Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except share and per share data)
1. Organization
Precigen, Inc. ("Precigen"), a Virginia corporation, is a synthetic biology company with an increasing focus on its discovery and clinical stage activities to advance the next generation of gene and cellular therapies to target the most urgent and intractable challenges in immuno-oncology, autoimmune disorders, and infectious diseases. Precigen operates through the following subsidiaries:
PGEN Therapeutics, Inc. ("PGEN Therapeutics") is a dedicated discovery and clinical stage biopharmaceutical company advancing the next generation of gene and cell therapies using precision technology to target urgent and intractable diseases in immuno-oncology, autoimmune disorders, and infectious diseases. PGEN Therapeutics is a wholly owned subsidiary of Precigen with primary operations in Maryland.
Precigen ActoBio, Inc. ("ActoBio") is pioneering a proprietary class of microbe-based biopharmaceuticals that enable expression and local delivery of disease-modifying therapeutics and is a wholly owned subsidiary of Precigen with primary operations in Belgium.
Exemplar Genetics, LLC, doing business as Precigen Exemplar ("Exemplar"), is committed to enabling the study of life-threatening human diseases through the development of MiniSwine Yucatan miniature pig research models and services, as well as enabling the production of cells and organs in its genetically engineered swine for regenerative medicine applications and is a wholly owned subsidiary of Precigen with primary operations in Iowa.
Trans Ova Genetics, L.C., including its wholly owned subsidiary Progentus, L.C., are providers of reproductive technologies, including services and products sold to cattle breeders and other producers and are hereinafter collectively referred to as "Trans Ova." Trans Ova is a wholly owned subsidiary with primary operations in California, Iowa, Maryland, Missouri, Texas, Washington, and Wisconsin.
Effective October 1, 2019, Precigen transferred substantially all of its proprietary methane bioconversion platform ("MBP") assets to a wholly owned subsidiary, MBP Titan LLC ("MBP Titan"). MBP Titan's proprietary technology is designed to convert natural gas into more valuable and usable energy and chemical products through novel, highly engineered bacteria that utilize specific energy feedstocks. Prior to October 1, 2019, the operation transferred to MBP Titan was an operating division within Precigen. Beginning in the second quarter of 2020, the Company suspended MBP Titan's operations and began the process to wind down MBP Titan's activities and had substantially completed the wind down by December 31, 2020, with the final disposition of certain property and equipment and the facility operating lease occurring in January 2021. With the exception of certain assets and obligations with which the Company has a continuing involvement after the wind down, MBP Titan has been presented as discontinued operations for all periods presented. See Note 3 for further discussion.
Precigen and its consolidated subsidiaries are hereinafter referred to as the "Company."
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain information and footnote disclosures normally included in the Company's annual financial statements have been condensed or omitted. These interim condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for fair statement of the Company's financial position as of March 31, 2022 and results of operations and cash flows for the interim periods ended March 31, 2022 and 2021. The year-end condensed consolidated balance sheet data was derived from the Company's audited financial statements but does not include all disclosures required by U.S. GAAP. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any other future annual or interim period. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying condensed consolidated financial statements reflect the operations of Precigen and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Liquidity
Management believes that existing liquid assets as of March 31, 2022 will allow the Company to continue its operations for at least a year from the issuance date of these condensed consolidated financial statements. These condensed consolidated financial statements are presented in United States dollars. The Company is subject to a number of risks similar to those of other companies conducting high-risk, early-stage research and development of therapeutic product candidates. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies, and the technical risks associated with the successful research, development, and clinical manufacturing of its and its collaborators' therapeutic product candidates. Additionally, the accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the three months ended March 31, 2022, the Company incurred a net loss of $19,251 and, as of March 31, 2022, had an accumulated deficit of $1,916,135. Management expects operating losses and negative cash flows to continue for the foreseeable future and, as a result, the Company will require additional capital to fund its operations and execute its business plan. In the absence of a significant source of recurring revenue, the Company's long-term success is dependent upon its ability to continue to raise additional capital in order to fund ongoing research and development (which could occur through debt or equity issuances, sales or partnerships of non-core assets, corroborations or licensing of core or non-core assets, or other transactions), adequately satisfy or renegotiate long-term debt obligations, obtain regulatory approval of its therapeutic product candidates, successfully commercialize its therapeutic product candidates, generate revenue, meet its obligations and, ultimately, attain profitable operations.
Risks and Uncertainties
COVID-19 has had and continues to have an extensive impact on the global health and economic environments. Furthermore, there is uncertainty regarding the duration and severity of the ongoing pandemic, and the Company could experience delays or other pandemic-related events that may adversely impact the Company's clinical as well as preclinical pipeline candidates in the future.
The Company is closely monitoring the impact of COVID-19 on all aspects of its businesses. Given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on the Company's ongoing business, results of operations, and overall financial performance in future periods cannot be reasonably estimated at this time, and it could have a material adverse effect on the Company's results of operations, cash flows, and financial position, including resulting impairments to goodwill and long-lived assets and additional credit losses.
See Note 3 for further discussion of the impact of COVID-19 on MBP Titan.
Equity Method Investments
The Company accounts for its investments in each of its joint ventures ("JVs") using the equity method of accounting based upon relative ownership interest. See additional discussion related to certain of the Company's JVs in Note 4.
Variable Interest Entities
As of March 31, 2022 and December 31, 2021, the Company determined that its JVs were variable interest entities ("VIEs"). The Company was not the primary beneficiary for these entities since it did not have the power to direct the activities that most significantly impact the economic performance of the VIEs. As of March 31, 2022 and December 31, 2021, the Company had no risk of loss related to the identified VIEs. See Note 4 for discussion of the Company's future funding commitments for its significant JVs.
Net Loss per Share
Basic net loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, using the treasury-stock method. For purposes of the diluted net loss per share calculation, shares to be issued pursuant to convertible debt, stock options, RSUs, and warrants are considered to be common stock equivalents but are excluded from the
calculation of diluted net loss per share because their effect would be anti-dilutive and, therefore, basic and diluted net loss per share were the same for all periods presented.
The following potentially dilutive securities as of March 31, 2022 and 2021, have been excluded from the above computations of diluted weighted average shares outstanding for the three months then ended as they would have been anti-dilutive:
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| March 31, |
| 2022 | | 2021 |
Convertible debt | 11,732,440 | | | 11,732,440 | |
Options | 16,034,553 | | | 11,451,614 | |
Restricted stock units | 1,185,205 | | | 790,364 | |
Warrants | 121,888 | | | 133,264 | |
Total | 29,074,086 | | | 24,107,682 | |
Segment Information
The Company's chief operating decision maker ("CODM") regularly reviews disaggregated financial information for various operating segments. Starting in 2021, the financial information regularly reviewed by the CODM was revised and the operating segments, which were determined to be operating and reportable segments, were (i) Biopharmaceuticals, (ii) Exemplar, and (iii) Trans Ova. The Biopharmaceuticals reportable segment is primarily comprised of the Company's legal entities of PGEN Therapeutics and ActoBio. All of Precigen's consolidated subsidiaries and operating divisions that did not meet the quantitative thresholds to report separately are combined and reported in a single category, All Other. See Note 1 for a description of PGEN Therapeutics, ActoBio, Exemplar, and Trans Ova. Corporate expenses, which are not allocated to the segments and are managed at a consolidated level, include costs associated with general and administrative functions, including the Company's finance, accounting, legal, human resources, information technology, corporate communication, and investor relations functions. Corporate expenses exclude interest expense, depreciation and amortization, gain or loss on disposals of assets, stock-based compensation expense, loss on settlement agreement, and equity in net loss of affiliates and include unrealized and realized gains and losses on the Company's securities portfolio as well as dividend income. See Note 18 for further discussion of the Company's segments.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"). Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments.
We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective transition method, which resulted in an increase to our reported long-term debt outstanding, net of current portion, of $18,196, a decrease to our additional paid-in capital of $36,868, and a corresponding cumulative-effect reduction to our opening accumulated deficit of $18,672. The adoption of ASU 2020-06 is expected to reduce non-cash interest expense related to existing convertible debt outstanding by approximately $11,800 for the year ending December 31, 2022, and did not have an impact on our consolidated cash flows. The use of the if-converted method did not have an impact on our overall earnings per share calculation.
Recently Issued Accounting Pronouncements Not Yet Adopted
There are no accounting standards which have not yet been adopted that are expected to have a significant impact on our financial statements and related disclosures.
3. Discontinued Operations
Where applicable, the notes to the accompanying condensed consolidated financial statements have been updated to reflect information pertaining to the Company's continuing operations based on the discontinued operations summarized below.
MBP Titan
As a result of market uncertainty driven by the COVID-19 pandemic and the state of the energy sector raising significant challenges for the strategic alternatives pursued by MBP Titan, beginning in the second quarter of 2020 and throughout the remainder of 2020, the Company suspended MBP Titan's operations, preserved certain of MBP Titan's intellectual property, terminated all of its personnel, and undertook steps to dispose of its other assets and obligations. The wind down of MBP Titan's activities was substantially completed by December 31, 2020, with the final disposition of certain property and equipment and the facility operating lease occurring in January 2021. This discontinuation of operations represented the continuation of a strategic shift to becoming a primarily healthcare company advancing technologies and products that address complex healthcare challenges that the Company commenced in 2020. The assets, liabilities, and expenses related to the discontinued operations of MBP Titan are reclassified and presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods.
The January 2021 sale of property and equipment resulted in a gain on disposal of assets of $464, which is included in income from discontinued operations in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2021. In January 2021, the Company executed termination and recapture agreements with the landlord of the leased facility used in MBP Titan's operations, thereby relieving the Company of all of its obligations related to the facility that were originally due to expire in July 2025. This lease termination resulted in a gain of $4,602, which is also included in income from discontinued operations in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2021.
After the wind down of MBP Titan, certain assets and contractual obligations which were previously managed by MBP Titan continue to be managed at the Precigen corporate level. These remaining assets and contractual obligations include the Company's equity interest in and collaboration agreements with Intrexon Energy Partners, LLC ("Intrexon Energy Partners"), and Intrexon Energy Partners II, LLC ("Intrexon Energy Partners II"), including the associated deferred revenue remaining under each collaboration agreement (Notes 4 and 5), as well as the associated intellectual property developed by MBP Titan to date. These assets, liabilities, and related historical revenue and equity losses are included in the Company's operating results from continuing operations in the accompanying condensed consolidated financial statements for all periods presented as a result of the Company's continuing involvement.
There were no discontinued operations related to MBP Titan for the three months ended March 31, 2022. The following table presents the financial results of discontinued operations related to MBP Titan for the three months ended March 31, 2021:
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| | Three Months Ended March 31, | | |
| | | 2021 | | | | |
| | | | | | | |
Operating gains | | | $ | 4,526 | | | | | |
Operating income | | | 4,526 | | | | | |
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Income before income taxes | | | 4,526 | | | | | |
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Income from discontinued operations | | | $ | 4,526 | | | | | |
The following table presents the significant noncash items, purchases of property, plant and equipment, and proceeds from sales of assets for the discontinued operations related to MBP Titan for the three months ended March 31, 2021 that are included in the accompanying condensed consolidated statements of cash flows.
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| | Three Months Ended March 31, |
| | | 2021 |
Adjustments to reconcile net loss to net cash used in operating activities | | | |
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Gain on disposals of assets, net | | | $ | (464) | |
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Noncash gain on termination of leases | | | (4,602) | |
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Cash flows from investing activities | | | |
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Proceeds from sales of assets | | | 1,083 | |
4. Investments in Joint Ventures
Intrexon Energy Partners
In 2014, the Company and certain investors (the "IEP Investors"), including an affiliate of Third Security, LLC ("Third Security"), entered into a Limited Liability Company Agreement that governs the affairs and conduct of business of Intrexon Energy Partners, a JV formed to optimize and scale-up the Company's MBP technology for the production of certain fuels and lubricants. The Company also entered into an exclusive channel collaboration ("ECC") with Intrexon Energy Partners providing exclusive rights to the Company's technology for the use in bioconversion for the production of certain fuels and lubricants, as a result of which the Company received a technology access fee of $25,000 while retaining a 50% membership interest in Intrexon Energy Partners. The IEP Investors made initial capital contributions, totaling $25,000 in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners totaling 50%. In addition, Precigen committed to make capital contributions of up to $25,000, and the IEP Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners, committed to make additional capital contributions of up to $25,000, at the request of Intrexon Energy Partners' board of managers (the "Intrexon Energy Partners Board") and subject to certain limitations. As of March 31, 2022, the Company's remaining commitment was $4,225. Intrexon Energy Partners is governed by the Intrexon Energy Partners Board, which has five members. Two members of the Intrexon Energy Partners Board are designated by the Company and three members are designated by a majority of the IEP Investors. The Company and the IEP Investors have the right, but not the obligation, to make additional capital contributions above the initial limits when and if solicited by the Intrexon Energy Partners Board.
The Company's investment in Intrexon Energy Partners was $(429) and $(428) as of March 31, 2022 and December 31, 2021, respectively, and is included in other accrued liabilities in the accompanying condensed consolidated balance sheets, which represents the Company's equity in losses for contractually committed contributions to Intrexon Energy Partners.
See Note 3 and 16 for additional discussion regarding the Company's investment in Intrexon Energy Partners.
Intrexon Energy Partners II
In 2015, the Company and certain investors (the "IEPII Investors"), entered into a Limited Liability Company Agreement that governs the affairs and conduct of business of Intrexon Energy Partners II, a JV formed to utilize the Company's MBP technology for the production of 1,4-butanediol, an industrial chemical used to manufacture spandex, polyurethane, plastics, and polyester. The Company also entered into an ECC with Intrexon Energy Partners II that provides exclusive rights to the Company's technology for use in the field, as a result of which the Company received a technology access fee of $18,000 while retaining a 50% membership interest in Intrexon Energy Partners II. The IEPII Investors made initial capital contributions, totaling $18,000 in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners II totaling 50%. In December 2015, the owners of Intrexon Energy Partners II made a capital contribution of $4,000, half of which was paid by the Company. Precigen committed to make additional capital contributions of up to $10,000, and the IEPII Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners II, committed to make additional capital contributions of up to $10,000, at the request of Intrexon Energy Partners II's board of managers (the "Intrexon Energy Partners II Board") and subject to certain limitations. As of March 31, 2022, the Company's remaining commitment was $10,000. Intrexon Energy Partners II is governed by the Intrexon Energy Partners II Board, which has five
members. One member of the Intrexon Energy Partners II Board is designated by the Company and four members are designated by a majority of the IEPII Investors. The Company and the IEPII Investors have the right, but not the obligation, to make additional capital contributions above the initial limits when and if solicited by the Intrexon Energy Partners II Board.
The Company's investment in Intrexon Energy Partners II was $(435) as of March 31, 2022 and December 31, 2021, and is included in other accrued liabilities in the accompanying condensed consolidated balance sheets, which represents the Company's equity in losses for contractually committed contributions to Intrexon Energy Partners II.
See Notes 3 and 16 for additional discussion regarding the Company's investment in Intrexon Energy Partners II.
5. Collaboration and Licensing Revenue
Historically, the Company has derived collaboration and licensing revenue through agreements with counterparties for the development and commercialization of products enabled by the Company's technology platforms. These collaborations and licensing agreements may provide for multiple promises to be satisfied by the Company and typically include a license to the Company's technology platforms, participation in collaboration committees, and performance of certain research and development services. Based on the nature of the promises in the Company's collaboration and licensing agreements, the Company typically combines most of its promises into a single performance obligation because the promises are highly interrelated and not individually distinct. Options to acquire additional services are considered to determine if they constitute material rights. At contract inception, the transaction price is typically the upfront payment received and is allocated to the performance obligations. The Company has determined the transaction price should be recognized as revenue based on its measure of progress under the agreement primarily based on inputs necessary to fulfill the performance obligation.
The Company recognizes the reimbursement payments received for research and development efforts in the period when the services are performed, in connection with the single performance obligation discussed above. The reimbursements relate specifically to the Company's efforts to provide services, and the reimbursements are consistent with what the Company would typically charge other collaborators for similar services. The Company assesses the uncertainty of when and if any milestones will be achieved to determine whether the milestone is included in the transaction price. The Company then assesses whether the revenue is constrained based on whether it is probable that a significant reversal of revenue would not occur when the uncertainty is resolved. Royalties, including sales-based milestones, received under the agreements will be recognized as revenue when sales have occurred because the Company applies the sales- or usage-based royalties recognition exception provided for under ASC Topic 606. The Company determined the application of this exception is appropriate because at the time the royalties are generated, the technology license granted in the agreement is the predominant item to which the royalties relate.
The Company determines whether collaborations and licensing agreements are individually significant for disclosure based on a number of factors, including total revenue recorded by the Company pursuant to collaboration and licensing agreements, collaborators or licensees with equity method investments, or other qualitative factors. Collaboration and licensing revenues generated from consolidated subsidiaries are eliminated in consolidation.
The following table summarizes the amounts recorded as revenue in the condensed consolidated statements of operations for each significant counterparty to a collaboration or licensing agreement for the three months ended March 31, 2022 and 2021.
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| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
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Castle Creek Biosciences, Inc. | $ | — | | | $ | 59 | | | | | |
Other | — | | | 7 | | | | | |
Total (1) | $ | — | | | $ | 66 | | | | | |
(1)Collaboration and licensing revenues include the recognition of $0 and $66 for the three months ended March 31, 2022 and 2021, respectively, associated with upfront and milestone payments which were previously deferred.
There have been no significant changes to the agreements with our collaborators and licensees in the three months ended March 31, 2022.
Deferred Revenue
Deferred revenue primarily consists of upfront and milestone consideration received for the Company's collaboration and licensing agreements. Revenue is recognized as services are performed. The arrangements classified as long-term (of which $21,205 is related to agreements with Intrexon Energy Partners L.L.C. and Intrexon Energy Partners II, L.L.C.) are not active while the respective counterparties evaluate the status of the project and its desired future development activities since the Company cannot reasonably estimate the amount of service to be performed over the next year.
Deferred revenue consisted of the following:
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| March 31, 2022 | | December 31, 2021 |
Collaboration and licensing agreements | $ | 23,023 | | | $ | 23,023 | |
Prepaid product and service revenues | 2,511 | | | 4,229 | |
Other | 158 | | | 213 | |
Total | $ | 25,692 | | | $ | 27,465 | |
Current portion of deferred revenue | $ | 2,669 | | | $ | 4,442 | |
Long-term portion of deferred revenue | 23,023 | | | 23,023 | |
Total | $ | 25,692 | | | $ | 27,465 | |
6. Short-term and Long-term Investments
The Company's investments are classified as available-for-sale. The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale investments as of March 31, 2022:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Aggregate Fair Value |
U.S. government debt securities | $ | 102,771 | | | $ | — | | | $ | (1,133) | | | $ | 101,638 | |
Certificates of deposit | 97 | | | — | | | — | | | 97 | |
Total | $ | 102,868 | | | $ | — | | | $ | (1,133) | | | $ | 101,735 | |
The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale investments as of December 31, 2021:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Aggregate Fair Value |
U.S. government debt securities | $ | 121,036 | | | $ | — | | | $ | (331) | | | $ | 120,705 | |
Certificates of deposit | 97 | | | — | | | — | | | 97 | |
Total | $ | 121,133 | | | $ | — | | | $ | (331) | | | $ | 120,802 | |
The estimated fair value of available-for-sale investments classified by their contractual maturities as of March 31, 2022 was:
| | | | | |
Due within one year | $ | 71,821 | |
After one year through two years | 29,914 | |
Total | $ | 101,735 | |
Changes in market interest rates and bond yields cause certain investments to fall below their cost basis, resulting in unrealized losses on investments. We do not intend to sell these investments and nor is it more likely than not that the Company will be required to sell these investments, prior to maturity or recovery of amortized cost.
7. Fair Value Measurements
The carrying amount of cash and cash equivalents, receivables, accounts payable, accrued compensation and benefits, other accrued liabilities, and related party payables approximate fair value due to the short maturity of these instruments.
Assets
The following table presents the placement in the fair value hierarchy of financial assets that are measured at fair value on a recurring basis as of March 31, 2022:
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| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | March 31, 2022 |
Assets | | | | | | | |
U.S. government debt securities | $ | — | | | $ | 101,638 | | | $ | — | | | $ | 101,638 | |
Certificates of deposit | — | | | 97 | | | — | | | 97 | |
Total | $ | — | | | $ | 101,735 | | | $ | — | | | $ | 101,735 | |
The following table presents the placement in the fair value hierarchy of financial assets that are measured at fair value on a recurring basis as of December 31, 2021:
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| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | December 31, 2021 |
Assets | | | | | | | |
U.S. government debt securities | $ | — | | | $ | 120,705 | | | $ | — | | | $ | 120,705 | |
Certificates of deposit | — | | | 97 | | | — | | | 97 | |
Total | $ | — | | | $ | 120,802 | | | $ | — | | | $ | 120,802 | |
The method used to estimate the fair value of the Level 2 short-term and long-term debt investments in the tables above is based on professional pricing sources for identical or comparable instruments, rather than direct observations of quoted prices in active markets.
Liabilities
The carrying values of the Company's long-term debt, excluding the 3.50% convertible senior notes due 2023 (the "Convertible Notes"), approximates fair value due to the length of time to maturity and/or the existence of interest rates that approximate prevailing market rates.
The calculated fair value of the Convertible Notes (Note 11) was approximately $164,000 and $160,000 as of March 31, 2022 and December 31, 2021, respectively, and is based on the recent third-party trades of the instrument as of the balance sheet date. The fair value of the Convertible Notes is classified as Level 2 within the fair value hierarchy as there is not an active market for the Convertible Notes, however, third-party trades of the instrument are considered observable inputs. The Convertible Notes are reflected on the accompanying condensed consolidated balance sheets at amortized cost, which was $198,362 and $179,882 as of March 31, 2022 and December 31, 2021, respectively (see Note 2 regarding adoption of ASU 2020-06 on January 1, 2022).
8. Inventory
Inventory consists of the following:
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| March 31, 2022 | | December 31, 2021 |
Supplies, embryos and other production materials | $ | 2,931 | | | $ | 2,588 | |
Work in process | 2,539 | | | 2,564 | |
Livestock | 5,918 | | | 6,310 | |
Feed | 1,342 | | | 1,799 | |
Total inventory | $ | 12,730 | | | $ | 13,261 | |
9. Property, Plant and Equipment, Net
Property, plant and equipment consist of the following:
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| March 31, 2022 | | December 31, 2021 |
Land and land improvements | $ | 11,118 | | | $ | 11,118 | |
Buildings and building improvements | 12,903 | | | 12,896 | |
Furniture and fixtures | 1,193 | | | 1,162 | |
Equipment | 34,304 | | | 33,584 | |
Leasehold improvements | 4,822 | | | 4,822 | |
Breeding stock | 953 | | | 1,000 | |
Computer hardware and software | 5,169 | | | 5,131 | |
Construction and other assets in progress | 3,596 | | | 3,824 | |
| 74,058 | | | 73,537 | |
Less: Accumulated depreciation and amortization | (40,475) | | | (39,222) | |
Property, plant and equipment, net | $ | 33,583 | | | $ | 34,315 | |
Depreciation expense was $1,483 and $1,593 for the three months ended March 31, 2022 and 2021, respectively.
10. Goodwill and Intangible Assets, Net
The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows:
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Balance at December 31, 2021 | $ | 54,148 | |
Impairment | (482) | |
Foreign currency translation adjustments | (53) | |
Balance at March 31, 2022 | $ | 53,613 | |
The Company recorded $482 of goodwill impairment related to the total goodwill assigned to one reporting unit within the biopharmaceutical segment during the first quarter of 2022.
The Company had $44,125 and $43,643 of cumulative impairment losses as of March 31, 2022 and December 31, 2021, respectively.
Intangible assets consist of the following as of March 31, 2022:
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| Gross Carrying Amount | | Accumulated Amortization | | Net |
Patents, developed technologies and know-how | $ | 90,000 | | | $ | (39,595) | | | $ | 50,405 | |
Customer relationships | 10,850 | | | (10,480) | | | 370 | |
Trademarks | 5,900 | | | (5,248) | | | 652 | |
Total | $ | 106,750 | | | $ | (55,323) | | | $ | 51,427 | |
Intangible assets consist of the following as of December 31, 2021:
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| Gross Carrying Amount | | Accumulated Amortization | | Net |
Patents, developed technologies and know-how | $ | 91,373 | | | $ | (38,630) | | | $ | 52,743 | |
Customer relationships | 10,850 | | | (10,252) | | | 598 | |
Trademarks | 5,900 | | | (5,126) | | | 774 | |
Total | $ | 108,123 | | | $ | (54,008) | | | $ | 54,115 | |
Amortization expense was $1,809 and $1,930 for the three months ended March 31, 2022 and 2021, respectively.
11. Lines of Credit and Long-Term Debt
Lines of Credit
Trans Ova had a $5,000 revolving line of credit with First National Bank of Omaha that matured on April 1, 2022. The line of credit bore interest at the greater of the U.S. Prime Rate or 3.00%, and the actual rate was 3.50% as of March 31, 2022. As of March 31, 2022 and December 31, 2021, there was no outstanding balance. The amount available under the line of credit was based on eligible accounts receivable and inventory up to the maximum principal amount and was $5,000 as of March 31, 2022.
Exemplar has a $700 revolving line of credit with American State Bank that matures on October 31, 2022. As of March 31, 2022, the line of credit bore interest at a stated rate of 4.00% per annum. As of March 31, 2022 and December 31, 2021, there was no outstanding balance.
Long-Term Debt
Long-term debt consists of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Convertible debt (1) | $ | 198,362 | | | $ | 179,882 | |
Notes payable | 3,105 | | | 3,217 | |
Other | — | | | 52 | |
Long-term debt | 201,467 | | | 183,151 | |
Less current portion | 355 | | | 402 | |
Long-term debt, less current portion | $ | 201,112 | | | $ | 182,749 | |
(1)See Note 2 regarding adoption of ASU 2020-06 as of January 1, 2022.
Convertible Debt
Precigen Convertible Notes
In July 2018, Precigen completed a registered underwritten public offering of $200,000 aggregate principal amount of Convertible Notes and issued the Convertible Notes under an indenture (the "Base Indenture") between Precigen and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented by the First Supplemental Indenture (together with the Base Indenture, the "Indenture"). Precigen received net proceeds of $193,958 after deducting underwriting discounts and offering expenses of $6,042.
The Convertible Notes are senior unsecured obligations of Precigen and bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 1 and July 1 of each year beginning on January 1, 2019. The Convertible Notes mature on July 1, 2023 and are repayable in cash, unless earlier repurchased or converted. Upon conversion by the holders, the Convertible Notes are convertible into cash, shares of Precigen's common stock or a combination of cash and shares, at Precigen's election. The initial conversion rate of the Convertible Notes is 58.6622 shares of Precigen common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $17.05 per share of common stock). The conversion rate is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date as defined in the Indenture, Precigen will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances. Prior to April 1, 2023, the holders may convert the Convertible Notes at their option only upon the satisfaction of the following circumstances:
•During any calendar quarter commencing after the calendar quarter ended on September 30, 2018, if the last reported sales price of Precigen's common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•During the five business day period after any five consecutive trading day period in which the trading price, as defined in the Indenture, for the Convertible Notes is less than 98% of the product of the last reported sales price of Precigen's common stock and the conversion rate for the Convertible Notes on each such trading day; or
•Upon the occurrence of specified corporate events as defined in the Indenture.
None of the above events allowing for conversion prior to April 1, 2023 occurred during the three months ended March 31, 2022. On or after April 1, 2023 until June 30, 2023, holders may convert their Convertible Notes at any time. Precigen may not redeem the Convertible Notes prior to the maturity date.
If Precigen undergoes a fundamental change, as defined in the Indenture, holders of the Convertible Notes may require Precigen to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Indenture contains customary events of default, as defined in the agreement, and, if any of the events occur, could require repayment of a portion or all of the Convertible Notes, including accrued and unpaid interest. Additionally, the Indenture provides that Precigen shall not consolidate with or merge with or into, or sell, convey, transfer or lease all or substantially all of its properties and assets to, another entity, unless (i) the surviving entity is organized under the laws of the United States and such entity expressly assumes all of Precigen's obligations under the Convertible Notes and the Indenture; and (ii) immediately after such transaction, no default or event of default has occurred and is continuing under the Indenture.
The net proceeds received from the issuance of the Convertible Notes were initially allocated between long-term debt, the liability component, in the amount of $143,723, and additional paid-in capital, the equity component, in the amount of $50,235. Additional paid-in capital was further reduced by $13,367 of deferred taxes resulting from the difference between the carrying amount and the tax basis of the Convertible Notes that is created by the equity component, which also resulted in deferred tax benefit recognized from the reversal of valuation allowances on the then current year domestic operating losses in the same amount.
As described in Note 2, the Company adopted ASU 2020-06 on January 1, 2022. Pursuant to ASU 2020-06, the equity components of the Convertible Notes separated from the debt components as required under the cash conversion model is required to be recombined into the Convertible Notes as a single instrument upon the adoption of ASU 2020-06. The
Convertible Notes shall be accounted for as if the conversion option had not been separated. As the Company elected the modified retrospective approach, the difference between the accounting under the cash conversion model and new model after the adoption of ASU 2020-06 (i.e., the single debt instrument with no separation) was recorded as an adjustment on the adoption date (i.e., January 1, 2022) through accumulated deficit. Tax accounting consequences of the adoption also required the reversal of the previously reported deferred tax benefit on the date of adoption.
Adoption of ASU 2020-06 resulted in an increase to long-term debt outstanding, net of current portion, of $18,196, a decrease to additional paid-in capital of $36,868, and a decrease to accumulated deficit of $18,672. Interest expense recognized on the convertible notes in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.
As of March 31, 2022, the outstanding principal balance on the Convertible Notes was $200,000 and the carrying value of long-term debt was $198,362. The effective interest rate on the Convertible Notes, including amortization of the long-term debt discount and debt issuance costs, is 4.25%. As of March 31, 2022, the unamortized long-term debt discount and debt issuance costs totaled $1,638.
The components of interest expense related to the Convertible Notes were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Cash interest expense | $ | 1,750 | | | $ | 1,750 | | | | | |
Non-cash interest expense | 284 | | | 2,751 | | | | | |
Total interest expense | $ | 2,034 | | | $ | 4,501 | | | | | |
Accrued interest of $1,750 is included in other accrued liabilities on the accompanying condensed consolidated balance sheet as of March 31, 2022.
Notes Payable
Trans Ova has a note payable that matures in April 2033 and had an outstanding principal balance of $3,105 as of March 31, 2022. Trans Ova pays monthly installments of $39, which includes interest at 3.95%. The note payable is collateralized by certain of Trans Ova's real estate and non-real estate assets.
Future Maturities
Future maturities of long-term debt as of March 31, 2022 are as follows:
| | | | | |
2022 | $ | 265 | |
2023 | 200,365 | |
2024 | 380 | |
2025 | 395 | |
2026 | 411 | |
2027 | 428 | |
Thereafter | 861 | |
Total | $ | 203,105 | |
12. Income Taxes
Tax provisions for interim periods are calculated using an estimate of actual taxable income or loss for the respective period, rather than estimating the Company's annual effective income tax rate, as the Company is currently unable to reliably estimate its income for the full year. The Company has U.S. taxable loss of approximately $5,300 and $40,400 for the three months ended March 31, 2022 and 2021, respectively. The following table presents the components of income tax benefit from continuing operations.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
Current foreign income tax expense from continuing operations | $ | — | | | $ | 4 | | | | | |
Deferred income tax benefit from continuing operations | (58) | | | (56) | | | | | |
Total income tax benefit from continuing operations | $ | (58) | | | $ | (52) | | | | | |
The Company's net deferred tax assets, excluding certain deferred tax liabilities totaling $2,438, are offset by a valuation allowance due to the Company's history of net losses combined with an inability to confirm recovery of the tax benefits of the Company's losses and other net deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
As of March 31, 2022, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $861,000 available to offset future taxable income, including approximately $609,000 generated after 2017, U.S. capital loss carryforwards of approximately $212,500, and federal and state research and development tax credits of approximately $11,300, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended. Net operating loss carryforwards generated prior to 2018 have begun to expire in 2022, and capital loss carryforwards will expire if unutilized beginning in 2024. As of March 31, 2022, the Company's foreign subsidiaries have foreign loss carryforwards of approximately $74,200, most of which do not expire.
13. Shareholders' Equity
Issuances of Precigen Common Stock
In January 2021, the Company closed a public offering of 17,250,000 shares of its common stock, resulting in net proceeds of $121,045, after deducting underwriting discounts and of capitalized offering expenses.
See Note 11 for discussion regarding conversion features of the convertible notes.
Share Lending Agreement
Concurrently with the offering of the Convertible Notes (Note 11), Precigen entered into a share lending agreement (the "Share Lending Agreement") with J.P. Morgan Securities LLC (the "Share Borrower") pursuant to which Precigen loaned and delivered 7,479,431 shares of its common stock (the "Borrowed Shares") to the Share Borrower. The Share Lending Agreement will terminate, and the Borrowed Shares will be returned to Precigen within five business days of such termination, upon (i) termination by the Share Borrower or (ii) the earliest to occur of (a) October 1, 2023 and (b) the date, if any, on which the Share Lending Agreement is either mutually terminated or terminated by one party upon a default by the other party. The Share Borrower maintains collateral in the form of cash or certain permitted non-cash collateral with a market value at least equal to the market value of the Borrowed Shares as security for the obligation of the Share Borrower to return the Borrowed Shares when required by the terms above. The Borrowed Shares were offered and sold to the public at a price of $13.37 per share under a registered offering (the "Borrowed Shares Offering"). Precigen did not receive any proceeds from the sale of the Borrowed Shares to the public or any lending fees from the Share Lending Agreement. The Share Borrower or its affiliates received all the proceeds from the sale of the Borrowed Shares to the public. Affiliates of Third Security purchased all of the shares of common stock in the Borrowed Shares Offering.
The Share Lending Agreement was entered into at fair value and met the requirements for equity classification. Therefore, the value is netted against the issuance of the Borrowed Shares in additional paid-in capital. Additionally, the Borrowed Shares are not included in the denominator for loss per share attributable to Precigen shareholders unless the Share Borrower defaults on the Share Lending Agreement.
Components of Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income are as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Unrealized loss on investments | $ | (1,133) | | | $ | (331) | |
Income (loss) on foreign currency translation adjustments | (566) | | | 534 | |
Total accumulated other comprehensive (loss) income | $ | (1,699) | | | $ | 203 | |
14. Share-Based Payments
The Company measures the fair value of stock options and restricted stock units ("RSUs") issued to employees and nonemployees as of the grant date for recognition of stock-based compensation expense. Stock-based compensation expense for employees and nonemployees is recognized over the requisite service period, which is typically the vesting period. Stock-based compensation costs included in the condensed consolidated statements of operations are presented below:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Cost of products | $ | 8 | | | $ | 9 | | | | | |
Cost of services | 31 | | | 65 | | | | | |
Research and development | 548 | | | 1,038 | | | | | |
Selling, general and administrative | 2,975 | | | 4,303 | | | | | |
| | | | | | | |
Total | $ | 3,562 | | | $ | 5,415 | | | | | |
Precigen Stock Option Plans
In April 2008, Precigen adopted the 2008 Equity Incentive Plan (the "2008 Plan") for employees and nonemployees pursuant to which Precigen's board of directors granted share-based awards, including stock options, to officers, key employees and nonemployees. Upon the effectiveness of the 2013 Omnibus Incentive Plan (the "2013 Plan"), no new awards may be granted under the 2008 Plan. As of March 31, 2022, there were 14,843 stock options outstanding under the 2008 Plan.
Precigen adopted the 2013 Plan for employees and nonemployees pursuant to which Precigen's board of directors may grant share-based awards, including stock options and shares of common stock, to employees, officers, consultants, advisors, and nonemployee directors. The 2013 Plan became effective in August 2013, and as of March 31, 2022, there were 27,000,000 shares authorized for issuance under the 2013 Plan, of which 14,121,502 stock options and 569,445 RSUs were outstanding and 2,085,537 shares were available for grant. In April 2022, Precigen's board of directors approved, subject to shareholder approval at Precigen's annual meeting in June 2022, an increase of 10,000,000 shares of common stock to be reserved for issuance under the 2013 Plan.
In April 2019, Precigen adopted the 2019 Incentive Plan for Non-Employee Service Providers (the "2019 Plan"), which became effective upon shareholder approval in June 2019. The 2019 Plan permits the grant of share-based awards, including stock options, restricted stock awards, and RSUs, to non-employee service providers, including board members. As of March 31, 2022, there were 5,000,000 shares authorized for issuance under the 2019 Plan, of which 1,898,208 stock options and 615,760 RSUs were outstanding and 243,025 shares were available for grant. In April 2022, Precigen's board of directors approved, subject to shareholder approval at Precigen's annual meeting in June 2022, an increase of 7,000,000 shares of common stock to be reserved for issuance under the 2019 Plan.
Stock option activity was as follows:
| | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) |
Balances at December 31, 2021 | 12,260,187 | | | $ | 14.06 | | | 6.79 |
Granted | 4,009,390 | | | 2.27 | | | |
| | | | | |
Exercised | (375) | | | 2.28 | | | |
Forfeited | (210,613) | | | 5.63 | | | |
Expired | (24,036) | | | 11.85 | | | |
Balances at March 31, 2022 | 16,034,553 | | | 11.22 | | | 7.31 |
Exercisable at March 31, 2022 | 8,937,195 | | | 14.85 | | | 5.99 |
RSU activity was as follows:
| | | | | | | | | | | | | | | | | |
| Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) |
Balances at December 31, 2021 | 468,481 | | | $ | 8.47 | | | 0.33 |
Granted | 1,387,831 | | | 2.12 | | | |
Vested | (669,041) | | | 5.71 | | | |
Forfeited | (2,066) | | | 7.26 | | | |
Balances at March 31, 2022 | 1,185,205 | | | 2.60 | | | 0.59 |
Precigen currently uses authorized and unissued shares to satisfy share award exercises.
The Company's Executive Chairman ("Executive Chairman"), who previously served as an employee and executive officer until September 24, 2020, received a base salary of $200 per month through March 31, 2020, payable in fully-vested shares of Precigen common stock with such shares subject to a three-year lock-up on resale. In September 2020, the Company's board of directors, upon the recommendation of the compensation committee of the board, approved a new compensation arrangement for the Executive Chairman consisting of (i) an annual retainer of $100 payable in cash or, at the Executive Chairman's election, shares of Precigen common stock; (ii) an annual grant of fully vested stock options having a grant date fair value of $250; and (iii) an annual grant of RSUs having a grant date fair value of $250 vesting over one year. The new compensation arrangement began in calendar year 2021 and was prorated for the nine months of 2020 not covered by the Executive Chairman's previous compensation arrangement discussed above. Expense associated with the arrangements above is included in selling, general, and administrative expenses in the Company's condensed consolidated statements of operations and totaled $433 and $400 for the three months ended March 31, 2022 and 2021.
15. Operating Leases
The Company leases certain facilities and equipment under operating leases. Leases with a lease term of twelve months or less are considered short-term leases and are not recorded on the balance sheet, and expense for these leases is recognized over the term of the lease. All other leases have remaining terms of one to nine years, some of which may include options to extend the lease and some of which may include options to terminate the lease within one year. The Company uses judgment to determine whether it is reasonably possible to extend the lease beyond the initial term or terminate before the initial term ends and the length of the possible extension or early termination. The leases are renewable at the option of the Company and do not contain residual value guarantees, covenants, or other restrictions.
The components of lease costs were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Operating lease costs | $ | 729 | | | $ | 839 | | | | | |
Short-term lease costs | 463 | | | 506 | | | | | |
Variable lease costs | 117 | | | 230 | | | | | |
Lease costs | $ | 1,309 | | | $ | 1,575 | | | | | |
As of March 31, 2022, maturities of lease liabilities, excluding short-term and variable leases, for continuing operations were as follows:
| | | | | |
2022 | $ | 2,117 | |
2023 | 2,519 | |
2024 | 2,528 | |
2025 | 2,259 | |
2026 | 1,778 | |
2027 | 1,345 | |
Thereafter | 3,292 | |
Total | 15,838 | |
Present value adjustment | (4,740) | |
Total | $ | 11,098 | |
Current portion of operating lease liabilities | $ | 1,590 | |
Long-term portion of operating lease liabilities | 9,508 | |
Total | $ | 11,098 | |
Other information related to operating leases in continuing operations was as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Weighted average remaining lease term (years) | 6.30 | | 6.65 |
Weighted average discount rate | 10.99 | % | | 10.99 | % |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Supplemental disclosure of cash flow information | | | |
Cash paid for operating lease liabilities | $ | 744 | | | $ | 1,005 | |
Operating lease right-of-use assets obtained in exchange for new lease liabilities (includes new leases or modifications of existing leases) | 556 | | | 55 | |
16. Commitments and Contingencies
Contingencies
On December 1, 2020, Trans Ova settled one of two patent infringement lawsuits brought by XY, LLC ("XY"). The lawsuit, originally filed in 2012, was tried and appealed between 2016 and 2020. On December 1, 2020, the parties reached a settlement resolving all remaining disputes. As part of that settlement, Trans Ova remitted to XY a settlement payment, which, in addition to all the other monies Trans Ova had previously paid XY, constituted full payment and satisfaction of the judgment, including pre-judgment interest, post-judgment interest, costs, and all past, current and future royalty obligations under the judgment. In exchange, XY released and forever discharged Trans Ova from all obligations arising out of the judgment.
XY filed a second lawsuit in December 2016, alleging infringement of seven additional patents. Two of those patents were later invalidated in different proceedings and dismissed from the lawsuit. A third patent was settled out of the case in April 2022. There are thus currently four patents remaining in the case. Of these, one patent expired on May 9, 2021, and another expires on May 21, 2022. As for the last two patents, Trans Ova has stopped practicing the technologies claimed therein. The Company expects a trial to occur sometime in 2023. While Trans Ova is confident in its claims and defenses, litigation is uncertain and there is a possibility that the Trans Ova is found liable and ordered to pay damages for past infringement. In the interim, Trans Ova shall continue to operate its business otherwise unaffected by the litigation.
In September 2020, the Company reached a final settlement with the Securities and Exchange Commission ("SEC") with respect to an investigation concerning the Company's disclosures regarding its MBP program in the first three quarters of 2017. Under the terms of the settlement, the Company, without admitting or denying the allegations of the SEC, consented to the entry of an administrative order requiring that the Company: (i) cease and desist from committing or causing any violations and future violations under Section 13(a) of the Securities Exchange Act of 1934, as amended, and Rules 13a-11 and 12b-20 promulgated thereunder; and (ii) pay a $2,500 civil money penalty to the SEC (which was paid in September 2020).
In October 2020, several shareholder class action lawsuits were filed in the United States District Court for the Northern District of California on behalf of certain purchasers of the Company's common stock. The complaints name as defendants the Company and certain of its current and former officers. The plaintiffs' claims track the allegations in the SEC's administrative order described above but challenge disclosures about the MBP program through September 2020, i.e., the date of the SEC administrative order. The plaintiffs seek compensatory damages, interest, and an award of reasonable attorneys' fees and costs. In April 2021, the court granted an order consolidating the claims and appointed a lead plaintiff and lead counsel in the case, captioned Abailla v. Precigen, Inc., F/K/A Intrexon Corp., et al. In May 2021, the lead plaintiff filed an amended complaint. The defendants moved to dismiss that complaint. In September 2021, the court issued an order mooting the defendants' motion to dismiss in light of the lead plaintiff's stated intent to file a second amended complaint in response to the motion to dismiss. On September 27, 2021, the lead plaintiff filed a second amended complaint. On April 7, 2022, at a hearing on the Company’s motion, the Court indicated that the second amended complaint would be dismissed with leave to amend. Plaintiffs’ counsel indicated a new complaint would be filed. The defendants intend to move to dismiss that complaint.
In December 2020, a derivative shareholder action, captioned Edward D. Wright, derivatively on behalf of Precigen, Inc. F/K/A Intrexon Corp. v. Alvarez et al, was filed in the Circuit Court for Fairfax County in Virginia on behalf of Precigen, Inc. asserting similar claims under state law against Precigen's current directors and certain officers. The plaintiff seeks damages, forfeiture of benefits received by defendants, and an award of reasonable attorneys' fees and costs. The case was stayed by an order entered on June 14, 2021. On September 24, 2021, an individual shareholder filed a lawsuit in the Circuit Court for Henrico County styled Kent v. Precigen, Inc., Case CL21-6349. The Kent action demands inspection of certain books and records of the Company pursuant to Virginia statutory and common law. On April 1, 2022, the court denied the demurrer and referred the matter to a hearing on the merits. The Company is evaluating how best to proceed.
The Company intends to defend the lawsuits vigorously; however, there can be no assurances regarding the ultimate outcome of these lawsuits.
The Company has previously entered into strategic collaborations, including ECCs and JVs, to fund and develop products enabled by its technologies. These relationships involve complex interests, and the Company's interests may diverge with those of its collaborators, which can occur as a result of operations under those collaborations, business or technological developments, or as the Company transitions away from, or terminates, certain strategic collaborations. The Company has had, and has, disagreements and disputes with certain collaborators and JV partners, including the IEP Investors and the IEPII Investors. While the Company believes it is entitled to payment for work performed per its collaborations and JVs, consistent with its policy for accounting for accounts receivable, in 2019, the Company has fully reserved the amount of any disputed accounts receivable that remained outstanding.
On December 29, 2021, the Company received a letter from a group of investors in each of Intrexon Energy Partners and Intrexon Energy Partners II, purporting to refer certain issues to arbitration pursuant to the arbitration provisions of the Amended and Restated Limited Liability Company Agreements of Intrexon Energy Partners and Intrexon Energy Partners II (the “Arbitration Matters”). On January 25, 2022, the Company filed a petition in the Court of Chancery for the State of Delaware seeking to enjoin the arbitration proceeding. In March 2022, the Court of Chancery for the State of Delaware determined that arbitration should proceed. The structure of the arbitration requires each party to propose terms for resolution of each matter and the arbitration panel will be required to award one of the two proposals for each matter without compromise. The Company has proposed terms that the Company would acquire the membership interests of the IEP Investors in exchange of $5,000, and the membership interests of the IEPII Investors in exchange of $2,000. The investor group has proposed terms that the Company would acquire the membership interests of each individual investor in exchange of $34,000 for the membership interests of the IEP Investors and $12,000 for the membership interests of the IEPII Investors, representing the purchase price of their original investments, as well as, in addition, accrued interest from the date of their original investments, which approximates $18,000 for the IEP Investors and $6,000 for the IEPII Investors. The Company expects the arbitration will
be concluded in the second quarter of 2022. While the Company believes the investor groups’ claims are without merit, there can be no assurance that the panel will award the Company’s proposal and will not award the investors’ proposal with respect to either of the Arbitration Matters. In addition, as disclosed in Note 5, as of March 31, 2022, the Company has a deferred revenue liability of $21,205 related to consideration previously received from Intrexon Energy Partners and Intrexon Energy Partners II that will be re-evaluated upon conclusion of the Arbitration Matters.
Such disagreements and disputes result in management distraction and may result in further litigation, arbitration, unfavorable settlements, or concessions by the Company, or adverse regulatory action, any of which could harm the Company's business or operations.
In the course of its business, the Company is involved in litigation or legal matters, including governmental investigations. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. As of March 31, 2022, the Company does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows.
17. Related Party Transactions
Third Security and Affiliates
The Company's Executive Chairman is also the Senior Managing Director and Chairman of Third Security and owns 100% of the equity interests of Third Security. The Company had an agreement with Third Security under which the Company reimbursed Third Security for certain tax-related services performed by Third Security as requested by the Company. The Company also reimburses Third Security for certain out-of-pocket expenses incurred on the Company's behalf. The agreement with Third Security expired on December 31, 2021. As the Company evaluates its alternatives, it continues to utilize these services on a limited basis under the terms of the original agreement. The total expenses incurred by the Company under these arrangements were $26 and $41 for the three months ended March 31, 2022 and 2021, respectively.
See also Note 14 regarding compensation arrangements between the Company and its Executive Chairman.
Through November 2021, the Company also subleased certain administrative offices to Third Security. The significant terms of the lease mirrored the terms of the Company's lease with the landlord, and the Company recorded sublease income of $20 for the three months ended March 31, 2021.
See Notes 1, 3, and 13 regarding additional transactions with affiliates of Third Security.
18. Segments
The Company's CODM assesses the operating performance of and allocates resources for several operating segments using Segment Adjusted EBITDA as a basis. Management believes this financial metric is a key indicator of operating results since it excludes noncash revenues and expenses that are not reflective of the underlying business performance of an individual enterprise. The Company defines Segment Adjusted EBITDA as net income (loss) before (i) interest expense, (ii) income tax expense or benefit, (iii) depreciation and amortization, (iv) stock-based compensation expense, (v) loss on settlement agreements where noncash consideration is paid, (vi) adjustments for accrued bonuses paid in equity awards, (vii) gain or loss on disposals of assets, (viii) loss on impairment of goodwill and other noncurrent assets, (ix) equity in net loss of affiliates, and (x) recognition of previously deferred revenue associated with upfront and milestone payments as well as cash outflows from capital expenditures and investments in affiliates, but includes proceeds from the sale of assets in the period sold.
Because the Company uses Segment Adjusted EBITDA as its primary measure of segment performance, it has included this measure in its discussion of segment operating results. The Company has also disclosed revenues from external customers and intersegment revenues for each reportable segment. Corporate expenses are not allocated to the segments and are managed at a consolidated level. The CODM does not use total assets by segment to evaluate segment performance or allocate resources, and accordingly, these amounts are not required to be disclosed. The Company's segment presentation excludes amounts related to the operations of MBP Titan which are reported as discontinued operations (Note 3).
For the three months ended March 31, 2022, the Company's reportable segments were (i) Biopharmaceuticals, (ii) Exemplar, and (iii) Trans Ova. These identified reportable segments met the quantitative thresholds to be reported separately for the three months ended March 31, 2022. See Note 2 for a description of Biopharmaceuticals. See Note 1 for a description of Exemplar and Trans Ova.
Segment Adjusted EBITDA by reportable segment was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Biopharmaceuticals | $ | (11,620) | | | $ | (8,854) | | | | | |
Exemplar | 3,558 | | | 1,806 | | | | | |
Trans Ova | 5,397 | | | 6,421 | | | | | |
Segment Adjusted EBITDA for reportable segments | $ | (2,665) | | | $ | (627) | | | | | |
The table below reconciles Segment Adjusted EBITDA for reportable segments to consolidated net loss from continuing operations before income taxes:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Segment Adjusted EBITDA for reportable segments | $ | (2,665) | | | $ | (627) | | | | | |
| | | | | | | |
Remove cash paid for capital expenditures, net of proceeds from sale of assets, and cash paid for investments in affiliates | 1,314 | | | 597 | | | | | |
Add recognition of previously deferred revenue associated with upfront and milestone payments | 1,446 | | | 307 | | | | | |
Other expenses: | | | | | | | |
Interest expense | (2,069) | | | (4,539) | | | | | |
Depreciation and amortization | (3,292) | | | (3,523) | | | | | |
Loss on disposals of assets | (125) | | | (121) | | | | | |
Impairment losses | (482) | | | — | | | | | |
| | | | | | | |
Stock-based compensation expense | (3,562) | | | (5,415) | | | | | |
Adjustment related to accrued bonuses paid in equity awards | 1,698 | | | — | | | | | |
Equity in net loss of affiliates | (1) | | | (3) | | | | | |
Other | — | | | (7) | | | | | |
Unallocated corporate costs | (10,060) | | | (8,194) | | | | | |
Eliminations | (1,511) | | | (371) | | | | | |
Consolidated net loss from continuing operations before income taxes | $ | (19,309) | | | $ | (21,896) | | | | | |
Revenues by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Biopharmaceuticals | | Exemplar | | Trans Ova | | Total |
Revenues from external customers | $ | 84 | | | $ | 5,429 | | | $ | 26,508 | | | $ | 32,021 | |
Intersegment revenues | 1,446 | | | — | | | 147 | | | 1,593 | |
Total segment revenues | $ | 1,530 | | | $ | 5,429 | | | $ | 26,655 | | | $ | 33,614 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Biopharmaceuticals | | Exemplar | | Trans Ova | | Total |
Revenues from external customers | $ | 178 | | | $ | 3,257 | | | $ | 21,076 | | | $ | 24,511 | |
Intersegment revenues | 241 | | | — | | | 107 | | | 348 | |
Total segment revenues | $ | 419 | | | $ | 3,257 | | | $ | 21,183 | | | $ | 24,859 | |
The table below reconciles total segment revenues from reportable segments to total consolidated revenues:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Total segment revenues from reportable segments | $ | 33,614 | | | $ | 24,859 | | | | | |
| | | | | | | |
Elimination of intersegment revenues | (1,593) | | | (348) | | | | | |
Total consolidated revenues | $ | 32,021 | | | $ | 24,511 | | | | | |
For the three months ended March 31, 2022 and 2021,13.0% and 8.4%, respectively, of total consolidated revenue was attributable to one customer in the Exemplar segment.
As of March 31, 2022 and December 31, 2021, the Company had $4,148 and $4,463, respectively, of long-lived assets in foreign countries. The Company recognized revenues derived in foreign countries totaling $205 and $99 for the three months ended March 31, 2022 and 2021, respectively.