Twist Bioscience Corporation — Q3 FY2019 Form 10-Q
Period: Three and nine months ended June 30, 2019; fiscal year ends September 30. Amounts are in U.S. dollars. The company develops and sells synthetic DNA products, including synthetic genes, oligo pools, next-generation sequencing (NGS) tools and DNA libraries.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2019 | $13.6 million | $38.6 million |
| Revenue, prior-year comparable period | $6.5 million | $17.0 million |
| Operating loss, 2019 | $28.1 million | $77.3 million |
| Net loss, 2019 | $27.9 million | $76.5 million |
| Net loss per share, 2019 | $0.92 | $2.97 |
| Operating cash used, 2019 | Not separately provided | $64.6 million |
- Q3 revenue increased 108% year over year; nine-month revenue increased 127%. Q3 cost of revenue was $11.4 million. Gross margin was approximately 16% for Q3 2019 versus negative 15% in Q3 2018; nine-month margin was approximately 9% versus negative 36%. Margins are calculated from reported revenue and cost of revenue.
- Q3 operating expenses were $41.7 million: research and development (R&D) $9.0 million and selling, general and administrative (SG&A) $21.3 million, in addition to cost of revenue. Nine-month R&D was $25.2 million and SG&A was $55.7 million.
- At June 30, cash and cash equivalents were $68.2 million and short-term investments were $93.6 million, totaling $161.8 million. Current assets were $182.6 million and current liabilities $25.4 million.
- Total debt was approximately $8.5 million: $3.3 million current and $5.1 million long-term. Nine-month investing cash outflow was $103.6 million, including investment purchases and property and equipment spending; financing provided $155.7 million.
- The company reported a $287.3 million accumulated deficit. It raised $84.3 million net from a May 2019 public offering; preferred stock converted to common stock around the October 2018 IPO.
Material changes and management commentary
- Q3 revenue was essentially flat sequentially from the March 2019 quarter. NGS tools contributed $5.6 million, up from $1.0 million a year earlier, and represented 41% of Q3 revenue. Synthetic gene revenue was $6.2 million, up from $4.2 million.
- Management attributed growth to broader NGS customer adoption and increased commercial volumes, as well as higher gene shipments and longer-gene products. Gene shipments rose 13% year over year in Q3 and 18% for the nine-month period.
- Costs rose with production ramp-up, added manufacturing capacity and headcount, R&D investment, sales and marketing expansion, public-company costs and legal fees. Nine-month stock-based compensation increased to $7.8 million from $1.9 million.
- Management said existing cash, investments and expected operating resources should fund operations, capital expenditures and financing obligations for at least 12 months. It cautioned additional financing could be needed; $4.5 million of capital expenditure commitments were outstanding at June 30.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expects continued losses while investing in product development, manufacturing, sales and marketing.
- The company is in ongoing Agilent litigation alleging trade-secret misappropriation and related claims. Trial was scheduled for February 2020; the company said it could not predict the outcome or estimate a reasonably possible loss, and recorded no accrual.
- Key disclosed risks include continued cash burn and financing needs, scaling manufacturing and product quality, dependence on a single-source critical component, customer concentration, competition and pricing pressure, and the ability to retain customers and manage growth. The company also cited risks involving regulation, international expansion, cybersecurity and intellectual property.
- The filing states that e-commerce generated 97% of total revenue in the current quarter; this disclosure is notable and merits verification. The company also reported that Ginkgo Bioworks was its largest customer and historically represented 34% of FY2018 revenue.
- Management reported effective disclosure controls at June 30, 2019 and no material change in internal control over financial reporting during the quarter. The filing notes controls provide reasonable, not absolute, assurance.
Investor verification priorities
- Confirm the sustainability and gross-margin contribution of rapidly growing NGS tools revenue, and whether customer adoption is progressing from pilot to commercial volumes.
- Track operating cash burn, capital spending and the stated 12-month funding runway against future financing needs.
- Review developments and potential costs or business effects from the Agilent litigation.
- Assess customer concentration, including Ginkgo-related exposure, and verify the filing’s statement that e-commerce accounted for 97% of Q3 revenue.
- Monitor production capacity, quality, and continuity of supply from the single-source component supplier.