Precigen(PGEN) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) This section presents the unaudited consolidated financial statements of Intrexon Corporation and its subsidiaries for the periods ended June 30, 2019, and December 31, 2018, including balance sheets, statements of operations, comprehensive loss, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, financial instruments, and operational changes Consolidated Balance Sheets The consolidated balance sheets show a decrease in total assets and total equity from December 31, 2018, to June 30, 2019, primarily driven by a reduction in cash, cash equivalents, and short-term investments, alongside an increase in total liabilities Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | June 30, 2019 | December 31, 2018 | Change (2019 vs 2018) | Percent Change | | :-------------------------- | :-------------- | :---------------- | :-------------------- | :------------- | | Total current assets | $183,164 | $285,483 | $(102,319) | -35.8% | | Total assets | $655,188 | $716,177 | $(60,989) | -8.5% | | Total current liabilities | $51,633 | $61,562 | $(9,929) | -16.1% | | Total liabilities | $375,965 | $337,455 | $38,510 | 11.4% | | Total equity | $279,223 | $378,722 | $(99,499) | -26.3% | - Cash and cash equivalents decreased from $102,768 thousand at December 31, 2018, to $58,162 thousand at June 30, 2019, a reduction of $44,606 thousand[18] - Short-term investments decreased from $119,688 thousand at December 31, 2018, to $67,641 thousand at June 30, 2019, a reduction of $52,047 thousand[18] Consolidated Statements of Operations The company experienced a significant reduction in total revenues and operating loss for both the three and six months ended June 30, 2019, compared to the same periods in 2018, primarily due to decreased collaboration and licensing revenues Consolidated Statements of Operations Highlights (Amounts in thousands) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change | Percent Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :----- | :------------- | | Total revenues | $35,986 | $45,275 | $(9,289) | -20.5% | | Operating loss | $(37,409) | $(49,735) | $12,326 | -24.8% | | Net loss attributable to Intrexon | $(38,766) | $(65,382) | $26,616 | -40.7% | | Net loss per share, basic & diluted | $(0.25) | $(0.51) | $0.26 | -51.0% | | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change | Percent Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :----- | :------------- | | Total revenues | $59,321 | $84,941 | $(25,620) | -30.2% | | Operating loss | $(96,112) | $(102,257) | $6,145 | -6.0% | | Net loss attributable to Intrexon | $(99,475) | $(111,547) | $12,072 | -10.8% | | Net loss per share, basic & diluted | $(0.65) | $(0.87) | $0.22 | -25.3% | - Collaboration and licensing revenues decreased by $8.4 million (48%) for the three months ended June 30, 2019, and by $22.2 million (60%) for the six months ended June 30, 2019, primarily due to reacquisition of rights from significant collaborators like ZIOPHARM and Ares Trading[223][240] - Selling, general and administrative (SG&A) expenses decreased by $12.9 million (38%) for the three months and $19.1 million (26%) for the six months ended June 30, 2019, mainly due to reduced share-based compensation expense[228][244] Consolidated Statements of Comprehensive Loss The consolidated statements of comprehensive loss show a decrease in comprehensive loss attributable to Intrexon for both the three and six months ended June 30, 2019, compared to the prior year, driven by a lower net loss and positive foreign currency translation adjustments Consolidated Statements of Comprehensive Loss Highlights (Amounts in thousands) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change | Percent Change | | :-------------------------------------- | :--------------------------- | :--------------------------- | :----- | :------------- | | Net loss | $(38,931) | $(66,829) | $27,898 | -41.7% | | Gain (loss) on foreign currency translation adjustments | $26 | $(12,153) | $12,179 | -100.2% | | Comprehensive loss attributable to Intrexon | $(38,647) | $(77,493) | $38,846 | -50.1% | | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change | Percent Change | | :-------------------------------------- | :--------------------------- | :--------------------------- | :----- | :------------- | | Net loss | $(101,067) | $(114,238) | $13,171 | -11.5% | | Gain (loss) on foreign currency translation adjustments | $311 | $(6,293) | $6,604 | -104.9% | | Comprehensive loss attributable to Intrexon | $(99,069) | $(117,737) | $18,668 | -15.9% | Consolidated Statements of Shareholders' and Total Equity Total equity decreased significantly from December 31, 2018, to June 30, 2019, primarily due to the net loss incurred during the period and the deconsolidation of a subsidiary, partially offset by stock-based compensation and shares issued for services Consolidated Statements of Shareholders' and Total Equity Highlights (Amounts in thousands) | Metric | December 31, 2018 | June 30, 2019 | Change | | :-------------------------- | :---------------- | :------------ | :----- | | Total Intrexon shareholders' equity | $362,855 | $279,223 | $(83,632) | | Noncontrolling interests | $15,867 | $— | $(15,867) | | Total equity | $378,722 | $279,223 | $(99,499) | - The deconsolidation of a subsidiary resulted in a decrease of $21,672 thousand in noncontrolling interests and total equity for the six months ended June 30, 2019[31] - Accumulated deficit increased from $(1,330,545) thousand at December 31, 2018, to $(1,430,020) thousand at June 30, 2019, reflecting the net loss[31] Consolidated Statements of Cash Flows The company experienced a significant net decrease in cash, cash equivalents, and restricted cash for the six months ended June 30, 2019, primarily due to increased cash used in operating activities, partially offset by net cash provided by investing activities Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change | | :-------------------------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash used in operating activities | $(76,637) | $(58,058) | $(18,579) | | Net cash provided by (used in) investing activities | $18,565 | $(20,920) | $39,485 | | Net cash provided by financing activities | $6,894 | $88,946 | $(82,052) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(51,596) | $10,349 | $(61,945) | | Cash, cash equivalents, and restricted cash, End of period | $58,586 | $85,894 | $(27,308) | - Cash outflows from operations increased by $18.6 million in 2019 compared to 2018, driven by increased expenses for clinical programs and reduced reimbursements from key collaborations[258] - Investing activities shifted from a net use of cash in 2018 to a net provision of cash in 2019, primarily due to $52.8 million net proceeds from short-term investment maturities, partially offset by $25.4 million in property, plant, and equipment purchases[259] - Financing activities provided significantly less cash in 2019 ($6.6 million) compared to 2018 ($88.0 million), reflecting lower proceeds from public offerings[261][262] Notes to the Consolidated Financial Statements The notes provide detailed disclosures on the company's organization, significant accounting policies, financial instruments, debt, equity, and segment information, highlighting the company's synthetic biology focus, recent business realignment, and ongoing financial challenges including a going concern warning Note 1. Organization Intrexon Corporation focuses on synthetic biology to address disease, environmental challenges, and sustainable food/chemicals, operating through various wholly-owned subsidiaries like Precigen, ActoBio, Trans Ova, Oxitec, Okanagan, and Exemplar. A significant event was the deconsolidation of AquaBounty in April 2019, after a public offering reduced Intrexon's control - Intrexon Corporation uses synthetic biology to program biological systems for disease alleviation, environmental remediation, and sustainable food/industrial chemicals[42] - Key wholly-owned subsidiaries include Precigen (biopharmaceuticals), ActoBio Therapeutics (microbe-based biopharmaceuticals), Trans Ova Genetics (reproductive technologies), Oxitec (biological insect control), Okanagan Specialty Fruits (non-browning apples), and Exemplar Genetics (genetically engineered swine)[43][44][45][46][47] - AquaBounty Technologies, Inc. was deconsolidated on April 9, 2019, following a public offering that removed Intrexon's contractual control, resulting in a $2,648 thousand loss on deconsolidation and derecognition of $38,682 thousand in net assets[48] Note 2. Summary of Significant Accounting Policies The company's financial statements are prepared under U.S. GAAP, with management expressing substantial doubt about its ability to continue as a going concern due to ongoing operating losses and insufficient capital. Key policies include fair value accounting for public equity securities, equity method for joint ventures, and the adoption of ASC 842 for operating leases, which resulted in the recognition of Right-of-Use (ROU) assets and lease liabilities - The company has incurred operating losses since inception and expects them to continue, leading to substantial doubt about its ability to continue as a going concern, as current cash and short-term investments are insufficient for the next 12 months[52] - The company accounts for equity securities in publicly traded companies using the fair value option, with unrealized gains and losses reported in the consolidated statements of operations[54] - Effective January 1, 2019, the company adopted ASC 842, recognizing ROU Assets of approximately $43,500 thousand and lease liabilities of approximately $45,500 thousand[67] - In April 2019, the company realigned its business into multiple reportable segments: Precigen, Methane Bioconversion Platform, Fine Chemicals, Okanagan, and Trans Ova, with corporate expenses unallocated[66] Note 3. Mergers and Acquisitions In September 2018, Intrexon's subsidiary ActoBio acquired 100% ownership of CRS Bio, Inc., Genten Therapeutics, Inc., and Relieve Genetics, Inc. (Harvest entities) from Harvest, a related party, by issuing $30,000 thousand in convertible promissory notes and receiving $15,500 thousand cash. This asset acquisition led to the write-off of $10,078 thousand in deferred revenue and immediate expensing of $8,721 thousand in in-process R&D - ActoBio acquired 100% ownership of CRS Bio, Inc., Genten Therapeutics, Inc., and Relieve Genetics, Inc. (Harvest entities) from Harvest in September 2018[76] - Consideration for the acquisition included $30,000 thousand in convertible promissory notes issued to Harvest and $15,500 thousand cash received[76] - The transaction resulted in a write-off of $10,078 thousand in deferred revenue and expensing of $8,721 thousand in in-process research and development[77] Note 4. Investments in Joint Ventures Intrexon has investments in several joint ventures, including Intrexon Energy Partners, Intrexon Energy Partners II, and EnviroFlight, primarily focused on bioconversion and animal feed. The company reacquired 100% ownership of Intrexon T1D Partners in November 2018, which was previously a joint venture for type 1 diabetes treatment, by issuing $18,970 thousand in common stock to investors - Intrexon has joint ventures such as Intrexon Energy Partners (methane bioconversion), Intrexon Energy Partners II (1,4-butanediol production), and EnviroFlight (animal/fish feed)[79][81][83] - As of June 30, 2019, Intrexon's remaining capital commitment to Intrexon Energy Partners was $4,568 thousand[79] - In November 2018, Intrexon reacquired 100% ownership of Intrexon T1D Partners by issuing $18,970 thousand in common stock, leading to a write-off of $8,517 thousand in deferred revenue and expensing of $10,453 thousand in in-process R&D[86] Note 5. Collaboration and Licensing Revenue Collaboration and licensing revenues are recognized over the performance period, typically combining multiple promises into a single obligation. Total collaboration and licensing revenues decreased significantly for both the three and six months ended June 30, 2019, primarily due to reacquisition of rights from key collaborators. A new collaboration with Surterra Holdings, Inc. was initiated in June 2019, providing a $10,000 thousand cash payment and $4,530 thousand in common stock as upfront consideration - Collaboration and licensing revenues decreased by $8,353 thousand (47.9%) for the three months ended June 30, 2019, and by $22,231 thousand (59.6%) for the six months ended June 30, 2019, compared to the prior year[24][237] - The decrease was primarily due to the reacquisition of rights from ZIOPHARM Oncology, Inc. and Ares Trading S.A., which eliminated or substantially reduced associated revenues[223][240] - In June 2019, a new Exclusive Product Collaboration with Surterra Holdings, Inc. was executed, providing a $10,000 thousand cash payment and $4,530 thousand in common stock as upfront consideration[93] Deferred Revenue (Amounts in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------- | :-------------- | :---------------- | | Collaboration and licensing agreements | $78,265 | $63,284 | | Prepaid product and service revenues | $2,523 | $2,933 | | Other | $2,347 | $3,547 | | Total | $83,135 | $69,764 | | Current portion | $16,593 | $15,554 | | Long-term portion | $66,542 | $54,210 | Note 6. Short-term Investments The company's short-term investments, classified as available-for-sale, primarily consist of U.S. government debt securities and certificates of deposit. As of June 30, 2019, the aggregate fair value was $67,641 thousand, with minor unrealized gains, and all investments were due within one year Available-for-Sale Investments (Amounts in thousands) | Investment Type | Amortized Cost (June 30, 2019) | Aggregate Fair Value (June 30, 2019) | Amortized Cost (Dec 31, 2018) | Aggregate Fair Value (Dec 31, 2018) | | :------------------------ | :----------------------------- | :----------------------------------- | :---------------------------- | :---------------------------------- | | U.S. government debt securities | $67,256 | $67,301 | $119,401 | $119,340 | | Certificates of deposit | $340 | $340 | $348 | $348 | | Total | $67,596 | $67,641 | $119,749 | $119,688 | - As of June 30, 2019, all available-for-sale investments were due within one year based on their contractual maturities[100] Note 7. Fair Value Measurements The company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy. As of June 30, 2019, total financial assets measured at fair value were $89,519 thousand, with a significant portion in Level 2 (U.S. government debt securities) and Level 3 (equity securities, including AquaBounty retained interest). The fair value of Convertible Notes was $112,000 thousand, classified as Level 2 Fair Value Hierarchy of Financial Assets (Amounts in thousands) | Asset Category | Level 1 (June 30, 2019) | Level 2 (June 30, 2019) | Level 3 (June 30, 2019) | Total (June 30, 2019) | | :------------------------ | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | U.S. government debt securities | $— | $67,301 | $— | $67,301 | | Equity securities | $1,196 | $266 | $20,041 | $21,503 | | Other | $— | $468 | $247 | $715 | | Total | $1,196 | $68,035 | $20,288 | $89,519 | - The fair value of the Convertible Notes was approximately $112,000 thousand as of June 30, 2019, and $141,000 thousand as of December 31, 2018, classified as Level 2[109] - The retained interest in deconsolidated AquaBounty contributed $14,239 thousand to Level 3 equity securities during the six months ended June 30, 2019[107] Note 8. Inventory Total inventory decreased from $21,447 thousand at December 31, 2018, to $18,192 thousand at June 30, 2019, with reductions across all categories including supplies, work in process, livestock, and feed Inventory Composition (Amounts in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :-------------- | :---------------- | | Supplies, embryos and other production materials | $2,962 | $4,729 | | Work in process | $4,893 | $4,391 | | Livestock | $9,462 | $10,167 | | Feed | $875 | $2,160 | | Total inventory | $18,192 | $21,447 | Note 9. Property, Plant and Equipment, Net Net property, plant and equipment decreased from $128,874 thousand at December 31, 2018, to $120,401 thousand at June 30, 2019. This reduction was primarily due to the deconsolidation of AquaBounty, which resulted in a $24,186 thousand decrease in PP&E Property, Plant and Equipment, Net (Amounts in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------- | :-------------- | :---------------- | | Total gross PP&E | $180,958 | $184,665 | | Accumulated depreciation and amortization | $(60,557) | $(55,791) | | Property, plant and equipment, net | $120,401 | $128,874 | - The deconsolidation of AquaBounty in April 2019 reduced net property, plant and equipment by $24,186 thousand[113] - Depreciation expense was $3,347 thousand for the three months and $6,920 thousand for the six months ended June 30, 2019[114] Note 10. Goodwill and Intangible Assets, Net Goodwill remained relatively stable at $149,916 thousand as of June 30, 2019, with minor foreign currency adjustments. Net intangible assets decreased from $129,291 thousand at December 31, 2018, to $112,526 thousand at June 30, 2019, primarily due to the deconsolidation of AquaBounty Goodwill and Intangible Assets, Net (Amounts in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :-------------- | :---------------- | | Goodwill | $149,916 | $149,585 | | Patents, developed technologies and know-how, net | $102,112 | $117,349 | | Customer relationships, net | $2,698 | $3,135 | | Trademarks, net | $2,386 | $3,459 | | In-process research and development | $5,330 | $5,348 | | Total intangible assets, net | $112,526 | $129,291 | - The deconsolidation of AquaBounty in April 2019 resulted in a reduction of $11,567 thousand in net intangible assets[119] - Amortization expense for intangible assets was $2,766 thousand for the three months and $5,770 thousand for the six months ended June 30, 2019[119] Note 11. Lines of Credit and Long-Term Debt The company's long-term debt, net of current portion, was $212,479 thousand as of June 30, 2019, primarily consisting of $200,000 thousand in 3.50% convertible senior notes due 2023. The deconsolidation of AquaBounty reduced long-term debt by $4,030 thousand. The company also has lines of credit and other convertible notes, including ActoBio Notes and the Merck Note Long-Term Debt (Amounts in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------- | :-------------- | :---------------- | | Convertible debt | $208,376 | $203,391 | | Notes payable | $4,320 | $4,551 | | Other | $251 | $3,852 | | Total long-term debt | $212,947 | $211,794 | | Less current portion | $(468) | $(559) | | Long-term debt, less current portion | $212,479 | $211,235 | - The 3.50% convertible senior notes due 2023 have an outstanding principal balance of $200,000 thousand and an effective interest rate of 11.02%[123][128] - Total interest expense related to the Convertible Notes was $4,069 thousand for the three months and $8,032 thousand for the six months ended June 30, 2019, including non-cash interest[129] - The deconsolidation of AquaBounty in April 2019 reduced long-term debt by $4,030 thousand[122] Note 12. Income Taxes The company recognized income tax benefits of $525 thousand and $1,103 thousand for the three and six months ended June 30, 2019, respectively. It has significant U.S. federal operating and capital loss carryforwards of approximately $516,400 thousand and foreign loss carryforwards of $162,900 thousand, most of which do not expire, but these are largely offset by a valuation allowance due to a history of net losses Income Tax Benefit (Amounts in thousands) | Period | Income Tax Benefit | | :--------------------------- | :----------------- | | 3 Months Ended June 30, 2019 | $525 | | 3 Months Ended June 30, 2018 | $1,127 | | 6 Months Ended June 30, 2019 | $1,103 | | 6 Months Ended June 30, 2018 | $5,213 | - The company has U.S. federal operating and capital loss carryforwards of approximately $516,400 thousand and federal and state R&D tax credits of approximately $8,800 thousand[135] - Foreign subsidiaries have loss carryforwards of approximately $162,900 thousand, most of which do not expire[135] - Net deferred tax assets are offset by a valuation allowance due to the company's history of net losses and inability to confirm recovery of tax benefits[134] Note 13. Shareholders' Equity Shareholders' equity was impacted by public offerings, a share lending agreement, and the deconsolidation of AquaBounty. In March 2019, AquaBounty completed a public offering yielding $6,611 thousand net proceeds, leading to its deconsolidation. The company's accumulated other comprehensive loss was $(28,206) thousand as of June 30, 2019 - In January 2018, Intrexon closed a public offering of 6,900,000 shares of common stock, generating net proceeds of $82,374 thousand[136] - Concurrently with Convertible Notes offering, Intrexon loaned 7,479,431 shares of common stock under a Share Lending Agreement, which met equity classification requirements[137][139] - In March 2019, AquaBounty completed a public offering, resulting in net proceeds of $6,611 thousand and Intrexon's deconsolidation of AquaBounty[140] Components of Accumulated Other Comprehensive Loss (Amounts in thousands) | Component | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :-------------- | :---------------- | | Unrealized gain (loss) on investments | $45 | $(61) | | Loss on foreign currency translation adjustments | $(28,251) | $(28,551) | | Total accumulated other comprehensive loss | $(28,206) | $(28,612) | Note 14. Share-Based Payments Stock-based compensation expense for employees and nonemployees was $61 thousand for the three months and $9,115 thousand for the six months ended June 30, 2019. The company has multiple equity incentive plans, with 11,730,954 stock options and 2,271,277 RSUs outstanding under the 2013 Plan as of June 30, 2019. The CEO's base salary is paid in fully-vested common stock Stock-Based Compensation Expense (Amounts in thousands) | Period | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of products | $4 | $25 | $12 | $50 | | Cost of services | $52 | $79 | $117 | $156 | | Research and development | $1,882 | $2,376 | $3,727 | $5,634 | | Selling, general and administrative | $(1,877) | $6,366 | $5,259 | $14,368 | | Total | $61 | $8,846 | $9,115 | $20,208 | - As of June 30, 2019, there were 11,337,856 stock options and 2,271,277 RSUs outstanding under the 2013 Omnibus Incentive Plan[146] - The CEO's base salary of $200 thousand per month is paid in fully-vested shares of Intrexon common stock, subject to a three-year lock-up on resale[149] Note 15. Operating Leases The company leases facilities and equipment under operating leases, with ROU assets and lease liabilities recognized on the balance sheet. Total lease costs were $3,642 thousand for the three months and $7,216 thousand for the six months ended June 30, 2019. The weighted average remaining lease term is 8.98 years, with a weighted average discount rate of 11.35% Operating Lease Costs (Amounts in thousands) | Period | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | | Operating lease costs | $2,522 | $5,048 | | Short-term and variable lease costs | $1,120 | $2,168 | | Total lease costs | $3,642 | $7,216 | Maturities of Lease Liabilities (Amounts in thousands) | Year | Amount | | :--- | :----- | | 2019 | $4,352 | | 2020 | $10,088 | | 2021 | $9,445 | | 2022 | $8,646 | | 2023 | $7,274 | | 2024 | $7,139 | | Thereafter | $26,746 | | Total | $73,690 | | Present value adjustment | $(30,120) | | Total (present value) | $43,570 | - The weighted average remaining lease term is 8.98 years, and the weighted average discount rate is 11.35% as of June 30, 2019[151] Note 16. Commitments and Contingencies The company has outstanding contractual purchase commitments of $10,384 thousand, primarily for non-browning apple trees. Trans Ova Genetics is involved in ongoing patent infringement and licensing disputes with XY, LLC, which resulted in increased royalty rates and a payment of $5,801 thousand in May 2019 for recalculated back royalties, currently held in court registry pending dispute resolution - As of June 30, 2019, the company had outstanding contractual purchase commitments of $10,384 thousand, mainly for commercial non-browning apple trees[154] - Trans Ova Genetics is a defendant in a licensing and patent infringement suit by XY, LLC, with the district court increasing the royalty rate on standard sorted semen products to 18.75% and assigning a minimum royalty of $6.25 per straw/embryo, retroactive to February 2016[155] - Trans Ova remitted $5,801 thousand in May 2019 for recalculated royalties owed from February 2016 through Q1 2019, which XY, LLC deposited into the district court's registry due to an ongoing dispute over calculation[156] - Additional royalty expense of $267 thousand and $383 thousand was recorded for the three and six months ended June 30, 2019, respectively, related to the recalculation[158] Note 17. Related Party Transactions The company has significant related party transactions, including a Services Agreement with Third Security, LLC (whose CEO is also Intrexon's CEO), for which Intrexon issued 483,279 shares ($2,284 thousand value) and 839,993 shares ($4,362 thousand value) for the three and six months ended June 30, 2019, respectively. Other related party transactions involve equity interests in collaborators like Fibrocell Science, Inc. and Oragenics, Inc - Intrexon has a Services Agreement with Third Security, LLC, for professional services, with a fee of $800 thousand per month paid in fully-vested shares of Intrexon common stock[162] - For the three months ended June 30, 2019, Intrexon issued 483,279 shares valued at $2,284 thousand to Third Security; for the six months, 839,993 shares valued at $4,362 thousand[162] - The company holds preferred stock and convertible notes in Fibrocell Science, Inc., valued at $247 thousand and $128 thousand, respectively, as of June 30, 2019[166][167] - The investment in Oragenics, Inc. Series C preferred stock was concluded to have no value as of June 30, 2019[168] Note 18. Net Loss per Share Basic and diluted net loss per share attributable to Intrexon was $(0.25) for the three months and $(0.65) for the six months ended June 30, 2019. Potentially dilutive securities, including convertible debt, options, restricted stock units, and warrants, were excluded from diluted EPS calculations as they were anti-dilutive due to the net loss Net Loss per Share Attributable to Intrexon | Period | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss attributable to Intrexon | $(38,766) | $(65,382) | $(99,475) | $(111,547) | | Weighted average shares outstanding | 153,749,929 | 129,299,584 | 153,351,208 | 128,500,897 | | Net loss per share, basic and diluted | $(0.25) | $(0.51) | $(0.65) | $(0.87) | Anti-Dilutive Securities (Number of Shares) | Security Type | June 30, 2019 | June 30, 2018 | | :-------------- | :------------ | :------------ | | Convertible debt | 19,667,765 | — | | Options | 11,730,954 | 11,359,531 | | Restricted stock units | 2,271,277 | 1,033,084 | | Warrants | 133,264 | 133,264 | | Total | 33,803,260 | 12,525,879 | Note 19. Segments In April 2019, Intrexon realigned its business into five reportable segments: Precigen, Methane Bioconversion Platform, Fine Chemicals, Okanagan, and Trans Ova, with all other operations grouped into 'All Other.' Segment performance is evaluated using Segment Adjusted EBITDA, which excludes non-cash items and certain other expenses. Corporate expenses are not allocated to segments - The company realigned its business in April 2019, creating reportable segments: Precigen, Methane Bioconversion Platform, Fine Chemicals, Okanagan, and Trans Ova[174] - Segment Adjusted EBITDA is the primary measure of segment performance, defined as net loss before interest expense, income tax, depreciation and amortization, stock-based compensation, impairment losses, equity in net loss of affiliates, and recognition of previously deferred revenue, as well as cash outflows from capital expenditures and investments in affiliates[172][217] - Corporate expenses are not allocated to the segments and are managed at a consolidated level[217] Segment Adjusted EBITDA (Amounts in thousands) | Segment | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Precigen | $(7,467) | $(7,858) | $(14,836) | $(12,832) | | Methane Bioconversion Platform | $(9,188) | $(7,629) | $(17,214) | $(13,867) | | Fine Chemicals | $855 | $901 | $1,742 | $1,893 | | Okanagan | $(12,012) | $(6,280) | $(21,123) | $(11,451) | | Trans Ova | $4,932 | $2,096 | $2,706 | $(57) | | All Other | $(10,060) | $(10,178) | $(17,494) | $(22,034) | | Total Segment Adjusted EBITDA | $(32,940) | $(28,948) | $(66,219) | $(58,348) | Note 20. Subsequent Events On August 8, 2019, the company entered into an Investment and Contribution Agreement related to its Methane Bioconversion Platform (MBP) technology. Intrexon will contribute MBP assets and interests in Intrexon Energy Partners and Intrexon Energy Partners II to a newly formed LLC, and an investor will invest $60,000 thousand in three tranches. The closing is expected in Q3 2019 - On August 8, 2019, Intrexon entered an Investment and Contribution Agreement for its Methane Bioconversion Platform (MBP) technology[178] - Intrexon will contribute MBP assets and interests in Intrexon Energy Partners and Intrexon Energy Partners II to a new LLC[178] - An investor will invest $60,000 thousand in three tranches ($20,000 thousand each) on the closing date, eight-month anniversary, and sixteen-month anniversary[178] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, detailing its synthetic biology strategy, revenue sources, operating expenses, and liquidity challenges, including a going concern warning. It also discusses the impact of recent business realignment and legal proceedings Overview Intrexon is a synthetic biology leader applying engineering principles to biological systems for health, food, energy, and environment. The company's strategy has evolved from exclusive channel collaborations (ECCs) to greater control and ownership over development and commercialization, including acquisitions of product-focused ventures and a recent realignment into Intrexon Health and Intrexon Bioengineering units - Intrexon is a leader in synthetic biology, programming biological systems for disease alleviation, environmental remediation, and sustainable food/industrial chemicals[181] - The company's strategy has shifted from ECCs to relationships providing more control and ownership over development and commercialization, including reacquiring rights (e.g., ZIOPHARM, Ares Trading)[185][186] - In April 2019, operations were aligned into two units: Intrexon Health and Intrexon Bioengineering, to better deploy resources and focus on healthcare[189] - Primary wholly-owned operating subsidiaries include Precigen, ActoBio Therapeutics, Trans Ova Genetics, Okanagan Specialty Fruits, Oxitec Limited, and Exemplar Genetics[191][192][193][195][196][197] Financial Overview Intrexon has incurred significant losses since its inception and expects to continue doing so, with no significant revenues from product sales or royalties to date. The company's April 2019 business realignment, focusing on healthcare and potential asset sales, may lead to future impairment charges on goodwill and intangible assets - The company has incurred significant losses since inception and anticipates continued losses, with no significant revenues from product sales or royalties[200] - Efforts to focus the business and generate capital through partnering, asset sales, and cost reductions may result in identifying impairment indicators or recording impairment charges in future periods[201] Sources of Revenue Intrexon's revenues historically come from collaboration and licensing agreements (technology access fees, R&D reimbursements, milestones, royalties, sublicensing) and product/service sales (e.g., advanced reproductive technologies). Collaboration revenues are expected to decrease due to reacquisition of licensed rights, while future revenues depend on partnering mature programs and scaling new offerings - Collaboration and licensing revenues are derived from technology access fees, R&D reimbursements, milestone payments, and royalties, often received as cash or collaborator securities[202][203] - Product and service revenues primarily come from sales of advanced reproductive technologies, bovine embryo transfer, IVF, genetic preservation, sexed semen, and related livestock/embryos[205] - Collaboration revenues are expected to decrease considerably due to reacquisition of rights from collaborators in 2018[206] Cost of Products and Services Costs of products and services primarily include labor, supplies for embryo transfer and IVF, livestock, feed, and facility charges. Fluctuations in livestock and feed prices have not significantly impacted operating margins - Cost of products and services primarily includes labor, drugs and supplies for embryo transfer and IVF, livestock and feed, and facility charges[207] - Fluctuations in livestock and feed prices have not had a significant impact on operating margins[207] Research and Development Expenses Research and development expenses, recognized as incurred, consist of personnel costs, consultant fees, lab supplies, in-licensed technology, depreciation, amortization, and facility costs. These expenses are expected to increase with the development of proprietary programs and expansion of offerings, including potential M&A activities - R&D expenses include salaries and benefits, fees to consultants and contract research organizations, laboratory supplies, in-licensed technology rights, depreciation, amortization, and facility costs[208] - Total research and development expenses decreased by $7,531 thousand (17.9%) for the three months and $11,607 thousand (14.7%) for the six months ended June 30, 2019[24][237] - The decrease in 2018 included $5.3 million of one-time costs from closing an Oxitec research and development facility[209][226][243] - R&D expenses are expected to increase due to hiring additional personnel, increased consultant fees, lab supplies, and potential M&A activities[210] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses primarily cover personnel costs, facility expenses, insurance, and professional services. SG&A expenses decreased significantly for both the three and six months ended June 30, 2019, mainly due to reduced share-based compensation and other personnel costs - SG&A expenses primarily consist of salaries and related costs (including stock-based compensation), rent and utilities, insurance, accounting and legal services, and intellectual property maintenance[211] - SG&A expenses decreased by $12,944 thousand (37.6%) for the three months and $19,087 thousand (25.7%) for the six months ended June 30, 2019[24][237] - The decrease was primarily due to reduced share-based compensation expense from the reversal of previously recognized expense for unvested options and certain stock option grants becoming fully vested in 2018[228][244] Other Income (Expense), Net Other income (expense), net, includes unrealized appreciation/depreciation on equity securities and preferred stock, interest expense (expected to increase due to Convertible Notes), and interest/dividend income (expected to decrease due to ZIOPHARM preferred shares return). Total other expense, net, decreased significantly for both periods due to lower unrealized losses - Other income (expense), net, includes unrealized appreciation/depreciation in fair value of equity securities and preferred stock, interest expense, and interest/dividend income[213][214][215] - Total other expense, net, decreased by $13,371 thousand (97.8%) for the three months and $7,513 thousand (73.8%) for the six months ended June 30, 2019[24][237] - This decrease was primarily due to a reduction in unrealized losses on preferred stock following the return of ZIOPHARM preferred shares in October 2018, partially offset by increased interest expense from Convertible Notes[229][245] Equity in Net Income (Loss) of Affiliates Equity in net income (loss) of affiliates represents Intrexon's pro-rata share of the operating results of its equity method investments, such as joint ventures and Harvest-backed start-up entities, adjusted for basis differences - Equity in net income (loss) of affiliates is the company's pro-rata share of its equity method investments' operating results, adjusted for accretion of basis difference[216] - The company uses the equity method for investments in joint ventures and start-up entities backed by Harvest Intrexon Enterprise Fund I, LP, where it has significant influence but not control[216] Segment Performance Segment performance is measured using Segment Adjusted EBITDA, which is defined as net loss before interest expense, income tax, depreciation and amortization, stock-based compensation, impairment losses, equity in net loss of affiliates, and recognition of previously deferred revenue, as well as cash outflows from capital expenditures and investments in affiliates. Corporate expenses are not allocated to segments - Segment Adjusted EBITDA is the primary measure of segment performance[217] - Segment Adjusted EBITDA excludes non-cash items and certain other expenses to reflect underlying business performance[172] - Corporate expenses are not allocated to the segments and are managed at a consolidated level[217] Results of Operations The company's results of operations for the three and six months ended June 30, 2019, show a decrease in total revenues and net loss compared to the prior year, driven by reduced collaboration and licensing revenues and lower operating expenses, particularly SG&A. Segment performance varied, with Okanagan and Methane Bioconversion Platform showing increased losses due to investments and unpartnered programs, while Trans Ova improved due to reduced legal fees and capital expenditures Comparison of the three months ended June 30, 2019 and the three months ended June 30, 2018 For the three months ended June 30, 2019, total revenues decreased by 20.5% to $35,986 thousand, and net loss attributable to Intrexon decreased by 40.7% to $(38,766) thousand. Collaboration and licensing revenues fell by 47.9%, while product revenues decreased by 18.3%. Operating expenses, particularly SG&A, saw significant reductions Key Financial Changes (3 Months Ended June 30, 2019 vs. 2018) (Amounts in thousands) | Metric | 2019 | 2018 | Dollar Change | Percent Change | | :-------------------------- | :----- | :----- | :------------ | :------------- | | Total revenues | $35,986 | $45,275 | $(9,289) | -20.5% | | Collaboration and licensing revenues | $9,097 | $17,450 | $(8,353) | -47.9% | | Product revenues | $7,819 | $9,568 | $(1,749) | -18.3% | | Service revenues | $18,400 | $17,718 | $682 | 3.8% | | Total operating expenses | $73,395 | $95,010 | $(21,615) | -22.8% | | Research and development | $34,518 | $42,049 | $(7,531) | -17.9% | | Selling, general and administrative | $21,483 | $34,427 | $(12,944) | -37.6% | | Net loss attributable to Intrexon | $(38,766) | $(65,382) | $26,616 | -40.7% | - Precigen's segment performance was comparable, while Methane Bioconversion Platform's loss increased due to unpartnered programs. Okanagan's loss significantly increased due to orchard expansion and sales/marketing efforts. Trans Ova's performance improved due to lower SG&A and reduced capital expenditures[232][233][235][236] Comparison of the six months ended June 30, 2019 and the six months ended June 30, 2018 For the six months ended June 30, 2019, total revenues decreased by 30.2% to $59,321 thousand, and net loss attributable to Intrexon decreased by 10.8% to $(99,475) thousand. Collaboration and licensing revenues declined by 59.6%, and product revenues decreased by 24.2%. Operating expenses, particularly SG&A, also saw substantial reductions Key Financial Changes (6 Months Ended June 30, 2019 vs. 2018) (Amounts in thousands) | Metric | 2019 | 2018 | Dollar Change | Percent Change | | :-------------------------- | :----- | :----- | :------------ | :------------- | | Total revenues | $59,321 | $84,941 | $(25,620) | -30.2% | | Collaboration and licensing revenues | $15,067 | $37,298 | $(22,231) | -59.6% | | Product revenues | $12,676 | $16,720 | $(4,044) | -24.2% | | Service revenues | $29,783 | $29,965 | $(182) | -0.6% | | Total operating expenses | $155,433 | $187,198 | $(31,765) | -17.0% | | Research and development | $67,580 | $79,187 | $(11,607) | -14.7% | | Selling, general and administrative | $55,077 | $74,164 | $(19,087) | -25.7% | | Net loss attributable to Intrexon | $(99,475) | $(111,547) | $12,072 | -10.8% | - Precigen's loss increased due to resource allocation to proprietary cell and gene therapy programs and increased capital expenditures for lab expansion. Methane Bioconversion Platform's loss increased due to unpartnered programs. Okanagan's loss significantly increased due to orchard expansion and sales/marketing efforts. Trans Ova's performance improved due to lower SG&A and reduced capital expenditures, despite decreased product sales[248][249][251][252] Liquidity and Capital Resources Intrexon has an accumulated deficit of $1.4 billion and faces substantial doubt about its ability to continue as a going concern, with cash and short-term investments totaling $125.8 million as of June 30, 2019. Cash used in operating activities increased significantly, while cash from financing activities decreased. The company plans to address liquidity needs through equity/debt financings, asset sales, and cost reductions, which may impact business operations - As of June 30, 2019, the company had an accumulated deficit of $1.4 billion and cash, cash equivalents, and short-term investments totaling $125.8 million[253] - There is substantial doubt about the company's ability to continue as a going concern within one year due to recurring losses and insufficient capital[265] - Net cash used in operating activities increased to $(76,637) thousand for the six months ended June 30, 2019, from $(58,058) thousand in the prior year[255] - Net cash provided by financing activities decreased significantly to $6,894 thousand for the six months ended June 30, 2019, from $88,946 thousand in the prior year[255] - To support liquidity, the company may shift internal investments, sell assets/subsidiaries, reduce operating expenditures, or delay capital expenditures, which could negatively impact business continuity and development[266][267] Contractual Obligations and Commitments As of June 30, 2019, the company's total contractual obligations amounted to $374,411 thousand, primarily comprising convertible debt ($255,743 thousand) and operating lease liabilities ($75,129 thousand). Additionally, the company has $14.6 million in remaining capital contribution commitments to joint ventures and $20.4 million in un-incurred R&D commitments with third parties Contractual Obligations and Commitments (Amounts in thousands) | Obligation Type | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | | :-------------------------- | :------ | :--------------- | :---------- | :---------- | :---------------- | | Operating leases | $75,129 | $9,952 | $19,742 | $15,092 | $30,343 | | Purchase commitments | $10,384 | $5,499 | $4,885 | $— | $— | | Convertible debt | $255,743 | $— | $55,743 | $200,000 | $— | | Cash interest payable on convertible debt | $28,000 | $7,000 | $14,000 | $7,000 | $— | | Long-term debt, excluding convertible debt | $4,570 | $468 | $781 | $706 | $2,615 | | Contingent consideration | $585 | $585 | $— | $— | $— | | Total | $374,411 | $23,504 | $95,151 | $222,798 | $32,958 | - Remaining capital contribution commitments to joint ventures were $14.6 million as of June 30, 2019, not included in the table due to timing uncertainty[270] - Research and development commitments with third parties totaled $20.4 million that had not yet been incurred as of June 30, 2019[271] Net Operating Losses As of June 30, 2019, Intrexon had approximately $516.4 million in U.S. federal operating and capital loss carryforwards and $8.8 million in federal and state R&D tax credits. Foreign subsidiaries held about $162.9 million in loss carryforwards. These are largely offset by a valuation allowance, and certain losses are subject to Section 382 limitations - As of June 30, 2019, the company had U.S. federal operating and capital loss carryforwards of approximately $516.4 million and federal and state R&D tax credits of approximately $8.8 million[272] - Foreign subsidiaries had approximately $162.9 million in foreign loss carryforwards, most of which do not expire[272] - Net deferred tax assets are offset by a valuation allowance due to the company's history of net losses[272] - Approximately $41.9 million of domestic net operating losses inherited via acquisitions are limited under Section 382 of the Internal Revenue Code[273] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements, other than purchase commitments, during the periods presented - The company did not have any off-balance sheet arrangements, other than purchase commitments, during the periods presented[274] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates from those described in its Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to critical accounting policies from the Annual Report on Form 10-K for the year ended December 31, 2018[276] Recent Accounting Pronouncements Information regarding recent accounting pronouncements and their impact on the consolidated financial statements is provided in Note 2 to the Consolidated Financial Statements - Refer to Note 2 for information on recent accounting pronouncements and their impact[277] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, stock price risk from its investment in AquaBounty, and foreign currency exchange risk from international subsidiaries. A hypothetical 100 basis point increase in interest rates would not materially affect interest-sensitive instruments, and a 10% change in foreign currency rates would not materially impact consolidated financial statements. However, AquaBounty's stock price volatility could significantly impact the fair value of the investment Interest Rate Risk The company's cash, cash equivalents, and short-term investments totaled $125.8 million as of June 30, 2019. These investments, primarily in money market funds and U.S. government debt securities, are subject to market risk from interest rate changes. A hypothetical 100 basis point increase in interest rates is not expected to materially affect their fair value - Cash, cash equivalents, and short-term investments totaled $125.8 million as of June 30, 2019[279] - A hypothetical 100 basis point increase in interest rates would not materially affect the fair value of interest-sensitive financial instruments[279] Investment in a Publicly Traded Company's Common Stock The company holds common stock in AquaBounty, valued at $20.0 million as of June 30, 2019, which is subject to market price volatility. A hypothetical 10% increase or 20% decrease in AquaBounty's stock value would result in fair values of approximately $22.0 million and $16.0 million, respectively - The fair value of the investment in AquaBounty common stock was $20.0 million as of June 30, 2019[280] - A hypothetical 10% increase or 20% decrease in AquaBounty's value would result in fair values of approximately $22.0 million and $16.0 million, respectively, as of June 30, 2019[280] Foreign Currency Exchange Risk The company has international subsidiaries in Belgium, Brazil, Canada, Hungary, and the United Kingdom, whose assets, liabilities, and revenues are denominated in foreign currencies. The company does not hedge this risk, and a hypothetical 10% change in foreign currency exchange rates is not expected to materially impact its consolidated financial statements - The company has international subsidiaries in Belgium, Brazil, Canada, Hungary, and the United Kingdom[281] - The company does not hedge its foreign currency exchange rate risk[281] - A hypothetical 10% change in foreign currency exchange rates would not have a material impact on the consolidated financial statements[281] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2019. There has been no material change in internal control over financial reporting during the three months ended June 30, 2019 - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2019[282] - No material change in internal control over financial reporting occurred during the three months ended June 30, 2019[283] PART II - OTHER INFORMATION Item 1. Legal Proceedings Trans Ova Genetics is involved in ongoing legal disputes with XY, LLC regarding patent infringement and licensing. Recent court orders increased royalty rates retroactively to February 2016, leading to a $5.8 million payment by Trans Ova, which is currently in dispute. Other patent infringement claims against Trans Ova are administratively closed pending appeal - Trans Ova Genetics is a defendant in a licensing and patent infringement suit brought by XY, LLC[286] - A March 2019 district court order clarified royalty base and reset royalty rates, increasing the rate on standard sorted semen products to 18.75% and assigning a minimum royalty of $6.25 per straw/embryo, retroactive to February 2016[286] - Trans Ova remitted $5.8 million in May 2019 for recalculated royalties, which XY deposited into the court's registry due to a dispute over calculation[287] - Other patent infringement claims against Trans Ova are administratively closed, pending XY's appeal of dismissed counts[289] Item 1A. Risk Factors The company's efforts to realign its business into Intrexon Health and Intrexon Bioengineering units, while aiming for resource optimization and growth, may not be successful. This realignment could potentially increase capital requirements and costs, or otherwise harm operating results and financial condition, and may lead to strategic and operational challenges - The realignment of operations into Intrexon Health and Intrexon Bioengineering units, aimed at better resource deployment and growth, may not be successful[292] - This strategy could increase capital requirements and costs, or otherwise harm operating results and financial condition[292] - Implementation of this strategy and leadership changes could lead to strategic/operational challenges, management distractions, impaired employee relations, inefficiencies, or increased costs[292] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds From April 1, 2019, through June 30, 2019, Intrexon issued 839,993 unregistered shares of common stock as payment under a Services Agreement with Third Security, LLC, relying on Section 4(a)(2) of the Securities Act for exemption from registration - From April 1, 2019, through June 30, 2019, 839,993 unregistered shares of common stock were issued as payment under the Services Agreement with Third Security, LLC[294] - These shares were issued in reliance on exemptions from registration under Section 4(a)(2) of the Securities Act[294] Item 3. Defaults on Senior Securities The company reported no defaults on senior securities - No defaults on senior securities were reported[295] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[296] Item 5. Other Information No other information was reported in this section - No other information was reported[297] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, incentive plans, certifications, and interactive data files in XBRL format - Exhibits include Amended and Restated Articles of Incorporation, Incentive Plans (2013 and 2019), Services Agreement amendments, and certifications (Section 302 and 906)[298] - Interactive Data Files (XBRL) for consolidated financial statements are attached as Exhibit 101.0[299] Signatures The report is duly signed on behalf of Intrexon Corporation by Rick L. Sterling, Chief Financial Officer (Principal Financial and Accounting Officer), on August 9, 2019 - The report is signed by Rick L. Sterling, Chief Financial Officer, on August 9, 2019[302]