Business Context and Reporting Period
This unaudited Form 10-Q covers Intrexon Corporation and its subsidiaries for the quarter and six months ended June 30, 2017. The filing describes a synthetic-biology platform business that commercializes technologies through exclusive channel collaborations, licensing arrangements, joint ventures, and acquisitions, alongside product and service businesses in bovine reproduction, insect control, aquaculture, agriculture, and related fields.
The request identifies the company as Precigen, Inc.; however, the supplied filing is filed under Intrexon Corporation and does not use the Precigen name.
Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $54.4 million, up 3.7% | $107.9 million, up 12.5% |
| Collaboration and licensing revenue | $28.2 million, up 2.5% | $61.2 million, up 18.8% |
| Product revenue | $10.0 million, down 8.3% | $18.1 million, down 6.8% |
| Service revenue | $15.9 million, up 14.1% | $27.9 million, up 13.5% |
| Operating loss | $35.3 million | $66.7 million |
| Net loss attributable to Intrexon | $18.7 million, or $0.16 per share | $50.1 million, or $0.42 per share |
| Net cash used in operating activities | Not separately provided | $48.2 million |
Reported gross profit, calculated as revenue less product and service costs, was approximately $37.6 million for the quarter and $75.5 million for the six-month period, representing approximate gross margins of 69.0% and 70.0%, respectively. Operating margins were approximately negative 64.8% and negative 61.8%.
- Research and development expense was $34.0 million for the quarter and $68.2 million for six months, increases of 19.9% and 25.7%, respectively.
- Selling, general and administrative expense was $38.8 million for the quarter and $74.0 million for six months, increases of 28.4% and 1.1%, respectively.
- Other income, net, was $18.1 million for the quarter and $21.5 million for six months, compared with other expense of $22.3 million and $43.8 million in the prior-year periods. The improvement primarily reflected fair-value changes in equity and preferred-stock investments and preferred-stock dividend income.
- Cash and cash equivalents were $64.4 million at June 30, 2017, with restricted cash of $7.0 million and short-term investments of $92.8 million. Total cash, cash equivalents, and short- and long-term investments were $157.2 million.
- Total assets were $934.0 million, including $240.4 million of intangible assets and $164.9 million of goodwill. Accumulated deficit was $780.9 million.
- Total debt was approximately $8.1 million, including $0.3 million outstanding under lines of credit. The company reported $7.7 million of long-term debt net of current maturities.
- Deferred revenue was $285.3 million, of which $278.3 million related to upfront and milestone payments from collaboration and licensing agreements.
Material Changes Versus Prior Comparable Period
- Six-month revenue increased $12.0 million, driven primarily by a $9.7 million increase in collaboration and licensing revenue and a $3.3 million increase in service revenue. Product revenue declined $1.3 million because of lower quantities of pregnant cows and live calves sold.
- The six-month operating loss widened by $2.9 million despite higher revenue, as operating expenses increased $14.9 million. Research and development accounted for most of the increase.
- Six-month net loss attributable to Intrexon improved by $63.4 million, primarily because the prior-year period included substantial investment fair-value losses, while 2017 included investment appreciation and dividend income.
- Operating cash use increased to $48.2 million from $16.0 million, partly reflecting recognition of previously deferred revenue and working-capital movements.
- Investing activities provided $52.3 million, largely from $88.0 million of investment maturities, offset by $18.3 million of property and equipment purchases, $14.2 million for AquaBounty’s land-based aquaculture facility, and $4.6 million of investments in joint ventures.
- In June 2017, the company acquired GenVec, Inc. for total preliminary consideration of $17.6 million, including stock, warrants, and contingent consideration. The acquisition added $14.0 million of intangible assets and $4.9 million of goodwill.
- In January 2017, the company distributed 1,776,557 AquaBounty shares valued at $22.4 million as a dividend to Intrexon shareholders.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects significant losses to continue and stated that the company has never generated royalty revenue from collaborator product sales and may never become profitable.
- Management believes existing cash, investments, expected collaborator receipts, and product and service receipts will fund operating expenses and capital expenditures for at least the next 12 months, but cautioned that estimates may prove incorrect and capital could be used sooner than expected.
- Potential future funding sources include equity or debt financing, government funding, strategic alliances, and licensing transactions. Additional financing could dilute shareholders or require the company to relinquish valuable rights.
- Contractual obligations totaled approximately $89.7 million, including operating leases, deferred consideration, purchase commitments, long-term debt, and contingent consideration. The company also reported $24.7 million of remaining joint-venture capital contribution commitments and $11.0 million of unincurred third-party research and development commitments.
- Significant investment valuation exposure remained: preferred-stock investments totaled $144.7 million, and equity securities totaled $23.9 million. These values can materially affect earnings because fair-value changes are recognized in operations.
- The company owned approximately 58% of AquaBounty at June 30, 2017. Its AquaBounty investment was valued at $41.4 million and is subject to share-price volatility.
- Trans Ova remained involved in patent and licensing litigation with XY, LLC. Appeals were pending, and the ultimate damages, license terms, and potential settlement outcome were uncertain.
- Shareholder class-action and derivative litigation remained pending or subject to appeal, and the SEC Division of Enforcement was conducting an investigation relating to issues the company believed concerned those matters. The company was cooperating with the SEC.
- The company stated that no legal matter was expected to have a material adverse effect, but acknowledged that an adverse resolution could materially affect a particular reporting period.
- There were no additional material changes to the risk factors reported in the 2016 Form 10-K. The company’s disclosure controls and procedures were concluded to be effective.
Investor Verification Items
- Verify the corporate-name discrepancy between the request for Precigen, Inc. and the supplied Intrexon Corporation filing.
- Assess the sustainability and composition of collaboration revenue, particularly the concentration in ZIOPHARM and deferred upfront and milestone payments.
- Reconcile operating cash burn with management’s statement that liquidity supports at least 12 months of operations, including joint-venture commitments and planned capital expenditures.
- Review the valuation assumptions and volatility exposure for the $144.7 million preferred-stock portfolio, $23.9 million of equity securities, and AquaBounty investment.
- Monitor GenVec integration, acquisition-related contingent consideration, and the potential for additional amortization or impairment of acquired intangible assets and goodwill.
- Track the XY litigation, shareholder lawsuits, SEC investigation, and related legal costs or potential settlements.
- Review dilution from stock-based compensation, acquisition consideration, related-party service payments, and outstanding options and warrants.