Business Context and Reporting Period
This Form 10-Q covers Intrexon Corporation, including its wholly owned subsidiary Precigen, for the quarter and nine months ended September 30, 2018. The filing was signed November 8, 2018. The company uses synthetic biology technologies across healthcare, food, energy, environmental and industrial applications, with additional operations in reproductive technologies, agricultural products, insect control and aquaculture. The filing does not identify Precigen, Inc. as the registrant; the registrant is Intrexon Corporation.
Financial Performance and Position
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Total revenue | $32.4 million | $46.0 million | $117.4 million | $154.0 million |
| Operating loss | $(66.5) million | $(44.7) million | $(168.7) million | $(111.4) million |
| Net loss | $(58.7) million | $(40.8) million | $(173.0) million | $(92.9) million |
| Net loss attributable to Intrexon | $(57.3) million | $(39.7) million | $(168.9) million | $(89.8) million |
| Loss per share | $(0.44) | $(0.33) | $(1.31) | $(0.75) |
| Operating cash flow | Not separately provided | Not separately provided | $(86.9) million | $(69.8) million |
- Collaboration and licensing revenue was $14.3 million in the third quarter and $51.6 million for the nine months, down 49.1% and 42.2%, respectively. Product revenue declined 11.0% in the quarter and 8.7% year to date, while service revenue increased 4.4% and 6.6%.
- Research and development expense rose 23.1% in the quarter and 18.5% year to date to $44.9 million and $124.1 million, respectively. Selling, general and administrative expense was broadly flat.
- Approximate gross margin, calculated as revenue less cost of products and services divided by revenue, was 52.7% in the third quarter and 58.1% for the nine months, compared with approximately 67.4% and 69.2% in the comparable 2017 periods. These figures are derived from reported revenue and product/service cost data and are not a separately reported company metric.
- Cash and cash equivalents were $82.4 million and short-term investments were $164.2 million at September 30, 2018. Including restricted cash, cash, cash equivalents and restricted cash totaled $89.8 million.
- Total assets were $980.4 million and total liabilities were $425.0 million. Accumulated deficit was $990.1 million.
- Long-term debt was $183.1 million, including the carrying value of the 3.50% convertible senior notes. The notes had $200.0 million of principal, mature July 2023 and had a September 30 carrying value of $145.8 million. Total contractual debt principal and interest obligations were reported at $265.0 million, excluding the uncertain timing of AquaBounty royalty-based repayments.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 29.5% in the third quarter and 23.8% for the nine months, primarily because of lower collaboration and licensing revenue.
- The operating loss increased 48.5% in the quarter and 51.5% year to date. Net loss attributable to Intrexon increased 44.4% and 88.2%, respectively.
- Other income deteriorated substantially, reflecting fair-value declines in equity securities and preferred stock and higher interest expense after the convertible notes issuance. Other income and expense, net, changed from income of $6.1 million in the third quarter of 2017 to expense of $3.7 million in 2018, and from income of $27.6 million to expense of $13.9 million for the nine-month periods.
- Operating cash use increased by $17.0 million year to date. Investing cash use was $182.0 million, primarily reflecting purchases of short-term investments, while financing cash provided was $282.5 million from debt and equity offerings.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced deferred revenue by $26.5 million and increased accumulated deficit by $26.6 million. Reported 2018 collaboration revenue was $6.7 million lower for the nine-month period than it would have been without adoption.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash, short-term investments and expected receipts should fund operating expenses and capital expenditures for at least the next 12 months, but cautioned that estimates may prove incorrect and additional financing may be required.
- The company expects continued significant losses and substantial capital requirements. It has no assurance that it will achieve or maintain profitability.
- In September 2018, ActoBio issued $30.0 million of convertible promissory notes to a related party in connection with acquiring certain Harvest entities. The transaction generated $15.5 million of cash proceeds, eliminated $10.1 million of deferred revenue and resulted in an $8.7 million immediate in-process research and development expense.
- In October 2018, Precigen entered into a new license agreement with ZIOPHARM that replaced the prior ECC. Intrexon returned ZIOPHARM preferred shares valued at $158.1 million at September 30, 2018. Management expected a fourth-quarter earnings impact, but the final accounting effect was not determined in the filing. Future collaboration revenue and dividend income are expected to decline, while Intrexon gains greater development and commercialization control over specified programs.
- The company reported a material weakness in internal control over financial reporting related to ASC 606 adoption, including contract modifications, gross-versus-net presentation and measuring progress on performance obligations. The weakness resulted in a restatement of first-quarter 2018 financial statements. Management is using external technical accounting advisors and enhanced contract-review procedures as remediation.
- Remaining commitments included $75.8 million of operating leases, $8.8 million of purchase commitments, $15.1 million of remaining joint-venture capital commitments and $15.9 million of unincurred third-party research and development commitments.
- Trans Ova remains involved in patent and trade-secret litigation with XY, LLC; the ultimate royalty and litigation outcome remains uncertain. The SEC Division of Enforcement concluded its investigation in September 2018 without recommending enforcement action.
- Key risks include continued operating cash burn, debt service and potential cash settlement or repurchase obligations on the convertible notes, dilution and share-price pressure associated with the share lending agreement, regulatory and commercialization uncertainty, collaboration termination, fair-value volatility in strategic investments, litigation and cybersecurity risks.
Investor Verification Points
- Verify the registrant and corporate relationship between Intrexon Corporation and Precigen, Inc.
- Review the ASC 606 restatement, material weakness remediation and the effect of revenue-recognition judgments on deferred revenue and future revenue.
- Assess liquidity after recurring operating cash burn, planned research spending, lease and joint-venture commitments, and the July 2023 convertible-note maturity.
- Confirm the fourth-quarter accounting impact of returning the ZIOPHARM preferred shares and the expected reduction in collaboration and dividend revenue.
- Monitor collaboration concentration, particularly ZIOPHARM and related parties, and determine whether future product royalties or milestones are sufficiently probable to offset declining collaboration revenue.
- Evaluate the market value and volatility of strategic equity and preferred-stock investments, including the material Level 3 valuation exposure disclosed before the ZIOPHARM share retirement.