Business Context and Reporting Period
The filing is Intrexon Corporation’s Form 10-K for the fiscal year ended December 31, 2016, filed March 1, 2017. The request metadata identifies Precigen, Inc., but the provided filing is for Intrexon Corporation, the company’s former name. Intrexon operated as a synthetic biology company commercializing technologies through exclusive channel collaborations, licensing agreements, joint ventures, acquisitions, and operating subsidiaries across health, food, energy, environmental, and consumer markets.
As of December 31, 2016, the company had 832 full-time and 103 part-time employees, including 446 research and development employees. No products derived from Intrexon’s collaborations had been commercialized as of year-end.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $190.9 million | $173.6 million | 10.0% increase |
| Collaboration and licensing revenue | $109.9 million | $87.8 million | 25.1% increase |
| Product revenue | $37.0 million | $41.9 million | 11.8% decrease |
| Service revenue | $43.0 million | $42.9 million | 0.3% increase |
| Operating loss | $125.2 million | $146.9 million | Improved by $21.7 million |
| Net loss attributable to Intrexon | $186.6 million | $84.5 million | 120.9% increase |
| Loss per share | $1.58 | $0.76 | Higher loss |
| Operating cash flow | $(56.0) million | $35.7 million | Declined by $91.6 million |
- Operating margin was approximately negative 65.6%, compared with negative 84.6% in 2015. Net margin attributable to Intrexon was approximately negative 97.7%, compared with negative 48.7% in 2015.
- Research and development expense was $112.1 million, down 24.0%, primarily because 2015 included a $59.6 million stock payment for an exclusive MD Anderson license. Selling, general and administrative expense increased 30.5% to $142.3 million.
- Other expense was $47.9 million in 2016, compared with $68.8 million of other income in 2015. The 2015 result benefited from an $81.4 million gain on the distribution of ZIOPHARM shares and favorable investment valuation changes.
- Cash and cash equivalents were $62.6 million; short-term and long-term investments were $180.6 million; and restricted cash was $7.0 million. Cash plus investments totaled approximately $243.2 million, excluding restricted cash.
- Total assets were $949.1 million and total liabilities were $379.8 million. Deferred revenue increased to $310.1 million from $197.7 million, largely reflecting upfront and milestone payments that had not yet been recognized as revenue.
- Long-term debt was $7.9 million, including $0.8 million of lines of credit and $7.9 million of long-term debt shown separately in the balance sheet disclosures. Contractual obligations included $47.5 million of operating leases, $8.8 million of deferred consideration, $7.2 million of purchase commitments, and $28.9 million of remaining joint venture capital commitments not included in the contractual-obligations table.
- Accumulated deficit was $729.3 million. U.S. federal net operating loss carryforwards were approximately $253.0 million, subject to potential Section 382 limitations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher collaboration and licensing revenue, including new 2016 collaborations and expanded research and development services. Product revenue declined because of lower demand and lower average selling prices for livestock-related products.
- Operating loss improved despite higher SG&A costs, but the company’s net loss more than doubled because 2015 included substantial investment gains that did not recur and 2016 included significant investment valuation losses.
- Operating cash flow shifted from a $35.7 million inflow to a $56.0 million outflow. Cash declined by $73.2 million during 2016, compared with a $108.3 million increase in 2015.
- Capital expenditures increased to $31.6 million from $12.7 million. The company also invested $11.5 million in affiliates, paid $7.2 million for the Old EnviroFlight assets, and issued $19.2 million of proceeds from stock option exercises.
- In 2016, the company formed or entered into collaborations involving Exotech Bio, Relieve Genetics, Intrexon T1D Partners, AD Skincare, Genten Therapeutics, and CRS Bio. It also acquired substantially all assets of Old EnviroFlight and contributed most of those assets to a 50%-owned joint venture.
- The company received ZIOPHARM preferred stock valued at $120.0 million as consideration for amendments to existing collaborations. The amendments reduced the royalty rate on certain products from 50% to 20%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantified revenue, earnings, or cash-flow guidance. Management stated that existing cash, investments, expected collaborator receipts, and expected product and service receipts were expected to fund operating expenses and capital expenditures for at least the next 12 months, but acknowledged that additional capital may be required if assumptions change.
- The company expected continued significant losses and negative operating cash flow and had never generated royalty revenue from collaborator product sales.
- Future results depend heavily on collaborators’ ability to obtain regulatory approvals, develop and commercialize products, fund programs, and maintain ECCs and joint ventures. Collaborators generally may terminate agreements on approximately 90 days’ notice.
- Regulatory and public-acceptance risks remain significant for genetically engineered products, gene therapies, agricultural products, aquaculture products, and biological insect-control products.
- Investment valuation volatility materially affects earnings. At year-end, equity securities were valued at $23.5 million versus an original cost basis of $104.0 million, while the Level 3 ZIOPHARM preferred-stock investment was valued at $129.5 million.
- The company recorded $4.3 million of litigation expense related to the Trans Ova/XY matter. Restricted cash of $7.0 million was deposited with the U.S. Treasury pending the appeals process. The damages could change or be eliminated on appeal.
- Shareholder securities litigation, a derivative action concerning the Third Security services agreement, shareholder demands, and an SEC Division of Enforcement investigation remained outstanding. Management did not expect a material adverse effect but stated that outcomes could not be predicted.
- Related-party arrangements are significant. Third Security, controlled by CEO and Chairman Randal J. Kirk, received $8.6 million of common stock in 2016 under a services agreement, and Mr. Kirk and affiliated shareholders controlled approximately 52% of voting stock at year-end.
- Subsequent events included a proposed acquisition of GenVec, a $25.0 million investment in AquaBounty, and a distribution of 1,776,557 AquaBounty shares that reduced Intrexon’s ownership from approximately 70% to 58%.
Most Important Facts for Investors to Verify
- Confirm the registrant identity and corporate-name history because the supplied filing is for Intrexon Corporation, while the request identifies Precigen, Inc.
- Assess the sustainability and quality of the $190.9 million revenue base, particularly the reliance on collaboration upfront payments, deferred revenue recognition, and related-party revenue.
- Reconcile the $243.2 million of cash and investments against the $56.0 million operating cash burn, planned capital expenditures, joint venture commitments, and expected financing needs.
- Review the valuation assumptions and liquidity of the $129.5 million ZIOPHARM preferred-stock investment and other collaborator securities.
- Evaluate whether collaborators can achieve regulatory approval and commercialization, since the company had not generated royalty revenue from commercialized collaboration products.
- Review the Trans Ova/XY appeal, shareholder litigation, SEC investigation, and related-party services arrangements for potential financial or governance effects.
- Consider dilution from 11.6 million outstanding stock options, future equity financing, and the company’s controlled ownership structure.