Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. Further, this section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. For discussion related to 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K, please refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K, filed with the United States Securities and Exchange Commission on March 13, 2023. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Item 1A. “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.
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Overview
Our mission is to make biology easier to engineer.
Ginkgo is the leading horizontal platform for cell programming, providing flexible, end-to-end services that solve challenges for organizations across diverse markets, from food and agriculture to pharmaceuticals to industrial and specialty chemicals. Ginkgo’s Biosecurity business is building a global infrastructure for biosecurity to empower governments, communities, and public health leaders to prevent, detect and respond to a wide variety of biological threats.
We use our platform to program cells on behalf of our customers. These “cell programs” are designed to enable biological production of products as diverse as novel therapeutics, key food ingredients, and chemicals currently derived from petroleum. Biology did not evolve by end market. All of these applications run on cells which have a common code—DNA—and a common programming platform can enable all of them. Because of this shared platform, we are able to drive scale and learning efficiencies while maintaining flexibility and diversity in our program areas. Ultimately, customers come to us because they believe we maximize the probability of successfully developing their products.
The foundation of our cell programming platform includes two core assets that execute a wide variety of cell programs for customers according to their specifications: our Foundry and our Codebase.
• Our Foundry is a highly automated, yet flexible, lab powered by proprietary automation and software to enable flexibility and scale. The Foundry automates lab workflows at high levels of abstraction, enabling users to generate potentially valuable datasets labeling broad genetic sequence design space with a wide range of functional data through modular design-build-test-learn cycles or campaigns. Our scale economic means that the Foundry’s capacity to perform more and more diverse campaigns grows while the cost per campaign decreases. We call this scaling factor Knight’s Law.
• Our Codebase is a data asset which accumulates as we operate our Foundry in service of customer projects. Our Codebase includes vast amounts of data at different levels of characterization and usability in engineering projects, including: proprietary libraries of genetic sequence data that can be used for pretraining large language models via unsupervised learning, experimental data for fine tuning task-specific generative artificial intelligence (“AI”) models, as well as sequences and optimized host cells that can be directly reusable for different applications of cell engineering.
As the platform scales, we have observed a virtuous cycle between our Foundry, our Codebase, and the value we deliver to customers. We believe this virtuous cycle sustains Ginkgo’s growth and differentiated value proposition.
• Foundry: As we take on more work in the Foundry, we benefit from scale economics, which over time may lead to lower program costs. We expect that these lower costs, in turn, will drive additional demand for our cell programming capabilities.
• Codebase: Cell programs also generate Codebase, which can drive better experimental direction and improve the odds of technical success, further increasing our customer value proposition, which we believe will result in additional demand.
Put simply: we believe that as we scale, the platform improves. We believe that this in turn yields better program execution and customer outcomes, ultimately driving more demand, which drives further investments in scale and platform improvements, and so on. We believe this positive feedback loop has the potential to drive compounding value creation in the future, as new programs typically contribute to both near-term revenues and have the potential to add significant downstream economics and more positive impact.
Our cell programming business model mirrors the structure of our platform and we are compensated in two primary ways. First, we charge usage fees for services, in much the same way that cloud computing companies charge usage fees for utilization of computing capacity or contract research organizations charge for services. Additionally, we negotiate a value share with our customers (typically in the form of royalties, milestones, and/or equity interests) in order to align our economics with the success of the programs enabled by our platform. As we add new programs, our portfolio of programs with this “downstream” value potential grows.
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With a mission to make biology easier to engineer, we have always recognized the need to invest in biosecurity as a key component of our platform. We are building the future bioeconomy with our customers and partners, and we envision the future of biosecurity as a global immune system equipped with the capabilities to prevent, detect, and respond to biological threats. The first, critical step in realizing this future is to build a robust early warning system for biological threats—this is the primary focus of Ginkgo’s Biosecurity business.
Our biosecurity offering includes biomonitoring and bioinformatic support services internationally as well as domestically. We are currently offering biomonitoring and bioinformatic support services domestically through our partnership with the Centers for Disease Control and Prevention (“CDC”) and XpresCheck, and internationally such as through our international programs, including those in Qatar, Rwanda and Ukraine.
We operate in two reportable business segments:
• Cell Engineering: Consists of research and development (“R&D”) services performed under collaboration and license agreements relating to our cell programming platform. Our cell programming platform includes two core assets: the Foundry, highly efficient biology lab facilities, enabled by investment in proprietary workflows, custom software, robotic automation, and data science and analytics, which is paired with our Codebase, a collection of biological “parts” and a database of biological data used to program cells. The Cell Engineering segment includes costs incurred for the development, operation, expansion and enhancement of the Foundry and Codebase. Cell Engineering revenue is derived from service fees and downstream value share in the form of milestone payments, royalties or equity interests.
• Biosecurity: Consists of our end-to-end biomonitoring and bioinformatic support services primarily provided to public health authorities. Biosecurity revenue is derived from fees for data, analytics, and services. Before the fourth quarter of 2023, Biosecurity revenue was also derived from sales of test kits.
Generating Economic Value Through Cell Programs
Our cell programming platform is a key enabling technology and source of intellectual property for our customers’ products. We earn Cell Engineering revenue for our R&D services as well as through a share of the value of products created using our platform.
We typically structure Cell Engineering revenue to include some combination of the following:
• service fees, which may comprise cash and/or non-cash consideration, in the form of:
◦ upfront payments upon consummation of an agreement or other fixed payments that are generally recognized over our period of performance;
◦ reimbursement for costs incurred for R&D services;
◦ milestone payments upon the achievement of specified technical criteria;
plus,
• downstream value share payments in the form of:
◦ milestone payments, which may comprise cash and/or non-cash consideration, upon the achievement of specified commercial criteria;
◦ royalties on sales of products from or comprising engineered organisms;
◦ royalties related to cost of goods sold reductions realized by our customers;
or,
• downstream value share in the form of equity interests in our customer.
◦ downstream value share in the form of equity interest appreciation is not recognized as revenue but is expected to contribute to future cash flows upon liquidation, the amount and timing of which is inherently unpredictable.
Customer arrangements which involve non-cash consideration generally fall into two categories: Platform Ventures and Structured Partnerships.
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Platform Ventures
Platform Ventures enable Ginkgo to partner with leading multinationals and financial investors to form new ventures in identified market segments with potential to benefit from synthetic biology. In exchange for an equity position in the venture, we contribute license rights to our proprietary cell programming technology and intellectual property, while our partners contribute relevant industry expertise, other resources and venture funding. We also provide R&D services for which we receive cash consideration on a fixed-fee or cost-plus basis. Platform Ventures include:
Motif FoodWorks, Inc.
Founded in 2018, Motif FoodWorks, Inc. (“Motif”) was formed to focus on the application of synthetic biology to reduce the reliance on animal products in the food industry. We entered into an intellectual property contribution agreement that granted Motif rights to our intellectual property, subject to mutually agreed upon technical development plans. In return for our contribution of intellectual property and access to our platform, we received shares of common stock in Motif. The initial fair value of our common stock investment in Motif was $65.1 million which has subsequently been reduced to a carrying value of zero as a result of the allocation of losses under our accounting for equity method investments. Motif was capitalized through Series A preferred stock financings that raised approximately $119 million in gross proceeds from an investor group which included certain of our investors, Louis Dreyfus Company and Fonterra Co-operative Group Limited. In June 2021, Motif raised an additional $226 million through a Series B preferred stock financing. Ginkgo also entered into a Technical Development Agreement with Motif under which we provide R&D services in return for cash consideration on a fixed-fee or cost-plus fixed margin basis.
Allonnia, LLC
Founded in 2019, Allonnia, LLC (“Allonnia”) was formed to focus on the application of synthetic biology in the waste bioremediation and biorecovery industries. We entered into an intellectual property contribution agreement that granted Allonnia rights to our intellectual property, subject to mutually agreed upon technical development plans. In return for our contribution of intellectual property and access to our platform, we received common units in Allonnia with a right to additional units subject to additional closings of Allonnia’s Series A preferred units. The initial fair value of our common units received in Allonnia was $24.5 million, subsequently increased by $12.7 million in 2021, all of which has been reduced to a carrying value of zero as a result of the allocation of losses under our accounting for equity method investments. Allonnia was capitalized through Series A preferred unit financings that raised approximately $52 million in gross proceeds from an investor group which included certain of our investors and Battelle Memorial Institute. In 2023, Allonnia raised an additional $30 million through a Series A extension. Ginkgo also entered into a Technical Development Agreement with Allonnia under which we provide R&D services in return for cash consideration on a fixed fee or cost-plus basis.
Arcaea, LLC
Founded in 2021, Arcaea, LLC (“Arcaea”) was formed to focus on the application of synthetic biology in the beauty and personal care products industry. In March 2021, we entered into an intellectual property contribution agreement that granted Arcaea rights to our intellectual property, subject to mutually agreed upon technical development plans. In return for our contribution of intellectual property and access to our platform, we received common units in Arcaea with a right to additional units subject to additional closings of Arcaea’s Series A preferred units. The initial fair value of our common units received in Arcaea was $11.9 million which has subsequently been reduced to a carrying value of zero as a result of the allocation of losses under our accounting for equity method investments. Arcaea was capitalized through a Series A preferred unit financing that raised approximately $77 million in gross proceeds from an investor group which included certain of our investors, CHANEL and Givaudan. Upon the closing of the Series A preferred unit financing in July 2021, we received an additional 5.2 million common units in Arcaea. The fair value of our Arcaea common units received in July 2021 of $35.5 million has subsequently been reduced to a carrying value of zero as a result of the allocation of losses under our accounting for equity method investments. Ginkgo also entered into a Technical Development Agreement with Arcaea under which we provide R&D services in return for cash consideration on a fixed fee or cost-plus basis.
Ayana Bio, LLC
Founded in September 2021, Ayana Bio, LLC (“Ayana”) was formed to identify and design new bioactive compounds for use as complementary medicine to support human health and wellness. Ayana was capitalized through a Series A funding that raised $30 million in gross proceeds from an investor group comprising certain of our investors. We hold an interest in
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9.0 million common units (representing 100% of common units at inception) of Ayana and have also provided Ayana with certain licenses to our intellectual property for use in the development or production of products that we have agreed to research and develop under technical development plans. Prior to the third quarter of 2022, we consolidated Ayana as a variable interest entity. In the third quarter of 2022, we deconsolidated Ayana and began accounting for our retained investment in Ayana as an equity method investment. The initial carrying value of the equity method investment in Ayana was equal to the fair value of our retained interest of $16.0 million as of the deconsolidation date which has been subsequently reduced to a carrying value of zero due to a basis difference associated with in-process research and development identified as part of the initial accounting for the equity method investment. Ginkgo also entered into a Technical Development Agreement with Ayana under which we provide R&D services in return for cash consideration on a fixed fee or cost-plus basis.
Verb Biotics, LLC
Founded in September 2021, Verb Biotics, LLC (“Verb”) was formed to identify and design new strains of probiotic bacteria with advanced properties for human nutrition, health, and wellness. Verb was capitalized through a Series A funding that raised $30 million in gross proceeds from an investor group comprising certain of our investors. We hold an interest in 9.0 million common units (representing 100% of common units at inception) of Verb and have also provided Verb with certain licenses to our intellectual property for use in the development or production of products that we have agreed to research and develop under technical development plans. Prior to the first quarter of 2022, we consolidated Verb as a variable interest entity. In the first quarter of 2022, we deconsolidated Verb and began accounting for our retained investment in Verb as an equity method investment. The initial carrying value of the equity method investment in Verb was equal to the fair value of our retained interest of $15.9 million as of the deconsolidation date which has been subsequently reduced to a carrying value of zero due to a basis difference associated with in-process research and development identified as part of the initial accounting for the equity method investment. Ginkgo also entered into a Technical Development Agreement with Verb under which we provide R&D services in return for cash consideration on a fixed fee or cost-plus basis.
BiomEdit, LLC
Founded in April 2022, BiomEdit, LLC (“BiomEdit”) was formed to discover, design and develop novel probiotics, microbiome derived bioactives and engineered microbial medicines in the animal health industry. BiomEdit was capitalized through a Series A preferred unit financing that raised approximately $32.5 million in gross proceeds from an investor group which included one of our investors. In April 2022, we entered into an intellectual property contribution agreement that granted BiomEdit rights to our intellectual property, subject to mutually agreed upon technical development plans and, in return, we received 3.9 million voting common units in BiomEdit. In addition, Elanco Animal Health also contributed intellectual property in exchange for 3.9 million non-voting common units in BiomEdit. The initial fair value of our common units received in BiomEdit was $8.9 million, subsequently increased by $1.1 million in the first quarter of 2023, all of which has been reduced to a carrying value of zero as a result of the allocation of losses under our accounting for equity method investments. Ginkgo also entered into a Technical Development Agreement with BiomEdit under which we provide R&D services in return for cash consideration on a fixed fee or cost-plus basis.
Structured Partnerships
Structured Partnerships allow Ginkgo to: (i) partner with early stage synthetic biology product companies to adopt our Foundry as their cell programming R&D platform, in which we offer flexible commercial terms on the service fees including the ability to pay a portion or all of such upfront fees in the form of non-cash consideration (convertible financial instruments and/or equity securities), in addition to downstream value share consideration (“Startup Structured Partnership”); and (ii) partner with existing entities with complementary assets for high potential synthetic biology applications in a large-scale, multi-program collaboration (“Legacy Structured Partnership”). In 2023 and 2022, we entered into 6 and 11 Startup Structured Partnerships, respectively, and received prepayments of service fees in the form of equity securities or convertible financial instruments in the amount of $18.9 million and $30.7 million, respectively, that is recognized as revenue over our period of performance. Our Legacy Structured Partnerships are described below:
Genomatica, Inc.
Genomatica, Inc. (“Genomatica”) is a biotechnology company specializing in the development and manufacturing of intermediate and specialty chemicals from both sugar and alternative feedstocks. In 2016 and 2018, we acquired preferred stock in Genomatica with an aggregate investment value of $55.0 million in exchange for cash and committed R&D
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services. The carrying value of the investment has been reduced to $11.9 million as of December 31, 2023, reflective of impairment losses recognized through that date.
Synlogic, Inc.
Synlogic, Inc. (“Synlogic”) is a publicly traded clinical-stage biopharmaceutical company focused on advancing drug discovery and development for synthetic biology-derived medicines. In 2019, we entered into several agreements with Synlogic whereby we purchased Synlogic common stock and warrants to purchase Synlogic common stock and agreed to provide R&D services to Synlogic. At inception, the fair value of Synlogic common stock and warrants was recorded at $35.8 million and $14.4 million, respectively. As of December 31, 2023, the fair value of Synlogic common stock and warrants was $1.6 million and $0.7 million, respectively. On February 8, 2024, Synlogic announced its decision to
cease operations and evaluate strategic options for the company.
See Notes 5 and 16 of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details of our investments in and the material terms of our agreements with our Platform Ventures and Structured Partnerships.
Key Business Metrics
A cell program (or “program”) is the work we do for our customers to enable their product(s) of interest. Programs are defined by a technical development plan or objective. We generally exclude proof-of-concept projects and other exploratory work undertaken on a customer’s behalf from the program count. In the near-term, programs typically deliver multi-year revenue from service fees. Over the long-term, program growth drives a physical infrastructure scale economic through our Foundry, a data and learning scale economic through our Codebase and accumulation of potential downstream value share. Our key business metrics comprise New Programs, Current Active Programs, and Cumulative Programs.
Years Ended December 31,
2023 2022
New Programs 78 59
Current Active Programs 162 112
Cumulative Programs 242 164
New Programs
New Programs represent the number of unique programs commenced within the reporting period. As new programs typically have multi-year durations, we view this metric as an indication of future Cell Engineering revenue growth.
Current Active Programs
Current Active Programs represent the number of unique programs for which we performed R&D services in the reporting period. We view this metric as an indication of current period and future Cell Engineering revenue.
Cumulative Programs
Cumulative Programs represent the cumulative number of unique programs Ginkgo has commenced. We view this metric as an indication of our competitive advantage and as a leading indicator of the mid- to long-term potential economic value derived from downstream value share arrangements. The cumulative number of programs also contributes to Codebase, which accumulates with each additional program we conduct over time and drives better experimental direction and improves the odds of technical success in current and future programs.
We believe the preceding metrics are important to understand our current business. These metrics may change or be substituted for additional or different metrics as our business develops. For example, as our program mix changes, our data gathering abilities expand or our understanding of key business drivers develops, we anticipate updating these metrics or their definitions to reflect such changes.
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Zymergen Bankruptcy and Deconsolidation
On October 3, 2023, Zymergen and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Zymergen Bankruptcy”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In connection with the Zymergen Bankruptcy, we entered into an asset purchase agreement with Zymergen as the stalking horse bidder under Section 363 of the U.S. Bankruptcy Code to acquire exclusive rights to substantially all of Zymergen’s intellectual property assets and certain other assets. On December 14, 2023, Zymergen concluded its auction. On December 21, 2023, the Bankruptcy Court approved the sale of substantially all of Zymergen’s assets to us through certain of our affiliates. On January 18, 2024, we completed our acquisition of such assets, and on February 5, 2024, Zymergen's plan of liquidation was confirmed by the Bankruptcy Court. All of our interests in the Zymergen entities were extinguished and terminated as of February 23, 2024.
While as of December 31, 2023 Zymergen remained a wholly-owned subsidiary of ours, as a result of the Zymergen Bankruptcy, we no longer had a controlling financial interest over Zymergen and therefore deconsolidated Zymergen’s financial position as of October 2, 2023. The deconsolidation included the derecognition of the carrying amounts of Zymergen’s consolidated assets and liabilities that were previously included in our financial statements. Upon deconsolidation, we recorded a $42.5 million loss, representing the remaining net book value of our investment that was reduced to a fair value of zero. Zymergen’s results of operations were removed from our consolidated statements of operations and comprehensive loss beginning October 3, 2023. The historical financial results for Zymergen have not been classified as a discontinued operation because it does not represent a strategic shift with a major effect on our operations and financial results.
See Note 3 , Acquisitions and Divestitures, of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
2021 Modification of Equity Awards in Connection with SRNG Business Combination
Prior to our merger with Soaring Eagle Acquisition Corp. on September 16, 2021 (the “SRNG Business Combination”), our restricted stock units (“RSUs”) were granted based on both service-based and performance-based vesting conditions. Historically, we did not recognize any stock-based compensation expense related to these awards as the achievement of the performance condition required either a change in control or an initial public offering (both as defined in the underlying award agreement), events that were deemed improbable. The SRNG Business Combination did not satisfy the performance condition required for the vesting of our RSUs.
On November 17, 2021 our board of directors modified the vesting terms of RSUs to allow 10% of the RSUs that met the service condition as of the closing of the SRNG Business Combination to vest with respect to the performance condition. The rest vested fully with respect to the performance condition by March 15, 2022. The change to the vesting terms was accounted for as a modification and the awards were remeasured using the fair value as of the modification date. RSU earnout shares were also modified as they were subject to the same performance condition as the underlying RSUs, in addition to achieving certain target stock price thresholds. The first target stock price of $12.50 per share was achieved on November 15, 2021. For the years ended December 31, 2023 and 2022, we recognized $129.7 million and $1.9 billion, respectively, of stock-based compensation expense related to the modified RSUs and RSU earnout shares.
Components of Results of Operations
Revenue
Cell Engineering Revenue
We generate Cell Engineering revenue through the execution of license and collaboration agreements whereby customers obtain license rights to our proprietary technology and intellectual property for use in the development and commercialization of engineered organisms and derived products. Under these agreements, we typically provide R&D services for cell programming with the goal of producing an engineered cell that meets a mutually agreed specification. Our customers obtain license rights to the output of our services, which are primarily the optimized strains or cell lines, in order to manufacture and commercialize products derived from that licensed strain or cell line. Generally, the terms of these agreements provide that we receive some combination of: (1) service fees in the form of (i) upfront payments upon consummation of the agreement or other fixed payments, (ii) reimbursement for costs incurred for R&D services and (iii) milestone payments upon the achievement of specified technical criteria, plus (2) downstream value share payments in the form of (i) milestone payments upon the achievement of specified commercial criteria, (ii) royalties on sales of products
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from or comprising engineered organisms arising from the collaboration or licensing agreement and (iii) royalties related to cost of goods sold reductions realized by our customers. Royalties did not comprise a material amount of our revenue during any of the periods presented.
Cell Engineering revenue includes transactions with Platform Ventures and Legacy Structured Partnerships where, as part of these transactions, we received an equity interest in such entities. Specifically related to the Platform Ventures, in these transactions, we received upfront non-cash consideration in the form of common equity interests in these entities, while the Platform Ventures each received cash equity investments from strategic partners and financial investors. We view the upfront non-cash consideration as prepayments for licenses which will be granted in the future as we complete mutually agreed upon technical development plans. In these instances, we also receive cash consideration for the R&D services performed by us on a fixed fee or cost-plus basis. We are not compensated through additional milestone or royalty payments under these arrangements. Our transactions with Genomatica and Synlogic included the purchase of equity securities and the provision of R&D services. As we perform R&D services under the mutually agreed upon development plans, we recognize a reduction in the prefunded obligation on a cost-plus basis. These arrangements are further described in Notes 5 , 6 , 16 and 20 of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Cell Engineering revenue also includes transactions with Startup Structured Partnerships where, as part of these transactions, we received upfront non-cash consideration in the form of current equity interests or financial instruments that are convertible into equity upon a triggering event. We grant the customer a prepaid Cell Engineering services credit in exchange for the upfront non-cash consideration, which can be drawn down as payment for R&D services performed under mutually agreed upon development plans.
Downstream value share in the form of equity interest appreciation is not recognized as revenue but is expected to contribute to future cash flows upon liquidation, the amount and timing of which is inherently unpredictable. The initial fair market value of the equity interests received may also decrease after contract inception and the amount of cash proceeds eventually realized may be less than the revenue recognized. Equity investments are accounted for under the equity method, cost method or are carried at fair value.
Biosecurity Revenue
We offer biomonitoring and bioinformatic support services internationally as well as domestically. We are currently offering biomonitoring and bioinformatic support services domestically through our partnerships with the CDC and XpresCheck, and internationally through our international programs, including those in Qatar, Rwanda and Ukraine. We are also engaged in a series of smaller partnerships that generate revenues through biosecurity services and R&D.
We generate service revenue through the sale of our end-to-end biomonitoring and bioinformatic support services. These service offerings generally consist of multiple promised goods and services including, but not limited to, sample collection, sample storage and transportation, outsourced laboratory analysis, access to results reported through a web-based portal, analytical reporting of results, and overall program management. Before the fourth quarter of 2023, we generated product revenue by selling lateral flow assay (“LFA”) diagnostic test kits, polymerase chain reaction (“PCR”) sample collection kits, and pooled test kits associated with COVID-19 tests to customers on a standalone basis.
In general, these agreements stipulate that we are entitled to compensation for service revenue as services are performed and for product revenue upon delivery of diagnostic test kits. The timing of revenue recognition depends on the identified performance obligations but is generally recognized ratably over time or as results are reported to the customer.
Costs and Operating Expenses
Cost of Biosecurity Product Revenue
Before the fourth quarter of 2023, cost of Biosecurity product revenue consisted of costs associated with the sale of diagnostic and sample collection test kits, which included costs incurred to purchase test kits from third parties.
Cost of Biosecurity Service Revenue
The cost of Biosecurity service revenue consists of costs related to our end-to-end pathogen testing, sequencing, and analysis services. This includes costs incurred for sample collection equipment and materials, outsourced laboratory analysis, access to results reported through our proprietary web-based portal, and reporting of results to public authorities.
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Additionally, the cost of Biosecurity service revenue includes direct labor cost associated with bioinformatics, lab network management, delivery logistics, and customer support.
Research and Development Expenses
The nature of our business, and primary focus of our activities, generates a significant amount of R&D expenses. R&D expenses represent costs incurred by us for the following:
• development, operation, expansion and enhancement of our Foundry and Codebase; and
• development of new offerings, such as Biosecurity.
The activities above incur the following expenses:
• laboratory supplies, consumables and related services provided under agreements with third parties and in-licensing arrangements;
• personnel compensation and benefits; and
• rent, facilities, depreciation, software, professional fees and other direct and allocated overhead expenses.
We expense R&D costs as incurred. As we grow our active programs and customer base and invest in our Foundry and Codebase through organic and inorganic growth initiatives, we anticipate that our R&D expenses will continue to increase. The nature, timing, and estimated costs required to support our growth will be dependent on advances in technology, our ability to attract new customers and the rate of market penetration within our existing customer industries.
In 2022, R&D expenses included a significant charge for stock-based compensation expense as a result of the modification of vesting terms of RSUs and the vesting of certain earnout shares in the fourth quarter of 2021 (as further described above in “ Modification of Equity Awards in Connection with SRNG Business Combination ”). The impact of the modification on stock-based compensation expense has significantly diminished by the end of 2023.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist primarily of costs for personnel in executive, business development, finance, human resources, legal and other corporate administrative functions. G&A expenses also include professional legal services fees and costs incurred relating to litigation, corporate, intellectual property and patent matters, professional fees incurred for accounting, auditing, tax and administrative consulting services, insurance costs, facility-related costs not otherwise included in R&D expenses, and asset impairments.
We anticipate that our G&A expenses attributable to organic business activities will either remain consistent or decline in 2024 as compared to 2023, reflecting a stabilization in our operational overhead. Conversely, we intend to maintain a strategic and opportunistic approach regarding inorganic G&A expenses arising from mergers, acquisitions, and other non-organic growth initiatives. We will capitalize on beneficial opportunities as they arise to enhance shareholder value and support our long-term growth objectives.
In 2022, G&A expenses included a significant charge for stock-based compensation expense as a result of the modification of vesting terms of RSUs and the vesting of certain earnout shares in the fourth quarter of 2021 (as further described above in “Modification of Equity Awards in Connection with SRNG Business Combination”). The impact of the modification on stock-based compensation expense has significantly diminished by the end of 2023.
Impairment of Lease Assets
Impairment of lease assets relates to impairment losses recognized on a right-of-use asset and the related leasehold improvements associated with a Zymergen facility that we exited in the third quarter of 2023.
Interest Income
Interest income consists primarily of interest earned on our cash and cash equivalents.
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Interest Expense
Interest expense consists primarily of interest related to our financing lease obligations.
Loss on Equity Method Investments
Loss on equity method investments includes our share of losses from certain of our equity method investments under the hypothetical liquidation at book value (“HLBV”) method.
Loss on Investments
Loss on investments includes the change in fair value of our marketable equity securities in publicly traded companies and impairment losses recognized on non-marketable equity securities in privately held companies.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities includes the change in fair value of private placement warrants (“Private Placement Warrants”) and publicly traded warrants (“Public Warrants”), which are classified as liabilities and were assumed as part of the SRNG Business Combination. Warrant liabilities are marked to market at each balance sheet date.
(Loss) Gain on Deconsolidation of Subsidiaries
(Loss) gain on deconsolidation of subsidiaries pertains to our deconsolidation of Zymergen in 2023 and Verb and Ayana, variable interest entities, i n 2022.
Other Income (Expense), Net
Other income (expense), net primarily consists of sublease rent income, changes in fair value of notes receivable that we elected to account for under the fair value option and loss on disposal of equipment.
Provision for Income Taxes
Income taxes are recorded in accordance with ASC 740 , Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our audited consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. For all periods presented, we have recorded a valuation allowance against the deferred tax assets that are not expected to be realized.
We account for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors, including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.
As of December 31, 2023, we had federal net operating loss carryforwards of approximately $1.0 billion, of which $139.2 million will begin to expire in 2029 and $884.1 million can be carried forward indefinitely. As of December 31, 2023, we had state net operating loss carryforwards of approximately $998.2 million, of which $869.2 million will begin to expire in 2030 and $129.0 million can be carried forward indefinitely. As of December 31, 2023, we had foreign net operating losses of approximately $1.7 million, which can be carried forward indefinitely. As of December 31, 2023, we had federal research and development tax credit carryforwards of approximately $40.4 million, which will begin to expire in 2029. As of December 31, 2023, we also had state research and development and investment tax credit carryforwards of approximately $30.1 million, which will begin to expire in 2030.
Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, R&D tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table presents our result of operations for the periods indicated:
Years Ended December 31,
(in thousands) 2023 2022 Change
Cell Engineering revenue $ 143,531 $ 143,666 $ (135)
Biosecurity revenue:
Product 28,949 35,455 (6,506)
Service 78,975 298,585 (219,610)
Total revenue 251,455 477,706 (226,251)
Costs and operating expenses:
Cost of Biosecurity product revenue 7,481 20,646 (13,165)
Cost of Biosecurity service revenue 46,524 183,570 (137,046)
Research and development (1)
580,621 1,052,643 (472,022)
General and administrative (1)
385,025 1,429,799 (1,044,774)
Impairment of lease assets 96,210 — 96,210
Total operating expenses 1,115,861 2,686,658 (1,570,797)
Loss from operations (864,406) (2,208,952) 1,344,546
Other income (expense):
Interest income 57,217 20,262 36,955
Interest expense (93) (106) 13
Loss on equity method investments (2,635) (43,761) 41,126
Loss on investments (54,827) (53,335) (1,492)
Change in fair value of warrant liabilities 5,168 124,970 (119,802)
(Loss) gain on deconsolidation of subsidiaries (42,502) 31,889 (74,391)
Other income (expense), net 9,138 7,634 1,504
Total other income (expense), net (28,534) 87,553 (116,087)
Loss before income taxes (892,940) (2,121,399) 1,228,459
Income tax benefit (71) (15,027) 14,956
Net loss (892,869) (2,106,372) 1,213,503
Loss attributable to non-controlling interest — (1,443) 1,443
Net loss attributable to Ginkgo Bioworks Holdings, Inc. stockholders $ (892,869) $ (2,104,929) $ 1,212,060
(1) R&D and G&A expenses included a significant charge for stock-based compensation expense as a result of the modification of the vesting terms of RSUs and related earnout shares (as further described above in “Modification of Equity Awards in Connection with
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SRNG Business Combination”). Total stock-based compensation expense, inclusive of employer payroll taxes, was allocated as follows (in thousands):
Year Ended December 31,
2023 2022
Research and development $ 148,861 $ 738,821
General and administrative 86,047 1,202,099
Total $ 234,908 $ 1,940,920
Cell Engineering Revenue
Cell Engineering revenue remained relatively flat in 2023 compared to 2022, decreasing by $0.1 million. The flat revenue for the year ended December 31, 2023 was primarily driven by a decrease in downstream value share from equity milestones, offset by an increase in services revenue. The increase in services revenue was primarily due to progress of Current Active Programs with existing and new customers. Additionally, services revenue increased due to the launch of New Programs and was partially offset by the completion of certain programs.
As discussed above in Components of Results of Operations, Cell Engineering revenue comprises both cash and non-cash consideration. Cell Engineering revenue recognized relating to non-cash consideration decreased from $75.8 million in 2022 to $48.5 million in 2023 primarily due to downstream value share milestone payments received in the form of equity securities in 2022.
In 2023, 78 New Programs commenced compared to 59 New Programs in 2022. The total number of Current Active Programs increased to 162 in 2023 from 112 in 2022. Cumulative Programs increased to 242 in 2023 from 164 in 2022. The number of customers increased to 91 in 2023 from 56 in 2022.
While the majority of Cell Engineering revenue today is made up of service fees, as we increase Cumulative Programs and to the extent our customers successfully commercialize products built on our platform, downstream value share is expected to comprise a larger proportion of Cell Engineering revenue. Downstream value share in the form of equity interest appreciation is not recognized as revenue but is expected to contribute to future cash flows upon liquidation, the amount and timing of which is inherently unpredictable. The initial fair market value of the equity interests received may also decrease after contract inception and the amount of cash proceeds eventually realized may be less than the revenue recognized.
Biosecurity Revenue
Biosecurity revenue decreased $226.1 million in 2023 compared to 2022 and was comprised of a decrease in product revenue of $6.5 million and a decrease in service revenue of $219.6 million.
The amount and components of Biosecurity revenue were primarily dependent on the demand for COVID-19 testing products and services. The demand for COVID-19 testing in schools significantly diminished following the end of the public health emergency in May 2023, and by the third quarter of 2023, our COVID-19 testing in schools had ceased completely. Biosecurity revenue in the fourth quarter of 2023 was comprised of our ongoing testing services. The amount and components of Biosecurity revenue in future periods are expected to be comprised of our expanded offerings of biomonitoring and bioinformatic support services provided through our domestic and international partnerships.
Cost of Biosecurity Product and Service Revenue
Cost of Biosecurity product and service revenue decreased $150.2 million in 2023 compared to 2022. The decrease was driven by decreased demand for our COVID-19 testing products and services and the end of our COVID-19 testing in schools in the third quarter of 2023.
Research and Development Expenses
Research and development expenses decreased $472.0 million in 2023 compared to 2022. The decrease was primarily attributable to a decrease in stock-based compensation expense of $590.0 million (inclusive of employer payroll taxes) due to vesting of RSUs and related earnout shares that were modified in the fourth quarter of 2021 (refer to above section “Modification of Equity Awards in Connection with SRNG Business Combination”), and decreases in professional fees of
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$11.2 million and laboratory supplies of $7.3 million, partially offset by increases in personnel-related compensation and benefits expense of $59.5 million, rent and facilities expense of $20.0 million, depreciation and amortization expense of $25.8 million, impairment of lab equipment of $12.3 million, software and technology expense of $9.1 million, acquired in-process research and development costs of $5.5 million, and other expenses of $4.3 million. Increases in research and development expenses, excluding stock-based compensation expense, supported the growth of Cell Engineering revenue and the integration of prior year acquisitions.
General and Administrative Expenses
General and administrative expenses decreased $1,044.8 million in 2023 compared to 2022. The decrease was primarily attributable to a decrease in stock-based compensation expense of $1,116.1 million (inclusive of employer payroll taxes) due to vesting of RSUs and related earnout shares that were modified in the fourth quarter of 2021 (refer to above section “Modification of Equity Awards in Connection with SRNG Business Combination”), partially offset by increases in rent and facilities expense of $18.1 million, increases in personnel-related compensation and benefits expense of $14.1 million, increases in professional fees and litigation costs of $13.5 million, an impairment of lab equipment related to prior year acquisitions of $12.9 million, and increases in the fair value of contingent consideration liabilities resulting from acquisitions of $10.4 million. Increases in general and administrative expenses, excluding stock-based compensation expense, supported the growth of Cell Engineering and Biosecurity revenue and the integration of prior year acquisitions.
Impairment of Lease Assets
Impairment of lease assets increased $96.2 million in 2023 compared to 2022. In September 2023, Zymergen exited and ceased use of a leased facility which resulted in a $96.2 million impairment to reduce the carrying value of the right-of-use asset and the related leasehold improvements to their estimated fair value.
Interest Income
Interest income increased $37.0 million in 2023 compared to 2022, primarily due to increased interest rates on cash held in money market accounts.
Interest Expense
Interest expense decreased by less than $0.1 million in 2023 compared to 2022.
Loss on Equity Method Investments
Loss on equity method investments decreased $41.1 million in 2023 compared to 2022. The decrease was primarily attributable to our equity method investments in Verb, Ayana, Joyn Bio, LLC ("Joyn Bio"), and BiomEdit. Upon the deconsolidation of Verb and Ayana in 2022, we recorded an aggregate $31.9 million loss on our retained investments in Verb and Ayana due to a basis difference associated with in-process research and development identified as part of the initial accounting for the equity method investments. The loss reduced the carrying value of our equity method investments in Ayana and Verb to zero and no further losses on these investments were recognized in the periods presented. In 2022, we recorded a $3.0 million loss on our equity method investment in Joyn Bio, a joint venture which was subsequently terminated in the fourth quarter of 2022. Our share of BiomEdit's losses under the HLBV method decreased by $7.0 million in 2023 compared to 2022 and the carrying value of our equity method investment in BiomEdit has been reduced to zero.
Under the HLBV method, we absorb losses as a common unit holder prior to preferred unit holders due to a substantive profit-sharing agreement where the preferred unit holders receive preferential distribution rights. Because we have no commitment to fund the losses of our equity method investees, no further losses on these investments were recognized during the periods presented.
Loss on Investments
Loss on investments increased $1.5 million in 2023 compared to 2022. The increase was driven by a $35.4 million increase in impairment losses and downward adjustments related to our non-marketable equity securities, offset by fluctuations in the stock prices of marketable equity securities and a $12.6 million mark-to-market adjustment on equity securities received as downstream value share payments upon the achievement of a commercial milestone in 2022. Non-cash consideration from customers is initially measured at the fair value of the non-cash consideration at contract inception.
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Change in Fair Value of Warrant Liabilitie s
The gain on the change in fair value of warrant liabilities decreased $119.8 million in 2023 compared to 2022. The change in fair value of warrant liabilities is primarily driven by changes in the value of our common stock. Increases or decreases in the value of our common stock results in a loss or gain, respectively, on the change in fair value of warrant liabilities.
(Loss) Gain on Deconsolidation of Subsidiaries
In 2023, we recorded a $42.5 million loss on our deconsolidation of Zymergen following Zymergen's bankruptcy filing in October 2023. In 2022, we recorded a $31.9 million gain on our deconsolidation of Verb and Ayana equal to the fair value of our retained interest in each entity measured as of the deconsolidation date.
Other Income (Expense), Net
Other income (expense), net increased $1.5 million in 2023 compared to 2022 primarily due to a $6.6 million unfavorable change in fair value of notes receivable offset by a $6.0 million increase in sublease rent income from Zymergen subleases prior to deconsolidation and a $2.6 million decrease in loss on disposal of equipment.
Non-GAAP Information
In addition to our results determined in accordance with GAAP, we use earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions. We believe these non-GAAP measures, when viewed with our GAAP results, may be helpful to investors in assessing our operating performance.
We define EBITDA as net loss attributable to Ginkgo Bioworks Holdings, Inc. stockholders before the impact of interest income, interest expense, provision for income taxes and depreciation and amortization.
We define Adjusted EBITDA as EBITDA adjusted for stock-based compensation expense, gain or loss on equity method investments, gain or loss on investments, change in fair value of warrant liabilities, gain or loss on deconsolidation of subsidiaries, transaction and integration costs associated with planned, completed or terminated mergers and acquisitions, including related litigation costs, acquired in-process research and development expenses, impairment charges, costs associated with the Zymergen Bankruptcy, and other income and expenses. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends because it eliminates the effect of financing activities, investing activities, and certain non-cash charges and other items that are not related to our core operating performance or affect comparability period over period.
Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by future income or future expenses similar to those excluded when calculating these measures. Our computation of these measures, especially Adjusted EBITDA, may not be comparable to similarly titled measures of other companies because not all companies calculate these measures in the same way. We compensate for these limitations by providing a reconciliation of EBITDA and Adjusted EBITDA to their most directly comparable GAAP financial measure.
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The following table reconciles net loss attributable to Ginkgo Bioworks Holdings, Inc. stockholders to EBITDA and Adjusted EBITDA for the years ended December 31, 2023 and 2022, respectively:
Year Ended December 31,
(in thousands) 2023 2022
Net loss attributable to Ginkgo Bioworks Holdings, Inc. stockholders $ (892,869) $ (2,104,929)
Interest income (57,217) (20,262)
Interest expense 93 106
Income tax benefit (71) (15,027)
Depreciation and amortization 70,507 42,552
EBITDA (879,557) (2,097,560)
Stock-based compensation (1)
234,908 1,940,920
Impairment of long-lived assets (2)
121,404 —
Merger and acquisition related expenses (3)
70,771 46,229
Loss on investments 54,827 53,335
Loss (gain) on deconsolidation of subsidiaries 42,502 (31,889)
Loss on equity method investments (4)
2,635 45,315
Change in fair value of warrant liabilities (5,168) (124,970)
Change in fair value of notes receivable 2,295 (4,153)
Adjusted EBITDA $ (355,383) $ (172,773)
(1) For the years ended December 31, 2023 and 2022, includes $5.0 million and $10.3 million, respectively, in related employer payroll taxes.
(2) For the year ended December 31, 2023, includes $25.2 million impairment loss on lab equipment and $96.2 million impairment loss on a right-of-use asset and the related leasehold improvements associated with an exited Zymergen leased facility.
(3) Represents transaction and integration costs directly related to mergers and acquisitions, including: (i) due diligence, legal, consulting and accounting fees associated with acquisitions, (ii) post-acquisition employee retention bonuses and severance payments, (iii) the fair value adjustments to contingent consideration liabilities resulting from acquisitions, (iv) acquired intangible assets expensed as in-process research and development, and (v) costs associated with the Zymergen Bankruptcy, as well as securities litigation costs, net of insurance recovery.
(4) Represents losses on equity method investments under the HLBV method, net of losses attributable to non-controlling interests.
Liquidity and Capital Resources
Sources of Liquidity
Upon the closing of the SRNG Business Combination in September 2021, we received net proceeds totaling approximately $1,509.6 million, inclusive of $760.0 million from investments from certain accredited investors for 76 million shares of our Class A common stock at a price of $10.00 per share. As of December 31, 2023, we had cash and cash equivalents of $944.1 million which we believe will be sufficient to enable us to fund our projected operations through at least the next 12 months from the date of filing of this Annual Report on Form 10-K.
Material Cash Requirements
We anticipate that our expenditures will exceed our revenue through at least the next 12 months from the date of filing of this Annual Report on Form 10-K, as we:
• continue our R&D, activities under existing and new programs and further invest in our Foundry and Codebase;
• hire additional personnel and secure facilities to support our expanding R&D efforts;
• develop and expand our offerings, including Biosecurity;
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• upgrade and expand our operational, financial and management systems and support our operations;
• acquire and integrate companies, assets or intellectual property that advance our company objectives; and
• maintain, expand, and protect our intellectual property.
Leases
We have various noncancelable operating leases for office and laboratory space, with significant leases expiring between 2030 and 2036. As of December 31, 2023 , we have minimum rental commitments under noncancellable operating leases of $43.6 million in 2024 and $387.5 million thereafter. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Purchase Obligations
In August 2023, we entered into a five-year strategic cloud and AI partnership with Google Cloud, which includes minimum annual commitments to purchase cloud hosting services. As of December 31, 2023, the remaining aggregate commitment was $286.1 million, with approximately $14.4 million payable in the next 12 months and $271.7 million thereafter.
In March 2022, we entered into a four-year noncancelable supply agreement with Twist for the purchase of diverse products including synthetic DNA. Under this agreement, we are obligated to spend a minimum of $58.0 million over the four-year term, with approximately $17.6 million payable in the next 12 months and $23.0 million thereafter.
Capital Expenditures
We anticipate our cumulative spending on capital expenditures to be in the range of $70 million over the next 12 months, subject to management’s ongoing reassessment, to support our commercial plan as we strategically invest in capacity and technology to deliver new cell programs.
Cash Flows
The following table provides information regarding our cash flows for each period presented:
Year Ended December 31,
(in thousands) 2023 2022
Net cash (used in) provided by:
Operating activities $ (295,500) $ (252,198)
Investing activities (80,693) (67,394)
Financing activities (3,216) 95,337
Effect of exchange rate changes (588) 908
Net decrease in cash, cash equivalents and restricted cash $ (379,997) $ (223,347)
Operating Activities
Net cash used in operating activities for the year ended December 31, 2023 consisted of net loss of $892.9 million, adjusted for net change in operating assets and liabilities of $29.8 million and non-cash charges of $567.5 million. The net change in operating assets and liabilities was primarily due to (i) a $50.1 million decrease in accounts receivable from collections of Biosecurity receivables and the end of COVID-19 testing in schools in the third quarter of 2023, (ii) a $10.5 million decrease in prepaid expenses and other current assets primarily from depletion of inventory coinciding with the reduction of Biosecurity product revenue in the third quarter plus the timing of directors and officers insurance payments in the prior year, (iii) a $9.3 million decrease in operating lease right-of-use assets from lease incentives received, (iv) a $16.9 million increase in accrued expenses and other current liabilities primarily from accrued litigation costs, partially offset by (v) a $35.9 million decrease in deferred revenue and (vi) a $22.8 million decrease in operating lease liabilities from rent payments. Non-cash adjustments primarily consisted of $70.5 million of depreciation and amortization, $229.9 million of stock-based compensation, $57.5 million loss on investments including equity method investments, $9.2 million loss on the change in fair value of contingent consideration liabilities, $28.3 million of non-cash lease expense, $121.4 million in impairments of long-lived assets, and $42.5 million loss on deconsolidation of Zymergen.
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Net cash used in operating activities for the year ended December 31, 2022 consisted of net loss of $2.1 billion, adjusted for net change in operating assets and liabilities of $37.0 million and non-cash charges of $1.9 billion. The net change in operating assets and liabilities was primarily due to (i) a decrease in accounts receivable of $55.0 million from increased Biosecurity collections, partially offset by (ii) increase in prepaid expenses and other current assets of $8.5 million primarily due to prepaid insurance for directors and officers, (iii) decrease in accounts payable of $10.8 million due to timing of invoices, (iv) decrease in accrued expenses and other current liabilities of $39.6 million, (v) decrease in deferred revenue of $36.4 million, and (vi) lease incentives received of $13.2 million offset by (vii) $10.8 million decrease in operating lease liabilities from rent payments. Non-cash adjustments primarily consisted of depreciation and amortization of $42.6 million, stock-based compensation expense of $1.9 billion, loss on investments and equity method investments of $97.1 million, non-cash lease expense of $19.1 million associated with operating lease right-of-use assets, partially offset by deferred income tax benefit of $14.6 million related to acquisitions, gain on the change in fair value of warrant liabilities of $125.0 million, non-cash equity consideration of $34.3 million from commercial milestones associated with a customer collaboration arrangement, and $31.9 million gain on the deconsolidation of Verb and Ayana.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2023, primarily consisted of purchases of property and equipment of $40.8 million associated with Foundry capacity and capability investments, relinquishment of $43.0 million in cash upon the deconsolidation of Zymergen, offset by $4.4 million in proceeds from the sale of equipment.
Net cash used in investing activities for the year ended December 31, 2022, primarily consisted of purchases of property and equipment of $52.3 million associated with Foundry capacity and capability investments, purchases of notes receivable and marketable equity securities of $43.7 million, relinquishment of $55.7 million in cash upon the deconsolidation of Verb and Ayana, partially offset by a $10.0 million cash redemption of a convertible note and net cash received from business and asset acquisitions of $74.7 million.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2023, primarily consisted of principal payments on finance leases and payments of contingent consideration related to business acquisitions.
Net cash provided by financing activities for the year ended December 31, 2022, primarily consisted of $99.3 million in net cash proceeds from our underwritten public offering in November 2022.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, are reflected in our consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.
Revenue Recognition
Cell Engineering Revenue
For certain Cell Engineering revenue agreements, we recognize revenue over the period of performance using a measure of progress based on costs incurred to date relative to total expected costs (i.e., cost-to-cost method). A significant level of judgment is involved in estimating the total expected costs. The amount of revenue recognized in a given period is dependent on the accuracy of our estimates of the cost to complete each project. When estimating total expected costs, we make assumptions and estimates regarding the contracted scope of work, tasks required to complete each project, technical and schedule risks associated with the science, the expected duration of each project, and the total amount of internal and
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external (i.e., subcontractor) resources required. We evaluate our measure of progress to recognize revenue for these agreements at each reporting date and, as necessary, adjust the measure of progress and related revenue recognition. We also evaluate contract modifications and amendments to determine whether any changes should be accounted for prospectively or on a cumulative catch-up basis.
Certain customer agreements contain payment in the form of shares of equity securities or other financial instruments that are convertible into equity upon a triggering event. Any non-cash consideration is measured at the estimated fair value of the non-cash consideration at contract inception. For equity securities and financial instruments received that are not actively traded, we generally engage a third-party valuation specialist to determine the estimated fair value of the upfront non-cash consideration. The fair value is generally determined based on a recent round of financing or by using a scenario-based valuation model. Significant unobservable inputs are used in the fair value measurements including expectations regarding future financings of the customer, scenario dates and probabilities, expected volatility, discount rates and recovery rates. Changes in these assumptions can materially affect the value of the non-cash consideration at contract inception and, accordingly, the total amount of revenue recognized for the contract.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by comparing the book values of the assets to the expected future net undiscounted cash flows that 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 book value of the assets exceed their fair value.
Investments in Non-Marketable Equity Securities
We account for our non-marketable equity securities using the measurement alternative, where the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Determining whether an observed transaction is similar to the security owned by us requires judgment based on the rights and obligations of the investments.
We evaluate non-marketable equity investments for impairment on a quarterly basis, considering both qualitative and quantitative factors that may have a significant effect on the investment’s fair value. Qualitative factors considered include the companies’ financial and liquidity position, access to capital resources, adverse changes in the economic environment of the investee, and adverse changes in the business prospects of the investee, among others. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our non-marketable equity securities using market and income approaches that require judgment and the use of estimates, including discount rates, assumptions around the investees' expected time to exit event, investee revenues and expenses, and comparable market data of guideline public companies, among others. When our assessment indicates that an impairment exists, we write down the investment to its fair value.
Recently Issued Accounting Pronouncements
See Note 2 , “Summary of Significant Accounting Policies,” of our consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements.