Filing Overview
The provided Form 10-Q is for Intrexon Corporation, not Precigen, Inc. It covers the quarter and nine months ended September 30, 2016, with unaudited consolidated results compared with the corresponding 2015 periods. Intrexon described its business as synthetic biology, collaboration and licensing activities, and product and service operations through subsidiaries including Trans Ova, Oxitec, Okanagan, ViaGen, Exemplar, AquaBounty and others. No commercialized products derived from Intrexon collaborations had been reported as of the filing date.
Financial Highlights
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $49.0 million | $53.4 million | $144.9 million | $132.1 million |
| Collaboration and licensing revenue | $30.6 million | $34.7 million | $82.1 million | $66.7 million |
| Product revenue | $9.3 million | $9.4 million | $28.7 million | $32.6 million |
| Service revenue | $8.7 million | $8.9 million | $33.3 million | $32.2 million |
| Operating loss | $(28.8) million | $(7.9) million | $(92.6) million | $(112.5) million |
| Net loss | $(30.0) million | $(39.0) million | $(145.4) million | $(54.7) million |
| Net loss attributable to Intrexon | $(29.0) million | $(38.2) million | $(142.5) million | $(51.8) million |
| Loss per share | $(0.24) | $(0.34) | $(1.21) | $(0.47) |
Approximate operating margin was negative 58.8% in Q3 2016 versus negative 14.8% in Q3 2015, and negative 63.9% for the first nine months of 2016 versus negative 85.1% in the prior-year period. These margins are not traditional gross margins because collaboration revenue has no directly comparable cost category in the filing.
Balance Sheet and Liquidity
- Cash and cash equivalents were $69.7 million at September 30, 2016, down from $135.8 million at December 31, 2015.
- Short-term and long-term investments totaled $211.0 million, compared with $208.0 million at year-end 2015. Total cash, cash equivalents and investments were approximately $280.7 million.
- Restricted cash was $7.0 million, deposited with the U.S. Treasury in connection with Trans Ova litigation.
- Total assets were $1.006 billion; total liabilities were $397.2 million; and total equity was $608.4 million.
- Deferred revenue increased to $322.4 million from $197.7 million, primarily reflecting upfront and milestone consideration not yet recognized as revenue.
- Debt was modest relative to liquidity: $8.4 million of long-term debt, including current maturities, and $0.5 million drawn on a subsidiary line of credit.
- Management stated that existing cash, investments, expected collaborator receipts, and product and service cash flows should fund operating and capital requirements for at least the next 12 months, although additional financing may eventually be required.
Cash Flow
| Cash flow | Nine months 2016 | Nine months 2015 |
|---|---|---|
| Operating activities | $(31.8) million | $23.3 million |
| Investing activities | $(45.1) million | $(257.3) million |
| Financing activities | $11.2 million | $331.4 million |
| Net change in cash | $(66.1) million | $98.0 million |
2016 investing uses included $20.2 million of capital expenditures, $9.4 million invested in affiliates and $7.2 million paid for the Old EnviroFlight asset acquisition. Financing cash flow primarily reflected $18.2 million from option exercises, partially offset by deferred consideration payments.
Material Changes Versus Prior Period
- Nine-month revenue increased 9.7%, led by a 23.2% increase in collaboration and licensing revenue. Q3 revenue declined 8.2% because of lower collaboration and licensing revenue.
- Nine-month operating expenses declined 2.9%, but the comparison benefited from a $59.6 million stock-based payment for the MD Anderson license recorded in 2015. Excluding that unusual item, 2016 operating costs were materially higher.
- Research and development expense decreased 31.3% for the nine months because of the 2015 MD Anderson charge, while Q3 research and development expense increased 34.4% as programs advanced and acquired operations expanded.
- Selling, general and administrative expense increased 43.9% for the nine months, driven by personnel, Third Security service fees paid in shares, legal and professional costs, acquisition-related operating costs and $4.2 million of XY litigation expense.
- Other income and expense deteriorated sharply for the nine months, from $65.1 million of net other income in 2015 to $39.1 million of net expense in 2016. The 2015 period included an $81.4 million gain on the distribution of ZIOPHARM shares to Intrexon shareholders and favorable equity-security valuation changes.
- The company received ZIOPHARM preferred stock valued at $120.0 million in exchange for amendments to two collaboration agreements. The amendments reduced Intrexon's royalty rate on certain products from 50% to 20%. The preferred stock was valued at $123.7 million at September 30, 2016, including dividends, using Level 3 valuation techniques.
- New 2016 collaborations included Exotech Bio, Relieve Genetics, Intrexon T1D Partners, AD Skincare, Genten Therapeutics and CRS Bio. The company also acquired substantially all assets of Old EnviroFlight and formed a 50%-owned joint venture with Darling Ingredients.
Outlook, Risks and Unusual Items
- Management expected continued significant losses and stated that the company had never generated royalty revenue from collaborator product sales and might never achieve profitability.
- Future revenue depends on new collaborations, program advancement, milestone payments, reimbursement of research and development costs, product and service sales, regulatory approvals and eventual commercialization by collaborators.
- At least $31.0 million of remaining joint-venture capital commitments existed at September 30, 2016, subject to conditions and limitations. Additional research and development commitments totaled $8.5 million.
- Contractual obligations included $48.8 million of operating leases, $8.7 million of deferred consideration, $6.4 million of scheduled long-term debt and $3.8 million of contingent consideration. These items exclude uncertain commitments such as the $2.0 million AquaBounty royalty-based financing balance and potential contingent payments.
- Trans Ova litigation resulted in a $6.1 million award to XY, partially offset by a $0.5 million award to Trans Ova. The net damages, including prejudgment interest, were placed in restricted cash pending appeals. The ultimate liability remained uncertain.
- The company faced a consolidated shareholder securities class action and a shareholder derivative action concerning the Third Security services arrangement. Outcomes could not be predicted.
- Equity securities and preferred stock exposed the company to substantial market, liquidity and valuation risk. Approximately 37% of consolidated assets were measured at fair value on a recurring basis, including 12% using Level 3 valuations.
- In November 2016, after the reporting date, Intrexon agreed, subject to conditions, to purchase $25.0 million of AquaBounty shares and announced an intended special stock dividend of some AquaBounty shares. The company expected to remain AquaBounty's majority owner.
Investor Verification Priorities
- Confirm that the filing and issuer are correctly identified: the supplied filing is Intrexon Corporation's 2016 Form 10-Q, not a Precigen, Inc. filing.
- Reconcile the sustainability and collectability of the $322.4 million deferred-revenue balance and the concentration of collaboration revenue among major counterparties, particularly ZIOPHARM.
- Assess cash burn, capital expenditures, joint-venture commitments and the timing of any need for equity or debt financing.
- Review the valuation assumptions and liquidity restrictions for the $123.7 million ZIOPHARM preferred-stock investment and other collaborator securities.
- Monitor the XY litigation appeal, shareholder lawsuits, derivative action and related restricted cash.
- Evaluate regulatory and commercialization milestones for subsidiaries and collaborators, since the filing reported no commercialized products derived from Intrexon collaborations.