Foreign. In September of 2021, the biotech company Ginkgo Bioworks went public by merging with a spec at a valuation of 15 billion dollars. The company promised to revolutionize a pharmaceutical, agriculture, cosmetics, and many other. Industries.

They would do this with their massive facility in Boston Massachusetts which creates genetically modified yeast organisms that can produce novel chemicals. The company was popular with growth investors and Kathy Woods Arc Invest bought a more than 10 stake. They also counted Bill Gates and the massive hedge fund Viking Global among their shareholders. Despite the hype, Ginkgo Stock has been a complete disaster, losing more than 85 percent of its value.

Despite what appeared to be impressive Revenue Growth: the company's losses were exploding with a more than 2 billion dollar net loss in 2022 a money losing spec. Seeing its share price decline is nothing new. We've seen this hundreds of times. What's interesting about Ginkgo is that the company has been accused of orchestrating a massive fraud which has been able to trick the likes of Kathy Wood Bill Gates and thousands of other investors.

The core alligator is that Ginkgo's lab is not nearly as successful as they claimed, and their revenue growth is merely the product of a highly sophisticated accounting manipulation. In this video, we'll take a deep dive into Ginkgo Bioworks and look at whether or not it represents the largest biotech fraud in U.S History Foreign was founded all the way back in 2008 by an MIT professor and four of his students. One of them was Jason Kelly who is the CEO of the company today with funding from Venture capitalists, they bought a massive 200 000 square foot facility in Boston which they called The Foundry. The idea of The Foundry is that they can create genetically modified organisms.

pharmaceutical Agricultural and other types of companies will pay Ginkgo to genetically engineer organisms with useful properties. They claim their Foundry can develop new drugs, carbon sequestration, fake meat, cosmetics, and even genetically modified cannabinoids. The primary organism that Ginkgo works with is yeast, a family of single-celled fungi. Yeast has long been popular for genetic engineering as its short lifespan makes it easy to grow many generations for experimentation.

It's important to note that Ginkgo hasn't really invented anything. All of their hardware for their Foundry are purchased from companies like Thermo, Fisher and Pacific Biosciences. While Ginkgo has developed some proprietary software to operate these machines, the machines themselves are commercially available to all of Ginkgo's competitors. Also, the idea of genetic engineering is not new by any means.

The pharmaceutical giant Merc Genetically Engineered Yeast secreat Hepatitis B vaccines. This vaccine came out in 1986. they basically did the same thing that Ginkgo is doing today almost 40 years ago. And it's not just Merg.

many pharmaceutical companies use genetically engineered yeast to develop new drugs. Despite the fact that Ginkgo didn't have any new technology, the growth they experienced has been impressive. according to their spec presentation. The number of daily lab operations at their Foundry has been doubling or even tripling every year before facing some temporary disruptions during the pandemic, this growth in lab operations resulted in massive Revenue growth.

In 2019, their revenue grew by 64 percent to 54 million dollars. They projected that by 2025, their revenue would increase almost 20 fold to 1.1 billion dollars. So how was Ginkgo able to achieve such impressive levels of Revenue growth? Let's see what Co-founder and CIA Jason Kelly had to say right after their SPAC merger, Congratulations on going public today! Yeah, Thanks! Morgan Uh, so let's talk a little bit about self programming the DNA of cells as easy as programming computers I mean that sounds very exciting. It also sounds very hard.

What does it entail? Okay, so the core idea is inside of every cell, right? Every plant animal microbe is digital code in the form of DNA right? It's Atcs and G's not zeros and ones like in a computer, but you can read that code DNA Sequencing like genomics and you can write it with DNA Printing And so what we do at Gingo is we have a big 200 000 square foot lab in Boston where we read and write genetic code to program cells for customers. and then we make money kind of like Applewood In the App Store we program a cell for you. We get a royalty on the sales of the products that come from that cell. That's the business model the Ginkgo CEO Compares himself to Apple which is perhaps the single most successful company in the world.

When a third-party developer makes an app and sells it on the Apple App Store, they have to pay Apple a 30 Commission on all future revenue and perpetuity. This is obviously very lucrative for Apple In addition to charging their customers an upfront fee Ginkgo receives royalties on all revenue generated from the genetically modified organisms that it helps to develop. Ginkgo Claimed that it had recreated Apple's business model in the Biotech Industry A lot of investors bought into the hype with the likes of Kathy Wood, the multi-billion dollar hedge fund Viking Global and even an investment fund owned by Bill Gates all bought into the stock, helping it to achieve a 15 billion dollar valuation. but as we peel back the layers of the onion, the situation is not nearly as rosy as investors were led to believe.

Foreign works, you almost immediately uncover some pretty serious red flags. The first red flag pops up on the day of the IPO during CEO Jason Kelly's interview on CNBC we engineer a cell to produce cannabinoids. you don't have to grow of the fields we work in animal-free meat with a company called Motif Food Works we work in antibiotics with Roche Like the range of places you can apply, this is really Broad And so the thing. I'm most excited coming up startups, small companies.

You should be able to launch a new company on Genco's platform without building a lab. You can just have an idea for a cell program. We'll do the biotech and you can commercialize and that's exactly like what the folks at Motif did. They're food scientists.

They're they're expert food people, right? They're making like impossible Burgers They didn't have to have any biotech people Ginkgo handled all that. It's like Outsourcing to the cloud. He talks about Ginkgo's successful collaboration with a fake meat company called Motif Food Works. They also use Motif as a case study in their spec presentation.

Kelly said The Motif people were food scientists. They didn't know about genetic engineering so they had to partner with Ginkgo which does have this expertise and he expects many other startups will partner with Ginkgo going forward. If you haven't heard of Motif Foods you're not alone. The company is Tiny and their fake need does not appear to be available at any major retailers.

Their YouTube channel has 51 subscribers and they have 54 employees according to LinkedIn. Motif is headquartered in Boston Massachusetts the same city where Ginkgo is based. Ginkgo's headquarters are located at 27 Dry Dock Avenue Boston Massachusetts According to Google, Motif's address is also 27 Dry Dock Avenue Boston Massachusetts As it turns out, Motif Foodworks was founded by Ginkgo Bioworks and spun off to be an independent company in 2019. Motif immediately became a customer of Ginkgo paying the millions of dollars to use the ginkgo.

Foundry Motif isn't the only company that Ginkgo spun out. As of the time Ginkgo went public, they disclosed that they spun off four companies join: Bio Calo Ingredients Alanya and Motif Food Works. All four of these spin-off companies are customers of Gingo. Additionally, they had two so-called structured Ventures: Genomatica and Sin Logic.

Basically, Ginkgo would come up with ideas of cool things that they could do with their Foundry for example, producing fake meat. They would create a new project to work on this idea and eventually commercialize it, but instead of running this project themselves, they spin it off as a separate company like Motif Foods. So this begs the question: Why spin off these new Ventures Why doesn't Ginkgo just operate them itself? Remember that Ginkgo's whole selling point to investors was that they would be the Apple App Store of the Biotech Industry They wouldn't commercialize products themselves. they would provide their Foundry services to other companies.

The problem was their Foundry isn't all that good and they've only had limited success in creating commercially viable organisms. Ironically, one of the earliest Skeptics of Ginkgo was the MIT Technology Review a news Outlet run by MIT the same University that all of Ginkgo's Founders came from. Shortly after Ginkgo's 15 billion dollars pack deal was announced, they published an article titled is Ginkgo Synthetic Biology Story worth 15 billion? The link to the full article is in the description below. If you want to check out for yourself, the article points out that despite the hype, Ginkgo thus far lacks any track record of Blockbuster products.

The only success they had was developing three fragrance molecules for the fragrance manufacturer Robert's hat. The author estimates that these three fragrances could generate a few million dollars of Revenue per year. Ginkgo would earn a few hundred thousand dollars of royalties from this. Over the years, Ginkgo's entered into Partnerships with many large companies, for example, all the way back in 2016, they announced a partnership with the Synthetic Biology Company Amorous But the collaboration failed and eventually they ended the relationship without having created a single commercial product.

Again, this goes back to the point that Ginkgo didn't have any novel technology. They used commercially available equipment that anyone can buy, so the results of their Foundry have not been exceptional. CEO Jason Kelly may be a better fundraiser than he is a scientist by promoting his company, he was able to raise VC money, but he was far less successful in convincing customers to spend large sums of money. And what can you do? If you don't have enough customers, you create them in order to utilize their Foundry.

They created projects like the Fake Meat Company Motif. The problem was Motif was in its early stages and was many years away from mass production. It may never generate significant Revenue Thus, just starting a fake meat project would not immediately increase Ginkgo's Consolidated Revenue So instead they spun off Motif as an independent company and had Motif pay Ginkgo for Foundry services. This allows Ginkgo to recognize Revenue years before any customer pays for a motif fake meat.

Burger In October of 2021, just one month after Ginkgo went public, the activist Short Selling Firm Scorpion Capital published a damning report. They said that Ginkgo is a complete failure of a company. It has only been able to prop itself up by creating fake Revenue Thank you. In 2020, Ginkgo's Foundry business generated 59 million dollars of Revenue of this 43 million dollars, or a shocking 72 percent came from related parties such as: Motif Related party revenue is concerning because it can be used to manipulate financial statements to explain how this can happen.

Let's use a hypothetical example. Let's suppose: you own a bakery and you bake a bunch of bread. Your bread tastes horrible and nobody wants to buy it. But if your bakery has zero sales, your shareholders will be not happy and your stock price will go down.

So you talk to the grocery store across the street and propose a strategic partnership. You'll invest 200 to buy an equity stake in the grocery store. As a condition of this investment, the grocery store agrees to spend 100 of these dollars to buy all of your worthless bread. Now you can recognize 100 of Revenue you essentially paid them to become your customer.

This is called round trip Investing where you invest money into an outside entity with the expectation that some of that money will come right back to you in the long run. This practice is unsustainable because you suffer a net cash outflow, but it is a way to boost revenue and make your bakery look more successful than it actually is. Similar to our hypothetical Bakery Ginkgo had their Foundry which not enough customers wanted to use, so they created these spin-off companies to become customers. None of these spin-off companies had any Revenue to speak of.

So how do they have the cash to pay for? Ginkgo Services According to the short report, which is linked in the description below, the hedge fund Viking Global Investors as well as Bill Gates's investment fund Cascade may have played a significant role. Both Viking and Cascade were major shareholders in Ginkgo. With Viking alone owning 15 percent of the shares outstanding at the time of this pack, Viking and Cascade invested millions of dollars into multiple of Ginkgo's related party customers. These customers would use the money to pay for Ginkgo Services One of these spin-off companies was called Kalo Ingredients.

They raised 77 million dollars despite having zero employees on LinkedIn. This LinkedIn page has since been taken down. It's unclear whether Viking or Cascade investing into this company specifically, but we do know that some of Ginkgo's existing investors participated in Kalo's equity raise on the job posting website Startup.job There is an old job opening for a Chief Technology officer of Calo Ingredients. Interestingly, the post says that Ginkgo Bioworks is hiring a chief technology officer.

This is very confusing. If you were to accept this job, would you be working for Ginkgo Bioworks or Calo Ingredients? It's very difficult to find any evidence that the company Kalo Ingredients even exists. yet. they raised 77 million dollars and became a customer of Ginkgo spending millions of dollars on Foundry services.

This appears like a classic case of the right hand giving money to the left hand. Ginkgo's investors are pumping money into these spin-off companies just so they can turn around and pay this money to Ginkgo. But why would Ginkgo's investors do this? Why would they invest tens of millions of dollars into these worthless spin-off companies? One potential motivation is to boost Ginkgo's reported Revenue. This created the perception that Ginkgo was a successful company and allowed them to merge with a stack at a 15 billion valuation.

This could potentially allow Ginkgo's early investors to dump their shares at high prices. The gains they would make on Ginkgo's stock would far exceed the money they invested in the spin-off companies. To be clear, there is no direct evidence that Viking or Bill Gates had any involvement in Ginkgo's alleged wrongdoings. It's just suspicious that they are investing in Ginkgo's related party customers while they were also shareholders in Ginkgo itself.

According to Ginkgo's own filings, in 2019, 65 percent of their Foundry Revenue was from related parties. In 2020, this percentage had increased to 72 percent, which is a shockingly high percentage. In 2021 and 2022, their revenue from non-related parties increased substantially. So by 2022, only 27 of their revenue came from related parties.

It looks like things are moving in the right direction. over time. They're getting more outside customers and are becoming less reliant on their own spin-off companies. However, the story doesn't end there.

One of Ginkgo's related party customers is a publicly traded Biotech company called Syn Logic. Sin Logic has been a complete failure of a company. They have failed to ever generate meaningful revenue and their share prices declined by 99 since they went public in June of 2019. Ginkgo acquired a minority seconds in Logic for 80 million dollars immediately after this Equity raise.

Syn Logic paid 30 million dollars to Ginkgo to prepay for Ginkgo's Foundry Services over the next five years. This is a classic case of round trip investing that we talked about earlier. The 30 million dollars of prepaid expenses is user to lose it if they use less than 30 million dollars worth of Ginkgo Services by the end of the five years, Ginkgo just keeps the money. So even if Ginkgo's Foundry is almost worthless, you'd expect some Logic to use a Whole 30 million dollars.

Because Sin Logic is a publicly traded company, we can look at their financial reports. In the summer of 2019, they recorded 30 million dollars of prepaid research and development expenses related to Ginkgo as they use Ginkgo services. this prepaid expense decreases. By the end of 2022, this prepaid expense had decreased to 8.6 million dollars.

That means that they'd use up 21 million dollars of Ginkgo Services Ginkgo should have reported this as related party Revenue But if you look at Ginkgo's Financial reports, the numbers don't add up in 2019. Ginkgo Claims to have only generated 17 000 from Syn Logic in 2020. They claim to only have generated 73 000 in 2022. Ginkgo stopped disclosing how much revenue they received from Syn Logic.

They instead just lump it into a category called other Equity investees if we just look at 2019 through 2021. Saint Logic claims that Ginkgo built them for 18 million dollars. yet Ginkgo only recognized about 100 000 of Revenue. So what's going on? One explanation is that Ginkgo knew their High proportion of related party Revenue would make investors suspicious, so they may have misclassified a portion of their synologic revenue to make it look like less of their revenue is coming from related parties.

If the allegations in the short report are true, Ginkgo's stock is likely worthless if they had to resort to fraud to inflate their revenues. This indicates that their Foundry is a complete failure and cannot generate sufficient revenue from real customers. It appears that the stock market is coming around to that conclusion when the share price, having lost more than 80 percent of its value since the IPO following the release of the short report Ginkgo hires an independent accounting firm to conduct an audit. The accounting firm concluded that the allegations in the short report were unfounded and no restatement of Ginkgo's financial statements was needed.

However, they did not directly address any of the key allegations. For example, they gave no explanation as to the suspiciously minuscule amounts of Revenue they recognized from same logic and when asked about the allegations in an interview, CEO Jason Kelly failed to give a substantive response other side of the business The Foundry Side of the business is getting a lot of attention to, particularly from a number of short sellers that have issued reports in the last couple of weeks. So talk to us about that business and how quickly you can grow that. Yeah, so this is this is exactly why we're having this developer conference.

So you know One of the things we uh, updated about halfway through the year was that we when we were doing our pipe process, we thought we'd get 23 new programs on the platform. We updated that to 30. Uh, we did have the short report the stock dropped 20. You'll notice within 10 days.

Uh, it's up at all-time highs. Uh, you know. So from my perspective I Think you know shorts are part of the market. They can make money too.

Uh, you know it's fine for people to say what They want to say about the company and our job is to keep building the business and making it easier for people to develop on the platform. And we're doing that yesterday. We'll be doing that tomorrow. So I guess just to dig a Little Deeper I mean when scorpion scorpion Capital comes out with 175 page report which you know put pressure on the stock.

The day it did, it said Ginkgo Bioworks is a colossal scam. a Frankenstein mashup of the worst frauds of the last 20 years. It says it is rare party scheme. Yeah uh.

It went on like that and talked about interviews with both Uh current and and former employees as well. Yeah, yeah, he said all that stuff. That's right. Yep, yeah.

I Think the stock price and what we've been doing in the interim speaks for itself. The CEO refused to publicly talk about any of the specific allegations and just said that the company's stock price speaks for itself now that the stock is down 85 percent. He's not using this argument anymore. There's one other bizarre thing about Ginkgo that is worth pointing out.

Every year they host their Ferment conference where they invite high-profile people to talk about genetic engineering. In 2021, their keynote speaker was to be Dr Scott Gottlieb a former commissioner of the FDA who is well respected within the pharmaceutical industry. He tweeted that he was suffering from a viral illness and would not be able to attend in person. He went on to say quote: the Ginkgo management team tried to coerce me to show up.

Perhaps they didn't believe me, but I refused to put people at risk. unquote. It's important to note that this incident happened shortly after Scorpion Capital's short report. Ginkgo Likely believed that getting a former FDA commissioner to speak at their conference would bolster their credibility in light of the recent short seller allegations.

That's why it was imperative that they get Dr Gottlieb to show up. We don't know what type of coercion Gottlieb experienced, but if true, it goes to show that Ginkgo is obsessively concerned with public relations and making themselves appear legitimate. For a time, this worked. They were able to get the likes of Kathy Wood and Bill Gates to invest hundreds of millions of dollars and achieve a peak valuation of 15 billion.

But now the chickens have come home to roost. It looks like Ginkgo will soon take its rightful place in the trashy but failed Biotech. Ventures Alright guys, that wraps it up for this video. What do you think about Ginkgo Bioworks let us know in the comments section below.

As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.