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XON > SEC Filings for XON > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for INTREXON CORP

Form 10-Q for INTREXON CORP


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements and you are cautioned not to place undue reliance on forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Special Note Regarding Forward-Looking Statements" and "Risk Factors." The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.

Overview

We believe Intrexon is a leader in the field of synthetic biology, an emerging and rapidly evolving discipline that applies engineering principles to biological systems. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs, which are DNA sequences that consist of key genetic components. A single gene program or a complex, multi-genic program are fabricated and stored within a DNA vector. Vectors are segments of DNA used as a vehicle to transmit genetic information. DNA vectors can, in turn, be introduced into cells in order to generate a simple or complex cellular system, which are the basic and complex cellular activities that take place within a cell and the interaction of those systems in the greater cellular environment. It is these genetically modified cell systems that can be used to produce proteins, produce small molecules, or serve as cell-based products, which enable the development of new and improved products and manufacturing processes across a variety of end markets, including health, food, energy, environment, and consumer. Intrexon's synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.

We have devised our business model to bring many different commercial products to market through the formation of exclusive channel collaborations, or ECCs, with collaborators that have expertise within specific industry segments. In our ECCs, we provide expertise in the engineering, creation and modification of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities. Generally, our collaborators compensate us through payment of technology access fees, royalties, milestones and reimbursement of certain costs. This business model allows us to leverage our capabilities and capital across a broader landscape of product opportunities and end markets than we would be capable of addressing on our own.

In certain strategic circumstances, we may enter into a joint venture with an ECC collaborator. In that event, we will enter into an ECC with a joint venture entity and may contribute access to our technology, cash or both into the joint venture which we will jointly control with our ECC collaborator. Pursuant to a joint venture agreement, we may be required to contribute additional capital to the joint venture, and we may be able to receive a higher financial return than we would normally receive from an ECC to the extent that we and our ECC collaborator are successful in developing one or more products. We recently executed the first three such joint venture agreements: S & I Ophthalmic, LLC, or S & I Ophthalmic, which is a joint venture with a subsidiary of Sun Pharmaceutical Industries Ltd., or Sun Pharmaceutical Subsidiary, an international specialty pharmaceutical company focused on chronic diseases, OvaXon, LLC, or OvaXon, which is a joint venture with OvaScience, Inc., or OvaScience, a life sciences company focused on the discovery, development and commercialization of new treatments for infertility and Intrexon Energy Partners, LLC, or Intrexon Energy Partners, a joint venture with a select group of external investors, to optimize and scale-up our gas-to-liquid bioconversion platform for the production of certain fuels and lubricants. Alternatively, where a collaborator wishes to work with us to develop an early-stage program, we may execute a research collaboration pursuant to which we receive reimbursement for our development costs but the exclusive license rights, and related access fee, are deferred until completion of an initial research program.

In 2011, we entered into our first collaboration and have added new collaborations since then, either by entering into new agreements or expanding or adding fields to existing ECCs. To date, we have entered into 23 such agreements and expansions with 19 different counterparties, of which 21 remain active. We have 20 active ECCs, including three expansions, and one research collaboration that we anticipate could, if successful, become an ECC. Under the ECCs, we are developing products in the fields of healthcare, food, energy and consumer goods. In healthcare, our ECCs include programs in oncology, anti-infectives, antibiotics and tissue repair. In food, we are working to increase the productivity and nutritional value of salmon and other fish. In energy, we are working to develop certain fuels and lubricants from natural gas. In consumer goods, we are working to advance new skin and hair care products.


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Effective July 26, 2013, the Company's board of directors and shareholders approved a reverse stock split of 1-for-1.75 of the Company's shares of common stock. Shareholders entitled to fractional shares as a result of the reverse stock split will receive a cash payment in lieu of receiving fractional shares. Our historical share and per share information have been retroactively adjusted to give effect to this reverse stock split. Shares of common stock underlying outstanding stock options and warrants were proportionately reduced and the respective exercise prices were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of common stock reserved for issuance upon the conversion of all of our Series Preferred Stock were proportionately reduced and the conversion prices were proportionately increased.

On August 13, 2013, we completed our initial public offering, or IPO, whereby we sold 11,499,998 shares of common stock (inclusive of 1,499,999 shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering) at a price of $16.00 per share. The shares began trading on the NYSE on August 8, 2013. The aggregate net proceeds received by us from the IPO were $168.3 million, net of underwriting discounts and commissions and estimated offering expenses payable by us. Upon the closing of the IPO, all outstanding shares of convertible preferred stock, including accrued but unpaid dividends thereon, converted into 79,705,130 shares of common stock. Additionally, in connection with the closing of the IPO, we amended and restated our articles of incorporation pursuant to which we are now authorized to issue 200,000,000 shares of common stock and 25,000,000 shares of undesignated preferred stock.

Mergers and acquisitions

On March 6, 2014, we acquired California-based Medistem, Inc., or Medistem, a pioneer in the development of Endometrial Regenerative Cells, or ERCs, universal donor adult-derived stem cells. We intend to employ our synthetic biology platforms to engineer a diverse array of cell-based therapeutic candidates using Medistem's multipotent ERCs. We began consolidating Medistem's results of operations and financial position effective March 6, 2014.

On October 1, 2013, we acquired 4,163,265 shares of common stock of Biological & Popular Culture, Inc., or BioPop, representing 51.00 percent of the outstanding shares of BioPop, resulting in us gaining control over BioPop. BioPop was consolidated on our results of operations and financial position beginning on October 1, 2013.

On November 16, 2012, we acquired 48,631,444 shares of common stock of AquaBounty Technologies, Inc., or AquaBounty, representing 47.56 percent of the then outstanding shares of AquaBounty, through a definitive purchase agreement with an existing AquaBounty shareholder and its affiliate. We originally accounted for our investment in AquaBounty using the equity method. On March 15, 2013, we acquired 18,714,814 additional shares of AquaBounty common stock increasing our aggregate ownership in AquaBounty to 53.82 percent, resulting in us gaining control over AquaBounty. AquaBounty was consolidated on our results of operations and financial position beginning on March 15, 2013. On March 20, 2014, we acquired 19,040,366 additional shares of AquaBounty common stock increasing our aggregate ownership in AquaBounty to 59.85 percent.

Financial overview

We have incurred significant losses since our inception. We anticipate that we may continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability. We have never generated any royalty revenues from sales of products by our collaborators and may never be profitable.

We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our synthetic biology technology platform. We believe that our existing cash and cash equivalents; short-term and long-term investments; and cash expected to be received through our current collaborators will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

Sources of revenue

We derive our revenues through the execution of ECCs for the development and commercialization of products enabled by our technologies. Generally, the terms of our ECCs provide that we receive some or all of the following: (i) technology access fees upon consummation of such ECC; (ii) reimbursements of costs incurred by us for our research and development and/or manufacturing efforts related to the specific application provided for in the ECC; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration.

Our technology access fees and milestone payments may be in the form of cash or securities of the collaborator. Because our ECCs contain multiple arrangements, we typically defer much of the technology access and milestone payments received and recognize such revenues in the future over the anticipated performance period. We are also entitled to sublicensing revenues in those situations where our collaborators choose to license our technologies to other parties.


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In future periods, our revenues will depend on the number of ECCs into which we enter, the advancement and creation of programs within our ECCs and the extent to which our collaborators bring products enabled by our technologies to market. Our revenues will also depend on the ability of AquaBounty to receive regulatory approval and establish successful commercialization of its AquAdvantage Salmon products. In light of our limited operating history and experience in consummating new ECCs, there can be no assurance as to the timing, magnitude and predictability of revenues to which we might be entitled.

In certain strategic circumstances, we may enter into a joint venture with an ECC collaborator whereby we will enter into an ECC with a joint venture entity and both parties may contribute access to their technology, cash or both into the joint venture and jointly control the joint venture. Pursuant to a joint venture agreement, we may be required to contribute additional capital to the joint venture, and we may be able to receive a higher financial return than we would normally receive from an ECC to the extent that we and our ECC collaborator are successful in developing one or more products.

Research and development expenses

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

salaries and related overhead expenses, including stock-based compensation expense, for personnel in research and development functions;

fees paid to consultants and contract research organizations who perform research on our behalf and under our direction;

costs related to laboratory supplies used in our research and development efforts;

depreciation of leasehold improvements, laboratory equipment and computers;

amortization of patents and related technologies acquired in mergers and acquisitions;

rent and utility costs for our research and development facilities; and

costs related to stock options granted to personnel in research and development functions.

We have no individually significant research and development projects and our research and development expenses primarily relate to either the costs incurred to expand or otherwise improve our multiple platform technologies or the costs incurred to develop a specific application of our technologies in support of current or prospective collaborators. Research and development expenses typically do not include significant development, including pre-clinical or clinical development, activities since they are the responsibility of our collaborators. Research and development expenses incurred for programs we support pursuant to an ECC agreement are reimbursed by the collaborator at cost and all other research and development programs may be terminated or otherwise deferred at our discretion. The amount of our research and development expenses may be impacted by, among other things, the number of ECCs and the number and size of programs we may support on behalf of an ECC.

The table below summarizes our research and development expenses incurred to expand or otherwise improve our multiple platform technologies or the costs incurred to develop a specific application of our technologies in support of current or prospective collaborators for the three months ended March 31, 2014 and 2013. Other research and development expenses for these periods include indirect salaries and overhead expenses that are not allocated to either expanding or improving our multiple platform technologies or specific applications of our technologies in support of current or prospective collaborators.

                                                                  Three months ended
                                                                       March 31,
                                                                  2014            2013
                                                                    (In thousands)
Expansion or improvement of our platform technologies          $    3,605       $  4,477
Specific applications of our technologies in support of
current and prospective collaborators                               5,246          4,263
Other                                                               3,240          2,671

Total research and development expenses                        $   12,091       $ 11,411


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We expect that our research and development expenses will increase as we continue to enter into ECCs and as we expand our offerings across additional market sectors. We believe these increases will likely include increased costs related to the hiring of additional personnel in research and development functions, increased costs paid to consultants and contract research organizations and increased costs related to laboratory supplies.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation expense, for employees in executive, operational, finance, information technology and legal functions. Other significant general and administrative expenses include rent and utilities, insurance, legal services and expenses associated with obtaining and maintaining our intellectual property.

We expect that our general and administrative expenses will increase as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Other income (expense), net

We hold equity securities received and/or purchased from certain collaborators. Other than investments accounted for using the equity method discussed below, we elected the fair value option to account for our equity securities held in these collaborators. These equity securities are recorded at fair value at each reporting date. Unrealized appreciation (depreciation) resulting from fair value adjustments are reported as other income (expense) in the consolidated statement of operations. As such, we bear the risk that fluctuations in the securities' share prices may significantly impact our results of operations.

Interest income consists of interest earned on our cash and cash equivalents and short-term and long-term investments.

Interest expense pertains to equipment currently under four capitalized leases and long term debt held by AquaBounty.

On March 15, 2013, we recorded a gain on our previously held equity investment in AquaBounty; such gain represented the adjustment to fair value of the pro rata share of our original investment.

Equity in net income (loss) of affiliate

Equity in net loss of affiliates is our pro-rata share of our equity method investments' operating results, adjusted for accretion of basis difference. Through March 15, 2013, we accounted for our investment in AquaBounty using the equity method of accounting since we had the ability to exercise significant influence, but not control, over the operating activities of AquaBounty. On March 15, 2013, we acquired additional ownership interests in AquaBounty which resulted in us gaining control over AquaBounty, thereby requiring consolidation effective on that date. We account for investments in S & I Ophthalmic, OvaXon, and Intrexon Energy Partners using the equity method of accounting since we have the ability to exercise significant influence, but not control, over the operating activities of these joint ventures.

Results of operations

Comparison of the three months ended March 31, 2014 and the three months ended March 31, 2013

The following table summarizes our results of operations for the three months ended March 31, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

                                    Three months ended
                                         March 31,             Dollar          %
                                     2014          2013        change        Change
                                             (In thousands)
         Revenues:
         Collaboration revenues   $    7,837     $  3,864     $  3,973         102.8 %
         Other revenues                   17           21           (4 )       -19.0 %

         Total revenues                7,854        3,885        3,969         102.2 %


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                                                       Three months ended
                                                           March 31,               Dollar          %
                                                      2014           2013          change        Change
                                                                (In thousands)
Operating expenses:
Research and development                               12,091         11,411           680           6.0 %
General and administrative                             13,635          6,480         7,155         110.4 %

Total operating expenses                               25,726         17,891         7,835          43.8 %

Operating loss                                        (17,872 )      (14,006 )      (3,866 )        27.6 %
Total other income (expense), net                      21,963        (21,966 )      43,929         200.0 %
Equity in loss of affiliates                             (536 )         (390 )        (146 )        37.4 %

Income (loss) before tax                                3,555        (36,362 )      39,917         109.8 %
Income tax expense                                       (306 )           -           (306 )       100.0 %

Net income (loss)                                       3,249        (36,362 )      39,611         108.9 %
Net loss attributable to noncontrolling interest          866             51           815        1598.0 %

Net income (loss) attributable to Intrexon          $   4,115      $ (36,311 )    $ 40,426         111.3 %

Revenues

Total revenues were $7.9 million for the three months ended March 31, 2014 compared to $3.9 million for the three months ended March 31, 2013, an increase of $4.0 million, or 102.2 percent. The following table shows the collaboration revenue recognized for upfront and milestone payments received from our collaborators and reimbursements received for research and development services provided to our collaborators for the three months ended March 31, 2014 and 2013, together with the changes in those items:

                                            Upfront and milestone                    Research and development
                                                  payments                                   services                                   Total
                                       Three months ended                         Three months ended                       Three months ended
                                           March 31,              Dollar              March 31,             Dollar              March 31,            Dollar
                                       2014           2013        change          2014           2013       change          2014          2013       change
                                                                                         (In thousands)
ZIOPHARM Oncology, Inc.             $       644      $   644     $     -       $     2,036      $ 1,430     $   606      $    2,680      $ 2,074     $   606
Synthetic Biologics, Inc.                   162          195          (33 )            197          375        (178 )           359          570        (211 )
Oragenics, Inc.                             262          137          125              533          379         154             795          516         279
Fibrocell Science, Inc.                     448          158          290              862          430         432           1,310          588         722
Genopaver, LLC                               69           -            69              421           -          421             490           -          490
S & I Ophthalmic, LLC                        -            -            -               879           -          879             879           -          879
OvaXon, LLC                                  -            -            -               169           -          169             169           -          169
Other                                       297            3          294              858          113         745           1,155          116       1,039

Total                               $     1,882      $ 1,137     $    745      $     5,955      $ 2,727     $ 3,228      $    7,837      $ 3,864     $ 3,973

The $4.0 million increase in collaboration revenue resulted primarily from the recognition of deferred revenue for upfront payments received from 13 collaborations or expansions thereof signed by the Company between April 1, 2013 and March 31, 2014; recognition of research and development services performed by the Company pursuant to these new collaborations; and increased research and development services performed by the Company for collaborations in effect prior to March 31, 2013 as a result of the progression of current programs and the initiation of new programs with these collaborators.

Research and development expenses

Research and development expenses were $12.1 million for the three months ended March 31, 2014 compared to $11.4 million for the three months ended March 31, 2013. The $0.7 million increase in research and development expenses is primarily the result of research and development expenses for AquaBounty increasing $0.5 million due to the inclusion of a full three months of AquaBounty's expenses in our consolidated results in the first quarter of 2014 compared to 16 days in the first quarter of 2013.

General and administrative expenses

General and administrative expenses increased $7.2 million to $13.6 million for the three months ended March 31, 2014 compared to $6.5 million for the three months ended March 31, 2013. Of the $7.2 million increase, $3.0 million relates to salaries,


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benefits and other personnel expenses resulting from our hiring of additional employees needed to operate as a public company, stock-based compensation expenses for stock option grants we made to all employees in the first quarter of 2014 and, finally, inclusion of a full three months of costs for AquaBounty employees in the first quarter of 2014 compared to 16 days in the first quarter of 2013. We also incurred stock-based compensation expense for options granted to our non-employee directors which increased $1.7 million due to changes in our director compensation plan which we adopted in conjunction with our transition to a public company. Legal expenses increased $0.7 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to costs associated with the Medistem acquisition and the formation of the joint venture with Intrexon Energy Partners. The remaining increase in general and administrative expenses in 2014 results from the inclusion of three full months of costs related to AquaBounty in 2014 compared to 16 days in 2013 and additional costs for accounting and auditing fees, directors and officers insurance, exchange listing fees, and other costs that are directly related to being a public company.

Total other income (expense), net

Total other income (expense), net is primarily composed of unrealized appreciation (depreciation) in fair value of equity securities which was $21.9 million for the three months ended March 31, 2014 compared to $(29.4) million for the three months ended March 31, 2013. The unrealized appreciation (depreciation) is the result of market change for the equity securities we hold in certain of our collaborators. Total other income (expense), net for the three months ended March 31, 2013 includes a $7.4 million gain on our previously held equity interest in AquaBounty triggered by the requirement to consolidate AquaBounty as of March 15, 2013.

Equity in net loss of affiliates

Equity in net loss of affiliates for the three months ended March 31, 2014 and 2013 includes our pro-rata share of the net losses of our investments we account . . .

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