Twist Bioscience Corp (TWST) FY 2021 MD&A

Item 7. Management’s discussion and analysis of financial condition and results of operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this Form 10-K. The last day of our fiscal year is September 30, and we refer to our fiscal year ended September 30, 2019 as fiscal year 2019 or 2019, September 30, 2020 as fiscal year 2020 or 2020 and our fiscal year ended September 30, 2021 as fiscal year 2021 or 2021.

Overview

We are an innovative synthetic biology and genomics company that has developed a scalable DNA synthesis platform to industrialize the engineering of biology. The core of our platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. We have miniaturized traditional chemical DNA synthesis reactions to write over one million short pieces of DNA on each silicon chip, approximately the size of a large mobile phone. We have combined this technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to create an integrated technology platform that enables us to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. We are leveraging our unique technology to manufacture a broad range of synthetic DNA-based products, including synthetic genes, tools for next generation sample preparation, and antibody libraries for drug discovery and development.

Additionally, we believe our platform will enable new value-added opportunities, such as discovery partnerships for biologic drugs, and will enable new applications for synthetic DNA, such as digital data storage. We sell our synthetic DNA and synthetic DNA-based products to a customer base of approximately 2,900 customers in fiscal year 2021 across a broad range of industries.

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

We have grown rapidly and generated revenues of $132.3 million in the year ended September 30, 2021, $90.1 million in the year ended September 30, 2020 and $54.4 million in the year ended September 30, 2019, while incurring net losses of $152.1 million, $139.9 million and $107.7 million in the years ended September 30, 2021, 2020 and 2019, respectively. Since our inception, we have incurred significant operating losses and have accumulated net deficit of $610.6 million. To support our growth, we have increased our number of employees and increased investment in our manufacturing capabilities. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the success of our existing products and development and commercialization of additional products in the synthetic biology industry, biologic drug industry and the data storage industry.

In 2021, 2020 and 2019 we served approximately 2,900, 2,200 and 1,300 customers, respectively.

Highlights from fiscal year 2021 compared with fiscal year 2020 included

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We have built a scalable commercial platform that enables us to reach a diverse customer base in a variety of industries including industrial chemicals/materials, academic research, healthcare, food, agriculture and data storage. To address this diverse customer base, we have employed a multi-channel strategy comprised of a direct sales force targeting synthetic DNA customers, international distributors, and an e-commerce platform. We launched our proprietary, innovative, and easy-to-use e-commerce platform in October 2017 to existing customers and expanded access to the general public in January 2018. Our platform allows customers to design, validate and place on-demand orders of customized DNA online. This is a key component of our strategy to address and support our diverse and growing customer base, as well as support commercial productivity, enhance the customer experience, and promote loyalty.

Seasonality

Over the years, we have experienced a pattern, although not consistently, of our third-quarter revenue growth being lower than revenue growth in other quarters due to a decrease in demand from certain potentially significant customers during such quarter and periodic revenue fluctuations in our NGS tools. As we grow our NGS tools, our revenue may continue to fluctuate from quarter to quarter. As our European and APAC businesses become larger percentage of our revenues, we anticipate reduced revenue in our fourth quarter due to the seasonal slowdown caused by summer vacations and European holiday schedules.

Key business metrics

We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business. However, we anticipate these will change or may be substituted for additional or different metrics as our business grows.

Value of orders received

We believe that the value of orders we receive is a leading indicator of our ability to generate revenue in subsequent quarters, although there can be no assurance orders will translate into revenue. We define an order as a contract with a customer or purchase order from a customer, which outlines the promised goods at an agreed upon-price. In some cases, we receive a blanket purchase order from our customers, which includes pricing, payment and other terms and conditions, with quantities defined at the time each customer subsequently issues periodic releases against the blanket purchase order. We regularly assess trends relating to the value of orders we receive, including with respect to our customer concentration.

Orders may never convert into actual revenue and the timing of delivery of our orders and recognition of revenue, if any, may vary based on the nature of the order, and there can be no assurance that orders will result in recognized revenue. The following table lists the value of orders received during the periods indicated:

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Number of customers

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

Percentage of revenue from new and repeat customers

We believe that the percentage of revenue that we generate from both new and repeat customers is an indicator of our ability to drive adoption of our products amongst existing customers while also generating a robust pipeline of new customers. We define a new customer as a customer who, as a separate legal entity or person, has not had multiple purchases in the current fiscal year. We define a repeat customer as any customer who, as a separate legal entity or person, has purchased products or services from us more than once in the current fiscal year.

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We shipped products to approximately 2,900, 2,200, and 1,300 customers in fiscal years ended 2021, 2020, and 2019, respectively. Our percentage of revenue from repeat customers were 98%, 97% and 97% for the fiscal years ended 2021, 2020, and 2019, respectively.

Financial overview

The following table summarizes certain selected historical financial results:

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Revenues

We generate revenue from sales of synthetic genes, oligo pools, NGS tools and Biopharma libraries. Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets, generate sales through our direct sales force and over time from our e-commerce platform and launch new products.

Revenues by geography

We have one reportable segment from the sale of synthetic DNA products. The following table shows our revenues by geography, based on our customers’ shipping addresses. Americas consists of United States of America, Canada, Mexico and South America; EMEA consists of Europe, Middle East and Africa; and APAC consists of Japan, China, South Korea, India, Singapore, Malaysia and Australia.

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Revenues by products

The table below sets forth revenues by products:

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Revenues by industry

Revenues by industry were as follows:

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Revenues and accounts receivable concentration

There are no major customers who accounted for 10% or more of our revenue for the fiscal year ended September 30, 2021. There were two major customers who accounted for 12% and 10% of our revenue for the fiscal year ended September 30, 2020. There was one major customer who accounted for 17% of our revenue for the financial year ended September 30, 2019. There are no major customers who accounted for 10% or more of the net accounts receivable as of September 30, 2021. There was one customer who accounted for 36% of net accounts receivable as of September 30, 2020.

Product shipments including synthetic genes

Shipments of number of genes in years ended September 30, 2021, 2020 and 2019 were as follows:

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Cost of revenues

Cost of revenues reflects the aggregate cost incurred in the production and delivery of our products and consists of production materials, personnel costs, cost of expensed equipment and consumables, laboratory supplies, depreciation of capitalized equipment, production overhead costs and allocations of information technology(“ IT”) and facility costs. Personnel costs consist of salaries, employee benefit costs, bonuses, and stock-based compensation expenses. We expect that our cost of revenues will vary with changes in our revenues and our revenue mix.

Research and development

Research and development expenses consist primarily of costs incurred for the development of our products, which include personnel costs, laboratory supplies, consulting costs and allocated overhead, including IT and facility costs. We expense our research and development expenses in the period in which they are incurred. We expect to increase our research and development expenses as we continue to invest in new product development.

Selling, general and administrative

Selling expenses consist of personnel costs, customer service expenses, direct marketing expenses, educational and promotional expense, market research and analysis. General and administrative expenses include executive, finance and accounting, legal and human resources. These expenses consist of personnel costs, audit and legal expenses, consulting costs and allocated IT and facility costs. We expense all selling, general and administrative expenses as incurred. We expect our selling and marketing costs will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability, with an increased presence both within and outside the United States, and to expand our brand awareness and customer base through targeted marketing initiatives. We expect general and administrative expenses will increase as well as we scale our operations.

Change in fair value of contingent consideration and indemnity holdback

Change in fair value of contingent consideration and indemnity holdback consists of remeasurement of contingent consideration and indemnity holdback related to the acquisition of iGenomX.

Interest expense

Interest expense is attributable to borrowing under our senior secured term loan and our equipment financing facility.

Interest income

Interest income consists primarily of interest earned on our cash, cash equivalents, and short-term investments.

Other income (expense), net

Other income (expense), net consists of realized foreign exchange gains and losses and loss on disposal of property and equipment.

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Results of operations

The following table sets forth selected consolidated statements of operations data for the fiscal years indicated and the percentage change in such data from year to year. These historical operating results may not be indicative of the results for any future period.

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Comparison of the years ended September 30, 2021, 2020 and 2019

Revenues

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Revenues increased from $90.1 million to $132.3 million in the year ended September 30, 2021, which was an increase of $42.2 million, or 47%, as compared to the same period in 2020. The increase in revenue was primarily due to an increase in revenue from NGS tools, which grew from $44.0 million in 2020 to $72.7 million in 2021, and an increase of $6.4 million in revenue from DNA & Biopharma libraries, which grew from $6.3 million to $12.7 million primarily due to growth in our revenues from antibody discovery project services. Our synthetic genes revenue grew from $35.2 million in 2020 to $39.0 million in 2021, mainly due to growth in the pharma industry. In the year ended September 30, 2021, we shipped approximately 372,000 genes, including approximately 28,000 adapters-off non-clonal genes that were introduced in December 2020, compared to approximately 339,000 genes in the year ended September 30, 2020, an increase of 10%. Synthetic gene pricing to our customers was relatively constant period-over-period. NGS tools revenue growth was primarily attributable to the adoption of our product by a larger customer base. We do not believe that pricing changes had a meaningful impact on revenue from NGS tools period-over-period.

Revenues increased from $54.4 million to $90.1 million in the year ended September 30, 2020, which was an increase of $35.7 million, or 66%, as compared to the same period in 2019. The increase in revenue was primarily due to an increase in revenue from NGS tools which grew from $21.0 million in 2019 to $44.0 million in 2020, and an $8.5 million increase in revenue from synthetic genes. The increase in synthetic genes revenue was primarily due to higher sales of 5.0KB genes and 3.2KB genes. In the year ended September 30, 2020, we shipped approximately 339,000 genes compared to approximately 288,000 genes in the year ended September 30, 2019, an increase of 17%. Synthetic gene pricing to our customers was relatively constant period-over-period, but the product mix changed with the introduction of our 5.0KB gene product and customers purchasing our 3.2KB genes. NGS tools revenue growth was primarily attributable to the adoption of our product by a larger customer base. We do not believe that pricing changes had a meaningful impact on revenue from NGS tools period-over-period.

A discussion of our revenues for the year ended September 30, 2019 can be found on page 63 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 filed with the SEC on November 27, 2020, or our 2020 Annual Report.

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Cost of revenues

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Cost of revenue increased from $61.4 million in the prior year to $80.6 million in the year ended September 30, 2021, which was an increase of $19.2 million, or 31%. The increase was primarily due to an increase in the cost of consumption of reagents and production materials costs of $9.6 million associated with increased product shipments. The increase in payroll and stock-based compensation expense of $5.3 million was due to increased expenses related to supporting new product portfolio launches and an increase in volume of products shipped. Outside services increased by $1.5 million, depreciation increased by $1.1 million and information technology costs increased by $1.6 million. Our cost of revenues was 61% and 68% of total revenues for the year ended September 30, 2021 and 2020, respectively. The favorable change in cost of revenues to total revenues was mainly due to an increase in volume of product sold and change in the mix of products sold during the current year.

Cost of revenue increased from $47.4 million in the prior year to $61.4 million in the year ended September 30, 2020, which was an increase of $14.0 million, or 29%. The increase was primarily due to the increase in personnel costs of $4.6 million related to supporting new product portfolio launches and increase in volume of products shipped and $1.0 million related to shelter-in-place pay premiums. Consumption of reagents and production materials increased by $6.3 million associated with the increased product shipments and higher revenue. Facilities and information technology costs increased by $2.4 million which included the effect of consolidating our manufacturing operations into one facility in South San Francisco. Our cost of revenues was 68% and 87% of total revenues for the year ended September 30, 2020 and 2019, respectively. The favorable change in cost of revenues to total revenues was mainly due to an increase in volume of product sold and change in the mix of products sold during the current year.

A discussion of our cost of revenues for the year ended September 30, 2019 can be found on page 64 of our 2020 Annual Report.

Research and development expenses

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Research and development costs increased by $26.1 million to $69.1 million for the year ended September 30, 2021, as compared to the same period 2020. The increases were mainly in payroll and stock-based compensation expense of $18.4 million associated with increasing our research and development headcount, and an increase in outside services of $8.1 million primarily associated with the development activities for our data storage technology.

Research and development costs increased by $7.3 million to $43.0 million for the year ended September 30, 2020, as compared to the same period 2019. The increase was due to costs related to expanding our DNA synthesis research and development capabilities which included increases in outside services of $3.4 million and increases of facilities and information technology of $1.8 million. Personnel costs increased by $4.8 million, which included $0.4 million of shelter-in-place pay premiums. The increase was offset by a $2.5 million reimbursement received from Georgia Institute of Technology related to the development of the DNA synthesis portion of the Molecular Information Storage program.

A discussion of our research and development expenses for the year ended September 30, 2019 can be found on page 64 of our 2020 Annual Report.

Selling, general and administrative expenses

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Selling, general and administrative expenses increased by $32.6 million to $135.6 million for the year ended September 30, 2021, compared to the same period for 2020. The increase was primarily due to increases in payroll expenses and related costs by $30.5 million as a result of increased headcount in our commercial organization, and included $11.7 million higher of stock-based compensation expenses and $2.5 million higher of sales commission. Outside services, including audit costs, COVID-19 testing costs and advisory services, increased by $11.0 million, depreciation expense increased by $1.8 million, merger & acquisition costs increased by $1.4 million, computer software costs increased by $1.0 million and rent expense increased by $1.9 million, mainly due to our Wilsonville facility lease expense. The increase in SG&A expenses was offset by a decrease of $11.8 million in legal expenses as our litigation with Agilent Technologies, Inc. (“Agilent”) concluded on February 6, 2020, a decrease of $3.0 million in consulting costs and a decrease of $1.2 million in travel costs.

Selling, general and administrative expenses increased by $23.1 million to $103.3 million for the year ended September 30, 2020, compared to the same period for 2019. The increase was primarily due to increases in personnel costs related to increased headcount, partially offset by a $0.6 million decreases in legal expenses. Salaries and related costs increased by $20.0 million, as a result of increased headcount, including $5.0 million higher stock-based compensation expense. Outside services and insurance increased by $2.4 million and facilities and information technology increased by $1.6 million. The increase was offset by a decrease in travel expenses of $1.7 million, primarily due to COVID-19 travel restrictions.

A discussion of our selling, general and administrative expenses for the year ended September 30, 2019 can be found on page 65 of our 2020 Annual Report.

Change in fair value of contingent consideration and indemnity holdback

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Change in the fair value was $0.5 million for the year ended September 30, 2021 associated with the contingent consideration and indemnity holdback related to the acquisition of iGenomX as a result of the change in fair value of our stock price as of September 30, 2021.

Interest, and other income (expense), net

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Interest income was $0.4 million in the year ended September 30, 2021, $1.5 million in the year ended September 30, 2020 and $3.0 million in the year ended September 30, 2019, resulting from our short-term investments. Interest expense was $0.4 million in fiscal year 2021, $0.8 million in fiscal year 2020 and $1.3 million in fiscal year 2019 related to our outstanding debt. Other expense was $1.4 million in fiscal year 2021, $0.2 million in fiscal year 2020 and $0.3 million in fiscal year 2019, mainly due to one-time costs not related to our normal business activities.

Provision for income taxes

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We recorded income tax benefit of $1.9 million in 2021 mainly as a result of the business acquisition of iGenomX. We recorded provision for income taxes of $0.4 million in 2020 and $0.3 million in 2019.

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Liquidity and capital resources

Sources of liquidity

To date, we have financed our operations principally through public equity raises, private placements of our convertible preferred stock, borrowings from credit facilities and revenue from our commercial operations.

Since our inception on February 4, 2013 and through September 30, 2021, we have received an aggregate of $1,063.9 million in net proceeds from the issuance of equity securities and an aggregate of $13.8 million from debt. As of September 30, 2021, we had a balance of $465.8 million of cash and cash equivalents and $12.0 million in short-term investments.

Loan and Security Agreement

In September 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Fourth Loan, with SVB, which allowed for borrowings aggregating up to $20.0 million in a series of three advances.

The first advance—which was effectuated in September 2017—provided a principal amount of $10.0 million, the second optional advance allowed for a principal amount of $5.0 million and the third optional advance allowed for a principal amount of $5.0 million during their respective drawdown periods; however, the drawdown periods for the second and third tranches under this agreement have expired as of January 31, 2018 and June 30, 2018, respectively.

In connection with the first advance, we issued warrants to purchase 64,127 shares of common stock at an exercise price of $6.24 per share. The Fourth Loan contains a subjective acceleration clause under which the Fourth Loan could become due and payable to SVB in the event of a material adverse change in our business. The term of the loan was 51 months with an interest rate of prime plus 3.00% and a final payment fee of $0.7 million.

In addition, we obtained a $10.0 million revolving facility from SVB in September 2017 as part of the Fourth Loan. The principal amount outstanding under the revolving line accrues interest at a floating per annum rate equal to one percentage point (1.00%) above the prime rate, which interest is payable monthly. The amounts available under the revolving line are limited by an advance rate which is a percentage of our account receivables balance. As of September 30, 2021, we have not borrowed against the $10.0 million revolving facility.

Our credit facilities contain customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on changes in business, management, ownership or business locations, indebtedness, encumbrances, investments, mergers or acquisitions, dispositions, maintenance of collateral accounts, prepayment of other indebtedness, distributions and transactions with affiliates. The credit facilities contain customary events of default subject in certain cases to grace periods and notice requirements, including (a) failure to pay principal, interest and other obligations when due, (b) material misrepresentations, (c) breach of covenants, conditions or agreements in the credit facilities, (d) default under material indebtedness, (e) certain bankruptcy events, (f) a material adverse change; (g) attachment, levy or restraint on business, (h) default with respect to subordinated debt, (i) cross default under our credit facilities, and (j) government approvals being revoked. As part of the Fourth Loan, all rights, title and interest to our personal property with the exception of our intellectual property, have been pledged as collateral, including cash and cash equivalents, short-term investments, accounts receivable, contractual rights to payment, license agreements, general intangibles, inventory and equipment. We were in compliance with all covenants under the Fourth Loan as of September 30, 2021.

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Future maturities of the loan as of September 30, 2021 are as follows:

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Capital resources

Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. As of September 30, 2021, we had cash, cash equivalents and short-term investments of $477.9 million.

We believe that our existing cash, cash equivalents and short-term investments are sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least one year from the issuance of these consolidated financial statements. In the future, we may still need to obtain additional financing to fund operations beyond this period, and there can be no assurance that we will be successful in raising additional financing on terms which are acceptable to us. In addition, our operating plan may change as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Our future capital requirements will depend on many factors. See “Risk factors—We will require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product manufacturing and development and other operations.”

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

Operating capital requirements

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs, laboratory and related supplies, legal and other regulatory expenses, and general overhead costs and the capital expenditures for the Wilsonville, Oregon facility expansion. We had $67.4 million and $6.0 million in commitments for capital expenditures as of September 30, 2021 and 2020, respectively.

Cash flows

The following table summarizes our sources and uses of cash and cash equivalents:

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Operating activities

Net cash used in operating activities was $112.2 million in fiscal year 2021 and consisted primarily of a net loss of $152.1 million adjusted for non-cash items including depreciation and amortization expenses of $9.8 million, stock-based compensation expense of $37.0 million, a change in operating assets and liabilities of $9.4 million, and a net total of other non-cash items of $2.5 million. The change in operating assets and liabilities was mainly due to increase in inventory of $19.5 million, other non-current assets of $4.7 million, accounts receivable of $2.2 million and decrease in accounts payable of $8.5 million and accrued compensation of $7.4 million.

Net cash used in operating activities was $142.2 million in fiscal year 2020 and consisted primarily of a net loss of $139.9 million adjusted for non-cash items including depreciation and amortization expenses of $6.7 million, stock-based compensation expense of $17.1 million, a change in operating assets and liabilities of $25.2 million, and a net total of other non-cash items of $0.9 million. The change in operating assets and liabilities was mainly due to increase in accounts receivable of $14.3 million, inventory of $5.0 million, prepaid expenses and other current assets of $3.7 million, accounts payable of $5.5 million, accrued expenses of $2.6 million and decrease in accrued expenses of $4.5 million.

A discussion of our net cash used in operating activities for the fiscal year 2019 can be found on page 69 of our 2020 Annual Report.

Investing activities

In fiscal year 2021, our net cash provided by the investing activities was $156.2 million primarily as a result of net impact of purchases and maturity of investments of $183.7 million and purchases of laboratory property, equipment and computers of $27.1 million.

In fiscal year 2020, our investing activities used net cash of $114.7 million. The use of net cash resulted primarily from the net impact of purchases and maturity of investments of $104.8 million and purchases of laboratory property, equipment and computers of $9.9 million.

A discussion of our net cash used in investing activities for the fiscal year 2019 can be found on page 69 of our 2020 Annual Report.

Financing activities

Net cash provided by financing activities was $329.2 million in fiscal year 2021, which consisted of $323.9 million in proceeds from a public offering of our common stock, net of underwriting discounts and commissions and offering expenses, $4.9 million from proceeds from issuance of shares under the 2018 ESPP and $14.6 million from the exercise of stock options, offset by $3.3 million in principal payments on long term debt and $10.8 million in repurchases of common stock for income tax withholdings.

Net cash provided by financing activities was $303.7 million in fiscal year 2020, which consisted of $48.0 million in net proceeds from our at-the-market offering, $247.5 million in net proceeds from the issuance of common stock in public offerings, $3.4 million from proceeds from issuance of shares under the 2018 ESPP and $10.5 million from the exercise of stock options, offset by $3.3 million in principal payments on long term debt and $2.4 million in repurchases of common stock for income tax withholdings.

A discussion of our net cash provided by financing activities for the fiscal year 2019 can be found on page 69 of our 2020 Annual Report.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements other than our indemnification agreements as described in Note 7 of the consolidated financial statements included elsewhere in this Form 10-K.

Contractual obligations and other commitments

In September 2016, we entered into a collaboration agreement with Distributed Bio to offer therapeutic antibody design and optimization services, as well as an exclusive library targeting G-protein coupled receptors to our customers. Upon successful commercialization, we agreed on a profit-sharing and license arrangement for an Antibody Optimization Software and GPCR-Targeting Antibody Library, which includes royalty payments for discovered pharmaceutical products in a tiered structure, which ranges from 25% to 35% of net revenue generated. During the year ended September 30, 2021, we exercised our option to purchase all rights to the G-coupled protein receptor library and its proprietary Twist Antibody Optimization software, both developed in collaboration with Distributed Bio.

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In December 2020, we entered into a 12-year operating lease for an approximately 111,000-square foot facility in Wilsonville, Oregon to further expand our operations. Subject to certain conditions pursuant to the lease, we expect monthly rent payments on the new facility to commence in the first quarter of 2022. We will pay an initial annual base rent of approximately $1.7 million, which is subject to scheduled 3% annual increases, plus certain operating expenses. We have been provided a tenant improvement allowance of $13.3 million. We have the right to sublease the facility, subject to landlord consent. We also have the option to extend the lease for two terms of five years each. The lease commenced on April 15, 2021. The total future minimum lease payments under the agreement are $27.9 million.

On April 13, 2021, we entered into the First Lease Amendment, which amends the terms of the Wilsonville, Oregon lease agreement dated December 18, 2020. The First Lease Amendment increases the premises originally leased within the same building by approximately 101,000 square feet. We intend to use the additional premises to support our additional product offerings, including DNA data storage, or other high value growth product lines. The First Lease Amendment also extends the termination date until April 1, 2034 and modifies our option to extend the term to an additional 10-year term for the premises. Additional rent under the First Lease Amendment for the additional premises commences April 1, 2022 with approximately $1.2 million in rent payments due the first year and approximately $17.6 million in aggregate estimated rent payments due over the total initial term of the First Lease Amendment. In addition, the First Lease Amendment increases the base rental payments relating to the original premises by 3% for the period in which the First Lease Amendment extends the term of the original premises. We are obligated to pay approximately 26% of the operating expenses and utilities applicable to the additional premises. The landlord will provide a tenant improvement allowance in connection with our improvements to the additional premises of approximately $4.3 million.

On April 14, 2021, we entered into a five-year operating lease for a 15,500-square foot warehouse in Brisbane, California to further expand our operations. Upon execution of the lease agreement, we provided the landlord an approximately $0.2 million security deposit. We will pay an initial annual base rent of approximately $0.3 million, which is subject to 3% annual increases, plus certain operating expenses. We have the right to sublease the facility, subject to landlord consent. The future minimum lease payments under the agreement are $2.2 million.

On July 28, 2021, we entered into a 7-year operating lease for an approximately 21,000 square-feet of office space located in South San Francisco, California, to further expand our operations. Upon execution of the lease agreement, we provided the landlord an approximately $0.2 million security deposit. We will pay an initial annual base rent of approximately $1.7 million, which is subject to scheduled 3% annual increases, plus certain operating expenses. We have the right to sublease the facility, subject to landlord consent. The lease had not commenced as of September 30, 2021 as the office space was not vacated by the landlord. The total future minimum lease payments under the agreement are $13.1 million.

Critical accounting policies and significant management estimates

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

Revenue recognition

Our revenue is generated through the sale of synthetic biology tools, such as synthetic genes, or clonal genes and fragments, oligonucleotide pools, or oligo pools, NGS tools and DNA libraries. We recognize revenue when control of the products is transferred to the customer and at a transaction price that is determined based on the agreed upon rates in the applicable order or master supply agreement applied to the quantity of synthetic DNA that was manufactured and shipped to the customer.

Contracts with customers are in the written form of a purchase order or a quotation, which outline the promised goods and the agreed upon price. Such orders are often accompanied by a Master Supply or Distribution Agreement that establishes the terms and conditions, rights of the parties, delivery terms, and pricing. We assess collectability based on a number of factors, including past transaction history and creditworthiness of the customer.

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For all of our contracts to date other than Biopharma contracts, the customer orders a specified quantity of a synthetic DNA sequence; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation.

The transaction price is determined based on the agreed upon rates in the purchase order or master supply agreements applied to the quantity of synthetic DNA that was manufactured and shipped to the customer. Our contracts include only one performance obligation—the shipment of the product to the customer. Accordingly, all of the transaction price, net of any discounts, is allocated to the one performance obligation. The Company’s sales are subject to Ex Works (as defined in Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up by the customer's freight forwarder, as the Company has determined that this is the point in time that product control transfers to the customer. Therefore, upon shipment of the product, there are no remaining performance obligations. Our shipping and handling activities are performed before the customer obtains control of the goods and therefore are considered a fulfillment cost. We have elected to exclude all sales and value added taxes from the measurement of the transaction price. We have not adjusted the transaction price for significant financing since the time period between the transfer of goods and payment is less than one year. We have elected the practical expedient of not disclosing the consideration allocated to remaining performance obligations and an explanation of when those amounts are expected to be recognized as revenue since the duration of our contracts is less than one year.

We recognize revenue at a point in time when control of the products is transferred to the customer.

Our Biopharma revenue currently primarily consists of research and development agreements with third parties that provide for up-front and milestone-based payments. We also enter into research and development agreements that do not include up-front or milestone-based payments and recognize revenue on these types of agreements based on the timing of development activities. Our research and development agreements may include more than one performance obligation. At the inception of the agreement, we assess whether each obligation represents a separate performance obligation or whether such obligations should be combined as a single performance obligation. The transaction price for each agreement is determined based on the amount of consideration we expect to be entitled to for satisfying all performance obligations within the agreement. We assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. In agreements where we satisfy performance obligation(s) over time, we recognize development revenue typically using an input method based on our costs incurred relative to the total expected cost which determines the extent of our progress toward completion. As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the transaction price and progress towards completion. We review our estimate of the transaction price and progress toward completion based on the best information available to recognize the cumulative progress toward completion as of the end of each reporting period and make revisions to such estimates as necessary. Also, these research and development agreements may include license payments. We recognize revenue from functional license agreements when the license is transferred to the customer and the customer is able to use and benefit from the license. A functional license has significant standalone functionality because it can be used “as is” for performing a specific task.

We had contract assets of $2.0 million and contract liabilities of $1.1 million as of September 30, 2021. For all periods presented, we did not recognize revenue from amounts that were included in the contract liability balance at the beginning of each period. In addition, for all periods presented, there was no revenue recognized in a reporting period from performance obligations satisfied in previous periods.

Based on the nature of our contracts with customers which are recognized over a term of less than 12 months, we have elected to use the practical expedient whereby costs to obtain a contract are expensed as they are incurred.

We state our revenues net of any taxes collected from customers that are required to be remitted to various government agencies. The amount of taxes collected from customers and payable to governmental entities is included on the balance sheet as part of “Accrued expenses and other current liabilities.”

Stock-based compensation

We have granted stock-based awards, consisting of stock options and restricted stock, to our employees, certain non-employee consultants and certain members of our board of directors. We measure stock-based compensation expense for restricted stock and stock options granted to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We measure stock-based compensation expense for restricted stock and stock options granted to non-employee consultants on the date of grant and recognize the corresponding compensation expense of those awards over the period in which the related services are received. We adjust for actual forfeitures as they occur.

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We have granted performance-based stock units (PSUs) to executive officers and senior level employees. We use the Black-Scholes method to calculate the fair value at the grant date without regard to the vesting condition and will recognize compensation cost for the units that are expected to vest.

We estimate the fair value of stock options granted to our employees, directors and non-employee consultants on the grant date, and rights to acquire stock granted under our Employee Stock Purchase Plan, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected Dividend. We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we use an expected dividend yield of zero.

Business Combinations

Accounting for business acquisition require management to make significant estimates and assumptions as of acquisition date which are inherently uncertain. Intangible assets we have recognized from such transaction includes goodwill, development technology and customer relationships. Significant judgment was exercised in determining the fair value of the developed technology intangible assets acquired, which included estimates and assumptions related to the projected revenues (specifically volume of sales), discount rate, and technology obsolescence curve.

Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to, projected revenues, technology obsolescence and discount rate. The rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.

Goodwill

Determining when to test for impairment, the reporting unit, the assets and liabilities of the reporting unit, and the fair value of the reporting unit requires significant judgment and involves the use of significant estimates and assumptions. We test goodwill for impairment in our fourth quarter each year, or more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is less than its carrying value. For reporting units for which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is considered not impaired and we are not required to perform the goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the fair value of the reporting unit. For reporting units for which this assessment concludes that it is more likely than not that the fair value is below the carrying value, goodwill is tested for impairment by determining the fair value of the reporting unit and comparing it to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value. For 2021, our qualitative assessment indicated that the fair value of our reporting unit substantially exceeded the carrying value and that a quantitative assessment was unnecessary.

Recently issued accounting pronouncements

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” in the

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Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for a further discussion of the impairment analysis of acquisition-related intangible assets.

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