PRECIGEN, INC. quarterly report, Q3 FY2019

Business Context and Reporting Period

This Form 10-Q was filed by Intrexon Corporation, not Precigen, Inc., for the quarter and nine months ended September 30, 2019. Precigen was a wholly owned, clinical-stage biopharmaceutical subsidiary and a separately reported segment. The company used synthetic biology across healthcare, food, energy, environmental, and industrial applications, with no commercialized products derived directly or through collaborations as of the filing date.

In April 2019, management realigned the business around healthcare, cost reductions, partnering, potential asset sales, and greater control over product development. Reportable segments became Precigen, MBP, Fine Chemicals, Okanagan, and Trans Ova, plus All Other.

Key Financial Metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Total revenue	$23.0 million	$32.4 million	$82.4 million	$117.4 million
Operating loss	$(48.6) million	$(66.5) million	$(144.7) million	$(168.7) million
Net loss	$(53.6) million	$(58.7) million	$(154.7) million	$(173.0) million
Net loss attributable to Intrexon	$(53.6) million	$(57.3) million	$(153.1) million	$(168.9) million
Loss per share	$(0.35)	$(0.44)	$(1.00)	$(1.31)
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$(103.8) million	$(86.9) million

Q3 revenue mix included collaboration and licensing revenue of $6.2 million, product revenue of $5.9 million, service revenue of $9.9 million, and other revenue of $1.1 million.
Gross margin percentages were not clearly provided in the filing. Management stated that product gross margin declined because of fewer products sold, while service gross margin was broadly consistent year over year.
Research and development expense was $31.5 million in Q3 and $99.1 million for the nine-month period. SG&A expense was $24.7 million in Q3 and $79.8 million for nine months.
Segment Adjusted EBITDA was $(33.2) million in Q3 and $(102.2) million for nine months, excluding specified items and cash outflows for capital expenditures and affiliate investments.

Liquidity, Debt, and Balance Sheet

At September 30, 2019, cash and cash equivalents were $44.4 million and short-term investments were $45.3 million, for total cash, cash equivalents, and short-term investments of $89.7 million.
Cash, cash equivalents, and restricted cash declined to $44.8 million from $110.2 million at December 31, 2018.
Total assets were $604.9 million and total liabilities were $376.5 million. Total equity was $228.4 million, compared with $378.7 million at year-end 2018.
Long-term debt was $215.5 million, including $200.0 million principal amount of 3.50% convertible senior notes due 2023 and $30.0 million of related-party ActoBio convertible notes due in 2020. The debt carrying value was $215.5 million before the current portion presentation.
Lease liabilities totaled $44.4 million following adoption of ASC 842, with $6.2 million classified as current.
The company reported an accumulated deficit of approximately $1.5 billion and stated that operating losses and negative cash flows were expected to continue.
Management concluded that substantial doubt existed regarding the company’s ability to continue as a going concern for one year after issuance of the financial statements. Additional funding was expected through asset monetization, licensing and collaboration agreements, equity or debt financing, and cost reductions.

Material Changes Versus the Prior Comparable Period

Total revenue declined 29.0% in Q3 and 29.8% for the first nine months. Collaboration and licensing revenue fell 56.8% in Q3 and 58.8% for nine months, primarily because the company reacquired rights previously licensed to ZIOPHARM, Ares Trading, and certain Harvest entities, reducing related reimbursement and deferred-revenue recognition.
Product revenue declined 14.3% in Q3 and 21.3% for nine months, primarily due to lower demand for pregnant cows, calf products, and cloned products. Service revenue was relatively stable.
Operating expenses declined 27.6% in Q3 and 20.6% for nine months. The reductions reflected lower R&D costs, including the absence of a $8.7 million in-process research and development charge recorded in Q3 2018, and lower SG&A costs from reduced compensation and stock-based compensation.
Operating and net losses improved year over year, but cash used in operations increased from $86.9 million to $103.8 million for the nine months because of clinical-program spending and reduced reimbursement from formerly partnered programs.
In April 2019, AquaBounty was deconsolidated after an offering reduced Intrexon’s contractual control. Intrexon retained approximately 38% ownership and recorded a $2.6 million deconsolidation loss for the nine-month period.
In October 2019, after the reporting date, Intrexon agreed to sell its AquaBounty shares to an affiliate of Third Security for $21.6 million, recognizing a $5.3 million gain in the fourth quarter.
The company adopted lease accounting under ASC 842 on January 1, 2019, recording approximately $43.5 million of right-of-use assets and $45.5 million of lease liabilities at adoption.

Guidance, Outlook, Risks, and Unusual Items

No formal revenue or earnings guidance was provided. Management expected continuing operating losses, negative cash flows, increased spending on proprietary healthcare programs, and continued reliance on financing, partnering, licensing, and asset sales.
Management stated that the proposed investment transaction involving the methane bioconversion platform was deferred while additional investors were pursued; there was no assurance that the transaction would close.
The company had contractual obligations of approximately $374.8 million, including operating leases, purchase commitments, convertible debt, interest, other debt, and contingent consideration. It also disclosed $14.2 million of remaining joint-venture capital commitments and $15.9 million of unincurred third-party R&D commitments.
Trans Ova remained involved in litigation with XY, LLC involving semen-sorting patents and royalties. A district court had increased royalty rates retroactively, Trans Ova paid $5.8 million into the court registry, and XY claimed more than $1.0 million in additional back royalties. The matter remained subject to appeal and further proceedings.
The company recorded $0.6 million of impairment losses in Q3 and nine months, including goodwill and property, plant, and equipment impairments associated with closing two reporting units.
Equity securities were carried at fair value, exposing earnings to market volatility. The company reported a $3.7 million Q3 unrealized depreciation on its AquaBounty investment and a $2.1 million nine-month unrealized appreciation.
Potential future equity or convertible-debt financing could dilute shareholders. The company also warned that asset sales, cost reductions, or business realignment could impair growth, delay development, or increase costs.

Most Important Facts an Investor Should Verify

Confirm the requested issuer: the supplied filing is an Intrexon Corporation Form 10-Q, although the request identifies Precigen, Inc.
Assess the going-concern disclosure and whether subsequent financings, asset sales, or strategic transactions provided sufficient liquidity.
Review the maturity and conversion terms of the $200.0 million convertible notes due 2023 and the related-party convertible obligations due in 2020 and 2021.
Evaluate the sustainability of revenue after the substantial decline in collaboration and licensing revenue and the company’s shift toward internally funded healthcare programs.
Verify the October 2019 AquaBounty sale, the reported $5.3 million gain, and its effect on liquidity and investment exposure.
Monitor the XY litigation, royalty calculations, appeals, and any additional payment obligations.
Reconcile segment performance, cash use, capital commitments, and potential impairment charges following the April 2019 realignment.