Business Context and Reporting Period
This Form 10-Q covers Intrexon Corporation for the quarter ended March 31, 2018. The request identifies Precigen, Inc.; however, the filing registrant is Intrexon Corporation, with Precigen described as a wholly owned subsidiary formed effective January 1, 2018 to hold substantially all gene- and cell-therapy assets.
Intrexon develops synthetic-biology technologies across health, food, agriculture, energy, environmental and industrial applications. Its operations include collaboration and licensing programs, research and development, bovine reproductive products and services, biological insect control, specialty produce and aquaculture. The filing states that no commercialized products had yet been derived from its collaborations.
Financial Metrics
| Metric | Three Months Ended March 31, 2018 | Prior Comparable Period |
|---|---|---|
| Total revenue | $43.8 million | $53.7 million |
| Collaboration and licensing revenue | $24.0 million | $33.1 million |
| Product revenue | $7.2 million | $8.1 million |
| Service revenue | $12.2 million | $12.0 million |
| Operating loss | $48.5 million | $31.4 million |
| Net loss | $43.2 million | $32.4 million |
| Net loss attributable to Intrexon | $42.0 million | $31.4 million |
| Loss per share, basic and diluted | $0.33 | $0.26 |
| Net cash used in operating activities | $29.9 million | $24.7 million |
Cost of products and services was $15.3 million, implying gross profit of approximately $28.5 million and a consolidated gross margin of approximately 65%. Operating margin was approximately negative 111%, reflecting substantial research and development and selling, general and administrative costs.
- Research and development expense was $37.3 million, up 9.0% year over year.
- Selling, general and administrative expense was $39.7 million, up 13.1%.
- Other income, net was $3.6 million, including $5.5 million of interest and dividend income, partly offset by unrealized investment depreciation and other expenses.
- Equity in net loss of affiliates was $2.5 million, compared with $4.9 million in the prior period.
- Income tax benefit was $4.1 million, compared with $0.5 million in the prior-year quarter.
- Cash, cash equivalents and restricted cash totaled $127.4 million at March 31, 2018, including $119.9 million of cash and cash equivalents and $7.4 million of restricted cash.
- Total assets were $895.7 million and total equity was $571.4 million at quarter-end.
- Total debt was $8.2 million, including $0.3 million drawn under lines of credit and $7.9 million of long-term debt. The company had no balance outstanding on Trans Ova's $5.0 million revolving facility.
- Deferred revenue was $263.4 million, predominantly related to collaboration and licensing arrangements.
- The company held $166.1 million of preferred-stock investments, primarily the ZIOPHARM preferred stock investment, which is valued using significant unobservable inputs.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 18.4%, primarily because collaboration and licensing revenue fell 27.3%, reflecting lower research and development services for certain ECCs.
- Product revenue decreased 12.0%, primarily due to lower demand and sales prices for cows and live calves. Service revenue increased 1.8% due to higher demand for bovine in-vitro-fertilization cycles.
- Operating loss increased 54.5% as revenue declined while research and development and SG&A expenses increased.
- Net loss attributable to Intrexon increased 33.7%, and loss per share increased from $0.26 to $0.33.
- Operating cash use increased 21.1% to $29.9 million.
- January 2018 financing generated $82.4 million of net proceeds from the issuance of 6.9 million common shares. Shares outstanding increased to 129.2 million at March 31, 2018 from 122.1 million at December 31, 2017.
- Intrexon adopted ASC 606 using the modified retrospective approach. The adoption produced a $40.4 million cumulative reduction to accumulated deficit and increased deferred revenue on a net basis. Reported first-quarter collaboration revenue was $1.6 million higher than it would have been without ASC 606.
- The company purchased an additional $5.0 million of AquaBounty common stock in January 2018, while its ownership declined from approximately 58% to approximately 53% because of AquaBounty's public offering.
- The S&I Ophthalmic joint venture was dissolved, and the company received $2.6 million. The OvaXon ECC was terminated in March 2018, with dissolution discussions continuing.
Outlook, Commentary, Risks and Unusual Items
Management expects significant losses and negative operating cash flow to continue for the foreseeable future and stated that the company may never achieve or maintain profitability. Management believes available cash, expected collaborator receipts, product and service receipts, and potential funding under its $100 million preferred-stock facility will fund operating and capital requirements for at least the next 12 months. This assessment depends on assumptions that may prove incorrect.
- Management is shifting from a primarily ECC-based model toward joint ventures, internally developed programs, acquisitions and structures providing greater control and ownership, which may increase capital requirements and execution risk.
- Remaining joint-venture capital contribution commitments were $17.3 million. Additional research and development commitments were $11.1 million, and purchase commitments were $15.1 million.
- Operating lease obligations totaled $71.7 million. Aggregate contractual obligations presented in the MD&A totaled $93.2 million, excluding certain uncertain or contingent obligations.
- Intrexon had approximately $930.2 million of accumulated deficit and continued to depend on external financing, collaborator payments and subsidiary revenue.
- An SEC Division of Enforcement investigation was ongoing. The company was cooperating voluntarily and stated that the outcome could not be predicted.
- Trans Ova remains involved in patent and licensing litigation with XY, LLC. Appeals were pending, and potential damages or recoveries could change.
- The company is exposed to volatility in equity and preferred-stock investments. The aggregate cost basis of publicly traded common-stock investments was $102.6 million versus market value of $14.0 million at March 31, 2018.
- In May 2018, after quarter-end, the company began restructuring Oxitec's Brazilian manufacturing and distribution operations and anticipated one-time second-quarter charges of up to approximately $6.0 million for facility exit costs, asset write-downs and severance.
- Newly identified risks included cybersecurity breaches, information-system disruptions, regulatory actions, litigation and operational interruption.
Important Facts to Verify
- Confirm that the intended issuer is Intrexon Corporation rather than Precigen, Inc., and assess the effect of the Precigen reorganization on segment and subsidiary reporting.
- Review ASC 606 adoption effects, particularly the $40.4 million cumulative adjustment, the $263.4 million deferred-revenue balance and the concentration of revenue among collaborators.
- Assess cash-burn trends, capital requirements, joint-venture commitments and the availability and terms of the unused $100 million preferred-stock facility.
- Evaluate dilution from the January equity offering, stock-based compensation and outstanding options and restricted stock units.
- Examine valuation assumptions for the $166.1 million of Level 3 preferred-stock investments and sensitivity to collaborator performance and market conditions.
- Monitor the SEC investigation, XY litigation, OvaXon dissolution discussions and any related-party transactions involving Third Security.
- Verify the expected timing and amount of the anticipated Oxitec restructuring charges and whether additional operating changes follow.