compliance with the GDPR and other similar laws and regulations will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation and reputational harm in connection with our activities outside the United States, including in the EEA.
Risks Relating to Government Regulation and Tax Matters
We may not be able to obtain, or may experience significant delays or costs in obtaining, regulatory approval for our products or their components and even if approvals are obtained, complying on an on-going basis with numerous regulatory requirements will be time-consuming and costly.
The product development and manufacturing requirements of the EPA and FDA and other government bodies, and the criteria these authorities use to determine the safety and/or efficacy of pipeline products or its components,
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vary substantially according to the type, complexity, novelty, intended use and geographic market of said pipeline product or component. It is difficult to determine the time required or the financial costs to obtain regulatory approvals for our pipeline products or its components or how long it will take to commercialize our pipeline products, even if approved for marketing. In the United States, the EPA administers the Toxic Substances Control Act (“TSCA”), which regulates the commercial registration, distribution and use of many chemicals. Before an entity can manufacture or distribute a new chemical subject to TSCA, it must file a Pre-Manufacture Notice (“PMN”), to add the chemical to the TSCA Inventory. The EPA has 90 days to review the filing but may request additional data or time, which could significantly extend the timeline for approval. As a result, we may not receive EPA approval as expeditiously as we would like. Similar regulations exist in the European Union (“EU”), known as REACH, where regulatory authorization under this program may be delayed or require additional significant costs.
We expect to encounter regulations in most, if not all, of the countries in which we may seek to produce, import, or sell our products, and we cannot assure you that we will be able to obtain necessary approvals and third-party verifications in a timely manner or at all. If there are delays or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary in a particular country, then we may not be able to commercialize our products in such country and our business will be adversely affected. In addition, any enforcement action taken by regulators against us or our products for non-compliance could cause us to suffer adverse publicity, which could harm our reputation and our relationship with our customers and vendors.
In addition, many of our products are intended to be a component of our collaboration partners and/or customers’ (or their customers’) end-use products. Such end-use products may be subject to similar or other various regulations, including regulations promulgated by U.S. or EU regulatory agencies or authorities. If we or our collaboration partners and customers (or their customers) are not successful in obtaining any required regulatory approval or third-party verifications for their end-use products that incorporate our products, or fail to comply with any applicable regulations for such end-use products, whether due to our products or otherwise, demand for our products may decline and our revenue will be adversely affected.
We may incur significant costs to comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
We use hazardous chemicals and biological materials in our business and are subject to a variety of federal, state, local and international laws and regulations governing, among other matters, the use, generation, manufacture, transportation, storage, handling, disposal of and human exposure to these materials both in the United States and overseas, including regulation by governmental regulatory agencies, such as the Occupational Safety and Health Administration and the EPA. We have incurred and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.
Although we have implemented safety procedures for handling and disposing of these materials and waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures will be compliant or capable of eliminating the risk of injury or contamination from the generation, manufacturing, use, storage, transportation, handling, disposal of and human exposure to hazardous materials. Failure to comply with environmental, health and safety laws could subject us to liability and resulting damages. There can be no assurance that violations of environmental, health and safety laws will not occur as a result of human error, accident, equipment failure, contamination or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present or future laws could result in the imposition of fines, regulatory oversight costs, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act in the United States can impose liability for the full amount of damages without regard to comparative fault for the investigation and cleanup of contamination and impacts to human health and for damages to natural resources. Contamination at properties we will own and operate and at properties to which we send hazardous materials, may result in liability for us under environmental laws and regulations.
Our business and operations may be affected by other new environmental, health and safety laws and regulations, which may require us to change our operations, or result in greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and harm our business.
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We are subject to certain U.S. and foreign anti-corruption, anti-bribery and anti-money laundering laws and regulations. We can face serious consequences for violations.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the U.K. Bribery Act and possibly other anti-corruption, anti-bribery and anti-money laundering laws and regulations in the jurisdictions in which we do business, both domestic and abroad. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or offers of improper payments to government officials, political parties, or commercial partners for the purpose of obtaining or retaining business or securing an improper business advantage, or engaging in certain transactions involving criminally-derived property or the proceeds of criminal activity. We plan to engage third parties to conduct our business abroad, for example, for product trials and/or to obtain necessary permits, licenses, patent registrations and other regulatory approvals. We and our third-party business partners, representatives and agents may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated universities or other entities, and we may be held liable for the corrupt or other illegal activities of our employees or such third parties even if we do not explicitly authorize such activities. We expect our non-U.S. activities to increase over time, which may also increase our exposure to these laws.
These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions in violation of those laws. While we have policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Any allegations or violation of the FCPA or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws may result in whistleblower complaints, sanctions, settlements, investigations, prosecution, enforcement actions, substantial criminal fines and civil penalties, imprisonment, debarment, tax reassessments, breach of contract and fraud litigation, loss of export privileges, suspension or debarment from U.S. government contracts, adverse media coverage, reputational harm and other consequences, all of which may have an adverse effect on our reputation, business, results of operations and prospects. Responding to an investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.
Governmental trade controls, including export and import controls, sanctions, customs requirements and related regimes, could subject us to liability or loss of contracting privileges or limit our ability to compete in certain markets.
Our products and technologies are subject to U.S. and non-U.S. export controls. Export authorizations may be required for the products, technologies, or services to be exported outside of the United States, to a foreign person, or outside of a foreign jurisdiction. Our current or future products or technologies are, and may in the future, be subject to the Export Administration Regulations (“EAR”). If a product, technology, or service meets certain criteria for control under the EAR, then that product, technology, or service would be exportable outside the United States or to a foreign person or from one foreign jurisdiction to another foreign jurisdiction only if we obtain the applicable export license or other applicable authorization including qualifying for a license exception, if required. Compliance with the U.S. and foreign export laws and regulations and other applicable regulatory requirements regarding the sales, shipment and use of our products and technology may affect our ability to work with foreign partners, affect the speed at which we can introduce new products into non-U.S. markets, or limit our ability to sell products or services or license technologies into some countries.
Additionally, certain materials that we use in our development and production activities are subject to U.S. import controls. We currently have, and may in the course of business need to procure, certain import authorizations, for example, related to plant pests, chemicals, biological agents and other controlled materials, including from the U.S. Department of Agriculture, U.S. Environmental Protection Agency and U.S. Centers for Disease Control. Compliance with applicable regulatory requirements regarding the import of such materials may limit our access to materials critical to our development activities or affect the speed at which we can develop new products.
Our activities are also subject to the economic sanctions laws and regulations of the United States and other jurisdictions. Such controls prohibit certain transactions, potentially including financial transactions and the transfer
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of products, technologies and services, to sanctioned countries, governments and persons, without a license or other appropriate authorization. U.S. sanctions policy changes could affect our ability to interact, directly and indirectly, with targeted companies or companies in sanctioned countries, including Chinese companies.
While we take precautions to comply with U.S. and non-U.S. export control, import control and economic sanctions laws and regulations, we cannot guarantee that such precautions will prevent violations of such laws, including transfers to unauthorized persons or destinations, and including inadvertent violations as a result of a misclassification of a product, technology or service under export control laws. Violations could result in our business being subject to government investigations, denial of export or import privileges, significant fines or penalties, denial of government contracts and reputational harm. Any limitation on our ability to export our products, technology, or services, or import materials critical to our development activities would likely adversely affect our business and financial condition.
We are party to a mitigation agreement with the Committee on Foreign Investment in the United States (“CFIUS”) and can face penalties or further restrictions if we fail to comply with that agreement. CFIUS may also condition, modify, delay or prevent our future acquisition or investment activities.
Due to certain foreign ownership interests in our business, the Company operates pursuant to an agreement with CFIUS agencies that requires us to adhere to certain information and technology protection requirements. This agreement will remain in place until CFIUS agrees to terminate it, which CFIUS might do if it determines that the agreement is no longer necessary due to changed circumstances, including any changes to the Company’s ownership. We have incurred and will continue to incur, incremental additional costs in implementing and complying with these standards, and those costs may increase as we continue to grow our business. If we fail to comply with our obligations under the agreement, we may be subject to penalties, injunctive action, additional mitigation conditions or other restrictions.
Further, subject to any future changes in the foreign ownership interest in the Company, including any that result from our initial public offering, CFIUS may interpret its regulations as continuing to give it jurisdiction to review the Company’s acquisitions of, or investments in, other US businesses. If CFIUS conducts such a review, it could impose restrictions on the investments or to deny such transactions to address any national security concerns that it determines are posed by such transactions.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred net losses since our inception and we may never achieve or sustain profitability. Generally, for U.S. federal income tax purposes, net operating losses incurred will carry forward. However, net operating loss carryforwards generated prior to January 1, 2018 are subject to expiration for U.S. federal income tax purposes. As of December 31, 2019, we had federal net operating loss carryforwards of approximately $460.0 million of which $96.9 million will begin to expire in 2033 and $363.1 million, which will carryforward indefinitely. As of December 31, 2019, we had a total state net operating loss carryforward of $418.5 million, which will begin to expire in 2027. As of December 31, 2019, we also had federal and state R&D tax credit carryforwards of approximately $19.3 million and $15.9 million, respectively, which may be available to offset future income tax liabilities. The federal R&D tax credit carryforwards would begin to expire in 2034. The state R&D tax credit carryforwards are not subject to expiration.
As of December 31, 2020, we had federal net operating loss carryforwards of $704.1 million of which $99.3 million will begin to expire in 2033 and $604.8 million will carryforward indefinitely. As of December 31, 2020, we had a total state net operating loss carryforward of $515.6 million, which will begin to expire in 2027. As of December 31, 2020, we also had federal and state R&D tax credit carryforwards of $26.8 million and $22.3 million, respectively, which may be available to offset future income tax liabilities. The federal R&D tax credit carryforwards would begin to expire in 2034. The state R&D tax credit carryforwards are not subject to expiration.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change in its equity ownership by certain shareholders over a three-year period, the corporation’s ability to use its pre-ownership change net operating loss carryforwards and other pre-ownership change tax attributes, such as research tax credits, to offset its post-ownership change income or taxes may be limited. As a result, even if we attain profitability, we may be unable to use a material portion of our net operating loss carryforwards and other tax attributes, which could adversely affect our future cash flows. There is also a risk that due to regulatory changes, such as suspensions on the
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use of net operating losses or other unforeseen reasons, our existing net operating losses could expire or otherwise be unavailable to offset future U.S. federal and state taxable income. For these reasons, we may not be able to utilize some portion of our net operating losses even if we attain profitability.
We have analyzed whether the public offering will potentially result in an “ownership change” as defined under Sections 382 and 383 of the Code. We are unable to determine if an ownership change will be triggered at the time of the public offering because the amount of shares to be sold in the public offering is uncertain. Accordingly, it is possible that the public offering may result in an ownership change. We continue to monitor the impact of the offering on our ability to use our net operating loss carryforwards and other tax attributes.
Changes in U.S. and foreign tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
We are subject to tax laws, regulations and policies of the U.S. federal, state and local governments and of taxing authorities in foreign jurisdictions, including Japan, Spain, the Netherlands and Taiwan. Changes in tax laws, as well as other factors, could cause us to experience fluctuations in our tax obligations and otherwise adversely affect our tax positions and/or our tax liabilities. For example, the Organisation for Economic Co-operation and Development (OECD) has published proposals covering various international tax-related issues, including country-by-country reporting, permanent establishment rules, transfer pricing and tax treaties. Future tax reform resulting from this development may result in changes to long-standing tax principles, which could adversely affect our effective tax rate or result in higher cash tax liabilities in those countries or change the manner in which we operate our business. There can be no assurance that our tax payments, tax credits, or incentives will not be adversely affected by these or other initiatives.
Risks Related to Our Initial Public Offering and Ownership of Our Common Stock
An active trading market for our common stock may never develop or be sustained.
There is currently no public market for our common stock. Our common stock has been approved for listing on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “ZY.” However, we cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your shares.
The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.
The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may differ from the market price of our common stock after the offering. As a result, you may not be able to sell your common stock at or above the initial public offering price. Some of the factors that may cause the market price of our common stock to fluctuate include:
the timing of launch of our products and the degree to which the launch and commercialization thereof meets the expectations for securities analysts and investors;
commencement or termination of collaborations for our product development and research programs;
failure or discontinuation of any of our product development and research programs;
the success of existing or new competitive products, services or technologies;
regulatory or legal developments in the United States and other countries;
developments or disputes concerning patent applications, issued patents, other intellectual property or proprietary rights;
the impact of COVID-19 on our business and on global economic conditions;
our ability to identify, recruit and retain skilled personnel;
the level of expenses related to any of our research programs or product development programs;
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actual or anticipated changes in our estimates as to our financial results or development timelines;
whether our financial results, forecasts and development timelines meet the expectations of securities analysts or investors;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders, or other stockholders;
expiration of market standoff or lock-up agreements;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in estimates or recommendations by securities analysts, if any, that cover our stock;
general economic, industry and market conditions; and
the other factors described in this “Risk Factors” section.
In recent years, stock markets in general and the market for technology companies (including biopharma companies) in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. Following periods of such volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
We do not expect to pay dividends in the foreseeable future.
You should not rely on an investment in our common stock to provide dividend income. See “Dividend Policy.” We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations and continue to invest in commercializing our existing products, launching products in our pipeline and furthering the development of our biofacturing platform and technology. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. As a result, investors seeking cash dividends should not purchase our common stock.
If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. Currently, we do not have any analyst coverage and we may not obtain analyst coverage in the future. In the event we obtain analyst coverage, we will not have any control over such analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Sales of a substantial number of shares of our common stock by our existing stockholders following this offering could cause the price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market could occur at any time following the expiration of the market standoff and lock-up agreements or the early release of these agreements or the perception in the market that the holders of a large number of shares of common stock intend to sell shares and could reduce the market price of our common stock.
After this offering,     shares of our common stock will be outstanding. Of these shares, the     shares we are selling in this offering may be resold in the public market immediately, unless purchased by our affiliates. Substantially all of the remaining shares of our common stock that will be outstanding after this offering are currently prohibited or otherwise restricted under securities laws, market standoff agreements entered into by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters; however, subject to applicable
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securities law restrictions and excluding shares of restricted stock that will remain unvested, these shares will be able to be sold in the public market beginning 180 days after the date of this prospectus. The representatives may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. Shares issued upon the exercise of stock options outstanding under our equity incentive plans or pursuant to future awards granted under those plans will become available for sale in the public market to the extent permitted by the provisions of applicable vesting schedules, any applicable market standoff and lock-up agreements and Rule 144 and Rule 701 under the Securities Act. See the section titled “Shares Eligible for Future Sale” for additional information.
Moreover, after this offering, holders of an aggregate of 204,386,437 shares of our common stock will have rights, subject to conditions, to require us to file registration statements with the SEC covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also plan to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described in the section titled “Underwriting” in this prospectus. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.
You will incur immediate and substantial dilution as a result of this offering.
If you purchase common stock in this offering, you will incur immediate and substantial dilution of $    per share, representing the difference between the assumed initial public offering price of $    per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses and our pro forma net tangible book value per share. As of December 31, 2020, there were 16,497,013 shares of common stock issuable upon exercise of outstanding stock options with a weighted-average exercise price of $2.22 per share. To the extent that these outstanding options, or any other rights, are exercised, or we issue additional equity or convertible securities in the future or the underwriters exercise their option to purchase additional shares, you will incur further dilution. See the section titled “Dilution” for a further description of the dilution you will experience immediately after this offering.
We may be unable to satisfactorily fund our working capital requirements and raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering or restrict our operations.
If our current funding becomes insufficient to support future operating requirements, we will need to obtain additional funding by raising additional debt or additional equity from the private or public capital markets. There can be no assurance that such additional funding will be available on terms attractive to us, or at all. The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our shareholders would experience dilution. Any preferred equity securities issued also would likely provide for rights, preferences or privileges senior to those of holders of our common shares. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common shares. Debt financing and preferred equity financing, if available, would increase our fixed payment obligations and may also involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures or declaring dividends. For example, the Perceptive Credit Agreement contains restrictions on our ability to purchase or dispose of assets and has other affirmative or negative covenants that impact how we run our business. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or pipeline products or to grant licenses on terms that may not be favorable to us. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited and could have a material adverse effect on our business, results of operations, prospects and financial condition.
Insiders will continue to have substantial influence over us after this offering, which could limit your ability to affect the outcome of key transactions, including a change of control.
After this offering, our directors, executive officers, holders of more than 5% of our outstanding stock and their respective affiliates will beneficially own shares representing approximately   % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and
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all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company and might affect the market price of our common stock.
Our management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.
Our management will have broad discretion in the application of the net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Accordingly, investors will need to rely on our judgment with respect to the use of these proceeds. We expect to use the net proceeds to us from this offering primarily for working capital and other general corporate purposes, which we currently expect will include continued investment in commercializing our existing products, launching products in our pipeline and furthering the development of our biofacturing platform and technology. We do not currently have specific planned uses for the proceeds of this offering. We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in businesses, assets or technologies, although we do not currently have any commitments for any such acquisitions or investments. For more information see, “Use of proceeds.” The failure by our management to apply these funds effectively could adversely affect our ability to continue maintaining and expanding our business. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.
In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering.
You should carefully evaluate all of the information in this prospectus. We have in the past received and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees, that incorrectly reports on statements made by our officers or employees or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted by SEC rules and plan to rely on exemptions from certain disclosure requirements that are applicable to other SEC-registered public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the SOX, not being required to comply with the auditor requirements to communicate critical audit matters in the auditor’s report on the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of the exemption regarding the timing of the adoption of accounting standards and, therefore, while we are an EGC we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not EGCs.
Delaware law and provisions in our amended and restated certificate of incorporation and bylaws that will be in effect prior to the closing of this offering might discourage, delay, or prevent a change in control of the Company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws that will be in effect prior to the closing of this offering may delay, deter or prevent a merger, acquisition or other change in control that stockholders
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may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our organizational documents will:
establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms;
provide that our directors may be removed only for cause;
provide that vacancies on our board of directors and any newly created directorship may be filled only by a majority of the remaining directors then in office, even though less than a quorum;
eliminate cumulative voting in the election of directors;
authorize our board of directors to issue shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;
permit stockholders to take actions only at a duly called annual or special meeting and not by unanimous written consent;
prohibit stockholders from calling a special meeting of stockholders;
certain litigation against us can only be brought in federal court or in Delaware and certain litigation in Delaware may require minimum ownership thresholds in order to file suit;
require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;
authorize our board of directors, by a majority vote, to amend certain provisions of the bylaws; and
require the affirmative vote of at least 6623% or more of the outstanding shares of common stock entitled to vote generally in the election of directors, voting as a single class to amend many of the provisions described above.
In addition, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder,” which is generally a person who, together with its affiliates and associates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or the DGCL that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our common stock.
Our certificate of incorporation that will become effective upon the closing of this offering designates the state courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with the Company and our directors, stockholders, officers and employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law unless we otherwise consent in writing to an alternative forum: (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of fiduciary duty owed by, or otherwise wrongdoing by, any director, stockholder, officer or other employee of our company to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation and bylaws (as each may be amended from time to time); (iv) any action to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the Bylaws (as either may be amended from time to time); or (v) any action asserting an internal corporate claim (as defined in Section 115 of the DGCL) or a claim otherwise implicating our internal affairs (except for, as to each of (i) to (v) above, any claim as to which the Court of Chancery determines that it does not have subject matter jurisdiction or there is an indispensable party
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not subject to the personal jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within 10 days following such determination), or which is statutorily vested in the exclusive jurisdiction of a court other than the Court of Chancery. For the avoidance of doubt, this provision would not apply to any direct action brought to enforce a duty or liability created by the Securities Act of 1933, or any successor thereto (the “Securities Act”) or the Securities Exchange Act of 1934.
Furthermore, our amended and restated certificate of incorporation will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to the foregoing forum selection provisions.
Our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
This choice of forum provision may limit a Company stockholder’s ability to bring a claim in a judicial forum that stockholder finds favorable for disputes with the Company or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, the enforceability of similar federal court choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find either of the choice of forum provisions contained in our amended and restated certificate of incorporation or amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions which could harm our business, results of operations and financial condition.
Risks Related to being a Public Benefit Corporation
Our status as a public benefit corporation may not result in the benefits that we anticipate.
Upon the closing of our initial public offering, we expect to be a public benefit corporation under the DGCL. As a public benefit corporation, we will be required to have a purpose to produce a public benefit or benefits and to operate in a responsible and sustainable manner. Our public benefit, as provided in our certificate of incorporation, will be: to displace the petrochemicals that pollute the Planet by designing, developing, and commercializing bio-based materials that deliver better performance than existing products, at attractive costs. We make products with broad applications and global reach that are safer for the people who manufacture them, healthier for the people who use them and better for the environment. Our directors and officers will be obligated to manage the Company in a manner that balances our stockholders’ pecuniary interests, the best interests of those materially affected by our conduct and the public benefit or benefits identified in our amended and restated certificate of incorporation. There can be no assurance that we will achieve our public benefit purpose or that the expected positive impact from being a public benefit corporation will be realized, which could have a material adverse effect on our reputation, which may have a material adverse effect on our business, results of operations and financial condition. See “Description of Capital Stock—Public Benefit Corporation Status.”
As a public benefit corporation, we will be required to publicly disclose at least biennially a report on our overall public benefit performance and on our assessment of our success in achieving our specific public benefit purpose, including the objectives established and standards adopted by our Board of Directors and factual information based on the objectives and standards related to the promotion of the public benefits. If we are not timely or are unable to provide this report, if the report does not reflect a positive assessment based on the objectives and standards or if the report is not viewed favorably by parties doing business with us, employees, regulators or others reviewing our credentials, our reputation and status as a public benefit corporation may be harmed.
As a public benefit corporation, our focus on a specific public benefit purpose and producing a positive effect for society may negatively influence our financial performance.
Unlike traditional corporations, whose directors have a fiduciary duty to manage the business in a manner that focuses exclusively on maximizing stockholder value, our directors will have a fiduciary duty to consider not only the stockholders' interests, but also our specific public benefit and the interests of other stakeholders affected by our
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actions. See “Description of Capital Stock—Public Benefit Corporation Status.” Therefore, we may take actions that we believe will further our specific public benefit or be in the best interests of those stakeholders materially affected by our conduct, even if those actions do not maximize our financial results or stockholder returns. While we intend for this public benefit designation and obligation to provide an overall net benefit to us and our business and stakeholders, including stockholders, it could instead cause us to make decisions and take actions without seeking to maximize the income generated from our business, and hence available for distribution to our stockholders. Our pursuit of longer-term or non-pecuniary benefits may not materialize within the timeframe we expect, or at all, and may have an immediate negative effect on any amounts available for distribution to our stockholders. Accordingly, being a public benefit corporation and complying with our related obligations could have a material adverse effect on our business, results of operations and financial condition, which in turn could cause our stock price to decline.
As a public benefit corporation, we may be less attractive as a takeover target than a traditional company would be and, therefore, your ability to realize your investment through an acquisition may be limited. Public benefit corporations may not be attractive targets for activists or hedge fund investors because new directors would still have to consider and give appropriate weight to the public benefit along with stockholder value and stockholders committed to the public benefit can enforce this through derivative suits. Further, by requiring that the board of directors of public benefit corporations consider additional constituencies other than maximizing stockholder value, Delaware public benefit corporation law could potentially make it easier for a board of directors to reject a hostile bid, even where the takeover would provide the greatest short-term financial yield to investors.
Our directors will have a fiduciary duty to consider not only our stockholders' interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our stockholders.
While directors of traditional corporations are required to make decisions they believe to be in the best interests of their stockholders, directors of a public benefit corporation have a fiduciary duty to consider not only the stockholders’ interests, but also the specific public benefit and the interests of other stakeholders affected by the company’s actions. Under the DGCL, directors are shielded from liability for breach of these obligations if they make informed and disinterested decisions that serve a rational purpose. Thus, unlike traditional corporations which must focus exclusively on stockholder value, our directors will not merely be permitted, but will be obligated, to consider our specific public benefit and the interests of other stakeholders. See “Description of Capital Stock—Public Benefit Corporation Status.” In the event of a conflict between the interests of our stockholders and the interests of our specific public benefit or our other stakeholders, our directors must only make informed and disinterested decisions that serve a rational purpose; thus, there is no guarantee such a conflict would be resolved in favor of our stockholders, which could have a material adverse effect on our business, results of operations and financial condition, which in turn could cause our stock price to decline.
As a Delaware public benefit corporation, we may be subject to increased derivative litigation concerning our duty to balance stockholder and public benefit interest, the occurrence of which may have an adverse impact on our financial condition and results of operations.
Stockholders of a Delaware public benefit corporation (if they, individually or collectively, own the lesser of 2% of our outstanding shares or $2,000,000 in market value of our stock) are entitled to file a derivative lawsuit alleging directors failed to balance stockholder and public benefit interests. This potential liability does not exist for traditional corporations. Therefore, we may be subject to the possibility of increased derivative litigation, which would require the attention our management, and, as a result, may adversely impact our management’s ability to effectively execute our strategy. Additionally, any such derivative litigation may be costly to defend or increase director and officer liability insurance premiums, which may have an adverse impact on our financial condition and results of operations.
General Risk Factors
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Federal securities laws, including the Exchange Act, Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations and the listing requirements of Nasdaq impose various requirements on public companies, including establishment and maintenance of effective disclosure and
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financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time and resources to these compliance initiatives, potentially at the expense of other business concerns, which could harm our business, financial condition, results of operations and prospects. Moreover, these rules and regulations will increase our legal and financial compliance costs, particularly as we hire additional financial and accounting employees to meet public company internal control and financial reporting requirements and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.
We are evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting. Any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
As a public reporting company, we will become subject to the rules and regulations established by the SEC and Nasdaq. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel, including senior management. In addition, as a public company, we will be required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting. Management’s initial certification under Section 404 of the Sarbanes-Oxley Act will be required with our annual report on Form 10-K for the year ending December 31, 2022. In support of such certifications, we will be required to document and make significant changes and enhancements, including potentially hiring additional personnel, to our internal control over financial reporting. Likewise, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an EGC. At such time as we are required to obtain auditor attestation, if we then have a material weakness, we would receive an adverse opinion regarding our internal control over financial reporting from our independent registered accounting firm.
To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, including through hiring additional financial and accounting personnel, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. During our evaluation of our internal control, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, or results of operations. If we are unable to conclude that our internal control over financial reporting is effective or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of shares of our common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded,
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processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our results of operations and financial condition could be materially adversely affected by changes in accounting principles.
The accounting for our business is subject to change based on the evolution of our business model, interpretations of relevant accounting principles, enforcement of existing or new regulations and changes in policies, rules, regulations and interpretations, of accounting and financial reporting requirements of the SEC or other regulatory agencies. Adoption of a change in accounting principles or interpretations could have a significant effect on our reported results of operations and could affect the reporting of transactions completed before the adoption of such change. It is difficult to predict the impact of future changes to accounting principles and accounting policies over financial reporting, any of which could adversely affect our results of operations and financial condition and could require significant investment in systems and personnel.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections of this prospectus and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:
our ability to successfully commercialize our products, including Hyaline, which is the first product we launched in December 2020;
our ability to generate revenues from our products (including Hyaline) on the timelines we anticipate;
our plans for the development, launch and commercialization of the products in our current and future product pipeline;
our ability to successfully produce products (including Hyaline) through fermentation that we initially launch using non-fermentation monomers;
the implementation of our business model and our ability to transition from revenues that are substantially all derived from R&D service contracts and collaboration agreements to revenues primarily derived from the commercialization of our products;
our ability to create products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver and to launch our products in roughly five years and $50 million;
our ability to find and qualify an alternate source of manufacturing after 2021;
our ability to successfully complete the expected 6-18 month product qualification process with customers;
the potential benefits of our existing and potential future R&D collaborations and other partner relationships;
our ability to address the market opportunity in the electronics, consumer care and agriculture sectors, as well as the total market opportunity across numerous sectors;
the size and growth potential of the markets for our products and our ability to serve those markets;
our capital requirements and our needs for additional financing;
our expectations regarding our ability to obtain and maintain intellectual property protection for our biofacturing platform, products and related technologies;
our ability to obtain and maintain regulatory approval for certain of our products;
regulatory developments in the United States and foreign countries;
the ability of incumbent chemical companies and synthetic biology companies to address the needs of our existing and potential customers;
developments relating to our competitors and our industry;
the success of competing products that are or may become available;
our goals for producing bio-based products that contribute to a more sustainable future;
our ability to successfully enter new markets and manage our international expansion;
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our financial performance;
our ability to generate revenue and obtain funding for our operations, including funding necessary to complete further development of our current and future products;
our estimates regarding margins, future revenue, expenses, capital requirements and needs for additional financing;
the success of our significant investments in our continued R&D of new products; and
the impact of COVID-19 on our business.
You should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.
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INDUSTRY AND MARKET DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources and on our knowledge of, and expectations about, the markets for our products. This information involves a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate or plan to operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause our results to differ materially from those expressed in the estimates made by independent third parties and by us.
Certain of management’s estimates contained in this prospectus are based on information from various sources, including independent industry publications, data compiled by a third party or other publicly available information. The sources of these publications, data and information are provided below:
A number of reports prepared by IHS Markit analyzing data relating to market opportunity information for a selection of chemicals and materials in our target industries.
IHS Markit reports, data and information referenced herein (the “IHS Markit Materials”) are the copyrighted property of IHS Markit, Ltd. and its subsidiaries (“IHS Markit”). The IHS Markit Materials are from sources considered reliable; however, the accuracy and completeness thereof are not warranted, nor are the opinions and analyses published by IHS Markit representation of fact. The IHS Markit Materials speaks of the original publication date thereof and are subject to change without notice. IHS Markit and other trademarks appearing in the IHS Markit Materials are the property of IHS Markit or their respective owners.
Certain statistical data estimates and forecasts contained in this prospectus are derived from the following independent industry publications or reports:
World Development Indicators by the World Bank
Delaware Online, “DuPont Timeline,” (February 1, 2017).
The Adhesive and Sealant Council (ASC), “North American Market Report for Adhesives and Sealants with a Global Overview,” (November 2018).
Randi Kronthal-Sacco and Tensie Whelan, “Sustainable Market Share Index,” New York University Stern Center for Sustainable Business, (July 2020).
M. Berners-Lee, C. Kennelly, R. Watson and C.N. Hewitt, “Current Global Food Production is Sufficient to Meet Human Nutritional Needs in 2050 Provided There is Radical Social Adaptation,” Elementa: Science of the Anthropocene (July 2018).
Joseph A. DiMasi, Henry G. Grabowski and Ronald W. Hansen, “Innovations in the Pharmaceutical Industry: New Estimates of R&D Costs, Journal of Health Economics (May 2016).
National Research Council, “Commercialization of New Materials for a Global Economy” (1993).
United States Environmental Protection Agency (EPA), “Overview of Greenhous Gases.”
The UN Environment Assembly, “Global Chemicals Outlook II” (2019).
IHS Markit, “Specialty Chemicals Update Program” (December 2018).
IHS Markit, “Specialty Chemicals Industry” (August 2020).
DSCC, “Quarterly Foldable/Rollable Display Shipment and Technology Report” (December 2020).
Statista, “Beauty & Personal Care Report” (2020).
Statista, “Home & Laundry Care Report” (2020).
Statista, “Smartphone Unit Shipments Worldwide 2007-2020, by Vendor” (2021).
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Hannah Ritchie, “Sector by Sector: Where do Global Greenhouse Gas Emissions Come From?” Our World in Data (September 2020).
Transparency Market Research, “Insect Repellent Market” (2018).
“Analysis on Sales and Profitability Within the Seed Sector,” Independent Report by IHS Markit (Phillips McDougall) for the Co-Chairs of the Ad-Hoc Open-Ended Working Group to Enhance the Functioning of the Multilateral System of FAO’s International Treaty on Plant Genetic Resources for Food and Agriculture (November 2019).
Euromonitor International Limited, Beauty and Personal Care 2020 edition, Retail Value RSP, US$, Fixed 2019 exchange rate, Current terms, (April 2020).
Information in this Prospectus on the Sun Care market is from independent market research carried out by Euromonitor International Limited but should not be relied upon in making, or refraining from making, any investment decision.
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USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $    million or $    million if the underwriters exercise in full their option to purchase additional shares of our common stock, at an assumed initial public offering price of $    per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
A $1.00 increase or decrease in the assumed initial public offering price would change our estimated net proceeds by $   , after deducting the estimated underwriting discounts and commissions. Similarly, a change in the number of shares of common stock we sell would increase or decrease our net proceeds. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease our estimated net proceeds by $   .
We expect to use the net proceeds to us from this offering primarily for working capital and other general corporate purposes, which we currently expect will include continued investment in commercializing our existing products, launching products in our pipeline and furthering the development of our biofacturing platform and technology. We do not currently have specific planned uses for the proceeds of this offering. We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in businesses, assets or technologies, although we do not currently have any commitments for any such acquisitions or investments.
The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Our management will have significant flexibility in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business.
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DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by our board of directors. In addition, the terms of our term loan facility contain restrictions on our ability to declare and pay cash dividends on our capital stock.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2020:
on an actual basis;
on a pro forma basis to reflect: (i) the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws upon the closing of this offering, (ii) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 204,346,437 shares of common stock upon the closing of this offering and (iii) the conversion of all warrants to purchase preferred stock into warrants to purchase shares of common stock upon the closing of this offering; and
on a pro forma as adjusted basis to reflect: (i) the pro forma adjustments set forth above and (ii) the issuance and sale of     shares of common stock by us in this offering at the initial public offering price of $   per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. This table should be read in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
As of December 31, 2020
(in thousands, except per share and share data)
Actual
Pro forma
Pro forma
as adjusted
Cash and cash equivalents
$210,205
$210,205
 
Short-term debt, net(1)
79,331
79,331
 
Warrant liabilities
14,231
 
Convertible preferred stock, $0.001 par value per share; 214,181,024 shares authorized; 204,279,898 shares issued and outstanding, actual; no shares issued or outstanding, pro forma and pro forma as adjusted
900,798
 
Stockholders’ equity
 
 
 
Common stock, $0.001 par value per share; 286,477,669 shares authorized, and 38,437,001 shares issued and outstanding actual; 286,477,669 shares authorized, and 242,783,438 shares issued and outstanding pro forma; and      shares authorized, and        shares issued and outstanding pro forma as adjusted
38
242
 
Additional paid-in capital
29,966
944,791
 
Accumulated deficit
(773,740)
(773,740)
Total stockholders’ deficit
(743,736)
171,293
Total capitalization
250,624
250,624
   
(1)
Due to the substantial doubt about our ability to continue operating as a going concern and the material adverse change clause in the loan agreement with our lender, the amounts outstanding as of December 31, 2020 have been classified as current in the consolidated financial statements. The lender has not invoked the material adverse change clause as of the date of issuance of these financial statements.
A $1.00 increase (decrease) in the assumed initial public offering price of $    per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash, cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $    million, assuming the assumed initial public offering price of $    per share of common stock remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
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If the underwriters exercise their option to purchase additional shares in full, each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit), total capitalization and pro forma as adjusted shares of common stock outstanding as of December 31, 2020 would be $    million, $    million, $    million, $    million and     shares, respectively.
The number of shares of our common stock issued and outstanding, pro forma and pro forma as adjusted in the table above is based on 38,437,001 shares of our common stock outstanding as of December 31, 2020 and excludes:
726,970 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2020, with a weighted average exercise price of $1.04 per share;
2,650,000 shares of common stock issuable upon the exercise of outstanding warrants to purchase Series C preferred stock as of December 31, 2020, with a weighted average exercise price of $5.66 per share (the warrants to purchase shares of preferred stock will become warrants to purchase shares of common stock upon the closing of this offering);
16,497,013 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020, under our 2014 Stock Plan, with a weighted-average exercise price of $2.22 per share;
4,950,165 shares of common stock issuable upon the exercise of stock options granted from January 1, 2021 to March 15, 2021, under our 2014 Stock Plan, with a weighted-average exercise price of $8.98 per share;
201,722 shares of common stock issuable upon the vesting of non-vested stock granted as part of the Radiant acquisition as of December 31, 2020;
12,060,188 shares of common stock that are reserved for issuance under our 2014 Stock Plan as of December 31, 2020;
    shares of common stock that are reserved for issuance under our 2021 Incentive Award Plan, that will become effective in connection with this offering; and
    shares of common stock that are reserved for issuance under our 2021 Employee Stock Purchase Plan that will become effective in connection with this offering.
Upon the effectiveness of the 2021 Incentive Award Plan, we will cease granting awards under the 2014 Stock Plan and any remaining shares available for issuance under the 2014 Stock Plan will be added to the shares reserved for issuance under the 2021 Incentive Award Plan. Our 2021 Incentive Award Plan and Employee Stock Purchase Plan each provides for annual automatic increases in the number of shares reserved thereunder and our 2021 Incentive Award Plan also provides for increases to the number of shares of common stock that may be granted thereunder based on shares underlying any awards under our 2014 Stock Plan that expire, are forfeited or otherwise terminate, as more fully described in the section titled “Executive Compensation — Equity Incentive Arrangements — 2021 Incentive Award Plan.”
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DILUTION
If you purchase shares of our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our common stock in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering.
Our historical net tangible book value as of December 31, 2020 was $140.2 million or $3.65 per share of common stock. Our historical net tangible book value per share represents our total assets less intangible assets, goodwill, deferred offering cost and total liabilities, divided by the aggregate number of shares of common stock outstanding as of December 31, 2020.
Our pro forma net tangible book value as of December 31, 2020 was $154.4 million or $0.64 per share of common stock. Our pro forma net tangible book value per share represents our total assets less intangible assets, goodwill, deferred offering cost and total liabilities, divided by the aggregate number of shares of common stock outstanding as of December 31, 2020, after giving effect to: (i) the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws upon the closing of this offering, (ii) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 204,346,437 shares of common stock and (iii) the conversion of all warrants to purchase preferred stock into warrants to purchase shares of common stock upon the closing of this offering.
After giving effect to the issuance and sale of      shares of common stock by us in this offering at an assumed public offering price of     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of     would have been $    million or $    per share. This represents an immediate increase in as adjusted net tangible book value to existing stockholders of $    per share and an immediate dilution in as adjusted net tangible book value to new investors of $    per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the as adjusted net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share
    
$    
Historical net tangible book value per share as of December 31, 2020
$3.65
 
Decrease per share attributable to the pro forma adjustments described above
(3.01)
Pro forma net tangible book value per share as of December 31, 2020
0.64
 
Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of common stock in this offering
    
 
 
 
 
Pro forma as adjusted net tangible book value per share
 
 
 
 
Dilution per share to new investors participating in this offering
 
    
Each $1.00 increase or decrease in the assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share after this offering by $    per share and the dilution in pro forma net tangible book value per share to investors participating in this offering by $    per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share after this offering by $    per share and the dilution in pro forma as adjusted net tangible book value per share to investors participating in this offering by $    per share, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
If the underwriters exercise their option to purchase additional shares in full, the as adjusted net tangible book value per share of our common stock after this offering would be $    per share and the dilution in as adjusted net tangible book value per share to investors in this offering would be $    per share of common stock.
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The following table sets forth, on a pro forma as adjusted basis, as of    , the number of shares of common stock purchased from us, the total consideration paid, or to be paid and the weighted-average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses:
 
Shares purchased
Total consideration
Weighted-
average
price per
share
 
Number
Percent
Amount
Percent
Existing stockholders
242,783,438
 
$905,516,329
 
$3.73
New investors
   
    
    
    
    
Total
100%
100%
Each $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, as applicable, the total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by approximately $    million, $    million and $   , respectively, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase or decrease of 1.0 million shares in the number of shares of common stock offered by us would increase or decrease, as applicable, the total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by approximately $    million, $    million and $   , respectively, assuming an initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
The foregoing tables assume no exercise by the underwriters of their option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, the number of shares of common stock held by our existing stockholders will represent approximately    % of the total number of shares of our common stock outstanding after this offering; and the number of shares held by new investors will represent approximately    % of the total number of shares of our common stock outstanding after this offering. In addition, to the extent outstanding stock options and warrants are exercised, investors participating in this offering will experience further dilution.
The foregoing tables and calculations (other than the historical net tangible book value calculation) are based on 38,437,001 shares of our common stock outstanding as of December 31, 2020 and excludes:
726,970 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2020, with a weighted average exercise price of $1.04 per share;
2,650,000 shares of common stock issuable upon the exercise of outstanding warrants to purchase Series C preferred stock as of December 31, 2020, with a weighted average exercise price of $5.66 per share (the warrants to purchase shares of preferred stock will become warrants to purchase shares of common stock upon the closing of this offering);
16,497,013 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020, under our 2014 Stock Plan, with a weighted-average exercise price of $2.22 per share;
4,950,165 shares of common stock issuable upon the exercise of stock options granted from January 1, 2021 to March 15, 2021, under our 2014 Stock Plan, with a weighted-average exercise price of $8.98 per share;
201,722 shares of common stock issuable upon the vesting of non-vested stock granted as a part of the Radiant acquisition as of December 31, 2020;
12,060,188 shares of common stock that are reserved for issuance under our 2014 Stock Plan as of December 31, 2020;
     shares of common stock that are reserved for issuance under our 2021 Incentive Award Plan that will become effective in connection with this offering; and
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    shares of common stock that are reserved for issuance under our 2021 Employee Stock Purchase Plan that will become effective in connection with this offering.
Upon the effectiveness of the 2021 Incentive Award Plan, we will cease granting awards under the 2014 Stock Plan and any remaining shares available for issuance under the 2014 Stock Plan will be added to the shares reserved for issuance under the 2021 Incentive Award Plan. Our 2021 Incentive Award Plan and Employee Stock Purchase Plan each provides for annual automatic increases in the number of shares reserved thereunder, and our 2021 Incentive Award Plan also provides for increases to the number of shares of common stock that may be granted thereunder based on shares underlying any awards under our 2014 Stock Plan that expire, are forfeited or otherwise terminate, as more fully described in the section titled “Executive Compensation—Equity Incentive Arrangements — 2021 Incentive Award Plan.”
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SELECTED CONSOLIDATED FINANCIAL DATA
The following tables presents our selected consolidated financial and other data. We derived the summary consolidated statement of operations data for the years ended December 31, 2019 and 2020 and consolidated balance sheet data as of December 31, 2019 and 2020 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.
When you read this selected consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.
 
Year ended December 31,
 
2019
2020
 
(in thousands, except per share and share
data)
Product revenue
$
$2
Revenue from research and development service agreements
13,234
9,788
Collaboration revenue
2,185
3,494
Total revenue
15,419
13,284
Costs and operating expenses:
 
 
Cost of service revenue(1)
102,640
84,818
Research and development(1)
50,717
90,852
Sales and marketing(1)
24,138
18,627
General and administrative(1)
61,247
60,076
Loss on lease termination
13,790
Total costs and operating expenses
252,532
254,373
Loss from operations
(237,113)
(241,089)
Interest income
4,921
492
Interest expense
(2,943)
(10,960)
Loss on change in fair value of warrant liability
(10,229)
Loss on extinguishment of debt
(1,810)
Other income (expense), net
150
(457)
Loss before income taxes
(236,795)
(262,243)
Income taxes
(8)
49
Net loss and comprehensive loss
$(236,803)
$(262,194)
Net loss per share attributable to common stockholders, basic and diluted
$(7.31)
$(7.15)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
32,375,409
36,654,165
(1)
Includes stock-based compensation expense as follows:
 
Year ended December 31,
 
2019
2020
 
(in thousands)
Cost of service revenue
$919
$1,179
Research and development
669
1,343
Sales and marketing
904
468
General and administrative
1,520
1,839
Total
$4,012
$4,829
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As of December 31, 2019
As of December 31, 2020
Consolidated Balance Sheet Data:
 
 
Cash and cash equivalents
$143,589
$210,205
Working capital(1)
$54,316
$107,116
Total assets
$227,890
$304,921
Short term debt, net(2)
$78,310
$79,331
Warrant liabilities
$4,002
$14,231
Convertible preferred stock
$607,763
$900,798
Accumulated deficit
$(511,546)
$(773,740)
Total stockholders’ deficit
$(499,578)
$(743,736)
(1)
Working capital is defined as current assets less current liabilities.
(2)
Due to the substantial doubt about our ability to continue operating as a going concern and the material adverse change clause in the loan agreement with our lender, the amounts outstanding as of December 31, 2019 and 2020 have been classified as current in the consolidated financial statements. The lender has not invoked the material adverse change clause as of the date of issuance of these financial statements.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. In this section, the terms “we,” “our,” “ours,” “us,” and “the Company” refer collectively to Zymergen Inc. and its 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. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus. Our fiscal year end is December 31, and references throughout this prospectus to a given fiscal year are to the 12 months ended on that date.
Overview
We partner with Nature to design, develop and commercialize bio-based breakthrough products that deliver extraordinary value to customers in a broad range of industries. Our first innovations include films designed for electronics companies to use in new categories of smart devices, including rollable tablets, and naturally derived UV protection. 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. Our goal is to launch our products in about half the time and 1/10th of the cost of what traditional chemicals and materials companies can deliver, which would allow us to address a wide array of commercial applications.
Based on our experience and expectations with our first four products which are electronic films and insect repellent products and subject to any regulatory requirements, which could lead to longer timelines and increased cost, we estimate the timelines and costs of launching our products to be roughly five years and $50 million. Our biofacturing platform allows us to bring more products to market faster and creates a vibrant and compelling portfolio of businesses that access market opportunities that traditional chemicals and materials companies wouldn’t consider. The platform unlocks biology for product innovation with a proprietary three-step process. Once a chemical solution to an important problem has been proposed, our biofacturing platform is designed to (1) identify and create novel biomolecules that are the basis of new materials with engineered characteristics that possess improved performance compared to existing products; (2) insert genes into a host microbe that produces the desired biomolecules; and (3) develop and scale up a production process including optimizing the microbe to produce biomolecules economically at scale, while retaining product functionality via time-and-cost efficient optimization, leading to commercialization at attractive margins. Our biofacturing platform is flexible, allowing for each step to be completed in parallel or independently. The platform is designed to accelerate launch of our products, satisfying customer needs more rapidly and increasing the returns of our pipeline investments.
We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. Hyaline is the first in a franchise of optical films, designed for electronics companies to use for display touch sensors in personal devices and other applications. Hyaline will allow our customers to make more accurate foldable touchscreens and high density flexible printed circuits. Hyaline uses a biomolecule that was identified through our biofacturing platform. In order to accelerate product launch and meet customer demand, we launched Hyaline with a non-fermentation produced biomolecule sourced from a third party. We are in the process of converting to a fermentation-produced molecule for Hyaline by using a microbe that has a demonstrated ability to produce the molecule through fermentation. We are currently developing commercial scale processes so we can produce the molecule through fermentation at sufficient volumes and costs to support commercial manufacturing. We expect this process to be complete in 2022.
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We have 10 other products in development, consisting of three in electronics, four with consumer applications, and three in agriculture. ZYM0107, which we plan to launch in 2022, is the next product in our films franchise and is a high-performance optical film like Hyaline. ZYM0101, planned for launch in 2023, is a breakthrough film for flexible electronics, which is designed to be used to build foldable and rollable phones and personal devices, as insulation for antennas to deliver 5G data speeds and as a coating for transparent monitors. Our consumer products include ZYM0201, a naturally derived non-DEET insect repellent, and we plan on partnering to create a microbial alternative to synthetic nitrogen fertilizer. We expect our biofacturing platform to be an engine of innovation and revenue generation, as we seek to develop new products in the same or adjacent sectors.
The market opportunity addressable by our biofacturing platform is enormous and diverse. Our bottom-up, industry-by-industry, application-by-application, analysis suggests that our total market opportunity is at least $1.2 trillion across 20 separate industries for our potential products, all ripe for disruption, and that the market opportunity of the first three industries we will pursue, electronics, consumer care and agriculture, is approximately $150 billion. We estimate, the display market alone for Hyaline was over $1 billion in 2020 and, according to Transparency Market Research, the global market for insect repellents is over $1.5 billion across sprays and other traditional formats. In addition, our consumer survey, which asked 2,750 adults between 18 and 65 years of age in the United States and an additional 6,000 consumers in five global markets as a follow up about their concerns about insects, their current behavior with insect protection and their interest in better insect repellent products, found that consumer need to repel insects is global, big and likely to get bigger with current solutions being unsatisfactory, suggesting that there is a large latent demand for better products and therefore we believe that the true market opportunity is much larger. We anticipate deploying our innovation engine to create decades of disruptive breakthrough products using a rigorous discipline to select new opportunities where there’s demand for new materials, where bio-based products have an advantage and where industries rapidly adopt new products.
The Evolution of our Business
We founded Zymergen in 2013 in the belief that biofacturing will lead to better products with better economics and a better world. In order to achieve this goal, we have taken deliberate steps to build our biofacturing platform, enhance our ability to unlock biology to manufacture our products, grow the volume and quality of our proprietary data and demonstrate validated results with partners and customers. In particular, we have pursued R&D service contracts with partners and integrated capabilities we have strategically acquired. Our early R&D service contracts validated our biofacturing platform’s ability to develop and optimize microbes for full-scale production. These programs have developed microbes which our partners have used to manufacture and sell over $1 billion worth of products made by microbes we developed and engineered. Further, these programs have generated proprietary data sets, which power our algorithms and provide a foundation for ongoing improvement.
Our overall strategy has led to the development of our biofacturing platform that has delivered a rich pipeline of novel products designed to answer the needs of a number of different industry verticals in ways traditional chemicals and materials companies cannot.
Below are key milestones in the development of our current product pipeline:
We signed our first revenue-generating R&D service contract in June 2014 with DARPA. This proof-of-concept contract led to follow on agreements and our participation in DARPA’s Living Foundries 1000 Molecules program, focused on the development of next-generation tools and technologies for engineering biological systems. While there is no longer any funding due to us in connection with the DARPA work, to date such work has generated over $23 million in revenue and has been a key step in the testing and validation of both the elements of our biofacturing platform focused on product discovery (including the predecessor system to the ZYmergen Navigator for Chemistry (ZYNC)) and establishing our own product pipeline across three primary industry verticals and our long-term strategy of serving numerous industry verticals. We do from time to time identify opportunities for funding through grants from government agencies and may pursue these in the future.
In September 2014, we entered into an R&D service contract with a multinational food processing company that focused on the improvement of a commercial production microbe used in the processing of an animal feed component. Pursuant to this arrangement, we demonstrated that our new approach, which involves systematically scanning the “dark matter” (or areas of the genome where you would not predict to find interesting functionality) of the genome, was a breakthrough in combining technology with biology to develop new products efficiently. This agreement has generated over $22 million in revenue, has yielded
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two improved production microbes, which performed as predicted and generated improved performance at greater than 150,000 liter scale, and a third production microbe is currently being assessed. We expect the completion of the assessment by the customer to be completed in the third quarter of 2021, which will bring this contract to a close. Over the next few years, we signed multiple R&D service contracts with numerous partners which contributed to the growth in the volume and quality of our proprietary data and further validated our biofacturing platform. Over the next few years, as we seek to grow our product sales and commercialize additional products, we expect revenue from R&D and collaboration arrangements to represent a smaller component of our total revenue. However, in the near term, we expect to continue generating revenue from R&D service agreements and collaborations and may in fact pursue additional arrangements with new or existing partners as we seek to enter new industry verticals.
We established our Products group in 2016 and their initial efforts focused on products for electronics, consumer care and agriculture. Through early conversations with electronics customers, we identified unmet customer needs and started building our pipeline of electronic films products. In parallel, we began developing our pipeline of consumer care and agriculture products.
We acquired Radiant Genomics, Inc. in December 2017, through which we acquired our metagenomics library, the Unified Metagenomics Database (UMDB). This extensive library enables the rapid isolation of novel enzymes, giving us the ability to reduce our costs. It also enables us to mine our library in an effort to create nature-based products that can support a number of verticals.
In 2019 we entered into a collaboration arrangement with Sumitomo Chemical for joint innovation of certain materials and applications of strategic interest to Sumitomo Chemical. Under this arrangement we have partnered with Sumitomo Chemical to bring together our ability to conceive and produce breakthrough products leveraging Sumitomo Chemical’s manufacturing and supply chain capabilities to significantly reduce the timeline to scale manufacturing of our electronic film products. We may enter into agreements similar to the collaboration arrangement with Sumitomo Chemical in the future. We may do this to help speed up the product development process or to utilize areas of expertise of specific partners.
In March 2020 we acquired EnEvolv, Inc. for their ultra-high throughput testing techniques which speed microbe development. The acquisition further enhances our biofacturing platform and supports rapid product development.
In December 2020, we launched our Hyaline product, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline).
Going forward, we will pursue our product sales strategy and also continue to work with partners to enter new industry verticals and explore new product opportunities that meet our strategic objectives.
How We Generate Revenue
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. While each revenue arrangement is unique, they typically include fixed fees, often paid in advance and recognized in deferred revenue until the services are performed. Other elements of these arrangements may include bonus payments for research milestones achieved and long-term royalty payments based upon the long-term economic benefit to the partner of our research. As a result, revenue from R&D service contracts and collaboration arrangements can fluctuate significantly from period to period.
Over the next few years, as we seek to grow our product sales and commercialize additional products, we expect revenue from R&D and collaboration arrangements to represent a smaller component of our total revenue. However, in the near term, we expect to continue generating revenue from R&D service agreements and collaborations and may in fact pursue additional arrangements with new or existing partners as we seek to enter new industry verticals.
Our long-term objective is to generate revenue from the sale of numerous breakthrough products across a variety of industries. Our first product in the electronics sector and first commercially available product is Hyaline which is sold to consumer electronics companies as a component that enables unique functionality in their devices. We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on
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commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. The price point of our product will depend on its application, but we expect to price the product by requiring customers to commit to a minimum purchase quantity measured in thousands of square meters, with pricing typically set as dollars per square meter. We have a direct global sales force as well as a team of application engineers who enable our electronic film product sales. We also have a rich and growing pipeline of products across several industry sectors, as discussed in more detail below under “—Our Product and Product Pipeline.”
Launching fermentation-produced products or products with fermentation-produced components or ingredients is a key element of our strategy for lowering manufacturing costs and launching products desirable to our customers more quickly. In some cases, we may initially launch products using molecules we have identified during the design phase but which are first produced with non-fermentation based methods. We refer to this strategy as Launch Acceleration and expect to achieve commercial launch 12-24 months faster where this is possible. Launch Acceleration typically results in a higher cost of production than can be achieved with fermentation-based production. We temporarily absorb this cost as it is outweighed by the benefit of faster product launch. Our strategy is to use Launch Acceleration only where we believe we will be able to replace these non-fermentation produced biomolecules or components with fermentation-produced versions in 12-24 months. We have used Launch Acceleration successfully on our first product, Hyaline, which we have launched with a non-fermentation produced biomolecule sourced from a third party and are executing on a process to convert to a fermentation-produced molecule, which we expect to occur in 2022. In the context of our first three strategic verticals, we expect to use Launch Acceleration frequently for our electronics pipeline but rarely in consumer care or agriculture. As we expand into additional verticals, we will evaluate the benefits of Launch Acceleration on a case-by-case basis.
Following the launch of Hyaline, our global direct sales force and a team of application sales engineers are now working with customers on the extensive sale qualification process in which customers are able to validate the product and qualify it as a standard component in their final electronic devices. During this time, we are providing customers with samples of our products to be tested for use in their own products so they can determine whether to purchase our product. Based on our experience to date since the launch of Hyaline in December 2020, we expect the sale qualification process of our products (including Hyaline) to last 6-18 months, or longer, depending on the customer and end device requirements. We only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product, which is typically done on a purchase order basis rather than a long-term contractual commitment. In the case of Hyaline, we expect to begin generating revenue in the second half of 2021, which will be prior to the time we expect to convert the non-fermentation produced biomolecule to the fermentation-produced molecule, which we expect to occur in 2022. We do not expect our estimated revenue from Hyaline to be meaningfully impacted by the conversion to the fermentation-produced molecule. We expect other electronics products, including ZYM0101, which we expect to launch in 2023, to follow a similar 6-18 month qualification process following which we expect to generate revenue. For many of our consumer care and agriculture products, including ZYM0201 which we expect to launch in 2023, a product qualification process will not be similarly necessary because we intend to launch and sell those products directly to the end-user and expect to generate revenue upon launch. For our other products in development for which we do not currently have an anticipated launch date, we cannot predict when we expect to begin generating revenue from such products.
As we ramp the sale of new products, we expect to initially experience negative product gross margins. Material manufacturing process changes, including using our Launch Acceleration strategy, could also result in reduced or possibly negative margins. We expect the timing for achieving positive gross margins for any product will depend on the pace at which we achieve commercial scale for that product, which could take one year or more from when we begin generating revenue from such product. We expect our cost of product revenue to increase over time in absolute dollars and our gross margins will vary based on the volume and mix of products sold. We may not achieve the product gross margins that we anticipate.
We plan to grow our business in several ways. First, we plan to grow as we increase the market penetration of our launched products. Next, we plan to grow by launching additional products in our chosen verticals of electronics, consumer care and agriculture and by continuing to add new products to our pipeline in these verticals. And finally,
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we plan to grow by entering new markets. We plan to partner with industry leaders to enter these markets, as we believe this approach de-risks and accelerates our time to product launch. Today, we are working with various industry leaders and our strategy is to enter into partnerships with these leaders in the future.
We generally target products with a market opportunity that if successful, at scale, could support annual sales of greater than $150 million. We also expect that some portion of those products could be breakthrough products, but it is very hard in the materials market to predict beforehand which products those would be. In the long term, our goal is to launch multiple breakthrough products every year. We believe that our strategy will drive strong future revenue growth as our revenues from launched products increase and revenues from new product launches stack on top of each other.
Our Product and Product Pipeline

Zymergen’s pipeline of products in electronics, consumer care and agriculture.2
We launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples of Hyaline). We are currently in the qualification process on Hyaline with multiple customers, including sampling and discussions on commercial terms with some of them. Given the importance of this qualification process in our current target markets, we anticipate that, even after we have launched a product, we will only generate revenue after customers have completed all aspects of the qualification process for that product and decided to place an order for our product. We have 10 other products in development, consisting of three in electronics, four with consumer applications and three in agriculture. We are targeting one new product launch in 2022 and two product launches in 2023, with additional product launches in these and other industry verticals in subsequent years. The products in our pipeline were selected for development due to their high-value potential and have been designed with rapid market adoption in mind, which we believe positions us for strong revenue growth in the coming years.
If customer trials are successful, we believe Hyaline suggests the willingness and ability of customers to rapidly incorporate our products into their supply chains. Seamless customer integration and adoption is a key commercial principle for all our product development. ZYM0107, which we plan to launch in 2022, is the next product in our films franchise and is a high-performance optical film like Hyaline. ZYM0101, planned for launch in 2023, is a breakthrough film for flexible electronics, which is designed to be used to build foldable and rollable phones and personal devices, as insulation for antennas to deliver 5G data speeds and as a coating for transparent monitors. Our consumer products include ZYM0201, a naturally derived non-DEET insect repellent. In agriculture, we are
2
*Reflects target launch dates for these products. ** In order to accelerate product launch and meet customer demand, we launched Hyaline with a non-fermentation produced biomolecule sourced from a third party We are currently developing commercial scale processes so we can produce the molecule through fermentation at sufficient volumes and costs to support commercial manufacturing. We expect this process to be complete in 2022.
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partnering to create a microbial alternative to synthetic nitrogen fertilizers, which are responsible for 5% of human-caused greenhouse gas emissions. While the products in our pipeline were selected for development due to their potential for high-value and rapid market adoption and recurring sales, the success of our product sales and related revenue will depend upon consumer and customer preferences and demand trends, the availability of manufacturing capacity and seasonal fluctuations.
Our Go-to-Market Strategy
Our biofacturing platform is designed to enable us to make products that solve a broad range of needs across a wide range of industries. We have worked to prioritize and identify a subset of industries to initially target, and a set of applications within those industries for which we will design molecules and products. We first identify markets based on the following criteria: (a) applications where bio-based materials enable differentiated advantages; (b) high-value segments where we believe attractive margins are achievable; and (c) industries that bring new products to market efficiently, where our approach enables faster timelines or where we can leverage partnerships to advance favorable economics. Additionally, we look for products that have significant adjacencies–once a product is commercially successful within a specific application in an industry, it can be further developed and modified into a series of products within that industry and used in analogous applications in other industries. This range of criteria led to our initial three target markets: electronics, consumer care and agriculture.
We plan to follow the same go-to-market strategy in all our end markets. First, we plan to approach all parts of the value chain, from end-customers to brand owners and OEMs of varying sizes and speed to all their key suppliers, which will allow us to understand all the key buying decisions and potential blockers in the value chain. Then we plan to target the fastest moving customers—who are usually smaller players—for initial sales. Finally, we plan to build volumes over time, expanding into larger, slower moving customers and identifying adjacent use cases.
Our goal is to grow future revenue by increasing market penetration with our existing products, launching new products in our target industries of electronics, consumer care and agriculture and entering new industry verticals through partnerships with industry leaders. Entering new industries or developing new types of products can bring new risks and can require capabilities that we do not yet possess. We use partnerships to reduce the risk and to develop the required capabilities. These partnerships contribute to both our commercial success when we partner with or sell to these companies and by providing access to needed capabilities as we enter into new markets. One such example is our partnership with Sumitomo Chemical for our electronic films. As part of this partnership, we have generated collaboration revenue 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. By partnering with Sumitomo Chemical, we significantly reduced the timeline to scale manufacturing of our Hyaline product.
Consistent with our practice to date, we expect that in the future we may pursue partnering arrangements with large, established players in the new verticals we target. This approach is intended both to de-risk and make more efficient the product development process and eventual launch of the product.
We organize our commercial efforts by industry vertical. Our sales teams, which are led by veterans with experience in the relevant industry, consist of business developers focusing on finding and developing, via the exchange of technical data, ways to specify our products in applications for potential customers. Once we have produced the product to the required specifications, our sales team engages in sales efforts to market and sell the product, while continuing to work with our R&D team to identify and develop future product specifications.
In the near term, our main focus is on the electronics vertical, particularly generating revenue from the sales of Hyaline, while also understanding the opportunity of ZYM0101 and ZYM0107. At this point, ZYM0101 commercial development is limited, as this is a main focus area of R&D. We are following, and expect to continue to follow, this model for our other product verticals, including consumer care and agriculture.
Our sales team for our electronics products include people based in the United States, Japan, Taiwan and the Netherlands. We expect to expand the sales team for electronics over time while also growing sales teams for other product launches.
Our International Operations
In 2019, approximately 74% of our total revenue was derived from North America (all from the United States), approximately 23% from Asia (approximately 17% from Japan and approximately 6% from South Korea) and
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approximately 3% from Europe. In 2020, approximately 46% of our total revenue was derived from North America (all from the United States), approximately 36% from Asia (all Japan) and approximately 18% from Europe.
To date, we have resources in the United States, Japan and Taiwan, where we have established subsidiaries, along with the Netherlands and Hong Kong. Further, we have established a subsidiary in Spain that supports some of the R&D efforts of one of our contracts.
Our future international expansion is likely to include the establishment of personnel and business operations hubs in both Asia and Europe, as well as expansion into other geographic segments where we see market opportunity for our products. We expect to complete a business plan to review the case for the establishment of the Asian and European operations hubs during 2021 with a view to set up by mid-2022.
Our Growth Strategy and Need for Additional Capital
While substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements, we launched our first product Hyaline in December 2020, beginning the expected 6-18 month product qualification process with customers. We generated revenue of $15.4 million from our R&D service and collaboration agreements in 2019 and $13.3 million in 2020. Since our inception, we have incurred significant operating losses. Our ability to generate sufficient product revenue to achieve profitability will depend heavily on our ability to successfully commercialize Hyaline and the development, launch and commercialization of additional products. We generated a net loss of $236.8 million and $262.2 million for the years ended December 31, 2019 and 2020, respectively. As of December 31, 2019 and 2020, we had an accumulated deficit of $511.5 million and $773.7 million, respectively. We expect to continue to incur significant expenses for at least the next several years. Furthermore, upon the closing of this offering, we expect to continue to incur additional accounting, legal, compliance, investor relations and other costs associated with operating as a public company.
As a result, 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 arrangements to fund operations, we expect to use proceeds from the issuance of 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 fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development, launch and commercialization of one or more of our product opportunities and other strategic initiatives.
As of December 31, 2019 and 2020, we had $143.6 million and $210.2 million in unrestricted cash and cash equivalents, respectively. In 2020, we received net cash proceeds of $293.0 million from the sale of shares of Series D convertible preferred stock.
In the future, we will need to raise additional capital to pursue our growth strategy and support continuing operations. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses. As of December 31, 2020, we concluded that this circumstance raises substantial doubt about our ability to continue as a going concern. We are subject to various covenants related to the Perceptive Credit Agreement and given the substantial doubt about our ability to continue as a going concern there is a risk that we may not meet our covenants in the future. See Note 1 to our consolidated financial statements appearing elsewhere in this prospectus for additional information. Similarly, in its report on our financial statements for 2020, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern.
After taking into account the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months after the closing of our initial public offering.
Key Factors Affecting Our Performance
We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors, all of which we consider to be important growth levers for us:
generating sales of Hyaline, a high-quality optical film designed for use in the electronics market, which is the first product we launched in December 2020;
strengthening our films product sales pipeline by attracting new customers;
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building our sales and marketing organization;
ramping films production volume by ensuring sufficient manufacturing capacity;
continuing to perform under our existing R&D services and collaboration arrangements;
launching and commercializing the next target products in our product pipeline, particularly those targeted for launch in 2022 and 2023;
commercializing the fermentation-produced version of Hyaline and any future bio-based products or products with bio-based components or ingredients initially launched with non-fermentation produced components, and achieving the product gross margins that we anticipate therefrom;
continuing to grow and expand our product pipeline by investing in pipeline R&D and expanding into new industries through partnerships; and
continuing to invest in our biofacturing platform to accelerate the time from product concept to launch, expand the scope of our technology and deepening the richness of our datasets.
Impact of COVID-19 on our business
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 caused by a novel strain of coronavirus as a pandemic, which continues to spread throughout the United States and around the world. Since then, extraordinary actions have been taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
Consistent with the actions taken by governmental authorities, including in California, where we are headquartered and most of our workforce is located, we have taken steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and then temporarily suspended on-site operations at our facilities in Emeryville and Boston in late March 2020. In addition, we began restricting non-essential travel and temporarily reduced salaries of our executives. As a result of the travel restrictions, we limited in-person sales and marketing activities.
Starting in late March 2020, approximately half of our employees and contractors were able to complete their duties from home, which enabled much critical work to continue, including data science, software development, sales and general and administrative activities. The remainder of our workforce was either unable to perform, or were partially limited in performing, their normal duties, from home. In June 2020, on-site operations resumed for those unable to perform their duties at home. We resumed modified operations that conform to the COVID-19 health precautions. This includes universal facial covering requirements, rearranging facilities to follow social distancing protocols, conducting active daily health checks and undertaking regular and thorough disinfecting of surfaces and tools. These precautionary actions have led to staff absentees due to quarantining, the need to adopt different employee shift patterns, additional costs associated with the provision of personal protective equipment and COVID-19 testing and lower equipment utilization to permit social distancing.
The pandemic has caused substantial disruption in global supply chains. We have experienced shortages in some of our key supplies, including materials required in our labs. In order to minimize the risk of this in 2021, we added alternate suppliers and purchased several months of certain inventory lines at the end of 2020. This has led to a large increase in storage requirements and related costs but has enabled us to avoid a further disruption in our lab operations to date.
In addition, the inability to travel has delayed the establishment of our Hyaline manufacturing capacity and delayed the process of selecting and vetting CMOs for our ZYM0201 insect repellent product. For example, we experienced delays of approximately three months in capital projects at our new U.S. CMO site for our Hyaline product and at a key supplier of a raw material for Hyaline and ZYM0107.
As a result of the restrictions, we experienced a partial suspension in servicing our R&D services contracts, and the development of our own products. This occurred for the duration of the suspension of our on-site operations and for a period afterward as we ramped the operation back up and adopted the new work practices. This resulted in an approximate reduction in R&D services revenue of $0.7 million from existing contracts, not recognized before the year ended December 31, 2020. In addition, we suffered a delay in establishing our Japan manufacturing capacity, which in turn led to delays in launching Hyaline. We have also suffered a delay in the establishment of our U.S.
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manufacturing capacity for Hyaline. However, Hyaline production became fully operational in Japan in December 2020 and we have continued to develop our product sales pipeline, despite the restrictions on travel and the restrictions on in-person meetings.
Following the launch of Hyaline, we have also experienced delays in the product qualification process due to the limitations on travel and the restrictions on work practices. Difficulties and delays such as those we have experienced and may experience in the future may prevent us from meeting our operating and financial goals, both in general and within our targeted timelines, and may cause our revenues and operating results to fluctuate from period to period. To date, we have not experienced any impairments of any of our assets as a result of the pandemic.
We are following, and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. The pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations. We are continuing to monitor the potential impact of the pandemic, including on global supply chains for some of our lab materials and manufacturing capacity, but we cannot be certain what the overall impact will be on our business, financial condition, results of operations and prospects on a go-forward basis.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) which, among other things, permits the deferral of the employer’s portion of social security tax payments between March 27, 2020 and December 31, 2020. As of December 31, 2020, approximately $3.7 million of employer payroll tax payments were deferred with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. Additionally, The CARES Act provides an employee retention credit (“CARES Employee Retention credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee through year end. The Company qualifies for the tax credit and adopted a policy to recognize the CARES Employee Retention credit when earned and to offset the credit against the related expenditure. Accordingly, during the fiscal year ended December 31, 2020, the Company recorded $1.3 million related to the CARES Employee Retention credit on the Company’s Consolidated Statement of Operations.
On May 13, 2020, the Company announced a workforce reduction and restructuring of approximately 10% of our workforce. The reduction and restructuring resulted in an expense of $1.1 million as of December 31.
Components of Results of Operations
Revenue
Product Revenue. We generate product revenue from the sale of the products we biofacture. To date, we have generated de minimis product revenue, consisting of selling samples of Hyaline to potential customers in December 2020. Revenue from product sales is recognized as a distinct performance obligation with the selling price to the customer recorded net of discounts and allowances. Revenue is recognized at a point in time when control of the promised goods or services has passed to the customer, which typically is upon shipment of the products. We record all amounts billed to customers in a sales transaction related to shipping and handling as revenue.
Research and Development Service Agreements Revenue. We earn revenue by engaging in R&D services to help our customers improve the economics of their 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 additional 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.
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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. In addition, in 2019 we recognized expense associated with a lease termination.
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.
We expect research and development expenses to increase as we continue to develop new products through investments in our biofacturing platform and product pipeline.
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 expect that our sales and marketing expenses will increase as we expand our sales and marketing efforts, our commercial capability and our brand awareness and customer base through targeted marketing initiatives. 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. We expect our general and administrative expenses to increase as a result of operating as a public company, including additional costs to comply with the rules and regulations of the SEC and stock exchange rules; for legal and auditing services; for additional insurance; for investor relations activities; and for other administrative and professional services. We also expect our intellectual property expenses to increase as we expand and protect our intellectual property portfolio.
Loss on lease termination. Loss on lease termination includes the one-time lease termination fee paid on the termination of a property lease along with the net cost to write off related built-to-suit assets and liabilities and previously capitalized construction-in-progress.
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.
Loss on extinguishment of debt
Loss on extinguishment of debt includes end-of term payments and prepayment fees payable on the termination of a loan prior to its maturity.
Change in fair value of warrant liability
The change in the fair value of the warrant liability is due to the increase in the value of the underlying preferred Series C Preferred Stock. The warrants were issued in December 2019, therefore, no change in fair value occurred in 2019 from issuance to year-end. The change in value in the year ended December 31, 2020 reflects the change in fair market value of the underlying preferred Series C Preferred Stock through that 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 Years Ended December 31, 2019 and December 31, 2020
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue:
 
 
 
 
Year ended December 31,
Change
 
2019
2020
$
%
 
(in thousands, except per share
and share data)
 
 
Product revenue
$
$2
$2
100%
Revenue from research and development service agreements
13,234
9,788
(3,446)
(26)%
Collaboration revenue
2,185
3,494
1,309
60%
Total revenue
15,419
13,284
(2,135)
(14)%
Costs and operating expenses:
 
 
 
 
Cost of service revenue(1)
102,640
84,818
(17,822)
(17)%
Research and development(1)
50,717
90,852
40.135
79%
Sales and marketing(1)
24,138
18,627
(5,511)
(23)%
General and administrative(1)
61,247
60,076
(1,171)
(2)%
Loss on lease termination
13,790
(13,790)
(100)%
Total costs and operating expenses
252,532
254,373
1,841
1%
Loss from operations
(237,113)
(241,089)
(3,976)
(2)%
Interest income
4,921
492
(4,429)
(90)%
Interest expense
(2,943)
(10,960)
(8,017)
(272)%
Loss on change in fair value of warrant liability
(10,229)
(10,229)
(100)%
Loss on extinguishment of debt
(1,810)
1,810
100%
Other income (expense), net
150
(457)
(607)
(405)%
Loss before income taxes
(236,795)
(262,243)
(25,448)
(11)%
Income taxes
(8)
49
57
713%
Net loss and comprehensive loss
$(236,803)
$(262,194)
(25,391)
(11)%
Net loss per share attributable to common stockholders, basic and diluted
$(7.31)
$(7.15)
$0.16
2%
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
32,375,409
36,654,165
(1)
Includes stock-based compensation expense as follows:
 
Year ended December 31,
 
2019
2020
 
(in thousands)
Cost of service revenue
$919
$1,179
Research and development
669
1,343
Sales and marketing
904
468
General and administrative
1,520
1,839
Total
$4,012
4,829
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Comparison of the Year Ended December 31, 2019 and 2020
Revenue
 
Year ended December 31,
Change
 
2019
2020
$
%
 
(in thousands)
 
 
Product revenue
R