XML 16 R23.htm IDEA: XBRL DOCUMENT

Summary of significant accounting policies (Policies)

12 Months Ended

Sep. 30, 2019

Basis of presentation and use of estimates

The presentation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of deferred tax assets, stock-based compensation expense, determination of the net realizable value of inventory, and the fair value of the Company’s common stock and redeemable convertible preferred stock warrant liabilities. Actual results could differ from those estimates. The Company’s consolidated financial statements include its wholly-owned subsidiaries. All intercompany balances and accounts are eliminated in consolidation.

Risks and uncertainties

The Company relies on third parties for the supply and manufacture of its products, including a single-source supplier for a critical component, as well as third-party logistics providers. In instances where these parties fail to perform their obligations, the Company may be unable to find alternative suppliers to satisfactorily deliver its products to its customers on time, if at all.

The Company operates in a dynamic and highly competitive industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations, or cash flows

ability to obtain future financing; advances and trends in new technologies and industry standards; market acceptance of the Company’s products; development of sales channels; certain strategic relationships; litigation or claims against the Company regarding intellectual property, patent, product, regulatory, or other factors; and the ability to attract and retain employees necessary to support its growth.

Refer to Note 7 for discussion of our current litigation with Agilent which is set to go to trial in February 2020 and could have a material adverse effect on the Company.

The Company has expended and expects to continue to expend substantial funds to complete the research and development of its production process. The Company may require additional funds to commercialize its products and may be unable to entirely fund these efforts with its current financial resources. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable on a timely basis from operations or additional sources of financing, the Company may have to delay the sale of the Company’s products and services which would materially and adversely affect its business, financial condition and operations.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Substantially all of the Company’s cash is held by one financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company’s investment policy addresses the level of credit exposure by establishing a minimum allowable credit rating and by limiting the concentration in any one investment.

The Company’s accounts receivable is derived from customers located principally in the United States and Europe. The Company maintains credit insurance for certain of its customer balances, performs ongoing credit evaluations of its customers, and maintains allowances for potential credit losses on customers’ accounts when deemed necessary. The Company does not typically require collateral from its customers. Credit losses historically have not been material. The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay.

Customer concentration

One customer accounted for more than 10% of total revenues as follows:


	Year ended September 30,
	2019			2018			2017
Customer A		17	%		34	%		40	%

One customer accounted for greater than 10% of net accounts receivable as follows:


	September 30,
	2019			2018
Customer A		13	%		27	%

Cash and cash equivalents

Cash equivalents that are readily convertible to cash are stated at cost, which approximates fair value. The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of investments in money market funds as of September 30, 2019 and 2018.

Short-term investments

The Company invests in various types of securities, including United States government, commercial paper, and corporate debt securities. It classifies its investments as

available-for-sale

and records them at fair value based upon market prices at period end. Unrealized gains and losses that are deemed temporary in nature are recorded in accumulated other comprehensive

income

as a separate component of stockholders’

equity (

deficit

)

. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of investments sold. The Company may sell these securities at any time for use in current operations.

Accounts receivable

Trade receivables include amounts billed and currently due from customers, recorded at the net invoice value and are not interest bearing. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amounts of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable. The Company

re-evaluates

such allowance on a regular basis and adjusts its allowance as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the allowance.

The Company has a short

order-to-invoice

lifecycle, as most products can be manufactured within one month. Upon delivery of the products to the customer, the Company invoices the customer. The typical timing of payment is net 30 days.

Fair value of financial instruments

The carrying amounts of the Company’s financial instruments including cash equivalents, short term investments, and accounts receivable approximate fair value due to their relatively short maturities. The carrying amounts of the redeemable convertible preferred stock warrant liability represent their fair values. Based on the borrowings rates currently available to the Company for loans with similar terms, the carrying value of the Company’s long-term debt approximates its fair value (level 2 within the fair value hierarchy).

Inventories

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the

first-in,

first-out

method. Determining net realizable value of inventory involves judgments and assumptions, including projecting selling prices and costs to sell. Provisions are made to reduce excess and obsolete inventories to their estimated net realizable value based on forecasted demand, past experience, the age and nature of inventories.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term of the respective leasehold improvements assets, if any. The Company recorded depreciation and amortization expense of $6.1 million, $5.5 million and $4.8 million for the years September 30, 2019, 2018 and 2017, respectively. Estimated lives of property and equipment are as follows:


Laboratory equipment		5 Years
Furniture, fixtures and other equipment		5 Years
Computer equipment		3 Years
Computer software		3 Year s
Leasehold improvements		Lesser of useful life or facilities’ lease term.

Maintenance and repairs are charged to expense as incurred. Betterments are capitalized and depreciated through the life of the lease. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

Capitalized software development costs

Costs associated with

internal-use

software systems, including those

to improve e-commerce

capabilities, during the application development stage are capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization ceases at the point when the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in property and equipment, net on the consolidated balance sheets.

Capitalized software development costs were $2.3 million and $1.9 million as of September 30, 2019 and 2018, respectively. Capitalized costs are amortized from the project completion date, using the straight-line method over an estimated useful life of the assets, which is

three

years.

Long-lived assets

The Company reviews property and equipment and intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds

their fair value

. There have been no such impairments of long-lived assets during the years ended September 30, 2019, 2018 and 2017.

Leases

The Company has entered into lease agreements for its manufacturing, research and development and office facilities. These leases qualify as and are accounted for as operating leases. Rent expense is recognized on a straight-line basis over the term of the lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a prepaid rent asset or a deferred rent liability, as appropriate for each lease.

Goodwill and purchased intangible assets

Goodwill is evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If, based on a qualitative assessment, the Company determines it is more likely than not that goodwill is impaired, a quantitative assessment is performed to determine if the fair value of the Company’s sole reporting unit is less than its carrying value.

Purchased intangible assets with finite lives are generally amortized over their estimated useful lives using the straight-line method. The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.

Segment information

The Company has one business activity, which is manufacturing of synthetic DNA using its semiconductor-based silicon platform and operates as one reportable and operating segment. The Company’s chief operating decision-maker, its Chief Executive Officer (CEO), reviews the Company’s operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.

Revenue recognition

Effective October 1, 2017, the Company elected to early adopt the requirements of Accounting Standards Codification (ASC) 606,

Revenue from Contracts with Customers

using the full retrospective method. The Company evaluated the impact on revenues, loss from operations, net loss attributable to common stockholders and basic and diluted earnings per share for all periods presented and concluded that there was no material impact on the Company’s consolidated financial statements for all periods presented.

The Company’s revenue is generated through the sale of synthetic biology tools, such as synthetic genes, or clonal genes and fragments, oligonucleotides pools, or oligo pools, next generation sequencing, or NGS tools and DNA libraries. The Company accounts for a contract when it has 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.

Contracts with customers are generally 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. The Company assesses collectability based on a number of factors, including past transaction history and creditworthiness of the customer.

For all of the Company’s contracts to date, the customer orders a specified quantity of synthetic DNA

;

therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation. Some contracts may contain prospective discounts when certain order quantities are exceeded; however, these future discounts are either not significant, not deemed to be incremental to the pricing offered to other customers, or not enforceable options to acquire additional goods. As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation. The Company does not offer retrospective discounts or rebates.

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. The Company’s contracts include only one performance obligation – the delivery of the product to the customer. Accordingly, all of the transaction price, net of any discounts, is allocated to the one performance obligation. Therefore, upon delivery of the product, there are no remaining performance obligations. The Company’s shipping and handling activities are considered a fulfillment cost. The Company has elected to exclude all sales and value added taxes from the measurement of the transaction price. The Company has not adjusted the transaction price for significant financing since the time period between the transfer of goods and payment is less than one year.

The Company recognizes revenue at a point in time when control of the products is transferred to the customer. Management applies judgment in evaluating when a customer obtains control of the promised good which is generally when the product is shipped or delivered to the customer. The Company’s customer contracts generally include a standard assurance warranty to guarantee that its products comply with agreed specifications. The Company reduces revenue by the amount of expected returns which have been insignificant.

The Company has elected the practical expedient to not disclose 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 the contracts is less than one year.

Refer to Note 15 for the disaggregation of revenues by geography, by product and by industry.

The Company does not have any contract assets or contract liabilities as of September 30, 2019 and 2018. For all periods presented, the Company 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 the Company’s contracts with customers which are recognized over a term of less than 12 months, the Company has elected to use the practical expedient whereby costs to obtain a contract are expensed as they are incurred.

Research and development

Research and development expenses consist of compensation costs, employee benefits, subcontractors, research supplies, allocated facility related expenses and allocated depreciation and amortization. All research and development costs are expensed as incurred.

Advertising costs

Costs related to advertising and promotions are expensed to sales and marketing as incurred. Advertising and promotion expenses for the years ended September 30, 2019, 2018 and 2017, were $1.3 million, $0.9 million and $0.1 million, respectively.

Government contract payments

The Company recognizes payments received from its funded research and development agreement with the Defense Advanced Research Projects Agency (DARPA), when milestones are achieved and records them as a reduction of research and development expenses. In fiscal 2019 and 2018, the Company received $0.5 million and $0.3 million, respectively, in DARPA payments. There were no DARPA payments received during the year ended September 30, 2017.

Redeemable convertible preferred stock warrant liability

Outstanding warrants that were related to the Company’s redeemable convertible preferred stock are classified as liabilities on the balance sheet. As the warrants to purchase redeemable convertible preferred stock were exercisable into shares of convertible preferred stock, the Company had recognized a liability for the fair value of its warrants on the consolidated balance sheets upon issuance and subsequently remeasured the liability to fair value at the end of each reporting period. In connection with the closing of

our

IPO, all of the outstanding warrants to purchase redeemable convertible preferred stock automatically converted to warrants to purchase common stock, which qualify for equity classification and no further measurement has been required thereafter.

Common stock warrants

Warrants to purchase the Company’s common stock issued in conjunction with debt are recorded as additional

paid-in-capital

and classified as equity on the consolidated balance sheets. During the year ended September 30, 2017, the Company recorded $0.5 million in additional

paid-in-capital

for the fair value of warrants to purchase common stock issued in connection with long-term debt. There were no common stock warrants issued during the years ended September 30, 2018 and 2019.

Stock-based compensation

The Company maintains performance incentive plans under which incentive and nonqualified stock options and restricted stock units are granted primarily to employees and may be granted to members of the board of directors and certain

non-employee

consultants, and employees may participate in an employee stock purchase plan.

The Company recognizes stock compensation in accordance with ASC 718,

Compensation—Stock Compensation

. ASC 718 requires the recognition of compensation expense, using a fair value-based method, for costs related to all stock-based payments including stock options, restricted stock units and employee stock purchase plan.

The Company recognizes fair value of stock options granted to

non-employees

as a stock-based compensation expense over the period in which the related services are received. The Company recognizes forfeitures as they occur. The Company believes that the estimated fair value of stock options is more readily measurable than the fair value of the services rendered.

Net loss per share attributable to common stockholders

The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with

the two-class method

required for companies with participating securities. In computing diluted net loss attributable to common stockholders, undistributed earnings

are re-allocated to

reflect the potential impact of dilutive securities. The Company’s basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. For purposes of the calculation of diluted net loss per share attributable to common stockholders, redeemable convertible preferred stock, unvested shares of common stock issued upon the early exercise of stock options, shares issuable for employee stock purchase plan contributions received, warrants to purchase redeemable convertible preferred stock, warrants to purchase common stock, unvested restricted common stock, unvested restricted stock units and stock options to purchase common stock are considered potentially dilutive securities but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.

Basic and diluted net loss per share of common stock attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards and warrants. Because the Company has reported a net loss for the years ended September 30, 2019, 2018 and 2017, diluted net loss per common share is the same as the basic net loss per share for those years.

The Company considered all series of its convertible preferred stock to be participating securities as they were entitled to receive noncumulative dividends prior and in preference to any dividends on shares of common stock. Due to the Company’s net losses, there was no impact on the loss per share calculation in applying

the two-class method

since the participating securities had no legal obligation to share in any losses.

Reverse stock split

In October 2018, the Company’s stockholders approved a

one-for-0.101

reverse stock split of its common and redeemable convertible preferred stock which was effected on October 16, 2018. The par value of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. Accordingly, all share and per share amounts for all periods presented in the consolidated financial statements and notes thereto have been adjusted retrospectively to reflect this reverse stock split.

Income taxes

The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability accounts are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. Valuation allowances are established where necessary to reduce deferred tax assets to the amounts expected to be realized.

Deferred offering costs

Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the Company’s IPO, were initially capitalized and subsequently offset against proceeds from the IPO within stockholders’ equity. As of September 30, 2019, there were no capitalized deferred offering costs on the consolidated balance sheets. As of September 30, 2018, there was $3.7 million of deferred offering costs within other

non-current

assets on the consolidated balance sheets.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2014-09,

Revenue from Contracts with Customers (Topic 606)

, which provides accounting guidance for all revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company adopted the new revenue standard, on October 1, 2017, using the full retrospective method.

In February 2016, the FASB issued new lease accounting guidance in

ASU 2016-02,

Leases

. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a

right-of-use

asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. A modified retrospective approach is required, applying the new standard to leases existing as of the date of initial application. An entity may choose to apply the standard as of either its effective date or the beginning of the earliest comparative period presented in the financial statements. The Company will adopt the new standard on October 1, 2019, the first day of fiscal 2020, using the effective date as the date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods prior to the first quarter of fiscal 2020. The Company will elect certain practical expedients permitted under the transition guidance within the new standard, which among other things, allow the Company to carry forward its prior conclusions about lease identification and classification.

The Company estimates the key change upon adoption of the standard will result in balance sheet recognition of additional lease assets and lease liabilities as of October 1, 2019, which

ll be

based on the present value of committed lease payments

which the Company expects to be consistent with the future minimum lease payments disclosed in Note 7

. The Company does not expect the adoption of the new standard to have a material impact on the recognition, measurement or presentation of lease expenses within its consolidated income statements, consolidated statements of comprehensive income or consolidated statements of cash flows.

In June 2016, the FASB

issued ASU 2016-13,

Financial Instruments—Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments

. The new standard requires entities to use the new “expected credit loss” impairment model for most financial assets measured at amortized cost, including trade and other receivables

and held-to-maturity debt

securities, and modifies the impairment model

for available-for-sale debt

securities. The standard is effective for fiscal years beginning after December 15, 20

, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU

2016-15,

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

, which was intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of

zero-coupon

bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company adopted this standard effective October 1, 2018. The adoption

of ASU 2016-15 did

not have an impact on the Company’s consolidated financial statements for either period presented.

In November 2016, the FASB issued ASU

2016-18,

Statement of Cash Flows (Topic 230): Restricted Cash

. This ASU applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the

beginning-of-period

and

end-of-period

total amounts shown on the statement of cash flows. Further, a reconciliation between the balance sheet and statement of cash flows is required when the balance sheet includes more than one line item for cash, cash equivalents, and restricted cash. Therefore, transfers between these balances should no longer be presented as a cash flow activity. The Company adopted this standard effective October 1, 2018, utilizing the retrospective transition method to each period presented. The following table provides a reconciliation of the Company’s cash and cash equivalents, current portion of restricted cash and

non-current

portion of restricted cash reported within the consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company’s consolidated statements of cash flows for the periods presented:


	September 30,
	2019		2018		2017
Cash and cash equivalents		46,735		80,757		31,227
Restricted cash, non-current		579		579		202
Restricted cash, current (within prepaid expenses and other current assets)		84		201		144

Total cash, cash equivalents and restricted cash		47,398		81,537		31,573

Amounts included in restricted cash primarily related to security deposits and a letter of credit with a financial institution, both in connection with office space lease agreements.

In January 2017, the FASB issued ASU

2017-01,

Business Combinations (Topic 805)

Clarifying the Definition of a Business

, clarifying the definition of a business. The ASU affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The Company adopted this standard effective October 1, 2018. The Company will apply the provisions of this ASU in evaluating the definition of a business for any prospective transaction from October 1, 2018.

In January 2017, the FASB issued ASU

2017-04,

Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.

This ASU simplifies the subsequent measurement of goodwill. The ASU eliminates step 2 from the goodwill impairment test, including for reporting units with a zero or negative carrying amount that fail a qualitative test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU should be applied on a prospective basis. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet determined whether it will early adopt this ASU.

In May 2017, the FASB issued ASU

2017-09,

Compensation

—

Stock Compensation (Topic 718): Scope of Modification Accounting

, which clarifies when to account for a change to the terms or conditions of a stock-based payment award as a modification. Under ASU

2017-09,

modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This standard is effective for all entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted this standard effective October 1, 2018. The adoption

of ASU 2017-09 did

not have an impact on the Company’s consolidated financial statements for either period presented.

In August 2018, the FASB issued ASU

2018-13,

Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

, which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU

2018-13

will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on its disclosures.