ZYMERGEN INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited Consolidated Financial Statements and related notes thereto for the year endedDecember 31, 2020 , included in our final Prospectus. In this section, the terms "we," "our," "ours," "us," and "the Company" refer collectively toZymergen Inc. and its consolidated direct and indirect subsidiaries. This discussion contains forward-looking statements that involve risks and uncertainties reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section of this Quarterly Report on Form 10-Q titled "Risk Factors". Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake any obligation to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. OverviewZymergen partners with Nature to design, develop and commercialize bio-based breakthrough products that can deliver value to customers in a broad range of industries. Our goal is to create new products with a proprietary platform that unlocks the design and manufacturing efficiency of the biological processes with technology's ability to rapidly iterate and control diverse functions. We call our process biofacturing and we believe it will create better products and materials faster, cheaper and more sustainably than traditional chemistry by engineering microbes to make novel biomolecules that are the key ingredients in those products. Substantially all of our revenue to date has been generated from R&D service contracts and collaboration arrangements aimed at developing, testing and validating our biofacturing platform by providing custom services for use only by the collaboration partner. Over the next few years, we seek to develop and commercialize our products and generate revenue from these products. Our long-term objective is to generate revenue from the sale of numerous breakthrough products across a variety of industries. Recent Developments Portfolio Review and Cost Reductions Since our business update onAugust 3, 2021 , we have made significant progress on our previously announced assessment of our target markets and the fit of the products in our pipeline to those markets (the "Portfolio Review"). We have reviewed our potential market opportunities and the related project portfolio, using a standardized evaluation process applied to current and potential market segments. This included a review of market size, addressable market, competitive profiles, product development cost, cost of goods of the final offering, cost of customer acquisition, time to market, margin profile and development risk. As a result of our Portfolio Review, we have determined to focus on a smaller number of programs that we believe capitalize on our capabilities and provide clear commercial opportunities. To that end, we are discontinuing our electronics film programs, other than ZYM0101, which is partnered with Sumitomo Chemical, because emerging data on the market segment we were targeting with Hyaline and other electronics films indicates a smaller near-term opportunity than previously expected. We are also discontinuing our consumer care programs, including our insect repellent, ZYM0201, because we determined through our Portfolio Review that the costs of customer acquisition with a direct-to-consumer model would have been prohibitive and, in the case of ZYM0201, it could not be produced and distributed at a price point competitive with incumbent products. As part of our Portfolio Review, two programs in the healthcare market have been promoted, one for development of key enzymes used in vaccine production and a second in drug discovery, and we have also continued to see success with our work in agriculture, particularly with a partnered program for nitrogen fixation. We are still evaluating several programs that are still in early concept stages as part of our Portfolio Review and may determine that additional programs do not meet our criteria for continued development. We have also made progress on our plan to reduce operating costs since August. We conducted two reductions in force eliminating approximately 220 positions. We are also working to potentially restructure some of our expenses, including lease expenses. We have recorded restructuring costs of$21.2 million in the third quarter of 2021, including$4.1 million in severance and employee-related restructuring costs and an impairment charge of$11.2 million with respect to certain manufacturing equipment. We expect to incur additional restructuring costs of approximately$8.2 million in the fourth quarter of 2021, including$4.5 million in severance and employee-related restructuring costs in connection with ourOctober 2021 reduction in force and$3.3 million in consulting costs. With this downsizing and restructuring we believe that we will have sufficient operating capital to continue to fund our operations to the middle of 2023. With our focus on a smaller number of 25 -------------------------------------------------------------------------------- TABLE OF CONTENTS programs and reduced cost structure and with the benefit of the analyses and evaluations that we have conducted through the Portfolio Review, we are developing our strategic plan through 2024 with clear milestones and goals. Perceptive Amendment OnOctober 20, 2021 , we entered into Amendment No. 1, Waiver and Consent to Amended and Restated Credit Agreement and Guaranty (the "Amendment") withPerceptive Credit Holdings II, LP , aDelaware limited partnership, in its capacity as administrative agent for the Lenders (in such capacity, together with its successors and assigns, the "Administrative Agent") and as the Lenders (the "Lenders") with respect to the Amended and Restated Credit Agreement and Guaranty, dated as ofFebruary 26, 2021 (the "Credit Agreement"). Pursuant to the terms of the Amendment, we and the Administrative Agent have agreed to: (1) shorten the term of the Credit Agreement by moving the final maturity date toJune 30, 2022 (the "Maturity Date"), (2) reduce the amount of the prepayment premium that will be due on the Maturity Date from what otherwise would have been payable, (3) eliminate the minimum revenue covenant set forth in the Credit Agreement and (4) increase the minimum liquidity covenant set forth in the Credit Agreement. As conditions precedent to the effectiveness of the Amendment, among other things, we: (1) paid the Administrative Agent (for the benefit of itself and the Lenders) approximately$41.0 million , representing a$35.0 million principal prepayment plus accrued interest and the applicable prepayment premium under the Credit Agreement and (2) deposited funds equal to the remaining outstanding principal amount of the loans under the Credit Agreement plus interest through the Maturity Date and further prepayment premium into a blocked account controlled by the Administrative Agent, which was released inNovember 2021 from the blocked account upon the Administrative Agent's completion of diligence to its reasonable satisfaction regarding our anticipated operating costs and budget through the Maturity Date. Components of Results of Operations
Revenue
Research and Development Service Agreements Revenue. To date, we have earned
revenue by engaging in R&D services primarily to help our customers develop
bio-based products. In addition, the R&D services provided to our customers test
and validate our biofacturing platform. We account for R&D service contracts
when we have approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract has
commercial substance and collectability of consideration is probable. The
research term of the contracts spans typically over several quarters and the
contract term for revenue recognition purposes is determined based on the
customer's rights to terminate the contract for convenience. Over the
longer-term, as and to the extent we grow our product sales and commercialize
products, we expect revenue from R&D services to represent a smaller component
of our total revenue.
Collaboration Revenue. Our collaboration revenue relates primarily to our
collaboration agreement with Sumitomo Chemical. Our agreement with Sumitomo
Chemical includes provision of R&D services by us through the joint innovation
of certain materials and applications of strategic interest to Sumitomo
Chemical. Under this arrangement R&D costs are shared equally between the
parties with settlement of such amounts on a quarterly basis. Amounts received
for those services are classified as collaboration revenue as those services are
being rendered because those services are considered to be part of our ongoing
major operations.
Cost of Service Revenue
Cost of service revenue represents costs we incur to service our contract
research efforts pursuant to our R&D service contracts, as well as certain costs
allocable to our Sumitomo Chemical collaboration arrangement. Costs include both
internal and third party fixed and variable costs including labor, materials and
supplies, facilities and other overhead costs.
Operating Expenses
Our operating expenses are classified in the following categories: research and
development, sales and marketing and general and administrative. For each of
these categories, the largest component is personnel costs, which includes
salaries, employee benefit costs, bonuses and stock-based compensation expenses.
We have recently implemented several measures designed to reduce our cost
structure with a goal to extend our cash runway. We have incurred, and expect to
continue to incur in the near-term, increased non-recurring expenses as a result
of our restructuring activities, including consultancy fees and restructuring
expenses.
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
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supplies associated with research and development projects as well as various
laboratory studies. Indirect research and development costs include
depreciation, amortization and other indirect overhead expenses.
Sales and marketing. Sales and marketing expenses consist primarily of personnel
costs, costs of general marketing activities and promotional activities,
travel-related expenses and other indirect overhead costs.
General and administrative. Our general and administrative expenses consist
primarily of personnel costs for our executive, finance, corporate and other
administrative functions, intellectual property and patent costs, facilities and
other allocated expenses, other expenses for outside professional services,
including legal, human resources, audit and accounting services and insurance
costs.
Restructuring charges. Our restructuring charges consist primarily of costs
associated with employee termination benefits, contract terminations,
restructuring-related consulting fees and long-lived asset impairments.
Interest income
Interest income consists of income earned from our cash, cash equivalents and
short-term investments.
Interest expense
Interest expense consists of interest incurred from our term loan along with the
amortization of loan initiation fees and lender warrant expense.
Change in fair value of warrant liability
The change in the fair value of the warrant liability is due to the change in
the value of the underlying shares of Series C Preferred Stock. The change in
value reflects the change in fair value of the underlying shares of Series C
Preferred Stock during the applicable period.
Other 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.
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Results of Operations for the Three Months EndedSeptember 30, 2021 and 2020 The following table set forth our results of operations for the periods (in thousands): Three Months Ended September 30, Change 2021 2020 $ % Revenues from research and development service agreements$ 2,947 $ 2,143 $ 804 37.5 % Collaboration revenue 1,135 1,065 70 6.6 % Total revenues 4,082 3,208 874 27.2 % Cost and operating expenses: Cost of service revenue 17,179 21,047 (3,868) (18.4) % Research and development 39,073 21,703 17,370 80.0 % Sales and marketing 3,977 4,354 (377) (8.7) % General and administrative 17,906 14,410 3,496 24.3 % Restructuring charges 21,193 - 21,193 n.m. Total cost and operating expenses 99,328 61,514 37,814 61.5 % Operating loss (95,246) (58,306) (36,940) 63.4 % Other income (expense): Interest income 7 32 (25) (78.1) % Interest expense (2,809) (2,769) (40) 1.4 % Gain (loss) on change in fair value of warrant liabilities - (477) 477 (100.0) % Other expense, net (199) (292) 93 (31.8) % Total other expense (3,001) (3,506) 505 (14.4) % Loss before income taxes (98,247) (61,812) (36,435) 58.9 % (Provision for) benefit from income taxes 18 (4) 22 (550.0) % Net loss$ (98,229) $ (61,816) $ (36,413) 58.9 % ------------ n.m.: Not meaningful Revenue Revenue from research and development service agreements increased by$0.8 million , or 38%, for the quarter endedSeptember 30, 2021 compared to the same period of the prior year. This increase was primarily due to the following: •a$0.5 million increase due to the timing of deliverables under fixed fee contracts; •a$0.3 million increase compared to the three months endingSeptember 30, 2020 as a result of temporary lab closures in 2020 due to the COVID-19 pandemic, which temporarily limited our ability to deliver R&D services to our customers; •a$0.3 million increase of additional revenue recognized at a point in time due to contract milestones; and •a$0.3 million increase from new and acquired contracts This was offset by: •a$0.6 million decrease from contracts ending in 2020. Collaboration revenue increased by$0.1 million , or 7%, for the quarter endedSeptember 30, 2021 compared to the same period of the prior year. This increase was due to the increased research activity under the partnership agreement with Sumitomo Chemical. 28 -------------------------------------------------------------------------------- TABLE OF CONTENTS Cost of Revenue Cost of service revenue decreased by$3.9 million , or 18%, for the quarter endedSeptember 30, 2021 compared to the same period of the prior year. This decrease was primarily due to: •a decrease of$5.1 million in labor cost associated with a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products, as well as a current period reversal of accrued performance bonuses resulting from our conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses, net of the impact of salary increases that went into effect in 2021 to reflect current market trends, and the impact of the acquisition ofLodo Therapeutics , which resulted in an increase in labor costs of approximately$0.2 million ; and •a decrease of approximately$0.5 million in consumables and$0.6 million in depreciation, both due to a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products. This was offset by: •an increase of approximately$0.9 million in stock-based compensation, partly due to an increase in the fair value of the shares underlying options with service-based vesting conditions, the vesting of awards under our Employee Stock Purchase Plan (the "ESPP"), the impact of the issuance of options with market-based vesting conditions, and the impact of the RSUs issued in relation to theLodo Therapeutics acquisition for post-acquisition services; •an increase in the use of contract research resources of$0.4 million due mainly to the engagement of contract research resources to accelerate a client early stage development project; •an increase of approximately$0.8 million in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development; and •an increase of approximately$0.2 million in other expenses due to an increase in insurance expenses. Operating Expenses Research and development Research and development expense increased by$17.4 million , or 80%, in the quarter endedSeptember 30, 2021 compared to the same period of the prior year. The overall increase was primarily due to: •the increase in resources allocated to our own product development from customer research and development activities, including product development work on Hyaline, our insect repellent, ZYM0201, and other products in our product pipeline prior to our decisions to discontinue Hyaline and our insect repellent, ZYM0201; and •expenses of approximately$1.7 million incurred after the acquisition ofLodo Therapeutics , primarily relating to personnel and consumables. This resulted in: •a$2.7 million net increase in manufacturing and lab consumables and subcontractors, largely attributable to the development of Hyaline and ZYM0201 (insect repellent) products as well as early development spend in other products; •a$2.7 million increase in labor costs due to an expansion of resources focused on research and development activities (including the Lodo personnel), and the impact of salary increases that went into effect in 2021 to reflect current market trends. This was partially offset by a current period reversal of accrued performance bonuses, resulting from our conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses; and •a$4.1 million increase in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development. In addition there was: •an increase of approximately$3.6 million in stock-based compensation, partly due to the increase in resources allocated to our own product development from customer research and development activities, an increase in the fair value of the shares underlying options with service-based vesting conditions, the vesting of awards under the ESPP, the impact of the issuance of options with market-based vesting conditions, and the impact of the RSUs issued in relation to theLodo Therapeutics acquisition for post-acquisition services; •a$2.8 million increase in depreciation attributable to new equipment and leasehold improvements entered into service throughout 2020 and 2021; and 29 -------------------------------------------------------------------------------- TABLE OF CONTENTS •an increase of approximately$1.5 million in other expenses, of which approximately$0.8 million was due to an increase in insurance expenses and approximately$0.4 million related to product and raw material freight and shipping costs. Sales and marketing Sales and marketing expense decreased by$0.4 million , or 9%, in the quarter endedSeptember 30, 2021 compared to the same period of the prior year. This increase was primarily due to: •a decrease of approximately$1.0 million in labor costs attributable to a current period reversal of accrued performance bonuses, resulting from our conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses. This was partially offset by the impact of salary increases that went into effect in 2021 to reflect current market trends. This was offset by: •an increase of approximately$0.3 million in stock-based compensation, partly due an increase in the fair value of the shares underlying options with service-based vesting conditions and the vesting of awards under the ESPP; and •a$0.2 million increase in allocated rent. General and administrative General and administrative expense increased by$3.5 million or 24%, in the quarter endedSeptember 30, 2021 compared to the same period of the prior year. The increase in general and administrative expenses was primarily attributable to the following: •a$2.4 million increase legal, strategy, investor relations and accounting services, mainly associated with becoming and being a public company, as well as services associated with litigation; and •an increase of approximately$2.0 million in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development. This was offset by: •a decrease of approximately$0.4 million in stock compensation, due to the reversal of expense related to the forfeiture of options with market-based vesting conditions. This was partially offset by an increase in the fair value of the shares underlying options with service-based vesting conditions and the vesting of awards under the ESPP; •a decrease of approximately$0.3 million in depreciation and software costs; and •a$0.2 million decrease in labor costs attributable to a current period reversal of accrued performance bonuses, resulting from our conclusion that we will not achieve certain 2021 corporate objectives established for payment of performance bonuses. This was partially offset by an expansion of resources to meet the requirements of being a public company and the impact of salary increases that went into effect in 2021 to reflect current market trends. Restructuring charges We recorded restructuring charges of$21.2 million in the quarter endedSeptember 30, 2021 and we did not record any restructuring charges in the corresponding prior year period. The restructuring charges resulted from one-time termination benefits of$4.1 million incurred in connection with ourSeptember 2021 reduction in force, contract termination costs in the amount of$3.7 million , long-lived asset impairments of$11.2 million and restructuring-related consulting fees of$2.2 million . Interest income (expense) Interest income and interest expense was flat in the quarter endedSeptember 30, 2021 compared to the same period of the prior year. Gain (loss) on change in fair value of warrant liability No change in fair value of warrant liability was recorded in the quarter endedSeptember 30, 2021 , as all warrants were exercised effective with our initial public offering ("IPO") inApril 2021 . The loss of$0.5 million in the same period of the prior year was the result of a change in the warrant value influenced by the change in the value of the underlying Series C preferred stock which increased significantly during the third quarter of 2020 with the expectation of Series D fund-raising closing, and hence providing a better runway for the Company to achieve its product goals. 30
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Results of Operations for the Nine Months EndedSeptember 30, 2021 and 2020 The following table set forth our results of operations for the periods (in thousands): Nine Months Ended September 30, Change 2021 2020 $ % Revenues from research and development service agreements$ 10,440 $ 4,818 $ 5,622 116.7 % Collaboration revenue 3,264 2,560 704 27.5 % Total revenues 13,704 7,378 6,326 85.7 % Cost and operating expenses: Cost of service revenue 60,138 63,721 (3,583) (5.6) % Research and development 129,036 60,986 68,050 111.6 % Sales and marketing 18,753 14,477 4,276 29.5 % General and administrative 60,898 44,713 16,185 36.2 % Restructuring charges 21,193 - 21,193 n.m. Total cost and operating expenses 290,018 183,897 106,121 57.7 % Operating loss (276,314) (176,519) (99,795) 56.5 % Other income (expense): Interest income 62 451 (389) (86.3) % Interest expense (8,303) (8,182) (121) 1.5 % Gain (loss) on change in fair value of warrant liabilities 1,849 (2,093) 3,942 (188.3) % Other expense, net (967) (355) (612) 172.4 % Total other expense (7,359) (10,179) 2,820 (27.7) % Loss before income taxes (283,673) (186,698) (96,975) 51.9 % (Provision for) benefit from income taxes 26 102 (76) (74.5) % Net loss$ (283,647) $ (186,596) $ (97,051) 52.0 % ------------ n.m.: Not meaningful Revenue Revenue from research and development service agreements increased by$5.6 million , or 117%, for the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This increase was primarily due to the following: •a$4.1 million increase from new and acquired contracts, including$1.6 million that was recognized at a point in time and an additional$0.6 million of which was recognized at a point in time for work performed in the fourth quarter of 2020 but recognized in the first quarter of 2021, due to a delay in contract signing until the first quarter of 2021; •a$2.1 million increase of additional revenue recognized at a point in time due to contract milestones; and •a$1.2 million increase compared to the nine months endedSeptember 30, 2020 as a result of temporary lab closures in 2020 due to the COVID-19 pandemic, which temporarily limited our ability to deliver R&D services to our customers. This was offset by: •a$1.8 million decrease from contracts ending in 2020. Collaboration revenue increased by$0.7 million , or 28%, for the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This increase was due to the increased research activity under the partnership agreement with Sumitomo Chemical. Cost of Revenue Cost of service revenue decreased by$3.6 million , or 6%, in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This was primarily due to the following: •a$9.5 million decrease in labor cost associated with a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products, as well as a current period reversal of accrued performance bonuses resulting from our conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses net of the impact of salary increases that went into effect in 2021 to reflect current market trends and the impact of the acquisition ofLodo Therapeutics ; and 31 -------------------------------------------------------------------------------- TABLE OF CONTENTS •a decrease of approximately$0.9 million in depreciation and software costs due to a shift of resources from performing research and development activities for third parties to performing research and development activities on our own products. This was offset by: •an increase of approximately$2.4 million in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development; •an increase of approximately$1.7 million in stock-based compensation, partly due an increase in the fair value of the shares underlying options with service-based vesting conditions, the impact of the issuance of options with market-based vesting conditions, RSUs issued in relation to theLodo Therapeutics acquisition for post acquisition services and the vesting of awards under the ESPP; •an increase in the use of contract research resources of$1.4 million due mainly to the engagement of contract research resources to accelerate a client early stage development work; •an increase of approximately$0.7 million in other expenses, primarily due to an increase in insurance expenses; and •an increase of approximately$0.6 million in lab consumables, mainly due to the lab shutdown from mid March through mid June of 2020 due to the COVID-19 pandemic. Operating Expenses Research and development Research and development expense increased by$68.1 million , or 112%, in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. The overall increase was primarily due to: •the increase in resources allocated to our own product development from customer research and development activities, including product development work on Hyaline, our insect repellent, ZYM0201 and other products in our product pipeline prior to our decisions to discontinue Hyaline and our insect repellent, ZYM0201; and •expenses of approximately$3.1 million incurred after the acquisition ofLodo Therapeutics , primarily relating to personnel and consumables. This resulted in: •a$29.8 million increase in manufacturing and lab consumables and subcontractors, largely attributable to the development of Hyaline, ZYM0107 (optical film), ZYM0101 (optical film) and ZYM0201 (insect repellent) products as well as early development spend on other products; •a$14.9 million increase in labor costs due to an expansion of resources focused on research and development activities (including the Lodo personnel), and the impact of salary increases that went into effect in 2021 to reflect current market trends. This was partially offset by a current period reversal of accrued performance bonuses, resulting from the conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses; and •a$9.2 million increase in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development. In addition, there was: •an increase of approximately$6.1 million in stock-based compensation, partly due to an increase in the fair value of the shares underlying options with service-based vesting conditions, the impact of the issuance of options with market-based vesting conditions, the vesting of awards under the ESPP and the impact of the RSUs issued in relation to theLodo Therapeutics acquisition for post acquisition services; •a$5.1 million increase in depreciation attributable to new equipment and leasehold improvements entered into service throughout 2020 and 2021; and •an increase of approximately$3.0 million in other expenses, of which approximately$1.5 million was due to an increase in insurance expenses. Sales and marketing Sales and marketing expense increased by$4.3 million , or 30%, in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This increase was primarily due to: •a$3.0 million increase in expense related to subcontractors. This was largely due to an increase in customer and brand marketing activities; •a$0.7 million increase in allocated rent due to an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development; and 32 -------------------------------------------------------------------------------- TABLE OF CONTENTS •an increase of approximately$0.6 million in stock-based compensation, partly due to an increase in the fair value of the shares underlying options with service-based vesting conditions and the vesting of awards under the ESPP. General and administrative General and administrative expense increased by$16.2 million or 36%, in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. The increase in general and administrative expenses was primarily attributable to the following: •a$7.6 million increase in legal, strategy, investor relations and accounting services, mainly associated with becoming and being a public company, as well as services associated with the acquisition ofLodo Therapeutics and on litigation; •a$4.4 million increase in rent and facilities costs. This was largely driven by an expansion of our real estate costs, including the addition of a new company headquarters, which is currently under development; •an increase of approximately$2.9 million in stock-based compensation, partly due to an increase in the fair value of the shares underlying options with service-based vesting conditions and the vesting of awards under the ESPP; •a$2.2 million increase in labor costs due to an expansion of resources to meet the requirements of being a public company and the impact of salary increases that went into effect in 2021 to reflect current market trends. This was partially offset by a current period reversal of accrued performance bonuses, resulting from our conclusion that we will not meet certain 2021 corporate objectives established for payment of performance bonuses and a reduction of allocation of headcount to general and administrative expense as a result of the end of temporary lab closures in 2020 due to the COVID-19 pandemic; and •an increase of approximately$0.5 million in other expenses, primarily due to an increase in insurance expenses. This was offset by: •a decrease of approximately$1.1 million in depreciation and software costs and a decrease of approximately$0.3 million in consumables, this was mainly due to a reduction of allocation of headcount to general and administrative expense as a result of the end of temporary lab closures in 2020 due to the COVID-19 pandemic. Restructuring charges We recorded restructuring charges of$21.2 million in the nine months endedSeptember 30, 2021 and did not record any restructuring charges in the corresponding prior year period. The restructuring charges resulted from one-time termination benefits of$4.1 million incurred in connection with ourSeptember 2021 reduction in force, contract termination costs in the amount of$3.7 million , long-lived asset impairments of$11.2 million and restructuring-related consulting fees of$2.2 million . Interest income (expense) Interest income decreased by$0.4 million , or 86%, in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This decrease was primarily due to a reduction in the principal balance held in certain money market funds combined with a decrease in overall market interest rates. Interest expense was flat in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. Gain (loss) on change in fair value of warrant liability A gain on change in fair value of warrant liability of$1.8 million was recorded in the nine months endedSeptember 30, 2021 , compared to a loss of$2.1 million in the same period of the prior year, a change in the fair value of warrant liability of$3.9 million . The gain in the fair value of the warrant liability in the nine months endedSeptember 30, 2021 , was primarily due to the assumption used in the valuation of the warrants which as ofMarch 31, 2021 , used a weighted average derived from a Black-Scholes (BSM) option model with a term consistent with the time to the expected IPO date as ofMarch 31, 2021 based on the expectation that the warrant would be exercised at the IPO (conditioned upon the consummation of a public offering of the Company's common stock on or prior toJune 30, 2021 ) and the value derived from the option pricing model with a term consistent with the remaining term until a future liquidity event, other than the IPO scenario described above. This change in assumption led to a gain on change in fair value of warrant liability of$2.3 million in the quarter endedMarch 31, 2021 . In the subsequent quarter endingJune 30, 2021 , there was a partial reversal of the gain of$0.4 million when the warrants were exercised in connection with the IPO inApril 2021 and were at that time remeasured to their intrinsic value. Throughout 2020, the warrant value was influenced by the change in the value of the underlying shares of Series C preferred stock which increased significantly during the nine months endingSeptember 30, 2020 , with the expectation of Series D closing and hence providing a better runway for the Company to achieve its product goals. The increase in fair value of the warrant liability resulted in a loss of$2.1 million in that period. 33 -------------------------------------------------------------------------------- TABLE OF CONTENTS Other expense Other expense increased by$0.6 million in the nine months endedSeptember 30, 2021 compared to the same period of the prior year. This increase was primarily due to an unrealized loss on a currency balance following a strengthening of theU.S. Dollar primarily against the Japanese Yen. Income Taxes Income taxes increased by$0.1 million in the nine months endedSeptember 30, 2021 compared to the same period of the prior year, this was due to the impact of the tax credit arising from the enEvolv acquisition in the first quarter of 2020. Liquidity, Capital Resources and Plan of Operations From our inception throughSeptember 30, 2021 we have incurred significant operating losses and negative cash flows from our operations as we developed our biofacturing platform. We have not yet generated revenue from product sales (except for nominal revenue related to the sale of samples), do not expect to generate revenue from product sales in 2021 and expect product revenue to be immaterial in 2022. As a result of our Portfolio Review, we have determined to discontinue our electronics film programs, other than ZYM0101, which is partnered with Sumitomo Chemical, because emerging data on the market segment we were targeting with Hyaline and other electronics films indicates a smaller near-term opportunity than previously expected. We are also discontinuing our consumer care programs, including our insect repellent, ZYM0201, because we determined through our Portfolio Review that the costs of customer acquisition with a direct-to-consumer model would have been prohibitive and, in the case of ZYM0201, it could not be produced and distributed at a price point competitive with incumbent products. We have also been developing a plan to reduce our costs to extend our cash runway, including conducting two reductions in force eliminating approximately 220 positions and working to potentially restructure some of our expenses, including lease expenses. As a result of these activities we believe that we will have sufficient cash to continue to fund our operations to the middle of 2023. We expect we will need additional funds to meet operational needs and capital requirements for product development and commercialization. To date, we have financed our operations primarily with proceeds from the sale of shares through our initial public offering, the sale of convertible preferred shares, proceeds from debt arrangements and revenue from R&D service and collaboration arrangements. We had unrestricted cash and cash equivalents as ofSeptember 30, 2021 of$496.2 million . Our primary uses of capital are, and we expect will continue to be for the near future, personnel costs, product pipeline development and commercialization costs, platform development costs, laboratory and related supplies, legal, patent and other regulatory expenses and general overhead costs. We may also pursue acquisitions, investments, joint ventures and other strategic transactions. We expect to 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 require additional capital to fund our operations, which may include capital from the issuance of additional equity, debt financings or other capital-raising transactions. We may be unable to increase our revenue, raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we are unable to raise capital when needed, we will need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans. OnOctober 20, 2021 we entered into the Amendment. Pursuant to the terms of the Amendment: (i) upon execution, we paid$41.0 million , which included$35.0 million in principal and$6.0 million of accrued interest and the applicable prepayment premium, (ii) we placed$63.0 million into an account at the sole control of the lender that represents the remaining obligations under the credit agreement, including any further prepayment premium, which was released inNovember 2021 upon the lender's approval of our planned cash usage through final maturity, (iii) eliminated the minimum revenue covenant and increased the minimum liquidity covenant and (iv) modified the final maturity to beJune 30, 2022 . Upon final maturity the remaining outstanding principal and applicable prepayment premium will be due. 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. 34 -------------------------------------------------------------------------------- TABLE OF CONTENTS Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): Nine Months Ended September 30, 2021 2020
Net cash used in operating activities
Net Cash Used in Operating Activities The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of operating assets and liabilities, which are generally attributable to timing of payments, and the related effect on certain account balances, operational and strategic decisions and contracts to which we may be a party. Net cash used in operating activities for the nine months endedSeptember 30, 2021 of$237.6 million primarily related to our net loss of$283.6 million , adjusted for non-cash charges of$40.7 million and net cash inflows of$5.3 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment, stock-based compensation, impairment of long-lived assets, and gain on fair value change of warrant liability. The main drivers of the changes in operating assets and liabilities were an increase of$18.0 million in deferred rent, largely as a result of the straight-line impact of leases, particularly for the new company headquarters, along with tenant improvement allowances received in the period, and a decrease in net other assets and liabilities of$0.8 million . These changes resulted in a cash inflow and were partially offset by cash outflows resulting from an$8.6 million decrease in accounts payable, accrued expenses and other liabilities, an increase in prepaid expenses of$2.4 million , mainly due to insurance costs related to being a public company, an increase in inventories of$1.2 million , a decrease in deferred revenue of$0.9 million and an increase in accounts receivable (billed and unbilled) of$0.4 million . Net cash used in operating activities for the nine months endedSeptember 30, 2020 of$161.2 million primarily related to our net loss of$186.6 million , adjusted for non-cash charges of$21.1 million and net cash inflows of$4.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment, stock-based compensation, and loss on fair value change of warrant liability. The main drivers of the changes in operating assets and liabilities were a$3.1 million inflow resulting from an increase in the deferred rent balance resulting from the straight-line impact of leases, a decrease in net other assets and liabilities of$2.7 million , a$0.9 million increase in deferred revenue and a decrease of$0.8 million in accounts receivable (billed and unbilled) resulting primarily from timing differences in customer billings and cash receipts. These changes resulted in a cash inflow and were partially offset by cash outflows resulting from a$2.1 million decrease in accounts payable, accrued expenses and other liabilities resulting primarily from a pay down of vendor balances; an increase in inventories of$0.7 million and a$0.4 million increase in prepaid expenses.Net Cash Used in Investing Activities Net cash used in investing activities was$26.0 million for the nine months endedSeptember 30, 2021 related to the purchase of property and equipment, of which a substantial majority related to purchases of laboratory equipment and facilities improvements, and the acquisition ofLodo Therapeutics . Net cash used in investing activities was$17.0 million for nine months endedSeptember 30, 2020 related to the purchase of property and equipment, of which a substantial majority related to purchases of laboratory equipment and facilities improvements. Net Cash Provided by Financing Activities Net cash provided by financing activities was$551.6 million for nine months endedSeptember 30, 2021 , which consisted primarily of$529.9 million in net proceeds from the initial public offering,$15.0 million from the exercise of Series C warrants,$4.7 million from the exercise of common stock options and$1.9 million in proceeds from the repayment of non-recourse loans. Net cash provided by financing activities was$102.1 million for the nine months endedSeptember 30, 2020 , which consists primarily of$99.9 million in net proceeds from the Series D preferred stock offering and$2.2 million from the exercise of common stock options. 35 -------------------------------------------------------------------------------- TABLE OF CONTENTS Off Balance Sheet Arrangements As ofSeptember 30, 2021 and 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off balance sheet arrangements or other purposes. Critical Accounting Policies We have prepared our financial statements in accordance with GAAP. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Prospectus, except as described below. Stock-Based Compensation Our stock-based compensation is accounted for in accordance with the provisions issued by the Accounting Standard Codification principles for stock compensation and share-based arrangements. Under the fair value recognition provisions of this statement, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award, taking into consideration actual forfeitures. Determining the appropriate fair value and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, risk free interest rates, expected dividends and expected life. We estimate the fair value of stock options with service-based vesting conditions and employee stock purchase plan purchases on the date of grant using the Black-Scholes-Merton option-valuation model. The grant-date fair value of option awards is based upon the fair value of our common stock as of the date of grant, as well as estimates of the expected term of the awards, expected common stock price volatility over the expected term of the option awards, risk-free interest rates and expected dividend yield. RSUs granted are valued at the market price of our common stock on the date of grant. Options with Market-based Vesting Conditions We estimate the fair value of stock options with a market-based vesting condition on the date of grant using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. The assumptions for stock price volatility, contractual term, dividend yield, and stock price used in theMonte Carlo simulations are determined using the same methodology as described above. The exception is that with respect to the stock price volatility used for theMonte Carlo simulations, we took into consideration the capital structure of each comparable company comprising the benchmark to isolate each comparable company's equity volatility without the effect of leverage and then re-levered using our capital structure. Additionally, we utilized an assumption for cost of capital in the Monte Carlo simulation that relied on market data due to the lack of our own publicly traded stock price history. The Monte Carlo simulation also calculates a derived service period for each of the vesting tranches, which is the measure of the expected time to achieve the market conditions. We recognize the cost of these options by accounting for each tranche as a discrete award and recognizing the cost over the requisite service period with respect to each award using the accelerated attribution method, regardless of whether the market conditions are achieved. We determine the requisite service period by comparing the derived service period to achieve the market-based condition and the implicit service-based condition, if any, using the longer of the two service periods as the requisite service period. Determination of the fair value of common stock on grant dates The estimated fair values of the shares of our common stock underlying options granted prior to the date of our IPO were determined by members of our board of directors as of the grant date, with input from management, considering our most recently available independent third-party valuation of our common stock and our directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed between the effective date of the most recent valuation and the date of the grant. Following the consummation of the IPO, the fair market value of our common stock is determined based on the quoted market price of our common stock. Prior to the IPO independent third-party valuations have generally been performed quarterly in accordance with the guidance outlined in the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation or AICPA's Practice Aid. In conducting the valuations, the independent third-party valuation specialist considered all objective and subjective factors that it believed to be relevant for 36 -------------------------------------------------------------------------------- TABLE OF CONTENTS each valuation conducted in accordance with AICPA's Practice Aid, including management's best estimate of our business condition, prospects and operating performance at each valuation date. Other significant factors included: •the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock; •our results of operations, financial position and the status of R&D efforts; •arms-length transactions involving recent rounds of preferred stock financings; •the composition of, and changes to, our management team and board of directors; •the lack of liquidity of our common stock; •our stage of development and business strategy and the material risks related to our business and industry; •the valuation of publicly traded companies in relevant industry sectors, as well as recently completed mergers and acquisitions of peer companies; •any external market conditions affecting relevant industry sectors; •the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions; and •the state of the IPO market for similarly situated privately held comparable companies. In valuing our common stock, the fair value of our business was determined using various valuation methods, including combinations of income approach (discounted cash flow method) and market approach (public company market multiple method) with input from management. We also used the option pricing model to backsolve the value of the security from our most recent round of financing, which implies a total equity value as well as a per share common stock value, when applicable for the valuation date. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenues and costs. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple was determined, which was applied to our operating results to estimate the enterprise value of our company. Once the enterprise value was determined under the market approach, we used the option pricing model to allocate that value among the various classes of securities to arrive at the fair value of the common stock. In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties and whether the transactions involved investors with access to our financial information. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level ofU.S. interest rates, particularly because our cash equivalents are primarily invested in short-termU.S. Treasury obligations, and our term loan bears interest at a variable rate. Our term loan bears a variable interest rate which is the sum of 9.25% plus the greater of the one-month LIBOR and 2.25%. Accordingly, increases in LIBOR could increase our interest payments under the term loan. An increase of 100 basis points in the interest rate of the term loan would not have a material impact on our financial position or results of operations. Foreign Currency Risk We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors. Our operations may be subject to fluctuations in foreign currency exchange rates in the future. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic and current reports that we file with theSEC is recorded, processed, summarized and 37 -------------------------------------------------------------------------------- TABLE OF CONTENTS reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our acting Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation and supervision of our acting Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our acting Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and that such information is accumulated and communicated to our management, including our acting Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. An evaluation was also performed under the supervision and with the participation of our management, including our acting Chief Executive Officer and our Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls and Procedures In designing and evaluating the controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 38
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