ITEM 1A. RISK FACTORS
Risk Factors Summary
Our business faces material risks. In addition to this summary below, you should carefully review the risk factors enumerated in the “Risk Factors” section immediately following this "Risk Factors Summary" section. We may be subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. Our business, financial condition, results of operations and growth prospects could be materially adversely affected by any of these risks, and the trading price of our common stock could decline by virtue of these risks.
Business and Operational Risks
• Global economic slowdown, geopolitical and COVID-19 impacts on our business and operations;
• Our ability to ship our products on time, without cost exposure or delays;
• Our ability to scale and manage operations;
• Our reliance on contract manufacturers to meet our regulatory requirements, production and delivery goals;
• Our ability to generate revenue through existing and future customers, distributors and collaboration partners;
• Our ability to compete effectively;
• Our ability to effectively integrate acquisitions;
• Our ability to launch majority-owned consumer brands;
• Our ability to ensure the safety of our products;
• Our reliance on collaboration arrangements to fund development and commercialization of our products;
• Our ability to manage the expansion of our international operations; and
• Our ability to manage increasing impacts of climate change, severe weather events, natural disasters and pandemics.
Financial Risks
• Our ability to generate sufficient cash to fund operations and service our debt;
• Our ability to design and maintain effective internal controls;
• Our ability to achieve or sustain profitability given our history of net losses and increased inflation rates;
• Our ability to manage current, or our need to incur future, indebtedness which could impair our flexibility to pursue certain transactions and our ability to operate our business, as well as restrict access to additional capital; and
• Variability of future financial results.
Regulatory, Intellectual Property, and Legal Risks
• Regulatory risks relating to our use of genetically modified feedstocks and yeast strains to produce our products;
• New regulations or changes in regulation relating to our existing or future products or use of customer data, as well as any costs incurred to comply with applicable regulations;
• Our ability to obtain, maintain, protect, and enforce our intellectual property rights; and
• Costs and resources required to manage litigation related to the development and commercialization of our products.
Risks Related to the Ownership of Our Common Stock
• Volatility of our stock price;
• The composition of our capital stock ownership with relevant insiders; and
• Changes in government regulation relating to purchases of our common stock.
Risk Factors
Investing in our common stock involves risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and related notes, which could materially affect our business, financial condition, results of operations, or growth prospects. If any of the following risks actually occurs, our business, financial condition, results of operations, and growth prospects could be materially and adversely harmed. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Business and Operational Risks
Our business is currently adversely affected and could be materially adversely affected in the future by the inflationary impact on key commodities (e.g., sugar prices), recent and potential future impacts of the Ukraine conflict and the COVID-19 pandemic on our supply chain, manufacturing and commercialization activities and other business operations, as well as global economic slowdown which could negatively impact consumer spending and demand.
The COVID-19 pandemic, the ongoing conflict in Ukraine, rising inflation, and global economic slowdown have had, and are expected to continue to have, a negative impact on our global supply chain, cost structure, manufacturing and commercialization activities. Although we have experienced an increase in digital commerce and online purchasing, these macroeconomic effects have, and are expected to continue to have, an adverse effect on consumer spending and overall demand. In addition, if these external pressures impact the financial position of our customers, resale channel partners or any of our collaboration partners, we may have difficulty achieving our growth targets, collecting receivables or milestone and royalty payments, and our business and results of operations could be exposed to risks associated with uncollectible accounts or defaults on contractual payment obligations by our collaboration partners. The duration and severity of any further economic or market impact of the COVID-19 pandemic, the Ukraine conflict, inflation and other geopolitical and economic trends remain uncertain, and there can be no assurance that it will not have an adverse effect on our liquidity and capital resources, including our ability to access capital markets, in the future, on terms that are favorable to us, or at all.
A limited number of customers, distributors and collaboration partners account for a material portion of our revenues. The loss of major customers, distributors or collaboration partners could harm our operating results.
Our revenues have varied materially from quarter to quarter and are dependent on sales to, and collaborations with, a limited number of customers, distributors and/or collaboration partners. We cannot be certain that customers, distributors and/or collaboration partners that have accounted for material revenues in past periods, individually or as a group, will continue to generate similar revenues in any future period. If we fail to renew with, or if we lose, a major customer, distributor or collaboration partner, our revenues could decline if we are unable to replace the lost revenues with revenues from other sources. Furthermore, if we lose one or more of our distributors and cannot replace the distributor in a timely manner or at all, our business, results of operation and financial condition may be materially adversely affected.
We face challenges producing our products at commercial scale and at commercially viable cost, especially as we ramp up operations at our new precision fermentation facility, and we may not be able to commercialize our products to the extent necessary to make a profit or sustain and grow our current business.
To commercialize our products, we must be successful in using our yeast strains to produce target molecules at commercial scale or at a commercially viable cost. If we cannot achieve commercially viable production economics for enough products to support our business plan, including through establishing and maintaining sufficient production scale and volume, we will be unable to achieve a sustainable products business. Our production costs depend on many factors that could have a negative effect on our ability to offer our planned products at competitive prices, including, in particular, our ability to establish and maintain sufficient production scale and volume, feedstock costs, exchange rates (primarily the Brazil Real versus the U.S. Dollar) and contract manufacturing costs.
We face financial risk associated with scaling up production to reduce our production costs. To reduce per-unit production costs, we must increase production to achieve economies of scale and to be able to sell our products with positive margins. However, if we do not sell production output in a timely manner or in sufficient volumes, our investment in production will lead to higher working capital costs, which harm our cash position and could generate losses. Additionally, we may incur added storage costs and we may face issues related to the decrease in quality of our stored products as well as supply chain delays and disruptions, all of which can adversely affect the value of such products. Since achieving competitive product prices generally requires increased production volumes and our manufacturing operations and cash flows from sales are in their early stages, we have had to produce and sell products at a loss in the past, and may continue to do so as we build our business. If we are unable to achieve adequate revenues from a combination of product sales and other sources, we may not be able to invest in production and we may not be able to pursue our business plans. In addition, in order to attract potential collaboration or joint venture partners, or to meet payment milestones under existing or future collaboration agreements, we have in the past been, and may in the future be, required to guarantee or meet certain levels of production costs. If we are unable to reduce our production costs to meet such guarantees or milestones, our net cash flow will be further reduced.
If we are not able to successfully commence, scale up or sustain operations at existing and planned manufacturing facilities, our customer relationships, business and results of operations may be adversely affected.
A substantial component of our planned production capacity in the near- and long-term depends on successful operations at our existing and potential large-scale production plants. In 2022, we completed construction of our new precision fermentation facility in Brazil, which we expect will allow us to manufacture up to five products concurrently, including our specialty ingredients portfolio and our zero calorie sweetener ingredient. We commenced operations of this factory in the first half of 2022 and had three (of five) production lines operational in the second half of 2022. However, there can be no assurances that we will be able to complete the commissioning of last two remaining production lines on our expected timeline, if at all. Delays or problems in the start-up or operation of such facilities could cause delays in our ramp-up of production and hamper our ability to reduce our production and logistics costs. Delays in construction can occur due to a variety of factors, including regulatory requirements, COVID-19-related factors, and our ability to fund construction and commissioning costs.
Once each production and purification line at this new facility is complete, we must successfully commission them, and they must perform as we expect. If we encounter significant delays in financing, cost overruns, engineering issues, contamination problems, equipment or raw material supply constraints, unexpected equipment maintenance requirements, safety issues, work stoppages or other serious challenges in bringing these facilities online and operating them at commercial scale, including as a result of the impacts of the COVID-19 pandemic, we may be unable to produce our renewable products in the time frame and at the cost we have planned. It is difficult to predict the effects of scaling up production of industrial fermentation to commercial scale, as it involves various risks to the quality and consistency of our molecules. In addition, in order to produce molecules at existing and potential future plants, we have been and may in the future be required to perform thorough transition activities and modify the design of the plant. Any modifications to the production plant could cause complications in the operations of the plant, which could result in delays or failures in production. If we are unable to create or obtain additional manufacturing capacity necessary to meet existing and potential customer demand, we may need to continue to use, or increase our use of, contract manufacturing sources, which may not be available on terms acceptable to us, if at all, and generally entail greater cost to us and would therefore reduce our anticipated gross margins. Further, if our efforts to increase (or commence, as the case may be) production at the facilities are not successful, our partners may decide not to work with us to develop additional production facilities, demand more favorable terms or delay their commitment to invest capital in our production. If we are unable to create and sustain manufacturing capacity and operations sufficient to satisfy the existing and potential demand of our customers and partners, our business and results of operations may be adversely affected.
In addition, the production of our products at our purpose-built, large-scale precision fermentation facility requires large volumes of feedstock. For this facility in Brazil, we rely primarily on Brazilian sugarcane. While in certain cases we have entered into feedstock agreements with suppliers which we expect to supply the sugarcane feedstock necessary to produce our products at our facility in Brazil that specify the pricing, quantity and product specifications, we cannot predict the future availability or price of these various feedstocks, nor can we be sure that our mill partners will be able to supply it in sufficient quantities or in a timely manner, whether due to COVID-19 impacts or otherwise. Furthermore, to the extent we are required to rely on sugar feedstock other than Brazilian sugarcane, the cost of such feedstock may be higher than we expect, increasing our anticipated production costs. Feedstock crop yields and sugar content depend on weather conditions, such as rainfall and temperature. Weather conditions have historically caused volatility in the sugar industries by causing crop failures or reduced harvests. Excessive rainfall can adversely affect the supply of sugarcane and other sugar feedstock available for the production of our products by reducing the sucrose content and limiting growers' ability to harvest. Crop disease and pestilence can also occur from time to time and can adversely affect feedstock growth, potentially rendering useless or unusable all or a substantial portion of affected harvests. With respect to sugarcane, its seasonal availability and price, the limited amount of time during which it keeps its sugar content after harvest, and the fact that sugarcane is not itself a traded commodity, increase supply risks and limit our ability to substitute supply. If production of sugarcane or any other feedstock we may use to produce our products is adversely affected by these or other conditions, our production will be impaired, increasing costs to our operations and adversely affecting our business.
Our use of contract manufacturers exposes us to risks relating to costs, supply and delivery, and logistics, and loss or termination of contract manufacturing relationships could harm our ability to meet our production goals.
In addition to our production and purification facilities, we must commercially produce, process and manufacture our products through the use of contract manufacturers, and we anticipate that we will continue to use contract manufacturers for the foreseeable future. Establishing and operating contract manufacturing facilities requires us to make significant capital expenditures, which reduces our cash and places such capital at risk. Also, contract manufacturing agreements may contain terms that commit us to pay for capital expenditures and other costs and amounts incurred or expected to be earned by the plant operators and owners, which can result in contractual liability and losses for us even if we terminate a particular contract manufacturing arrangement or decide to reduce or stop production under such an arrangement. Further, we cannot be sure that contract manufacturers will be available when we need their services, that they will be willing to dedicate a portion of their capacity to our projects, or that we will be able to reach acceptable price, delivery and other terms with them for the provision of their production services.
The locations of contract manufacturers can pose additional cost, logistics and feedstock challenges. If production capacity is available at a plant that is remote from usable chemical finishing or distribution facilities, or from customers, we will be required to incur additional expenses in shipping products to other locations. Such costs could include shipping costs, compliance with export and import controls, tariffs and additional taxes, among others. In addition, we may be required to use feedstock from a particular region for a given production facility. The feedstock available in such region may not be the least expensive or most effective feedstock for production, which could materially raise our overall production cost or reduce our product’s quality until we are able to optimize the supply chain.
Moreover, we rely on contract manufacturers to produce and/or provide downstream processing of our products, and we anticipate that we will continue to use contract manufacturers for the foreseeable future. If we are unable to secure the services of contract manufacturers when and as needed, we may lose customer opportunities and the growth of our business may be impaired. If we shift priorities and adjust anticipated production levels (or cease production altogether) at contract manufacturing facilities, such adjustments or cessations could also result in disputes or otherwise harm our business relationships with contract manufacturers. In addition, reliance on external sources for our other target molecules could create a risk for us if a single source or a limited number of sources of manufacturing runs into operational issues, creating risk of loss of sales and profitability. Reducing or stopping production at one facility while increasing or starting up production at another facility generally results in significant losses of production efficiency, which can persist for significant periods of time. Also, in order for production to commence under our contract manufacturing arrangements, we generally must provide equipment for such operations, and we cannot be assured that such equipment can be ordered or installed on a timely basis, at acceptable costs, or at all. Further, in order to establish operations at new contract manufacturing facilities, we need to transfer our yeast strains and production processes from our labs to commercial plants controlled by third parties, which may pose technical or operational challenges that delay production or increase our costs.
Our ability to establish substantial commercial sales of our products is subject to many risks, any of which could prevent or delay revenue growth and adversely impact our customer relationships, business and results of operations.
There can be no assurance that our products will be approved or accepted by customers, including customers of our branded products, or that we will be able to sell our products profitably at prices and with features sufficient to establish demand. The potential customers for our products generally have well-developed manufacturing processes and arrangements with suppliers of the chemical components of their products and may have a resistance to changing these processes and components. These potential customers frequently impose lengthy and complex product qualification procedures on their suppliers, influenced by consumer preference, manufacturing considerations such as process changes and capital and other costs associated with transitioning to alternative components, supplier operating history, established business relationships and agreements, regulatory issues, product liability and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months. Similarly, customers of our branded products may have a resistance to accept our alternative compositions for such products. Additionally, we may be subject to product safety testing and may be required to meet certain regulatory and/or product safety standards. Meeting these standards can be a time-consuming and expensive process, and we may invest substantial time and resources into such qualification efforts without ultimately securing approval. If we are unable to convince these potential customers, the consumers who purchase end-products containing our products and the customers of our direct-to-consumer products, that our products are comparable to the chemicals that they currently use or that the use of our products is otherwise to their benefit, we will not be successful in entering these markets and our business will be adversely affected.
Moreover, in order to successfully market our direct-to-consumer products, we must continue to build our formulation, production, logistics, quality, sales, marketing, digital, managerial, compliance, and related capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate marketing, sales and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize such products. Additionally, the internet and other new technologies facilitate competitive entry and comparison shopping for our consumer products, and our digital channels compete against numerous websites, mobile applications and catalogs, which may have a greater volume of circulation and web traffic or more effective marketing through online media and social networking sites. There is no assurance that we will be able to continue to successfully maintain or expand our digital sales channels and respond to shifting consumer traffic patterns and digital buying trends. Our inability to adequately respond to these risks and uncertainties or successfully maintain and expand our digital business could have an adverse impact on our results of operations.
The price and availability of sugarcane and other feedstocks can be volatile as a result of changes in industry policy and may increase the cost of production of our products.
In Brazil, Conselho dos Produtores de Cana-de-Açúcar, Açúcar e Etanol do Estado de São Paulo (Council of Sugarcane, Sugar and Ethanol Producers in the State of São Paulo (Consecana), an industry association of producers of sugarcane, sugar and ethanol, sets market terms and prices for general supply, lease and partnership agreements for sugarcane. If Consecana makes changes to such terms and prices, it could result in higher sugarcane prices and/or a significant decrease in the volume of sugarcane available for the production of our products. In addition, if the availability of sugarcane juice or syrup or other feedstocks is restricted or limited due to the impacts of the COVID-19 global pandemic, weather conditions, land conditions or any other reason, we may not be able to manufacture our products in a timely or cost-effective manner, or at all, which would have a material adverse effect on our business.
We expect to face competition for our products from existing suppliers, and if we cannot compete effectively against these companies, products or prices, we may not be successful in bringing our products to market, demand for some of our renewable products may decline, or we may be unable to further grow our business.
We expect that our renewable products will compete with both the traditional products that are currently being used in our target markets and with the alternatives to these existing products that established enterprises and new companies are seeking to produce. In the markets that we have entered, and in other markets that we may seek to enter in the future, we will compete primarily with the established providers of ingredients currently used in products in these markets. Producers of these incumbent products include global health and nutrition companies, large international chemical companies and companies specializing in specific products, such as flavor or fragrance ingredients, squalene or essential oils. We may also compete in one or more of these markets with products that are offered as alternatives to the traditional products being offered in these markets.
With the emergence of many new companies seeking to produce products from renewable sources, we may face increasing competition from such companies. As they emerge, some of these companies may be able to establish production capacity and commercial partnerships to compete with us. If we are unable to establish production and sales channels that allow us to offer comparable products at attractive prices, we may not be able to compete effectively with these companies. Similarly, if we cannot demonstrate that our products are comparable or better alternatives to existing products and to any alternative products that are being developed for the same markets based on some combination of product cost, availability, performance, and consumer preference characteristics, our renewable products may not succeed in the market, which would have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We believe the primary competitive factors in our target markets are:
• product performance and other measures of quality;
• product price;
• product cost;
• sustainability and social responsibility;
• dependability of naturally sourced ingredients; and
• infrastructure compatibility of products.
Many of our competitors are much larger than us and have well-developed distribution systems and networks for their products, valuable historical relationships with the potential customers we are seeking to serve and much more extensive marketing and sales programs in place to promote their products. In order to be successful, we must convince customers that our products are at least as effective as the traditional products they are seeking to replace, and we must provide our products on a cost basis that does not greatly exceed these traditional products and other available alternatives. Some of our competitors may use their influence, brands, and significant resources to impede the development and acceptance of renewable products of the type that we are seeking to produce.
We are subject to risks related to our reliance on collaboration arrangements to fund development and commercialization of our products, and our financial results may be adversely impacted if we fail to meet technical, development, or commercial milestones in such agreements.
For most product markets where we are seeking to enter and grow, we have collaboration partners to fund the research and development, commercialization, and production efforts required for the target products, and in some cases, for the ultimate sale of certain products to the customer under the agreement. Typically, we provide limited exclusive rights and revenue-sharing with respect to the production and sale of particular products in specific markets in exchange for such up-front funding. These exclusivity, revenue-sharing, and other similar terms limit our ability to commercialize our products and technology and may impact the size of our business or our profitability in ways that we do not currently envision. In addition, most of these agreements do not affirmatively obligate the other party to purchase specific quantities of any products, and most contain
important conditions that must be satisfied before additional funding of research and development or product purchases would occur. These conditions include research and development programs and milestones, including technical specifications that must be achieved to the satisfaction of our collaboration partners. We may focus our efforts and resources on potential discovery efforts, product targets or candidates that require substantial technical, financial, and human resources which we cannot be certain we will achieve.
In addition, we may encounter numerous uncertainties and difficulties in developing, manufacturing, and commercializing any new products subject to these collaboration arrangements that may delay or prevent us from realizing their expected benefits or enhancing our business, including uncertainties on the feasibility of taking new molecules to commercial scale. Any failure to successfully develop, produce, and commercialize products under our existing and future collaboration arrangements could have a material adverse effect on our business, financial condition, results of operation and growth prospects.
Revenues from these types of relationships are a key part of our cash plan for 2023 and beyond. If we fail to collect expected collaboration revenues, including earnout revenues, we may be unable to fund our operations or pursue development and commercialization of our planned products. To achieve our collaboration revenue targets from year to year, we may be obliged to source new partners or enter into agreements that contain less favorable terms. Historically, the process of negotiating and finalizing collaboration arrangements with our partners has at times been lengthy and unpredictable. Furthermore, as part of our current and future collaboration arrangements, we may be required to make significant capital investments at our existing or planned production facilities in order to develop, produce, and commercialize molecules or other products. Any failure or difficulties in maintaining existing collaboration arrangements or establishing new collaboration arrangements, or building up or retooling our operations to meet the demands of our collaboration partners could have a material negative impact on our business, including our ability to achieve commercial viability for our products, lead to the inability to meet our contractual obligations and could cause us to allocate or divert capital, personnel, and other resources from our organization, which could adversely affect our business and reputation.
Our collaboration arrangements may restrict or prevent our future business activity with respect to certain products, or in certain geographic markets or industries, which could harm our ability to grow our business.
As part of our collaboration arrangements in the ordinary course of business, we grant to our partners rights of first refusal (ROFRs) and exclusive rights with respect to the development, production, and/or commercialization of particular products or types of products in specific geographic markets or industries, in exchange for up-front funding and/or downstream royalty arrangements. These rights may inhibit potential collaboration or strategic partners or potential customers from entering into negotiations with us about further business opportunities, and we may be restricted or prevented from engaging with other partners or customers for such products or in those markets, which may limit our ability to grow our business or influence our strategic focus, and may lead to an inefficient allocation of capital resources.
In the past, we have had to grant concessions to existing partners in exchange for such partners waiving or modifying their exclusive rights with respect to a particular product, type of product or market in order to engage with a third party with respect to such product, product type, or market. Such concessions are often costly or further limit our ability to conduct future business with respect to a certain product or market. There can be no assurance that existing partners will be willing to grant waivers of or modify their exclusive rights or ROFRs in the future on favorable terms, if at all. If we are unable to engage other potential partners with respect to particular products, product types, geographic markets or industries for which we have previously granted exclusive rights or ROFRs, our ability to grow our business would be harmed, and our business, financial condition, and results of operations may be adversely affected.
Our relationship with DSM exposes us to financial and commercial risks.
In May 2017, DSM made an investment in us and, in connection therewith, we entered into a stockholder agreement with DSM (subsequently amended) which provides DSM with certain rights, including the right to designate one member of our board of directors (to the extent DSM maintains beneficial ownership of at least 4.5% of our outstanding common stock) as well as exclusive negotiating rights in connection with certain future commercial projects and arrangements. Subsequently, in July and September 2017, we entered into collaboration agreements (and related license agreements) with DSM to jointly develop several new molecules in animal and human health and nutrition field using our technology, which we would produce and DSM would commercialize. In December 2020, we entered into a Farnesene Framework Agreement with DSM, under which we assigned to DSM the supply of Farnesene to Givaudan International SA (Givaudan) for the production and sale of a single specialty ingredient. In March 2021, we entered into agreements, under which DSM acquired certain exclusive rights to our flavor and fragrance (F&F) product portfolio an d an exclusive license to our F&F intellectual property, and under which we agreed to manufacture F&F ingredients for DSM for fifteen years. In October 2022, we entered into a loan and security agreement with an affiliate of DSM, as lender, for a secured term loan facility, which was amended in December 2022. For
more information regarding these and other transactions and arrangements with DSM, please see Note 4, “Debt,” Note 6, “Stockholders’ Equity (Deficit),” Note 10, “Revenue Recognition” and Note 11, “Related Party Transactions” in Part II, Item 8 of this Annual Report on Form 10-K.
DSM, due to its presence on our board of directors, equity ownership in us, and commercial relationships with us, may be able to influence our management, operations and affairs, including the approval of significant corporate transactions, such as the disposition of our intellectual property, mergers, consolidations or the sale of all or substantially all of our assets. Due to its various relationships with us, DSM may have interests different from, and may not act in the best interests of, our other stockholders.
A significant portion of our operations is centered in Brazil, and our business could be adversely affected if we do not operate effectively in that country.
We may be subject to risks associated with the concentration of essential product sourcing and operations in Brazil. The Brazilian government has changed in the past, and may change in the future, monetary, taxation, credit, tariff, labor, export, and other policies to influence the course of Brazil's economy. For example, the government's actions to control inflation have involved interest rate adjustments. We have no control over, and cannot predict what, policies or actions the Brazilian government may take in the future. Our business, financial performance, and prospects may be adversely affected by, among others, the following factors:
• delays or failures in securing licenses, permits, or other governmental approvals necessary to build and operate facilities, use our yeast strains to produce products, and export such products for sale outside Brazil;
• rapid consolidation in the sugar and ethanol industries in Brazil, which could result in a decrease in competition;
• political, economic, diplomatic, or social instability in, or in the region surrounding, Brazil, including the recent political upheaval in the country related to the presidential election;
• effects of changes in currency exchange rates;
• changing interest rates;
• impact of the COVID-19 pandemic on the supply of raw materials, labor or services;
• tax burden and policies;
• any changes in currency exchange policy that lead to the imposition of exchange controls or restrictions on remittances abroad;
• export or import restrictions that limit our ability to move our products out of Brazil or interfere with the import of essential materials into Brazil;
• changes in, or interpretations of, foreign regulations that may adversely affect our ability to sell our products or repatriate profits to the United States;
• tariffs, trade protection measures, and other regulatory requirements;
• compliance with U.S. and foreign laws that regulate the conduct of business abroad;
• compliance with privacy, anti-corruption, and anti-bribery laws, including certain anti-corruption and privacy laws recently enacted in Brazil;
• an inability, or reduced ability, to protect our intellectual property in Brazil including any effect of compulsory licensing imposed by government action; and
• difficulties and costs of staffing and managing foreign operations.
We cannot predict whether the current or future Brazilian government will implement changes to existing policies on taxation, exchange controls, monetary strategy, labor relations, social security and the like, nor can we estimate the impact of any such changes on the Brazilian economy or our operations.
We continue to expand our international footprint and operations, and we may expand further in the future, which subjects us to a variety of risks and complexities which, if not effectively managed, could negatively affect our business.
We maintain operations in foreign jurisdictions other than Brazil, and may in the future expand, or seek to expand, our operations to additional foreign jurisdictions. For example, operating in Europe, China and the Middle East exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to taxation, import and export tariffs, environmental regulations, genetically modified microorganisms (GMM), land use rights, product testing requirements, intellectual property, currency controls, network security, and other matters. In addition, we may not obtain or retain the requisite permits to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China.
Furthermore, our counterparties in China may use or disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.
In addition, a significant percentage of the production, downstream processing and sales of our products occurs outside the United States or with vendors, suppliers or customers located outside the United States. If tariffs or other restrictions are placed by the United States on foreign imports from Brazil, European or other countries where we operate or seek to operate, or any related counter-measures are taken, our business, financial condition, results of operations and growth prospects may be harmed. Tariffs may increase our cost of goods, which could result in lower gross margin on certain of our products. If we raise prices to account for any such increase in costs of goods, the competitiveness of the affected products could potentially be reduced. In either case, increased tariffs on imports from Brazil, European or other countries where we operate or seek to operate could materially and adversely affect our business, financial condition and results of operations. Furthermore, in retaliation for any tariffs imposed by the United States, other countries may implement tariffs on a wide range of American products, which could increase the cost of our products for non-U.S. customers located in such countries. Any increase in the cost of our products for non-U.S. customers, which represent a substantial portion of our sales, could result in a decrease in demand for our products by such customers. Trade restrictions and sanctions implemented by the United States or other countries, including sanctions imposed on Russia by the United States and other countries due to Russia's invasion of Ukraine, could materially and adversely affect our business, financial condition and results of operations.
Financial Risks
We may not be able to generate sufficient cash inflows from our various revenue streams to fund our anticipated operations and to service our debt obligations.
Our planned working capital needs and operating and capital expenditures for 2023, and our ability to service our outstanding debt obligations, are dependent on significant inflows of cash from product sales, licenses, and royalties, and grants and collaborations and, as needed, additional financing arrangements, as well as cost mitigation initiatives such as our Fit-to-Win initiatives that we commenced in the third quarter of 2022. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, procurement, storage, distribution, and other aspects of our business. Some of our anticipated funding sources, such as research and development collaborations, are subject to the risks that we may not be able to meet milestones, or that collaborations may end prematurely for reasons that may be outside of our control (including technical infeasibility of the project or a collaborator’s right to terminate without cause). The inability to generate sufficient cash flow, as described above, could have a material effect on our ability to continue with our business plans and our status as a going concern.
If we are unsuccessful in executing our Fit-to-Win initiatives or otherwise have insufficient cash, our ability to continue as a going concern would be jeopardized, and we would take the following actions:
• Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts;
• Reduce or delay uncommitted capital expenditures, nonessential facilities and lab equipment, and information technology projects or liquidate certain of our assets;
• Closely monitor our working capital position with contract manufacturers and other suppliers, as well as suspend operations at pilot plants and demonstration facilities; and
• Reduce expenditures for third party contractors, including consultants, professional advisors, and other vendors.
Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
• Achieve planned production levels;
• Develop and commercialize products within planned timelines or at planned scales;
• Introduce new consumer brands; and
• Continue other core activities.
Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could materially affect our ability to meet contractual requirements and increase the severity of the consequences described above. In addition, we are subject to market conditions on our ability to access our existing cash, cash equivalents and investments. For example, although we do not hold any cash or maintain any accounts at, nor do we have any other relationships with, Silicon Valley Bank or Signature Bank, on March 10, 2023 and March 12, 2023, respectively, the Federal Deposit Insurance Corporation took control and was appointed receiver of these banks, and if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions
affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened, which could have a material adverse effect on our business and financial condition.
We have incurred substantial debt, which could impair our flexibility and access to capital and adversely affect our financial position, and our business would be materially adversely affected if we are unable to service our debt obligations.
In November 2021, we sold $690.0 million aggregate convertible senior notes due 2026 (2026 Convertible Senior Notes). During 2022, we issued $181.7 million aggregate of principal amount of additional promissory notes pursuant to senior secured credit facilities with Foris and DSM. As of December 31, 2022, the principal amounts due under our debt instruments (including the 2026 Convertible Senior Notes and related party debt) totaled $923.0 million, of which $128.7 million is classified as current. We may incur additional indebtedness from time to time to finance working capital, research and product development efforts, strategic acquisitions, investments and partnerships, capital expenditures, including funding the completion of our new manufacturing facilities in Brazil, or other general corporate purposes, subject to the restrictions contained in our debt agreements.
Our substantial indebtedness may:
• limit our ability to use our cash flow or obtain additional financing (on satisfactory terms or at all) to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances, and for other general corporate requirements;
• require us to use a substantial portion of our cash flow from operations to make debt service payments;
• increase our vulnerability to economic downturns and adverse competitive and industry conditions and place us at a competitive disadvantage compared to those of our competitors that are less leveraged;
• limit our flexibility in planning for, or reacting to, changes in our business and our industry and limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future, and implement our business strategies;
• result in dilution to our existing stockholders in the event exchanges of our 2026 Convertible Senior Notes are settled in common stock; and
• restrict our ability to grant additional liens on our assets, which may make it more difficult to secure additional financing in the future.
In addition, servicing our debt requires a significant amount of cash. Our cash balance is significantly less than the principal amount of our outstanding debt, and we may not generate sufficient cash flow from our operations to pay our substantial debt, including any payments in connection with the 2026 Convertible Senior Notes, in which case we would be in default under our 2026 Convertible Senior Notes. We may also be required to raise additional working capital through future financings or sales of assets to enable us to repay our outstanding indebtedness as it becomes due. There can be no assurance that we will be able to generate cash or raise additional capital. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we would be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us, if at all. Any debt financing that is available could cause us to incur substantial costs and subject us to covenants that significantly restrict our ability to conduct our business. If we seek to complete additional equity financings, the interests of existing stockholders may be diluted. If we are unable to make payment on our secured debt instruments when due, the lender under such instrument may foreclose on and sell the assets securing such indebtedness to satisfy our payment obligations, which could prevent us from accessing those assets for our business and conducting our business as planned, which could materially harm our financial condition and results of operations.
Our existing secured financing arrangements provides our lenders with liens on substantially all of our assets, including our intellectual property, and contain financial covenants and other restrictions on our actions, which may restrict our ability to pursue certain transactions and operate our business.
We have granted liens on substantially all of our assets, including our intellectual property, as collateral in connection with senior secured credit facilities with Foris and liens on certain remaining assets in connection with a secured credit facility with DSM. In connection with such credit facilities, we have agreed to financial covenants and other covenants that materially limit our ability to take certain actions, including, among other things, our ability to pay dividends, make certain investments, incur additional indebtedness, undertake certain mergers and consolidations, and encumber and dispose of assets (see Note 4, “Debt” in Part II, Item 8 of this Annual Report on Form 10-K). The credit facilities contain customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgements, and insolvency. A failure to comply with the covenants and other provisions of our debt instruments, including any
failure to make a payment when required, would generally result in payment penalties or events of default under such credit facilities, which could trigger acceleration of such indebtedness and result in a material adverse effect on our business. If such indebtedness were to be accelerated, it could trigger an event of default under our other outstanding indebtedness, permitting acceleration of a substantial portion of our indebtedness. We have in the past had certain of our debt instruments accelerated for failure to make a payment when due. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness.
If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or in a timely manner or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) and related SEC rules require management to assess the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and help us to prevent fraud. The process of implementing our internal controls and complying with Section 404 is expensive and time consuming and requires significant continuous attention of management. We cannot be certain that these measures will ensure that we maintain adequate controls over our financial processes and reporting in the future.
Control deficiencies in 2017 and 2018 resulted in the restatement of our audited consolidated financial statements for the year ended December 31, 2017 and our interim condensed consolidated financial statements for March 31, 2018, June 30, 2018 and September 30, 2018. Also, a control deficiency in 2019 identified p rior to issuing our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 resulted in us concluding this control deficiency was a material weakness and that our internal control over financial reporting was not effective as of December 31, 2019, and created a reasonable possibility that a further material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
Our management has remediated this material weakness. We cannot, however, guarantee that additional material weaknesses or significant deficiencies in our internal controls will not be discovered or occur in the future. We experienced significant growth in 2022 and anticipate continuing this growth trajectory to continue throughout 2023 through business acquisitions, hiring of additional employees, expanding of our facilities and operating locations, and significantly increasing our manufacturing activity and service delivery capabilities in Brazil and Europe, all of which could impact our ability to accurately and timely record transactions, and could result in internal control failures that lead to material weaknesses or significant deficiencies. If these events occur, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and adversely affect the market price of our common stock and our ability to access the capital markets, and we could be subject to sanctions or investigations by the Nasdaq Stock Market (Nasdaq), the SEC or other regulatory authorities. See Part II, Item 9A “Controls and Procedures” of this Annual Report on Form 10-K for additional information.
In addition, to the extent we create joint ventures or have any variable interest entities and the financial statements of such entities are not prepared by us, we will not have direct control over their financial statement preparation. As a result, we will, for our financial reporting, depend on what these entities report to us, which could result in us adding monitoring and audit processes to those operations and increase the difficulty of implementing and maintaining adequate internal control over our financial processes and reporting in the future, which could lead to delays in our external reporting. In particular, this may occur in instances where we are establishing such entities with commercial partners that do not have sophisticated financial accounting processes in place, or where we are entering into new relationships at a rapid pace, straining our integration capacity. Additionally, if we do not receive the information from the joint venture or variable interest entity on a timely basis, it could cause delays in our external reporting.
Even if we conclude in the future, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations, which could reduce the market’s confidence in our financial statements and harm our stock price. In addition, failure to comply with Section 404 could subject us to a variety of administrative sanctions, including SEC action, the suspension or delisting of our common stock by Nasdaq, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price and could harm our business.
We have a history of net losses to date, anticipate continuing to incur losses in the future, and may not be able to achieve or sustain profitability.
We have incurred operating losses since our inception, and we expect to continue to incur losses and negative cash flows from operations for at least the next 12 months following the issuance of this Annual Report on Form 10-K. As of December 31, 2022, we had an accumulated deficit of $2.9 billion.
Future revenues are difficult to predict, and our failure to predict revenue accurately may cause our results to be below our expectations or those of analysts or investors and could result in our stock price declining.
Our revenues are comprised of product revenues, licenses and royalties revenues, and collaborations and grants revenues. We generate our consumer and ingredients product revenues from sales to partners and distributors and from direct sales. Our collaboration, supply and distribution agreements do not usually include any specific purchase obligations. The sales volume of our products in any given period has been difficult to predict. A significant portion of our product sales is dependent upon the interest and ability of third-party distributors to create demand for, and generate sales of, such products to end-users. For example, if such distributors are unsuccessful in creating pull-through demand for our products with their customers, such distributors may purchase less of our products from us than we expect.
In addition, many of our new and novel ingredients products are intended to be a component of other companies’ products; therefore, sales of our products may be contingent on our collaboration partners’ and/or customers’ timely and successful development and commercialization of end-use products that incorporate our products, and price volatility in the markets for such end-use products could adversely affect the demand for our products and the margin we receive for our product sales, which could harm our financial results. In addition, certain of our partners have the right to terminate their agreements with us if we undergo a change of control or a sale of our business, which could discourage a potential acquirer from making an offer to acquire the Company.
Further, we have in the past entered into, and expect in the future to enter into, research and development collaboration arrangements pursuant to which we receive payments from our collaboration partners. Certain collaboration arrangements include advance payments in consideration for grants of exclusivity or research and development activities to be performed by us. It has in the past been difficult for us to know with certainty when we will sign a new collaboration arrangement and receive payments thereunder. In addition, a portion of the advance payments we receive under our collaboration agreements is typically classified as contract liabilities and recognized over multiple quarters or years. As a result, achievement of our quarterly and annual financial goals has been difficult to forecast with certainty. Once a collaboration agreement has been signed, receipt of cash payments and/or recognition of related revenues may depend on our achievement of research, development, production or cost milestones, which may be difficult to predict. Our collaboration arrangements may also include future royalty payments upon commercialization of the products subject to the collaboration arrangements, which is uncertain and depends in part on the success of the counterparty in commercializing the relevant product. As a result, our receipt of royalty revenues and the timing thereof is difficult to predict with certainty.
Furthermore, in recent years, we started to market and sell our consumer products directly to end-consumers in the clean beauty and personal care market. We have a portfolio of consumer brands in various stages of their growth trajectory. It is difficult to predict how successful our efforts will be in developing brand awareness through digital marketing and selling direct to consumer, and we may not achieve the product sales we expect to achieve on the timeline we anticipate, if at all. These factors have made it difficult to predict future revenues and have resulted in our revenues being below our previously announced guidance or analysts’ estimates. We continue to face these risks in the future, which may cause our stock price to decline.
We have limited experience in marketing and sales of consumer products, and if we are unable to expand our marketing and sales organization to adequately address our customers’ needs, our business may be adversely affected.
We rely on distributors for the sale of our products in the United States and in certain countries outside of the United States. We exert limited control over these distributors under our agreements with them, and if their sales and marketing efforts for our products in the region are not successful, our business would be materially and adversely affected. Locating, qualifying and engaging distribution partners with local industry experience and knowledge will be necessary in at least the short to mid-term to effectively market and sell our platform in certain countries outside the United States. We may not be successful in finding, attracting and retaining distribution partners, or we may not be able to enter into such arrangements on favorable terms. Even if we are successful in identifying distributors, such distributors may engage in sales practices that violate local laws or our internal policies. Furthermore, sales practices utilized by any such distribution parties that are locally acceptable may not comply with sales practices standards required under any U.S. laws that apply to us, which could create additional compliance
risk. If our sales and marketing efforts by us or our distributors are not successful, we may not achieve significant market acceptance for our products, which would materially and adversely impact our business, financial condition, results of operations and prospects.
O ur financial results could vary materially from quarter to quarter and are difficult to predict.
Our revenues and results of operations could vary materially from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that could cause our quarterly results of operations to fluctuate include:
• achievement, or failure, with respect to technology, product development or manufacturing milestones needed to allow us to enter identified markets on a cost-effective basis or obtain milestone-related payments from collaboration partners;
• delays or greater than anticipated expenses associated with the completion, commissioning, acquisition or retrofitting of new production facilities, or the time to ramp up and stabilize production at a new production facility or the transition (including ramp up) to producing new molecules at existing facilities or with new contract manufacturers;
• depreciation of technology assets or the cost of conducting research and development activities on outdated equipment;
• impairment of assets based on shifting business priorities and working capital limitations;
• ongoing impacts of the COVID-19 pandemic on our business operations and the supply of raw materials, labor or services;
• disruptions in the production process at any manufacturing facility, including disruptions due to seasonal or unexpected downtime as a result of a COVID-19 outbreak, feedstock availability, contamination, safety or other technical difficulties, or scheduled downtime as a result of transitioning equipment to the production of different molecules;
• losses of, or the inability to secure new customers, collaboration partners, contract manufacturers, suppliers or distributors;
• losses associated with producing our products as we ramp to commercial production levels;
• failure to recover value added tax (VAT) that we currently reflect as recoverable in our financial statements (e.g., due to failure to meet conditions for reimbursement of VAT under local law);
• the timing, size and mix of product sales to customers;
• increases in price or decreases in availability of feedstock;
• the unavailability of contract manufacturing capacity altogether or at reasonable cost;
• exit costs associated with terminating contract manufacturing relationships;
• fluctuations in foreign currency exchange rates;
• change in the fair value of debt and derivative instruments;
• fluctuations in the price of and demand for sugar, ethanol, petroleum-based and other products for which our products are alternatives;
• seasonal variability in production and sales of our products;
• competitive pricing pressures, including decreases in average selling prices of our products;
• unanticipated expenses or delays associated with changes in governmental regulations and environmental, health, labor and safety requirements;
• departure of executives or other key management employees resulting in transition and severance costs;
• our ability to use our net operating loss carryforwards to offset future taxable income;
• business interruptions such as pandemics or natural disasters like earthquakes and tsunamis;
• our ability to integrate businesses that we have acquired or may acquire in the future;
• our ability to successfully collaborate with joint venture partners;
• risks associated with the international aspects of our business; and
• changes in general economic, industry and market conditions, both domestically and in our foreign markets, including rising interest rates, taxes and inflation.
Due to the factors described above, among others, the results of any quarterly or annual period may not meet our expectations or the expectations of our investors and may not be meaningful indications of our future performance.
Our international operations expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.
We currently incur material costs and expenses in the Brazilian real and may in the future incur additional expenses in foreign currencies and derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage
successfully. During the past few decades, the Brazilian currency has faced frequent and substantial exchange rate fluctuations in relation to foreign currencies mostly because of political and economic conditions. There can be no assurance that the Brazilian real will not materially appreciate or depreciate against the U.S. dollar in the future. We also bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the U.S. dollar compared to those foreign currencies will increase our costs as expressed in U.S. dollars. For example, future measures by the Central Bank of Brazil to control inflation, including interest rate adjustments, intervention in the foreign exchange market and actions to fix the value of the real, may weaken the U.S. dollar in Brazil. Whether in Brazil or elsewhere, we may not be able to adjust the prices of our products to offset the effects of inflation or foreign currency appreciation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging, tax optimization or other mechanisms, our revenues and results of operations could be adversely affected.
Our U.S. GAAP operating results could fluctuate substantially due to the accounting for convertible debt and derivative liabilities that we measure at fair value.
A portion of our outstanding convertible debt instruments are accounted for under Accounting Standards Codification 825-10-25, The Fair Value Option (ASC 825) and certain equity instruments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging (ASC 815), as free standing derivative liabilities. ASC 825 allows companies to account for certain financial assets and financial liabilities at fair value, with the change in fair value recognized in net income each reporting period. The data used for the measurement must reflect assumptions that market participants would use in pricing the asset or liability. There is no current observable market for this convertible debt instrument and, as such, we determine the fair value of the debt instrument using a model based on an instrument with and without the conversion option and other embedded derivative features. The valuation model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. ASC 815 requires companies to account for freestanding derivative financial instruments as a liability at fair value according to certain criteria. If the freestanding criteria are met, the current fair value of the derivative is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative being charged to earnings (loss) in the statement of operations. We have determined that we must account for certain free standing financial instruments as derivative liabilities in accordance with ASC 815. There is no current observable market for this type of derivative and, as such, we determine the fair value of the free standing derivatives using an option pricing model. The valuation model uses the period close stock price, expected term of the instrument, risk-free interest rate, estimated stock volatility and expected dividend yield. Changes in the inputs for these valuation models may have a material impact on the estimated fair value of the of the convertible debt instrument accounted for under the fair value option and the embedded derivative liabilities. For example, an increase in our stock price would result in an increase in the estimated fair value of the embedded derivative liabilities, if in this example, each of the other elements of the valuation model remained substantially unchanged from the last measurement date. The convertible debt instrument accounted for under the fair value option and the embedded derivative liabilities may have, on a U.S. GAAP basis, a substantial effect on our balance sheet and statement of operations from quarter to quarter and it is difficult to predict the effect on our future U.S. GAAP financial results, since valuation of the convertible debt instrument accounted for under the fair value option and the embedded derivative liabilities are based on factors largely outside of our control and may have a negative impact on our statement of operations and balance sheet. The effects of these embedded derivatives may cause our U.S. GAAP operating results to be below expectations, which may cause our stock price to decline. See Note 3, “Fair Value Measurement” in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the valuation of embedded derivatives in certain of our outstanding debt instruments.
The accounting method for convertible debt securities that may be settled in cash, such as the 2026 Convertible Senior Notes, may have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, issued by the Financial Accounting Standards Board, which we refer to as FASB, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2026 Convertible Senior Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the 2026 Convertible Senior Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at issuance, and the value of the equity component would be treated as a discount for purposes of accounting for the debt component of the 2026 Convertible Senior Notes. As a result, we will be required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the 2026 Convertible Senior Notes to their face amount over the term of the 2026 Convertible Senior Notes. We will report larger net losses or lower net income in our financial results because ASC 470-20 will require interest to include both the amortization of the debt discount and the instrument’s coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the 2026 Convertible Senior Notes. In addition, under certain circumstances, convertible debt instruments (such as the
2026 Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method for earnings per share purposes, the effect of which is that the shares issuable upon conversion of the 2026 Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the 2026 Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued.
In August 2020, the Financial Accounting Standards Board published an Accounting Standards Update, which we refer to as ASU 2020-06, which amends the accounting standards for convertible debt instruments that may be settled entirely or partially in cash upon conversion. ASU 2020-06 eliminates requirements to separately account for liability and equity components of such convertible debt instruments and eliminates the ability to use the treasury stock method for calculating diluted earnings per share for convertible instruments whose principal amount may be settled using shares. Instead, ASU 2020-06 requires (i) the entire amount of the security to be presented as a liability on the balance sheet and (ii) application of the “if-converted” method for calculating diluted earnings per share. Under the “if-converted” method, diluted earnings per share will generally be calculated assuming that all the 2026 Convertible Senior Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive, which could adversely affect our diluted earnings per share. However, if the principal amount of the convertible debt security being converted is required to be paid in cash and only the excess is permitted to be settled in shares, the if-converted method will produce a similar result as the “treasury stock” method prior to the adoption of ASU 2020-06 for such convertible debt security. ASU 2020-06 is effective for public companies for fiscal years beginning after December 15, 2021.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code (the Code), a corporation that undergoes an “ownership change,” as defined in the Code, is subject to limitations on its ability to utilize its pre-ownership change net operating loss carryforwards (NOLs) to offset future taxable income. During the two years ended December 31, 2019, changes in our share ownership resulted in significant reductions in our NOLs pursuant to Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code; if that occurs, our ability to utilize NOLs could be further limited. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations under Section 382 of the Code. For these reasons, we may not be able to utilize a material portion of our reported NOLs as of December 31, 2022, even if we attain profitability, which could adversely affect our cash flows and results of operations.
Regulatory, Intellectual Property, and Legal Risks
Ethical, legal and social concerns about products using genetically modified microorganisms could limit or prevent the use of our products and technologies and could harm our business.
Our technologies and products involve the use of genetically modified microorganisms (GMMs). Public perception about the safety of, and ethical, legal or social concerns over, genetically engineered products, including GMMs, could affect public acceptance of our products. If we are not able to overcome any such concerns relating to our products, our technologies may not be accepted by our customers or end-users. In addition, the use of GMMs has in the past received negative publicity, which could lead to greater regulation or restrictions on imports of our products. If our technologies and products are not accepted by our customers or their end-users due to negative publicity or lack of public acceptance, our business could be materially harmed.
Our use of genetically modified feedstocks and yeast strains to produce our products subjects us to risks of regulatory limitations and rejection of our products.
The use of GMMs, such as our yeast strains, is subject to laws and regulations in many countries, some of which are new and some of which are still evolving. In the United States, the Environmental Protection Agency (EPA), regulates the commercial use of GMMs as well as potential products produced from GMMs. Various states or local governments within the United States could choose to regulate products made with GMMs as well. While the strain of genetically modified yeast that we currently use for the development and commercial production of our target molecules, S. cerevisiae , is eligible for exemption from EPA review because it is generally recognized as safe, we must satisfy certain criteria to achieve this exemption, including but not limited to use of compliant containment structures, waste disposal and safety procedures, and we cannot be sure that we will meet such criteria in a timely manner, or at all. If exemption of S. cerevisiae is not obtained, our business may be substantially harmed. In addition to S. cerevisiae , we may seek to use different GMMs in the future that will require EPA approval. If approval of different GMMs is not secured, our ability to grow our business could be adversely affected.
In Brazil, GMMs are regulated by the National Biosafety Technical Commission (CTNBio). We have obtained approvals from CTNBio to use GMMs in a contained environment in our Brazil facilities for research and development purposes as well as at contract manufacturing facilities in Brazil for industrial-scale production of target products. As we continue to develop new yeast strains and deploy our technology at new production facilities in Brazil, we will be required to obtain further approvals from CTNBio in order to use these strains in industrial-scale commercial production in Brazil. We may not be able to obtain such approvals on a timely basis, or at all, and if we do not, our ability to produce our products in Brazil could be impaired, which would adversely affect our results of operations and financial condition.
In addition to our production operations in the United States and Brazil, we have been party to contract manufacturing agreements with parties in other production locations around the world, including Europe. The use of GMM technology is regulated in the European Union, which has established various directives for member states regarding regulation of the use of such technology, including notification processes for contained use of such technology. We expect to encounter GMM regulations in most, if not all, of the countries in which we may seek to establish production capabilities and/or conduct sales to customers or end-use consumers, and the scope and nature of these regulations will likely be different from country to country. If we cannot meet the applicable regulatory requirements in the countries in which we produce or sell, or intend to produce or sell, products using our yeast strains, or if it takes longer than anticipated to obtain the necessary regulatory approvals, our business could be materially affected. Furthermore, there are various governmental, non-governmental and quasi-governmental organizations that review and certify products with respect to the determination of whether products can be classified as “natural”, non-GMO or other similar classifications. While the certification from such governmental organizations, and verification from non-governmental and quasi-governmental organizations are generally not mandatory, some of our current or prospective customers, collaboration partners or distributors may require that we meet the standards set by such organizations as a condition precedent to purchasing or distributing our products. We cannot be certain that we will be able to satisfy the standards of such org anizations, and any delay or failure to do so could harm our ability to sell or distribute some or all of our products to certain customers and prospective customers, which could have a negative impact on our business.
We may not be able to obtain or maintain regulatory approval for the sale of our renewable products.
Our renewable chemical products may be subject to government regulation in our target markets. In the United States, the EPA administers the Toxic Substances Control Act (the TSCA), which regulates the commercial registration, distribution, and use of many chemicals. Before an entity can manufacture or distribute a new chemical subject to the TSCA, it must file a Pre-Manufacture Notice to add the chemical to a product. The EPA has 90 days to review the filing but may request additional data, which could significantly extend the timeline for approval. As a result, we may not receive EPA approval to list future molecules on the TSCA registry as expeditiously as we would like, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH. Under this program, chemicals imported or manufactured in the European Union in certain quantities must be registered with the European Chemicals Agency, and this process could cause delays or entail significant costs. To the extent that other countries in which we are producing or selling (or seeking to produce or sell) our products, such as Brazil and various countries in Asia, including South Korea, rely on TSCA or REACH (or are implementing similar laws and programs) for chemical registration or regulation in their jurisdictions, delays with the U.S. or European authorities, or any relevant authorities in such other countries, may delay entry into these markets as well. In addition, some of our Biofene-derived products are sold for the cosmetics market, and some countries may impose additional regulatory requirements or permits for such uses, which could impair, delay or prevent sales of our products in those markets. Also, certain of our current or proposed products in the Flavor & Fragrance, Clean Beauty & Personal Care and Health & Wellness markets, including Flavor & Fragrance ingredients, skincare ingredients and cosmetic actives, alternative sweeteners, dietary supplements and nutraceuticals, may be subject to the approval of and regulation by the FDA, the European Food Safety Authority, Brazil ANVISA authority, as well as similar agencies of states and foreign jurisdictions where these products are sold or proposed to be sold.
We expect to encounter regulations in most, if not all, of the countries in which we may seek to produce, import or sell our products (and our customers may encounter similar regulations in selling end-use products to consumers), and we cannot assure you that we (or our customers) will be able to obtain necessary approvals and third-party verifications in a timely manner or at all. If our products do not meet applicable regulatory requirements in a particular country, then we (or our customers) may not be able to commercialize our products in such country and our business will be adversely affected. In addition, any enforcement action taken by regulators against us or our products could cause us to suffer adverse publicity, which could harm our reputation and our relationship with our customers and vendors. Emerging biodiversity regulations in response to the global Nagoya Protocol may further complicate the regulatory product compliance process.
In addition, many of our products are intended to be a component of our collaboration partners’ and/or customers’ (or their customers’) end-use products. Such end-use products may be subject to various regulations, including regulations promulgated
by the EPA, the FDA, or the European Food Safety Authority. If we or our collaboration partners and customers (or their customers) are not successful in obtaining any required regulatory approval or third-party verifications for their end-use products that incorporate our products or fail to comply with any applicable regulations for such end-use products, whether due to our products or otherwise, demand for our products may decline and our revenues could be materially adversely affected.
Changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on our business.
The markets where we sell our products are heavily infl uenced by foreign, federal, state and local government regulations and policies. Changes to existing or adoption of new foreign or domestic federal, state and local legislative initiatives that impact the production, distribution or sale of products may harm our business or new and existing data privacy regulations that could impact the ability of our consumer brands to leverage data to market and sell products. The uncertainty regarding future standards and policies, including developing regulation in the Clean Beauty industry and the data privacy landscape, may also affect our ability to develop our products or to license our technologies to third parties and to market and sell products to our end customers. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Furthermore, the production of our products will depend on the availability of feedstock, especially sugarcane. Agricultural production and trade flows are subject to government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives and import and export restrictions on agricultural commodities and commodity products can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, and the availability and competitiveness of feedstocks as raw materials. Future government policies may adversely affect the supply of feedstocks, restrict our ability to use sugarcane or other feedstocks to produce our products, or encourage the use of feedstocks more advantageous to our competitors, which would put us at a commercial disadvantage and could negatively impact our business, financial condition, and results of operations.
Our cannabinoid and COVID-19 vaccine development initiatives are uncertain and may not yield commercial results and are subject to material regulatory risks.
Since 2019, we have been developing, producing and commercializing fermentation-derived cannabinoids, but our cannabinoid program is the subject of ongoing litigation. While we believe there are substantial business opportunities for us in this field, there can be no assurance that our activities will be successful, or that any research and development and product testing efforts will result in commercially saleable products, or that the market will accept or respond positively to our products. In addition, the market for cannabinoids is heavily regulated. Certain synthetic cannabinoids may be viewed as controlled substances under the federal Controlled Substances Act of 1970 (CSA), and may be subject to a high degree of regulation including, among other things, certain registration, licensing, manufacturing, security, record keeping, reporting, import, export, clinical and non-clinical studies, insurance and other requirements administered by the U.S. Drug Enforcement Administration (DEA) and/or the FDA.
Individual states and countries have also established controlled substance laws and regulations, which may differ from U.S. federal law. We or our partners may be required to obtain separate state or country registrations, permits or licenses in order to be able to develop produce, sell, store and transport cannabinoids. Complying with laws and regulations relating to cannabinoids is evolving, complex and expensive, and may divert management’s attention and resources from other aspects of our business. Failure to maintain compliance with such laws and regulations may result in regulatory action that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The DEA, FDA or state agencies may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.
Since 2020, we have been working with our partners, ImmunityBio and Access to Advanced Health Institute, to develop a next-generation COVID-19 vaccine. In late 2021, we launched a joint venture with ImmunityBio to accelerate the manufacturing and commercialization of the COVID-19 vaccine on a worldwide basis. In the United States, to obtain approval from the FDA to market any of our future drug, biologic, or vaccine products, we are required to submit a new drug application (NDA) or biologics license application (BLA) to the FDA. Ordinarily, the FDA requires a company to support an NDA or BLA with substantial evidence of the product candidate’s effectiveness, safety, purity and potency in treating the targeted indication based on data derived from adequate and well-controlled clinical trials, including Phase 3 trials conducted in patients with the disease or condition being targeted. Regulatory authorities in other jurisdictions around the world, such as the European Commission or the competent authorities of the European Union member states or other European countries, have similar requirements.
Our COVID-19 vaccine product candidate entered a Phase 1 human clinical trial in the first half of 2022. Upon successful completion of all required phases of clinical trials of our COVID-19 vaccine product candidate, we expect to seek regulatory approval in various jurisdictions for commercialization. If we are not successful in our clinical development, or if our clinical trials do not generate the data we expect, or if we are unable to obtain regulatory approval in a timely manner, or at all, for our COVID-19 vaccine product candidate, we may not be able to commercialize our COVID-19 vaccine according to our expected timeline, or at all, which would prevent us from receiving a return on our investments and could negatively impact our business and growth prospects.
Moreover, to obtain approval from the FDA or a similar international or national regulatory body of any product candidate, we or our suppliers for that product must obtain approval by the applicable regulatory body to manufacture and supply product, in some cases based on qualification data provided to the applicable body as part of our regulatory submission. Any delay in generating, or failure to generate, data required in connection with submission of the chemistry, manufacturing and controls portions of any regulatory submission could negatively impact our ability to meet our anticipated submission dates, and therefore our anticipated timing for obtaining FDA or similar international or national regulatory body approval, or our ability to obtain regulatory approval at all. In addition, any failure of us or a supplier to obtain approval by the applicable regulatory body to manufacture and supply product or any delay in receiving, or failure to receive, adequate supplies of a product on a timely basis or in accordance with applicable specifications could negatively impact our ability to successfully launch and commercialize products and generate sales of products at the levels we expect.
Since 2020, given the global pandemic crisis, the COVID-19 vaccine development processes have been atypical and U.S. regulators have employed Emergency Use Authorization (EUA) procedures to enable access to COVID-19 vaccine in an accelerated manner. We cannot predict the timelines or revised regulatory processes that may be required for the authorization or approval of our COVID-19 vaccine or potential retraction of existing EUAs. In addition, our product candidates including our COVID-19 vaccine, and any other pharmaceutical products that we may develop or commercialize in the future, are subject to extensive FDA regulation and oversight, as well as oversight by other regulatory agencies in the United States and by comparable authorities in other countries. This includes, but is not limited to, laws and regulations governing product development, including testing, manufacturing, record keeping, storage and approval, as well as advertising and promotion. If we or any of our suppliers encounter manufacturing, quality or compliance difficulties with respect to any of our products, whether due to the evolving effects of the COVID-19 pandemic (including as a result of disruptions of global shipping and the transport of products) or otherwise, we may be unable to obtain or maintain regulatory approval or meet commercial demand for such products, which could adversely affect our business, financial condition, results of operations and growth prospects.
We may incur material costs to comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to material liabilities.
We use intermediate substances, hazardous chemicals and biological materials in our business, and such materials are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials in the United States, Brazil and the European Union. Although we have implemented safety procedures for handling and disposing of these materials and related waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures and those of our contractors will prevent accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our insurance coverage. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws could result in the imposition of fines, real property contamination, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws can be joint and several, without regard to comparative fault, and may be punitive in nature. Furthermore, environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and otherwise harm our business.
Our proprietary rights may not adequately protect our technologies and product candidates.
Our commercial success will depend substantially on our ability to obtain patents and maintain adequate legal protection for our technologies and product candidates in the United States and other countries. As of December 31, 2022, we had 689 issued U.S. and foreign patents and 347 pending U.S. and foreign patent applications that were owned or co-owned by or licensed to us. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, filing, prosecuting, maintaining and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less extensive than those in the United States. We may also fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Our existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from designing products around our patents or otherwise developing competing products or technologies. In addition, the patent positions of companies like ours are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of patent claims has emerged to date in the United States. Additional uncertainty may result from legal decisions by the U.S. Federal Circuit and Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws or from legislation enacted by the U.S. Congress. The patent situation outside of the United States is also difficult to predict. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
• we (or our licensors) were the first to make the inventions covered by each of our issued patents and pending patent applications;
• we (or our licensors) were the first to file patent applications for these inventions;
• others will independently develop similar or alternative technologies or duplicate any of our technologies;
• any of our or our licensors' patents will be valid or enforceable;
• any patents issued to us (or our licensors) will provide us with any competitive advantages, or will be challenged by third parties;
• we will be able to identify when others are infringing our (or our licensed) valid patent claims ;
• others will claim we are infringing on their patent claims;
• we will develop additional proprietary products or technologies that are patentable; or
• the patents of others will have a material adverse effect on our business.
We do not know whether any of our pending patent applications or those pending patent applications that we license will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our technology or product candidates. Accordingly, even if issued, we cannot predict the breadth, validity and enforceability of the claims upheld in our and other companies' patents. The patents we own or license and those that may be issued in the future may be challenged, invalidated, rendered unenforceable, or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents or other intellectual property rights, which could hinder us from preventing the infringement of our patents or other intellectual property rights. Proceedings to enforce our patent rights in the United States or foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert patent infringement or other claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license from third parties.
Moreover, we have granted certain of our lenders liens on substantially all of our assets, including our intellectual property, as collateral. If we default on our payment obligations under these secured loans, such lenders have the right to foreclose upon and control the disposition of our assets, including our intellectual property assets, to satisfy our payment obligations under such instruments. If such default occurs, and our intellectual property assets are sold or licensed, our business could be materially adversely affected.
Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States or may provide, today or in the future, for compulsory licenses. Moreover, in some cases our ability to determine if our intellectual property is being unlawfully used by a competitor may be limited. If competitors are able to use our technology, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain
patents for technologies that are similar, or superior, to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause harm to our business.
We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
We rely on trade secrets to protect some of our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain and protect. Our strategy for contract manufacturing and scale-up of commercial production requires us to share confidential information with our international business partners and other parties. Our product development collaborations with third parties, including with DSM, Firmenich, Givaudan, Ingredion, Minerva and Yifan, require us to share certain confidential information. While we use reasonable efforts to protect our trade secrets, our or our business partners' employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming, and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors lawfully obtain or independently develop equivalent knowledge, methods, and know-how, we would not be able to assert our trade secrets against them.
We require new employees and consultants to execute proprietary information and inventions agreements upon the commencement of an employment or consulting arrangement with us. We additionally require contractors, advisors, corporate collaboration partners, outside scientific collaboration partners, and other third parties that may receive trade secret information to execute such agreements or confidentiality agreements. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual's relationship with us be kept confidential and not be disclosed to third parties. These agreements also typically provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, or these agreements may be unenforceable or difficult to enforce. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. Additionally, trade secret law in Brazil differs from that in the United States, which requires us to take a different approach to protecting our trade secrets in Brazil. Some of these approaches to trade secret protection may be novel and untested under Brazilian law, and we cannot guarantee that we would prevail if our trade secrets are contested in Brazil. If any of the above risks materializes, our failure to obtain or maintain trade secret protection could materially adversely affect our competitive business position.
Third parties and former employees may misappropriate our trade secrets including those embodied in our yeast strains.
Third parties, including collaboration partners, contract manufacturers, other contractors, and shipping agents, as well as exiting employees, often have access to our trade secrets and custody or control of our yeast strains. If our trade secrets or yeast strains were stolen, misappropriated, or reverse engineered, they could be used by other parties who may be able to reproduce the yeast strains for their own commercial gain. If this were to occur, it would be difficult for us to challenge and prevent this type of use, especially in countries where we have limited intellectual property protection or that do not have robust intellectual property law regimes.
If we are, or one of our collaboration partners is, sued for infringing intellectual property rights or other proprietary rights of third parties, litigation could be costly and time consuming and could prevent us from developing or commercializing our future products.
Our commercial success depends on our and our collaboration partners' ability to operate without infringing the patents and proprietary rights of other parties and without breaching any agreements we have entered into with regard to our technologies and product candidates. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business. Our industry spans several sectors, including biotechnology, renewable fuels, renewable specialty chemicals, and other renewable molecules, and is characterized by the existence of a significant number of patents and disputes regarding patent and other intellectual property rights. Because patent applications remain unpublished and confidential for eighteen months and can take several years to issue, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or product candidates. There may be a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. The existence of third-party patent applications and patents could significantly reduce the coverage of patents owned by or licensed to us and our collaboration partners and limit our ability to obtain meaningful patent protection. If we wish to make, use, sell, offer to sell, or import the technology or compound claimed in issued and unexpired patents owned by others, we may need to obtain a license from the owner, develop or obtain alternative technologies, enter into litigation to challenge the validity
of the patents, or incur the risk of litigation in the event that the owner asserts that we infringe its patents. If patents containing competitive or conflicting claims are issued to third parties and these claims are ultimately determined to be valid, we and our collaboration partners may be enjoined from pursing research, development, or commercialization of products, or be required to obtain licenses to these patents, or to develop or obtain alternative technologies.
If a third party asserts that we infringe upon its patents or other proprietary rights, we could face a number of issues that could materially harm our competitive position, including:
• infringement and other intellectual property claims, which could be costly and time-consuming to litigate, whether or not the claims have merit, and could prevent or delay getting our products to market and divert management time and attention from our business;
• substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe a third party's patent or other proprietary rights;
• a court prohibiting us from selling or licensing our technologies or future products unless the holder licenses the patent or other proprietary rights to us, which it is not required to do;
• the International Trade Commission prohibiting us from importing our products into the United States; and
• the requirement from a third party to pay substantial royalties to license its patent(s), or grant cross licenses to our patents or proprietary rights.
The industries in which we operate, and the biotechnology industry in particular, are characterized by frequent and extensive litigation and patent agency procedures regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage in our industry. If any of our competitors have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to the patents for these inventions in the United States. In addition, third parties may be able to challenge the validity of one or more of our patents using available post-grant procedures including oppositions and inter partes reviews. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference or post-grant proceeding may result in loss of certain of our patent claims. Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights, or as a result of alleged infringement of the rights of others, may divert management time and attention from business operations and could cause us to spend significant resources, all of which could harm our business and results of operations.
Many of our employees were previously employed at universities, and at biotechnology or specialty chemical companies, including our competitors or potential competitors. We may be subject to claims that these employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel and be enjoined from certain activities. A loss of key research personnel or their work product, especially to our competitors or potential competitors, could hamper or prevent our ability to commercialize our product candidates, which could materially harm our business. Even if we are successful in prosecuting or defending against these claims, litigation could result in substantial costs and demand on management resources.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, indemnity claims and other legal proceedings or be the subject of a government investigation or enforcement action. In the event that such claims, proceedings, investigations or actions are ultimately resolved unfavorably to us at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business, financial condition, results of operations or growth prospects.
We may need to commence litigation to enforce our intellectual property rights, which would divert resources and management's time and attention with uncertain results.
Our commercial success depends in part on obtaining, maintaining, and defending intellectual property protection for our products and assets. Enforcement of our intellectual property rights may require us to bring claims against third parties that are using our proprietary rights without permission, and such process is expensive, time-consuming, and uncertain. Significant litigation would result in substantial costs, even if the eventual outcome is favorable to us, and would divert management's attention from our business objectives. In addition, an adverse outcome in litigation could result in a substantial loss of our proprietary rights, and we may lose our ability to exclude others from practicing our technology or producing our product candidates.
Patent enforcement generally must be sought on a country-by-country basis, and the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents by foreign holders and other intellectual property protection, particularly those relating to biotechnology and/or biochemical technologies. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Moreover, our efforts to protect our intellectual property rights in such countries may be inadequate.
We do not have exclusive rights to intellectual property we develop under U.S. federally funded research grants and contracts, including with DARPA and DOE, and we could ultimately share or lose the rights we do have under certain circumstances.
Some of our intellectual property rights have been or may be developed in the course of research funded by the U.S. government, including under our agreements with Defense Advanced Research Projects Agency (DARPA) and Department of Energy (DOE). As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. Government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us, or an assignee or exclusive licensee to such inventions, to grant licenses to any of these inventions to a third party if the U.S. government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; (iii) government action is necessary to meet requirements for public use under federal regulations; or (iv) the right to use or sell such inventions is exclusively licensed to an entity within the United States and substantially manufactured outside the United States without the U.S. government’s prior approval. Additionally, we may be restricted from granting exclusive licenses for the right to use or sell our inventions created pursuant to such agreements unless the licensee agrees to additional restrictions (e.g., manufacturing substantially all of the invention in the United States). The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Further, certain inventions are subject to transfer restrictions during the term of these agreements and for a period thereafter, including sales of products or components, transfers to foreign subsidiaries for the purpose of the relevant agreements, and transfers to certain foreign third parties. If any of our intellectual property becomes subject to any of the rights or remedies available to the U.S. government or third parties pursuant to the Bayh-Dole Act of 1980, this could impair the value of our intellectual property and could adversely affect our business.
Our products subject us to product safety risks, and we may be sued for product liability.
The design, development, formulation, production, and sale of our products, in particular those designed for human consumption, involve an inherent risk of product liability claims and the associated adverse publicity. Our products could be used by a wide variety of consumers with varying levels of sophistication. Although safety is a priority for us, we are not always in control of the final uses and formulations of the products we supply or their use as ingredients. Our products could have detrimental impacts or adverse impacts we cannot anticipate. Despite our efforts, negative publicity about the Company, including product safety or similar concerns, whether real or perceived, could occur, and our products could face withdrawal, recall or other quality issues. In addition, we may be named directly in product liability suits relating to our products, including, among other things, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances, even for defects resulting from errors of our commercial partners, contract manufacturers, chemical finishers, customers or end users of our products. These claims could be brought by various parties, including customers who are purchasing products directly from us or other users who purchase products from our customers. We could also be named as co-parties in product liability suits that are brought against the contract manufacturers with whom we partner to produce our products. Insurance coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms. Any insurance we do maintain may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, our business would be adversely impacted. In addition, insurance coverage may become more expensive, which would harm our results of operations.
Nutritional supplement products may not be supported by conclusive clinical studies, and sales of our consumable products and ingredients including alternative sweeteners and nutraceuticals could be negatively impacted by adverse publicity associated with any assertions made about the safety or efficacy of such ingredients and products.
Certain consumer brands feature nutritional supplements that are made from vitamins, minerals, herbs, and other ingredients, all deemed safe for human consumption by the FDA. All of our products are tested for quality, safety and efficacy based on consumer feedback and third party inspections in a controlled laboratory environment. Although we believe that our products are safe when taken as directed, we have not yet performed or sponsored randomized, double-blinded placebo human clinical studies. Furthermore, because we are highly dependent on consumers' perception of the quality, safety and efficacy of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers’ use or misuse of our products or similar products of our competitors. For example, on February 27, 2023, one new study was published relating to the cardiovascular risk associated with the sweetener ingredient, erythritol, which is in Purecane products. Erythritol has been classified as Generally Recognized as Safe in the United States since 2001 and consumed globally for many years; however, any such negative publicity around the potential health risks associated with an ingredient in our products could negatively impact consumer demand, customer satisfaction, and product sales, or expose us to potential legal claims.
R isks Related to Ownership of Our Common Stock
Our stock price has been, and may continue to be, volatile.
The market price of our common stock has been, and may continue to be, subject to material volatility. Such fluctuations could be in response to, among other things, the factors described in this “Risk Factors” section, or other factors, some of which are beyond our control, such as:
• fluctuations in our financial results or outlook, or those of companies perceived to be similar to us;
• changes in estimates of our financial results or recommendations by securities analysts;
• changes in the prices of commodities associated with our business or changes in the prices of commodities that some of our products may replace, such as oil and other petroleum sourced products;
• changes in our capital structure, such as future issuances of securities or the incurrence of debt;
• announcements by us or our competitors of significant contracts, acquisitions or strategic partnerships;
• regulatory developments in the United States, Brazil, and/or other foreign countries;
• the ongoing impacts of the COVID-19 pandemic and resulting impact on stock market performance;
• litigation or government investigations involving us or our general industry;
• additions or departures of key personnel;
• investors’ general perceptions of us; and
• changes in general economic, industry and market conditions.
Furthermore, stock markets have experienced price and volume fluctuations that have affected, and continue to affect, the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes and international currency fluctuations, may negatively affect the market price of our common stock.
Additionally, the global economy and financial markets may be adversely affected by geopolitical events, including the current or anticipated impact of military conflict and related sanctions imposed on Russia by the United States and other countries due to Russia's recent invasion of Ukraine.
In the past, many companies that have experienced volatility and sustained declines in the market price of their stock have become subject to securities class action and derivative action litigation. We have been involved in four such lawsuits that were dismissed in September 2017, July 2018 and September 2018, and in another such lawsuit that was resolved in December 2020. We are currently defending three such lawsuits, as described in more detail below under “Legal Proceedings,” and we may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could materially harm our business. Any insurance we maintain may not provide adequate coverage against potential losses from such securities litigation, and if claims or losses exceed our liability insurance coverage, our business would be adversely impacted. In addition, insurance coverage may become more expensive, which would harm our financial condition and results of operations.
The concentration of our capital stock ownership and certain rights we have granted to insiders will limit the ability of other stockholders to influence corporate matters and presents risks related to our future securities offerings, which could substantially impact our business.
As of December 31, 2022, over 30% of our capital stock was beneficially owned by a limited number of stockholders, including Foris Ventures, LLC (Foris) and DSM. Furthermore, Foris and other insider stockholders hold some or a combination of convertible preferred stock, warrants and purchase rights, pursuant to which they may acquire additional shares of our common stock and thereby increase their ownership interest in the Company. Additionally, Foris is indirectly owned by John Doerr, one of our current directors, and DSM has one director on our Board of Directors pursuant to designation rights under its agreement with the Company. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with stockholders with significant interests. Also, these stockholders, acting together, may be able to control or materially influence our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets, and may not act in the best interests of our other stockholders. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control or a change in our management or Board of Directors, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, even if such actions would benefit our other stockholders.
While we have a related party transactions policy that requires certain approvals of any transaction between the Company and a significant stockholder or its affiliates, there can be no assurance that our significant stockholders will act in the best interests of our other stockholders, which could harm our results of operations and cause our stock price to decline.
Future sales and issuances of our common stock, convertible securities, warrants or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
From time to time, we have sold a substantial number of warrants and rights to acquire our common stock as well as convertible securities, which, if exercised, purchased, or converted, result in dilution to our stockholders. In the future, we may sell additional warrants, rights, convertible or exchangeable securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time, to finance our business operations and investments. To the extent we raise capital by issuing equity securities, our stockholders may experience substantial dilution.
If our existing stockholders, particularly our largest stockholders, our directors, their affiliates, or our executive officers, sell a substantial number of shares of our common stock in the public market, the market price of our common stock could decrease materially. The perception in the public market that these stockholders might sell our common stock could also depress the market price of our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.
We have in place, or have agreed to file, registration statements for the resale of certain shares of our common stock held by, or issuable to, certain of our largest stockholders. All of our common stock sold pursuant to an offering covered by such registration statements will be freely transferable. In addition, shares of our common stock issued or issuable under our equity incentive plans to employees and directors have been registered on Form S-8 registration statements and may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
The conditional conversion feature of our 2026 Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of our 2026 Convertible Senior Notes is triggered, holders thereof will be entitled to convert the 2026 Convertible Senior Notes into shares of our common stock, at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of the 2026 Convertible Senior Notes do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The capped call transactions may affect the value of our 2026 Convertible Senior Notes and our common stock.
In connection with the pricing of the 2026 Convertible Senior Notes, we entered into capped call transactions with certain of the initial purchasers or their respective affiliates and other financial institutions (the “option counterparties”). The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. In addition, the option counterparties and/or their respective affiliates may
modify their hedge. This could also cause or avoid an increase or a decrease in the market price of our common stock or the notes, which could affect holders’ ability to convert the 2026 Convertible Senior Notes which may potentially affect the number of shares and value of the consideration that note holders will receive upon conversion of the 2026 Convertible Senior Notes.
We are subject to counterparty risk with respect to the capped call transactions related to our 2026 Convertible Senior Notes.
The option counterparties may default or otherwise fail to perform, or terminate, their obligations under the capped call transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we would become an unsecured creditor in those proceedings. In addition, any default or other failure to perform, or a termination of obligations, by an option counterparty, may cause our shares of common stock to be further diluted more than we currently anticipate.
We are subject to new U.S. foreign investment regulations which may impose additional burdens on or may limit certain investors' ability to purchase our common stock, potentially making our common stock less attractive to investors.
The U.S. Department of Treasury implemented part of the Foreign Investment Risk Review Modernization Act (FIRRMA) on November 10, 2018. The FIRRMA program expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), to include certain direct or indirect foreign investments in a defined category of U.S. companies, including companies involved in critical infrastructure and critical technologies. Among other things, FIRRMA empowers CFIUS to require certain mandatory filings in connection with certain foreign investments in U.S. companies and permits CFIUS to charge filing fees related to such filings. Such filings are subject to review by CFIUS, which will have the authority to recommend that the U.S. President block or impose conditions on certain foreign investments in companies subject to CFIUS’s oversight. Any such restrictions on the ability of foreign investors to invest in the Company could limit our ability to engage in strategic transactions that may benefit our stockholders, including a change of control, and may prevent our stockholders from receiving a premium for their shares of our common stock in connection with a change of control, and could also affect the price that some investors are willing to pay for our common stock.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock can be influenced by the research and reports that industry or securities analysts publish about us, our business, our market or our competitors. If any of the analysts who cover the Company change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price may decline. If any analyst who covers the Company were to cease coverage of our stock or fail to regularly publish reports on the Company, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not expect to declare any cash dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, certain of our equipment leases and credit facilities currently restrict our ability to pay dividends. Consequently, investors may need to rely on sales of their shares of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Anti-takeover provisions contained in our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our Certificate of Incorporation and Bylaws contain provisions that could delay or prevent a change in control. These provisions could also make it more difficult for stockholders to nominate directors and take other corporate actions. These provisions include:
• a staggered Board of Directors;
• authorizing the Board of Directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;
• authorizing the Board of Directors to amend our Bylaws, to increase the number of directors and to fill board vacancies until the end of the term of the applicable class of directors;
• prohibiting stockholder action by written consent;
• limiting the liability of, and providing indemnification to, our directors and officers;
• eliminating the ability of our stockholders to call special meetings; and
• requiring advance notification of stockholder nominations and proposals.
Section 203 of the Delaware General Corporation Law (DGCL) prohibits, subject to some exceptions, “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that the stockholder became an interested stockholder. While we have agreed to opt out of Section 203 through our Certificate of Incorporation, our Certificate of Incorporation contains substantially similar protections to the Company and stockholders as those afforded under Section 203.
These and other provisions in our Certificate of Incorporation and our Bylaws could discourage potential takeover attempts, reduce the price that investors are willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions.
The exclusive forum provisions in our restated Bylaws may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims.
In November 2020, we amended our restated Bylaws to provide that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our certificate of incorporation, or our restated Bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated bylaws further provide that the U.S. federal district courts will, to the fullest extent permitted by law, be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or a Federal Forum Provision. Our decision to adopt a Federal Forum Provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal or state courts will follow the holding of the Delaware Supreme Court or determine that the Federal Forum Provision should be enforced in a particular case, application of the Federal Forum Provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions contained in our Certificate of Incorporation or restated Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and results of operations. In addition, Section 203 of the DGCL may discourage, delay or prevent a change in control of our company.
General Risks
Loss of key personnel, including key executives and key members of our research and development programs and our brand teams, and/or failure to attract and retain additional personnel could delay our product development programs and harm our research and development efforts and the commercialization efforts of our brands, which could impact our ability to meet our business objectives.
Our business involves complex, global operations across a variety of markets and requires a management team and employee workforce that are knowledgeable in the many areas in which we operate. As we continue to build our business, we will need to hire and retain qualified research and development, management, and other personnel to succeed. The process of hiring, training, and successfully integrating qualified personnel (including ones who were hired through acquisitions) into our operations in the United States, Brazil, and other countries in which we may seek to operate, can be lengthy and expensive. The market for qualified personnel is very competitive because of the limited number of people available who have the necessary technical skills and understanding of our technology and products. Our failure to hire and retain qualified personnel could impair our ability to meet our research and development and business objectives and adversely affect our results of operations and financial condition.
The loss of any key member of our management or any key technical and operational employee, or the failure to attract or retain such employees, could prevent us from developing and commercializing our products for our target markets and executing our business strategy. In addition, we may not be able to attract or retain qualified employees in the future due to the intense
competition for qualified personnel among biotechnology and other technology-based businesses. Furthermore, the loss of one or more of our employees to a competitor could materially adversely affect our business, results of operations and ability to capitalize on our proprietary information, particularly if we cannot enforce any non-compete or non-solicitation obligations with respect to our employees.
If we do not maintain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our collaboration partners and customers in a timely fashion or to support our internal research and development programs and operations. In particular, our product and process development programs depend on our ability to attract and retain highly skilled technical and operational personnel. Competition for such personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our U.S. employees are “at-will” employees, which means that either the employee or the Company may terminate the employee's employment at any time.
Our operations rely on sophisticated information technology and equipment systems, a disruption of which could harm our operations.
We rely on various information technology and equipment systems, some of which are dependent on services provided by third parties, to manage our technology platform and operations. These systems provide critical data and services for internal and external users, including research and development activities, procurement and inventory management, transaction processing, financial, commercial and operational data, partner and joint venture activities, human resources management, legal and tax compliance and other processes necessary to operate and manage our business. These systems are complex and are frequently updated as technology improves, and include software and hardware that is licensed, leased, or purchased from third parties. If our information technology and equipment systems experience breaches or other failures or disruptions, our systems and the information contained therein could be compromised. While we have implemented security measures and disaster recovery plans designed to mitigate the effects of any failures or disruption of these systems, such measures may not adequately prevent adverse events such as breaches or failures from occurring or mitigate their severity if they do occur. If our information technology or equipment systems are breached, damaged, or fail to function properly due to internal errors or defects, implementation or integration issues, catastrophic events, or power outages, we may experience a material disruption in our ability to manage our business operations. Failure or disruption of these systems could have a material adverse effect on our results of operations and financial condition.
Increased security threats to information systems and more sophisticated, targeted computer invasions could pose a risk to our technology platform and operations.
Increased information systems security threats, cyber- or phishing-attacks and more sophisticated, targeted computer invasions pose a risk to the security of our systems and networks, and the confidentiality, availability, and integrity of our data, operations, and communications. Exposure to such risks is enhanced in our remote work environment as a result of the COVID-19 pandemic. Cyber-attacks against our technology platform and infrastructure could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Likewise, improper or inadvertent employee behavior, including data privacy breaches by employees and others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we attempt to mitigate these risks by employing a number of measures, including security measures, employee training, comprehensive monitoring of our networks and systems, maintenance of backup and protective systems, and incident response procedures, if these measures prove inadequate, we could be adversely affected by, among other things, loss or damage of intellectual property, proprietary and confidential information, data integrity, and communications or customer data, increased costs to prevent, respond to, or mitigate these cyber security threats and interruptions of our business operations.
Growth may place material demands on our management, our infrastructure, and our contract manufacturing relationships.
We have experienced, and expect to continue to experience, expansion of our business as we continue to make efforts to develop and bring our products to market. We have grown from approximately 300 employees at the time of our initial public offering in 2010 to 1,598 full-time employees at December 31, 2022. Our growth and diversified operations have placed, and may continue to place, material demands on our management and our operational and financial infrastructure, particularly with respect to integrating the business practices, operations, and personnel with those of any of our acquired businesses. In particular, continued growth could strain our ability to:
• manage multiple research and development programs;
• operate multiple manufacturing facilities around the world;
• develop and improve our operational, financial and management controls;
• enhance our reporting systems and procedures;
• recruit, train, and retain highly skilled personnel;
• fully realize the anticipated benefits of our acquired companies and businesses;
• develop and maintain our relationships with existing and potential business partners including contract manufacturers;
• maintain our quality standards; and
• maintain customer satisfaction.
Managing our growth will require material expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, financial condition, and results of operations would be adversely impacted.
Our headquarters and other facilities are located in active earthquake, tsunami or hurricane zones, and an earthquake, hurricane, wildfire or other type of natural disaster affecting us or our suppliers could cause resource shortages, disrupt our business and harm our results of operations.
We conduct our primary research and development operations in the San Francisco Bay Area in an active earthquake and tsunami zone, and certain of our suppliers conduct their operations in the same region or in other locations that are susceptible to natural disasters. In addition, California and some of the locations where certain of our suppliers are located have experienced shortages of water, electric power and natural gas from time to time. The occurrence of a hurricane or associated flooding in the Wilmington, North Carolina area could cause damage to our facility located in Leland or result in localized extended outages of utilities or transportation systems. The occurrence of a natural disaster, such as an earthquake, wildfire, hurricane, drought or flood, or localized extended outages of critical utilities or transportation systems, or any critical resource shortages, affecting us or our suppliers could cause a material interruption in our business, damage or destroy our facilities, production equipment or inventory or those of our suppliers and cause us to incur material costs or result in limitations on the availability of our raw materials, any of which could harm our business, financial condition and results of operations. The insurance we maintain against earthquakes, fires and other natural disasters may not be adequate to cover our losses in any particular case. Our facilities undergo annual loss control audits and both our Emeryville and Leland facilities have emergency actions plans outlining emergency response practices for these and other emergency scenarios. Training on emergency response is provided to all employees at hire and annually thereafter as a refresh.
