Business Context and Reporting Period
This filing is an unaudited Form 10-Q for Intrexon Corporation, not Precigen, Inc., for the quarter and six months ended June 30, 2018. Intrexon operated synthetic-biology businesses spanning human therapeutics, agriculture, environmental applications, energy, reproductive technologies and aquaculture. Precigen was a wholly owned subsidiary established effective January 1, 2018 to hold substantially all human gene- and cell-therapy assets.
The company reported no commercialized products derived from its collaborations as of June 30, 2018. Its operating model was shifting from exclusive channel collaborations toward joint ventures, internally developed programs and greater ownership of commercialization activities.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $45.3 million, down 16.8% | $84.9 million, down 21.3% |
| Collaboration and licensing revenue | $17.5 million, down 38.0% | $37.3 million, down 39.1% |
| Product revenue | $9.6 million, down 4.1% | $16.7 million, down 7.7% |
| Service revenue | $17.7 million, up 11.5% | $30.0 million, up 7.3% |
| Operating loss | $49.7 million | $102.3 million |
| Net loss | $66.8 million | $114.2 million |
| Net loss attributable to Intrexon | $65.4 million, or $0.51 per share | $111.5 million, or $0.87 per share |
| Operating margin | Approximately negative 109.9% | Approximately negative 120.4% |
| Net margin | Approximately negative 147.6% | Approximately negative 134.5% |
- Research and development expense was $42.0 million in the quarter and $79.2 million for the six-month period, increasing 23.6% and 16.1%, respectively. The six-month increase included approximately $5.3 million of one-time costs related to closing an Oxitec research facility in Brazil.
- Selling, general and administrative expense was $34.4 million in the quarter and $74.2 million for the six-month period. Quarterly SG&A declined 11.4%, while six-month SG&A was essentially unchanged.
- Other expense included net unrealized and realized depreciation of equity securities and preferred stock of $19.2 million in the quarter and $20.3 million for the six-month period. Interest and dividend income was $5.7 million and $11.2 million, respectively.
- Cash and cash equivalents were $78.5 million at June 30, 2018, compared with $68.1 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $85.9 million.
- Net cash used in operating activities was $58.1 million for the six months, compared with $47.8 million in the prior-year period. Capital expenditures were $21.6 million, and cash used in investing activities was $20.9 million.
- Financing activities provided $88.9 million, primarily from the January 2018 public offering of common stock. The company issued 6.9 million shares and received net proceeds of $82.4 million.
- Total debt at June 30, 2018 included $0.6 million drawn on lines of credit and $7.8 million of long-term debt, including current maturities of $0.5 million.
- Total deferred revenue was $193.9 million, including $187.7 million related to collaboration and licensing agreements, down from $236.4 million at December 31, 2017.
- Accumulated deficit was $932.8 million and total equity was $567.1 million at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because collaboration and licensing revenue fell $10.7 million in the quarter and $23.9 million for the six months. Management attributed the decrease to reduced research and development services for certain exclusive channel collaborations as resources were redirected toward new platforms, partnering opportunities and programs with greater company control.
- Service revenue increased due to pricing changes and improved embryo production per bovine in vitro fertilization cycle. Product revenue declined because of lower demand for live calves and cows and increased costs associated with new and cloned products.
- The operating loss widened by $14.5 million in the quarter and $35.6 million for the six months, driven by lower revenue and higher research and development spending.
- Net loss attributable to Intrexon increased from $18.7 million to $65.4 million in the quarter and from $50.1 million to $111.5 million for the six months. The deterioration also reflected unfavorable fair-value changes in equity and preferred-stock investments, compared with gains in the prior year.
- ASC 606 was adopted prospectively on January 1, 2018 using the modified retrospective method. Adoption reduced deferred revenue by $26.5 million and increased accumulated deficit by $26.6 million through a cumulative catch-up adjustment. The company did not restate prior-year results.
- The company reported a material weakness in internal control over financial reporting related to ASC 606 implementation. The weakness resulted in misstatements and a restatement of the quarter ended March 31, 2018, including collaboration revenue, deferred revenue and accumulated deficit.
- In March 2018, the company and OvaScience terminated their exclusive channel collaboration agreement and continued discussions regarding the related joint venture. In January 2018, the company received $2.6 million upon dissolution of S & I Ophthalmic.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued significant losses and substantial capital requirements and stated that profitability may never be achieved.
- Management believed cash on hand, expected collaborator receipts, product and service receipts, and proceeds from the July 2018 financing would fund operating expenses and capital expenditures for at least the next 12 months. This expectation depended on assumptions that may prove inaccurate.
- In July 2018, after the reporting date, Intrexon issued $200 million of 3.50% convertible senior notes due 2023. The notes are senior unsecured obligations, cannot be redeemed before maturity, and may require cash payments upon conversion or a fundamental change.
- In connection with the notes, the company loaned 7.5 million common shares to J.P. Morgan Securities for hedging-related transactions. The filing warned that related short sales and hedging activity could pressure the common-stock price.
- Remaining joint-venture capital contribution commitments were $17.3 million. The company also reported $13.5 million of unincurred research and development commitments, $13.0 million of purchase commitments and $77.8 million of operating lease obligations.
- The SEC Division of Enforcement was investigating matters the company believed related to previously dismissed shareholder litigation. The company was cooperating voluntarily, but the outcome was uncertain.
- Trans Ova remained involved in patent and licensing litigation with XY, LLC. Three patent-infringement counts remained pending, and the ongoing royalty calculation had been remanded for reconsideration.
- Fair-value results were exposed to significant volatility. The company held $153.8 million of preferred-stock investments, including a $153.5 million ZIOPHARM preferred-stock investment valued using Level 3 assumptions.
- As of June 30, 2018, the company owned approximately 52% of AquaBounty. A future reduction below 50% could require deconsolidation of AquaBounty.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Intrexon Corporation, while the request metadata identifies Precigen, Inc.
- Assess whether the company can reduce its operating cash burn of $58.1 million for the first six months and sustain funding after the July debt financing.
- Review the ASC 606 material weakness, the March 31, 2018 restatement and management’s remediation progress.
- Evaluate the sustainability and concentration of collaboration revenue, including the decline in revenue from major counterparties and the $193.9 million deferred-revenue balance.
- Analyze the terms, conversion mechanics, cash-settlement exposure and potential dilution associated with the $200 million convertible notes and related share-lending agreement.
- Monitor the SEC investigation, XY litigation, joint-venture funding commitments and other contingent obligations.
- Test the valuation sensitivity of Level 3 preferred-stock investments and the effect of market-price changes on reported earnings.