From Promise to Peril: The Downfall of Ginkgo Bioworks

• In a report released in October 2021, Scorpion Capital alleged Ginkgo Bioworks Holdings Inc of being a "colossal scam", claiming that the company, at a $23 billion valuation, was ridiculously overpriced.
• Former employees cited in this short report claimed that 9 out of 10 projects launched by the company since its inception have failed. 
• Ginkgo shares crashed 12% on the same day the report was released. Investor sentiment deteriorated further when the Department of Justice launched an investigation into the company's affairs in November 2021.
• Ginkgo stock, after reaching an all-time high of around $15 in October 2021, has lost more than 97% of its value.
• In November 2021, a shareholder lawsuit was filed against Ginkgo alleging that the company violated Federal security laws. 
• Ginkgo Bioworks has agreed to pay up to $17.75 million to settle this lawsuit. All affected investors can file a claim to receive the payment.

Overview

“Our revenue has grown substantially, and we are proud of the progress we've made in establishing strategic partnerships. The robust pipeline of projects we have in place positions us well for continued financial success.“

Gingko CEO Jason Kelly in August 2021

Ginkgo Bioworks DNA went public in September 2021 through an SPAC merger and raised $1.6 billion. The company attracted high-profile names such as Baillie Gifford, Putnam Investments, Morgan Stanley's Counterpoint Global, Ark Investment Management, and Bill Gates' Cascade Investment to its private financing round of $775 million before the IPO. Retail investors, encouraged by the involvement of prominent investors and the optimistic projections provided by Ginkgo Bioworks' management regarding the company's global potential, significantly increased their investments in Ginkgo at that time. This led to substantial losses when Ginkgo's stock declined a month later following a report by Scorpion Capital, which raised concerns about the company's business practices.

After reaching a market value of almost $30 billion in November 2021, Ginkgo's market value has plummeted to $825 million today with the company's losses continuing to accumulate while revenue has halved since 2022.  

Ginkgo's Fall From The Skies

On May 14, 2021, Ginkgo issued a press release announcing the company's decision to merge with Soaring Eagle, a special purpose acquisition company, to go public. From that day onwards through the market debut in September, Ginkgo periodically updated investors about successful partnerships, breakthrough business developments, and strategic business initiatives to capture a share of the $4 trillion market for bioengineered products. These announcements played a key role in boosting investor sentiment toward the company, which led to a strong positive reaction to Ginkgo shares once the company became public. The company, in its prospectus filed in September 2021, made references to widely adopted platform products such as Microsoft Windows and Amazon Web Services to claim that its technical platform will be a market leader.

Ginkgo, through these references to big tech companies and new deals announced with seemingly well-funded business partners, was able to attract the attention of investors well before its IPO. However, the company faced trouble when Scorpion Capital, in a 175-page report, accused Ginkgo of not disclosing that the majority of its revenue in 2020 came from related-party transactions that involved companies funded, created, or managed by Ginkgo executives. Findings revealed that 72% of Ginkgo's 2020 revenue and almost 100% of deferred revenue as of 2021 came from related party transactions.

The SEC maintains strict regulatory requirements to protect investors from falling victim to inflated revenue figures arising from related-party transactions. For example, Regulation S-K, Item 404 and Regulation S-X, Rule 4-08(k) govern that companies must disclose related party transactions in their financial statements, providing sufficient details to allow investors to understand their nature and effects. As highlighted by Scorpion Capital, Ginkgo's perceived failure to properly disclose the nature of these transactions harmed investors.

Making matters worse, some of the partnerships announced by Ginkgo between May to September 2021 proved to involve related parties as well.

When Scorpion Capital highlighted its findings regarding the existing relationship between Ginkgo and its customers, shares dropped 12% and never really recovered since then. Ginkgo's revenue declined sharply in 2023 after hitting a high of $477.7 million in 2022.

The massive growth in revenue in 2021 and 2022 proved to be attached to the success of Ginkgo's Covid-19 testing business. With pandemic fears easing, Ginkgo faced major challenges to retaining this growth with its core business.

The market was also spooked by the comments of employees and former employees interviewed by Scorpion for its report. For instance, a former Ginkgo executive who commented on the collaborations highlighted by the company leading up to its IPO claimed that none of these were successful initiatives.

“One thing that Jason's really good at is publicizing success. So, if any of those collaborations were successful, he would have publicized it, and I haven't seen any of those publicized.”

Former Ginkgo employee

Ginkgo CEO Jason Kelly addressed these allegations when they emerged in 2021, asserting that Ginkgo's platform facilitates the rapid launch of new startups and emphasized the company's commitment to supporting biotech entrepreneurs. Meanwhile, the company acknowledged that the Department of Justice initiated an investigation into its business practices.

After that situation, shareholders filed a lawsuit against Ginkgo in October 2021, alleging that the company had misrepresented facts and misguided investors by concealing the nature of some key business transactions. 

Ginkgo, in response to the DOJ investigation and the shareholder lawsuit alleging misconduct, launched an independent investigation into the matter. The findings of this independent investigation revealed that Ginkgo did not commit any of the mistakes highlighted by Scorpion Capital, including fraud, SEC reporting violations, and accounting errors.

Commenting on the findings of the independent investigation, CEO Jason Kelly commented during an earnings call in November 2021 and said:

“And shortly after the report came out, we received an informal inquiry from the DOJ, which is why I’m very happy to report today that, that based on the independent investigation, the Audit Committee found that any suggestion of fraud, reporting violations, accounting errors, or other wrongdoing contained in the short seller's report were unfounded and importantly that no restatement of our financials was needed. I will say, as CEO, it is very, very rewarding to see so many parts of the company and so many people in the team strenuously pressure tested like this and see them pass with flying colors. It is a testament to the culture we’ve been building at Ginkgo the last 13 years now. And I’m not going to call the process following up on the short report particularly fun, but it was rewarding, and I’m glad we’re through it.“

The reassurances given by the CEO in November 2021 did little to help Ginkgo stock in the market as investors were already concerned about the company’s profitability metrics. Amid lackluster growth and increasing competition, Ginkgo shares have continued to decline after its initial boom.

Resolving The Case

To resolve the situation with affected shareholders, Ginkgo agreed to a settlement with a total cash amount of up to $17.7 million. If you invested in Ginkgo Bioworks between May 11, 2021, and October 5, 2021, you may be eligible to file for a portion of the settlement to recover some of your losses.

In conclusion, the case of Ginkgo Bioworks highlights the importance of transparency in financial reporting and the risks associated with investing in companies that carry out substantial related-party transactions. Ginkgo, which remains focused on advancing synthetic biology, may come out of this massive reputational damage if the company delivers better-than-expected revenue growth in the coming years, paving the way for profitable expansion.