Business Context and Reporting Period
This unaudited Form 10-Q was filed by Intrexon Corporation, not Precigen, Inc.; Precigen is a wholly owned subsidiary and a separately reported segment. The report covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. Intrexon develops synthetic-biology applications across healthcare, environmental, food, energy, and industrial markets. Management announced a realignment toward healthcare, including partnering, potential asset sales, and operating-cost reductions.
Financial Performance and Position
Amounts below are in thousands, except per-share data.
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $35,986 | $45,275 | $59,321 | $84,941 |
| Operating loss | $(37,409) | $(49,735) | $(96,112) | $(102,257) |
| Net loss | $(38,931) | $(66,829) | $(101,067) | $(114,238) |
| Net loss attributable to Intrexon | $(38,766) | $(65,382) | $(99,475) | $(111,547) |
| Loss per share | $(0.25) | $(0.51) | $(0.65) | $(0.87) |
- Revenue mix for the six months included collaboration and licensing revenue of $15,067, product revenue of $12,676, service revenue of $29,783, and other revenue of $1,795.
- Operating margin was approximately negative 103.9% in the second quarter and negative 162.0% for the six-month period. Net margin was approximately negative 108.2% and negative 170.4%, respectively.
- Six-month operating expenses were $155,433, including research and development expense of $67,580 and selling, general and administrative expense of $55,077.
- Net cash used in operating activities was $76,637 for the six months, compared with $58,058 in 2018. Capital expenditures were $25,423.
- Net cash provided by investing activities was $18,565, principally reflecting investment maturities, while financing activities provided $6,894, including $6,611 from a public financing.
- Cash, cash equivalents, and short-term investments totaled $125,803 at June 30, 2019, consisting of $58,162 of cash and cash equivalents and $67,641 of short-term investments. Cash, cash equivalents, and restricted cash declined by $51,596 during the first six months.
- Total assets were $655,188 and total liabilities were $375,965 at June 30, 2019. Total debt, including current portions, was approximately $213,334, and lease liabilities totaled $43,570.
- Accumulated deficit was $1.430 billion, and shares outstanding were 161,917,424 at June 30, 2019; 162,070,609 shares were outstanding as of July 31, 2019.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 20.5%, and six-month revenue declined 30.2%. Collaboration and licensing revenue fell 47.9% in the quarter and 59.6% year to date, primarily because the company reacquired rights previously licensed to ZIOPHARM and Ares Trading and no longer recognized related revenue streams.
- Product revenue declined 18.3% in the quarter and 24.2% year to date, primarily because of lower demand for pregnant cows, live and weaned calves, and cloned products. Service revenue was broadly stable.
- Operating expenses decreased 22.8% in the quarter and 17.0% year to date. Research and development expense declined partly because 2018 included approximately $5.3 million of one-time costs related to closing an Oxitec facility. SG&A declined principally because of lower stock-based compensation and personnel costs.
- Despite lower revenue, operating loss improved by $12,326 in the quarter and $6,145 year to date. Net loss improved by $27,898 in the quarter and $13,171 year to date.
- Interest expense increased materially to $4,358 in the quarter and $8,669 year to date, primarily from the 3.50% convertible notes issued in July 2018 and related noncash discount amortization.
- Precigen segment adjusted EBITDA was $(7,467) in the quarter and $(14,836) year to date. Trans Ova generated positive segment adjusted EBITDA of $4,932 in the quarter and $2,706 year to date, while Okanagan and the Methane Bioconversion Platform remained significant sources of segment losses.
- In April 2019, Intrexon deconsolidated AquaBounty after losing contractual control of its board. The company retained approximately 38% ownership and recorded the investment at fair value; a $2,648 loss on deconsolidation was recognized.
Outlook, Risks, Contingencies, and Unusual Items
- Going concern: Management stated that cash, cash equivalents, and short-term investments of $125,803 were insufficient to fund planned operations through one year after issuance of the financial statements. The filing therefore identifies substantial doubt about the company’s ability to continue as a going concern.
- Management expects continuing operating losses and negative cash flows and may need additional financing, strategic collaborations, asset or subsidiary sales, cost reductions, and delayed or reduced capital expenditures. Failure to obtain funding could require significant reductions or a shutdown of operations.
- The company entered into a June 2019 collaboration with Surterra. It received a $10,000 cash technology access payment and Surterra stock valued at $4,530, and may receive up to $68,000 of development milestones plus research payments and royalties.
- On August 8, 2019, after quarter-end, the company entered into an agreement under which an investor would invest $60,000 in a new entity related to the Methane Bioconversion Platform, subject to closing conditions and staged funding. The accounting impact was still under evaluation.
- Contractual obligations included approximately $75,129 of operating-lease payments, $10,384 of purchase commitments, $255,743 of convertible debt obligations, $28,000 of cash interest on convertible debt, and $4,570 of other long-term debt obligations. Remaining joint-venture capital commitments were $14.6 million, and unincurred third-party research and development commitments were $20.4 million.
- Trans Ova continues to face litigation and royalty disputes with XY, LLC. Trans Ova paid $5,801 into the court registry in May 2019, while XY claimed more than $1,000 of additional back royalties. The company recorded $267 of related expense in the quarter and $383 year to date.
- Fair-value gains and losses on equity securities can materially affect earnings. The company recognized $5,702 of net appreciation in equity securities and preferred stock year to date, including appreciation related to its AquaBounty investment.
- The company adopted the new lease standard on January 1, 2019, recording approximately $43,500 of right-of-use assets and $45,500 of lease liabilities at adoption.
Investor Verification Priorities
- Verify the company identity and corporate structure: the filing is for Intrexon Corporation, with Precigen reported as a subsidiary and segment.
- Assess the going-concern disclosure, projected cash burn, financing needs, and the feasibility and terms of proposed asset sales, partnerships, and cost reductions.
- Review the maturity and conversion terms of the $200 million principal amount of convertible notes due July 2023, including the $47,366 unamortized discount and issuance costs at June 30, 2019.
- Evaluate the sustainability of revenue after the loss of major collaboration-related revenue streams and the company’s increased responsibility for internally funded development programs.
- Monitor the Surterra collaboration, the post-quarter-end $60 million investment agreement, and any resulting dilution, asset transfers, or accounting changes.
- Follow the XY litigation and royalty dispute, including the potential for additional back royalties or restrictions on Trans Ova’s use of the licensed technology.
- Reconcile reported consolidated revenue and loss with segment results, non-GAAP Segment Adjusted EBITDA, related-party transactions, and fair-value investment gains.