Business Context and Reporting Period
The filing is an unaudited Form 10-Q for Intrexon Corporation, the entity identified in the source text, for the quarter and nine months ended September 30, 2017. The request metadata identifies Precigen, Inc.; the filing itself does not use that name. Intrexon develops synthetic-biology technologies through exclusive channel collaborations, licensing arrangements, joint ventures and acquisitions, and also operates product and service businesses including bovine reproductive technologies, genetic preservation, biological insect control, specialty produce and aquaculture. The company stated that no commercialized products had yet been derived from its collaborations.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $46.0 million | $49.0 million | $154.0 million | $144.9 million |
| Operating loss | $(44.7) million | $(28.8) million | $(111.4) million | $(92.6) million |
| Net loss | $(40.8) million | $(30.0) million | $(92.9) million | $(145.4) million |
| Net loss attributable to Intrexon | $(39.7) million | $(29.0) million | $(89.8) million | $(142.5) million |
| Loss per share | $(0.33) | $(0.24) | $(0.75) | $(1.21) |
| Operating margin | (97.2%) | (58.8%) | (72.4%) | (63.9%) |
| Net margin | (88.8%) | (61.3%) | (60.3%) | (100.3%) |
Revenue mix for the nine months included collaboration and licensing revenue of $89.4 million, product revenue of $25.8 million, service revenue of $37.9 million and other revenue of $0.9 million. Research and development expense was $104.7 million and selling, general and administrative expense was $113.3 million.
For the nine months, operating cash flow was $(70.3) million, compared with $(31.8) million in the prior-year period. Investing cash flow was $80.4 million, primarily reflecting $136.3 million of investment maturities, partially offset by $32.7 million of capital expenditures, $14.2 million for an aquaculture facility and $10.6 million of investments in joint ventures. Financing cash flow was $(9.4) million. Cash and cash equivalents increased by $1.6 million to $64.2 million.
At September 30, 2017, the company had $44.5 million of short-term investments, $6.99 million of restricted cash and $108.7 million of cash, cash equivalents and short-term investments in total. Total assets were $898.3 million, total liabilities were $345.1 million and total equity was $553.2 million. Deferred revenue was $276.3 million, including $228.0 million classified as long term.
Debt was relatively limited compared with total assets: $8.1 million of long-term debt, including current maturities, and $0.2 million outstanding under lines of credit. The company reported an accumulated deficit of $820.6 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 6.1%, while nine-month revenue increased 6.2%. Nine-month collaboration and licensing revenue increased 8.8%, and service revenue increased 13.8%, partially offset by a 10.2% decline in product revenue.
- Third-quarter operating loss widened by $15.9 million, primarily because research and development expense increased 25.6% and SG&A increased 16.2%. Nine-month operating loss widened by $18.8 million.
- Research and development spending increased by $21.4 million for the nine months, reflecting higher personnel, laboratory, consulting, depreciation and facility costs, including costs associated with expanding platforms and supporting collaborators.
- Net loss improved by $52.5 million for the nine months, largely because the prior-year period included $45.4 million of investment depreciation, while 2017 included $9.2 million of net investment appreciation and higher dividend and interest income. This improvement did not reflect positive operating cash flow.
- In June 2017, Intrexon acquired GenVec for total consideration of $17.6 million, including shares, warrants and contingent consideration, and recorded $4.9 million of goodwill and $14.0 million of developed technology.
- In January 2017, the company distributed 1.8 million AquaBounty shares valued at $22.4 million to shareholders. At September 30, 2017, it still owned approximately 58% of AquaBounty.
- Deferred revenue declined from $310.1 million at December 31, 2016 to $276.3 million at September 30, 2017, reflecting revenue recognition and other changes in contract balances.
- The Harvest commitment period terminated in September 2017; existing Harvest-sponsored collaborations were not affected.
Guidance, Outlook, Risks and Unusual Items
Management stated that the company expects to continue incurring significant losses and may never achieve profitability. It also expects substantial future capital requirements and increasing research and development and SG&A expenses. Management believed that existing liquidity, expected collaborator and product/service receipts, and potential preferred-stock financing would fund operating and capital requirements for at least the next 12 months, but cautioned that estimates could prove incorrect.
In October 2017, after the reporting date, the company entered into a preferred-stock facility permitting issuance of up to $100 million of Series A Redeemable Preferred Stock to an affiliate of Third Security. The securities would accrue an 8% dividend, have preferential rights over common stock in certain circumstances, and could be redeemable by the holder after December 31, 2020. Conversion requires shareholder and regulatory approval. This facility creates potential dilution, preferred claims and future cash-redemption risk.
Key commitments included $64.4 million of operating leases, $10.6 million of purchase commitments, $19.2 million of remaining joint-venture capital commitments and $9.5 million of unincurred research and development commitments. Contingent consideration liabilities were $2.9 million. AquaBounty also had $2.1 million of royalty-based financing with repayment dependent on future commercialization and regulatory developments.
Material risks included dependence on collaborators for product development, regulatory approval and commercialization; volatility in equity and preferred-stock investments; continuing operating losses and negative operating cash flow; litigation and intellectual-property disputes; customer-demand variability in product businesses; dilution or senior claims from future financing; and significant influence by Chairman and CEO Randal J. Kirk, who beneficially owned approximately 47% of the voting stock.
Trans Ova remained involved in patent and licensing litigation with XY, with appeals pending and possible changes to damages or licensing obligations. Shareholder derivative litigation remained pending, and the SEC Division of Enforcement was conducting an investigation relating to issues the company believed concerned those matters. Management did not expect these matters to have a material adverse effect, but acknowledged that outcomes were uncertain.
Most Important Facts to Verify
- Confirm the requested issuer identity: the supplied filing is for Intrexon Corporation, not an entity named Precigen, Inc.
- Assess whether the company can reduce its substantial operating cash burn while continuing high research and development investment.
- Review the quality and timing of the $276.3 million deferred-revenue balance and the concentration of collaboration revenue among major counterparties.
- Evaluate the liquidity impact, dilution potential and redemption terms of the post-quarter-end $100 million preferred-stock facility.
- Monitor regulatory approvals and commercialization progress for the company’s and collaborators’ products, particularly AquaBounty and other acquired or partnered programs.
- Review the resolution and potential financial exposure from the XY litigation, shareholder derivative actions and SEC investigation.
- Consider the sensitivity of reported earnings and equity to fair-value changes in investments, including $148.5 million of Level 3 preferred-stock investments.