PRECIGEN, INC. (PGEN) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, Part I, Item 1, "Business" and Item 8, "Financial Statements and Supplementary Data." For information on risks and uncertainties related to our business that may make past performance not indicative of future results, or cause actual results to differ materially from any forward-looking statements, see "Special Note Regarding Forward-Looking Statements," and Part I, Item 1A, "Risk Factors."
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. Our historical collaboration and licensing revenues were generated under a business model from which we have transitioned, and we do not expect to expend significant resources servicing our historical collaborations in the future. We may enter into strategic transactions for individual platforms or programs in the future from which we may generate new collaboration and licensing revenues. We continue to generate product and service revenues through our Trans Ova and Exemplar subsidiaries, and in 2021 and 2020, both of these subsidiaries generated positive Segment Adjusted EBITDA. Products currently in our clinical pipeline will require regulatory approval and/or commercial scale-up before they may commence significant product sales and operating profits.
As we continue our efforts to focus our business and generate additional capital, we may be willing to enter into transactions involving one or more of our operating segments and reporting units for which we have goodwill and intangible assets. These efforts could result in us identifying impairment indicators or recording impairment charges in future periods. In addition, market changes and changes in judgments, assumptions, and estimates that we have made in assessing the fair value of goodwill could cause us to consider some portion or all of certain assets to become impaired.
Sources of revenue
Historically, we have derived our collaboration and licensing revenues through agreements with counterparties for the development and commercialization of products enabled by our technologies. Generally, the terms of these collaborations provide that we receive some or all of the following: (i) technology access fees upon signing; (ii) reimbursements of costs incurred by us for our research and development and/or manufacturing efforts related to specific applications provided for in the collaboration; (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. Our collaborations contain multiple arrangements, and we typically defer revenues from the technology access fees 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.
As we continue to shift our focus on our healthcare business, we have and may continue to mutually terminate collaboration agreements or repurchase rights to the exclusive fields from collaborators, relieving us of any further performance obligations under the agreement. Upon such circumstances or when we determine no further performance obligations are required of us under an agreement, we may recognize any remaining deferred revenue as either collaboration revenue or as a reduction of operating expense, depending on the circumstances. See "Notes to the Consolidated Financial Statements - Note 5" appearing elsewhere in this Annual Report for a discussion of changes to our significant collaborations.
We generate product and service revenues primarily through sales of products or services that are created from technologies developed or owned by us. Our primary current revenues arise from Trans Ova and include sales of advanced reproductive technologies, including our bovine embryo transfer and IVF processes and from genetic preservation and sexed semen
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processes, and applications of such processes to other livestock, as well as sales of livestock and embryos produced using these processes and used in production. Exemplar also generates product and service revenues through the development and sale of genetically engineered miniature swine models. We recognize revenue when control of the promised product is transferred to the customer or when the promised service is completed.
In future periods, in connection with our focus on healthcare, our revenues will primarily depend on our ability to advance and create our own programs and the extent to which we bring products enabled by our technologies to market. Other than for collaboration revenues recognized upon cancellation or modification of an existing collaboration or for revenues generated pursuant to future strategic transactions for any of our existing platforms or programs, we expect our collaboration revenues will continue to decrease in the near term. Our revenues will also depend upon our ability to maintain or improve the volume and pricing of Trans Ova's and Exemplar's current product and service offerings and to develop and scale up production of new offerings from the various technologies of our subsidiaries. As we focus on our healthcare business, we anticipate that our expenses will increase substantially if, and as, we continue to advance the preclinical and clinical development of our existing product candidates and our research programs. We expect a significant period of time could pass before commercialization of our various product candidates or before the achievement of contractual milestones and the realization of royalties on product candidates commercialized under our collaborations and revenues sufficient to achieve profitability. Accordingly, there can be no assurance as to the timing, magnitude, and predictability of revenues to which we might be entitled.
Cost of products and services
Cost of products and services includes primarily labor and related costs, drugs and supplies used primarily in Trans Ova's embryo transfer and IVF processes, livestock and feed used in production, and facility charges, including rent and depreciation. Fluctuations in the price of livestock and feed have not had a significant impact on our operating margins and no derivative financial instruments are used to mitigate the price risk.
Research and development expenses
We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
•salaries and benefits, 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 and acquiring, developing, and manufacturing preclinical study and clinical trial materials;
•costs related to certain in-licensed technology rights or reacquired in-process research and development;
•amortization of patents and related technologies acquired in mergers and acquisitions; and
•facility-related expenses, which include direct depreciation costs and unallocated expenses for rent and maintenance of facilities and other operating costs.
Our research and development expenses are generally incurred by our reportable segments and primarily relate to either costs incurred to expand or otherwise improve our technologies or the costs incurred to develop our own products and services. Our Biopharmaceuticals segment is progressing preclinical and clinical programs that target urgent and intractable diseases in our core therapeutics areas of immuno-oncology, autoimmune disorders and infectious diseases, including PRGN-3005, PRGN-3006, PRGN-3007, PRGN-2009, PRGN-2012, and AG019. Exemplar's research and development activities relate to new and improved pig research models. Trans Ova's research and development activities support new and improved product and service offerings for its customers. The following table summarizes our research and development expenses incurred by
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reportable segment and reconciles those expenses to research and development expenses on the consolidated statements of operations for the years ended December 31, 2021, 2020, and 2019.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (In thousands) | ||||||||||
| Biopharmaceuticals | $ | 47,644 | $ | 38,992 | $ | 46,833 | ||||
| Exemplar | 289 | 611 | 894 | |||||||
| Trans Ova | 2,222 | 2,228 | 2,037 | |||||||
| Total research and development expenses from reportable segments | 50,155 | 41,831 | 49,764 | |||||||
| Other research and development expenses, including from other operating segments | — | (171) | 17,672 | |||||||
| Eliminations | (14) | (16) | (770) | |||||||
| Total consolidated research and development expenses | $ | 50,141 | $ | 41,644 | $ | 66,666 |
The amount of research and development expenses may be impacted by, among other things, the number and nature of our own proprietary programs, and the number and size of programs we may support on behalf of collaboration agreements. We expect that our research and development expenses will increase as we continue to develop our own proprietary programs, including progression of these programs into preclinical and clinical stages. We believe these increases will likely include increased costs paid to consultants and contract research organizations, and increased costs related to laboratory supplies.
Research and development expenses may also increase as a result of in-licensing of technologies or ongoing research and development operations that we might assume through mergers and acquisitions.
Selling, general and administrative expenses
Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs, including stock-based compensation expense, for employees in executive, operational, finance, information technology, legal, and corporate communications functions. Other significant SG&A expenses include rent and utilities, insurance, accounting, and legal services (including the cost of settling any claims and lawsuits), and expenses associated with obtaining and maintaining our intellectual property.
SG&A expenses may fluctuate in the future depending on the scaling of our corporate functions required to support our corporate initiatives and the outcomes of legal claims and assessments against us.
Other income (expense), net
We historically held equity securities and preferred stock of private and publicly traded companies, including investments received and/or purchased from certain collaborators. These equity securities and preferred stock were recorded at fair value at each reporting date. Unrealized appreciation (depreciation) resulting from fair value adjustments were reported as other income (expense) in the consolidated statements of operations. In January 2020, as part of the TS Biotechnology Sale, we sold our remaining equity securities and investment in preferred stock, and therefore, no future gains (losses) will be incurred.
Interest expense is expected to decrease in future periods upon the adoption of a new accounting standard effective January 1, 2022, which simplifies the accounting for the Convertible Notes as described in "Notes to the Consolidated Financial Statements - Note 2" appearing elsewhere in this Annual Report.
Interest income consists of interest earned on our cash and cash equivalents and short-term and long-term investments and may fluctuate based on amounts invested and current interest rates. Dividend income historically consisted of the monthly preferred stock dividends received from our investments in preferred stock, all of which have been liquidated as of December 31, 2020.
Equity in net income (loss) of affiliates
Equity in net income or loss of affiliates is our pro-rata share of our equity method investments' operating results, adjusted for accretion of basis difference. We account for investments in our JVs using the equity method of accounting since we have the ability to exercise significant influence, but not control, over the operating activities of these entities. We previously accounted for our investments in start-up entities backed by Harvest using the equity method of accounting. In December 2020, we
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entered into an agreement with Harvest to resolve matters related to the parties' contractual and equity relationships and our remaining equity interests in start-up entities backed by Harvest were terminated.
Segment performance
We use Segment Adjusted EBITDA as our primary measure of segment performance. We define 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. Corporate expenses are not allocated to the segments and are managed at a consolidated level. See "Notes to the Consolidated Financial Statements - Note 18" appearing elsewhere in this Annual Report for further discussion of Segment Adjusted EBITDA.
Results of operations
Comparison of the year ended December 31, 2021 to the year ended December 31, 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020, together with the changes in those items in dollars and as a percentage:
| Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| Revenues | ||||||||||||||
| Collaboration and licensing revenues (1) | $ | 506 | $ | 21,208 | $ | (20,702) | (97.6) | % | ||||||
| Product revenues | 27,295 | 24,349 | 2,946 | 12.1 | % | |||||||||
| Service revenues | 75,570 | 56,899 | 18,671 | 32.8 | % | |||||||||
| Other revenues | 502 | 722 | (220) | (30.5) | % | |||||||||
| Total revenues | 103,873 | 103,178 | 695 | 0.7 | % | |||||||||
| Operating expenses | ||||||||||||||
| Cost of products | 24,864 | 28,550 | (3,686) | (12.9) | % | |||||||||
| Cost of services | 33,521 | 26,963 | 6,558 | 24.3 | % | |||||||||
| Research and development | 50,141 | 41,644 | 8,497 | 20.4 | % | |||||||||
| Selling, general and administrative | 74,122 | 91,704 | (17,582) | (19.2) | % | |||||||||
| Impairment of goodwill | — | — | — | N/A | ||||||||||
| Impairment of other noncurrent assets | 543 | 920 | (377) | (41.0) | % | |||||||||
| Total operating expenses | 183,191 | 189,781 | (6,590) | (3.5) | % | |||||||||
| Operating loss | (79,318) | (86,603) | 7,285 | (8.4) | % | |||||||||
| Total other expense, net | (17,604) | (16,114) | (1,490) | 9.2 | % | |||||||||
| Equity in loss of affiliates | (3) | (1,138) | 1,135 | (99.7) | % | |||||||||
| Loss from continuing operations before income taxes | (96,925) | (103,855) | 6,930 | (6.7) | % | |||||||||
| Income tax benefit | 160 | 82 | 78 | 95.1 | % | |||||||||
| Loss from continuing operations | (96,765) | (103,773) | 7,008 | (6.8) | % | |||||||||
| Income (loss) from discontinued operations, net of income tax benefit (2) | 4,599 | (66,748) | 71,347 | 106.9 | % | |||||||||
| Net loss attributable to Precigen | $ | (92,166) | $ | (170,521) | $ | 78,355 | (46.0) | % |
(1)Including $0 and $3,053 from related parties for the years ended December 31, 2021 and 2020, respectively.
(2)See "Notes to the Consolidated Financial Statements - Note 3" appearing elsewhere in this Annual Report.
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Collaboration and licensing revenues
The following table shows the collaboration and licensing revenue recognized for the years ended December 31, 2021 and 2020, together with the changes in those items.
| Year Ended December 31, | Dollar Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||
| (In thousands) | ||||||||||
| Alaunos Therapeutics, Inc. (formerly ZIOPHARM Oncology, Inc.) | $ | 100 | $ | 200 | $ | (100) | ||||
| Oragenics, Inc. | — | 3,053 | (3,053) | |||||||
| Castle Creek Biosciences, Inc. | 388 | 17,810 | (17,422) | |||||||
| Other | 18 | 145 | (127) | |||||||
| Total | $ | 506 | $ | 21,208 | $ | (20,702) |
Collaboration and licensing revenues decreased $20.7 million, or 98 percent, from the year ended December 31, 2020, primarily due to the accelerated recognition of previously deferred revenue in the prior period upon the mutual terminations of collaborations with Castle Creek and Oragenics, Inc., or Oragenics, in 2020.
Product revenues and gross margin
Product revenues increased $2.9 million, or 12 percent, over the year ended December 31, 2020. The increase in product revenue was primarily due to higher customer demand for animals as a result of stronger beef and dairy industries in the current year. Gross margin on products improved in the current period as a result of the increased revenues, increased focus on selling higher margin products, and operational efficiencies that have been gained through reductions in workforce and improved inventory management.
Service revenues and gross margin
Service revenues increased $18.7 million, or 33 percent, over the year ended December 31, 2020. Trans Ova's revenues and gross margins thereon improved primarily due to an increase in services performed as a result of higher customer demand as the beef and dairy industries have been stronger in the current year and a change in pricing structure with certain customers. Additionally, Exemplar's service revenues and gross margins thereon improved in the current period due to an increase in services performed resulting from a higher demand from existing and new customers as well as a combination of price increases and a change in pricing structure with certain customers.
Research and development expenses
Research and development expenses increased $8.5 million, or 20 percent, over the year ended December 31, 2020. Contract research organization costs and lab supplies increased $6.7 million with the advancement of our clinical and preclinical programs.
Selling, general and administrative expenses
SG&A expenses decreased $17.6 million, or 19 percent, from the year ended December 31, 2020. Salaries, benefits, and other personnel costs decreased $4.9 million in 2021 primarily due to (i) a reduced headcount as we scaled down our corporate functions to support our more streamlined organization and (ii) reduced stock compensation costs for previously granted awards that became fully vested in early 2021. There was a reduction of $13.9 million for the nonrecurring settlements with Harvest and the SEC in the prior period (see "Notes to the Consolidated Financial Statements - Notes 16 and 17" appearing elsewhere in this Annual Report). This was partially offset by an increase in professional fees of $1.1 million, primarily due to an increase in legal fees associated with certain litigation matters.
Impairment of other noncurrent assets
Impairment losses for the year ended December 31, 2021 of $0.5 million arose primarily from an impairment of the right-of-use asset at one of the Company's leased facilities. Impairment losses for the year ended December 31, 2020 of $0.9 million were due to the impairment of the right-of-use assets for certain of our leased facilities.
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Total other expense, net
Total other expense, net, which primarily includes interest expense, increased $1.5 million, or 9 percent, over the year ended December 31, 2020. Interest income earned on our short-term investments decreased in 2021 due to lower interest rates. Additionally, interest expense increased associated with our Convertible Notes issued in July 2018 due to the noncash amortization of the related debt discount and debt issuance costs.
Segment performance
The following table summarizes Segment Adjusted EBITDA, which is our primary measure of segment performance, for the years ended December 31, 2021 and 2020, for each of our reportable segments, as well as unallocated corporate costs.
| Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| Segment Adjusted EBITDA: | ||||||||||||||
| Biopharmaceuticals | $ | (45,754) | $ | (35,378) | $ | (10,376) | (29.3) | % | ||||||
| Exemplar | 6,898 | 4,004 | 2,894 | 72.3 | % | |||||||||
| Trans Ova | 17,420 | 13,530 | 3,890 | 28.8 | % | |||||||||
| Unallocated corporate costs | (33,506) | (37,479) | 3,973 | 10.6 | % |
For a reconciliation of Segment Adjusted EBITDA to net loss from continuing operations before income taxes, see "Notes to the Consolidated Financial Statements - Note 18" appearing elsewhere in this Annual Report.
The following table summarizes revenues from external customers for the years ended December 31, 2021 and 2020, for each of our reportable segments.
| Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||
| Biopharmaceuticals | $ | 922 | $ | 21,780 | $ | (20,858) | (95.8) | % | ||||||
| Exemplar | 13,345 | 10,158 | 3,187 | 31.4 | % | |||||||||
| Trans Ova | 89,606 | 71,186 | 18,420 | 25.9 | % |
Biopharmaceuticals
The decrease in revenues for Biopharmaceuticals was primarily due to the accelerated recognition of previously deferred revenue in the prior period upon the mutual terminations of collaborations with Castle Creek and Oragenics in 2020. Segment Adjusted EBITDA declined as we had increased costs associated with the advancement of our clinical and preclinical programs.
Exemplar
Revenues for Exemplar increased due to an increase in services performed resulting from a higher demand from existing and new customers. Revenues also increased due to price increases as well as a change in the pricing structure with certain customers. The improvement in Segment Adjusted EBITDA was primarily due to the increased revenues and reduced costs as a result of operational efficiencies gained through reductions in workforce and improved inventory management.
Trans Ova
Revenues for Trans Ova increased primarily due to higher customer demand for pregnant cows and more procedures performed as a result of stronger beef and dairy industries in the current year. Revenues also increased due to a change in the pricing structure with certain customers. The improvement in Segment Adjusted EBITDA was primarily due to the increased revenues, as well as reduced costs as a result of operational efficiencies gained through reductions in workforce and improved inventory management.
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Unallocated Corporate Costs
Unallocated corporate costs decreased primarily due to decreased legal fees associated with certain litigation matters, including our settlement with the SEC in the prior period, and due to a reduction of corporate employees as we scaled down our corporate functions to support our more streamlined organization.
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
For a comparison of our results of operations for the years ended December 31, 2020 and 2019, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. As a result of the revision of our reportable segments and the definition of Segment Adjusted EBITDA in 2021, as discussed in "Notes to the Consolidated Financial Statements - Notes 2 and 18" appearing elsewhere in this Annual Report, the discussion of segment performance for the years ended December 31, 2020 and 2019, has been restated below to conform to the revised segment determination and revised calculation of Segment Adjusted EBITDA.
Segment performance
The following table summarizes Segment Adjusted EBITDA, which is our primary measure of segment performance, for the years ended December 31, 2020 and 2019, for each of our reportable segments and for All Other segments combined, as well as unallocated corporate costs.
| Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||
| Segment Adjusted EBITDA: | ||||||||||||||
| Biopharmaceuticals | $ | (35,378) | $ | (44,552) | $ | 9,174 | 20.6 | % | ||||||
| Exemplar | 4,004 | (1,586) | 5,590 | 200% | ||||||||||
| Trans Ova | 13,530 | (2,836) | 16,366 | 200% | ||||||||||
| All Other | — | (3,501) | 3,501 | 100.0 | % | |||||||||
| Unallocated corporate costs | (37,479) | (46,007) | 8,528 | 18.5 | % |
For a reconciliation of Segment Adjusted EBITDA to net loss from continuing operations before income taxes, see "Notes to the Consolidated Financial Statements - Note 18" appearing elsewhere in this Annual Report.
The following table summarizes revenues from external customers for the years ended December 31, 2020 and 2019, for each of our reportable segments and for All Other segments combined.
| Year Ended December 31, | Dollar Change | Percent Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||||||||
| (In thousands) | |||||||||||||
| Biopharmaceuticals | $ | 21,780 | $ | 6,259 | $ | 15,521 | 200% | ||||||
| Exemplar | 10,158 | 6,958 | 3,200 | 46.0 | % | ||||||||
| Trans Ova | 71,186 | 68,672 | 2,514 | 3.7 | % | ||||||||
| All Other | — | 4,873 | (4,873) | (100.0) | % |
Biopharmaceuticals
The increase in revenues for Biopharmaceuticals was primarily due to the accelerated recognition of previously deferred revenue upon the mutual terminations of collaborations with Castle Creek and Oragenics in 2020. Segment Adjusted EBITDA improved due to higher costs for contract research organizations incurred in 2019 for preclinical activities on certain programs prior to moving to clinical trials and the manufacturing of clinical trial materials in advance of initiation of the trials. Additionally, fewer costs related to the PRGN-3005 Phase 1 trials were incurred in the second quarter of 2020 as enrollment of new patients in this trial was temporarily suspended due to a mandated hold on certain early and late-stage clinical trials at the Fred Hutchinson Cancer Research Center in Seattle that was instituted in light of the COVID-19 pandemic. Additionally, fewer
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AG019 trial costs were incurred in the second quarter of 2020 due to the temporary suspension of the last cohort of the Phase 1b/2a clinical trial. Costs related to Biopharmaceutical's' clinical trials are expected to increase in 2021 as the trials progress and as we initiate new clinical trials for new clinical programs. Finally, capital expenditures decreased in the current period as PGEN Therapeutics completed an expansion of its lab facilities in 2019.
Exemplar
Revenues for Exemplar increased due to an increase in services performed resulting from a higher demand from existing. The improvement in Segment Adjusted EBITDA was primarily due to the increased revenues and reduced costs as a result of operational efficiencies gained through reductions in workforce and improved inventory management.
Trans Ova
Revenues for Trans Ova increased primarily as a result of more procedures performed for new and existing customers and the expansion of its commercial dairy business. The improvement in Segment Adjusted EBITDA was primarily due to operational efficiencies gained through reductions in workforce and improved inventory management, a decrease in the cost of cows used in production, and a reduction in third-party royalty rate obligations for certain licensed technologies.
All Other
Revenues in All Other decreased in 2020 as our partnered programs with Harvest start-up entities were paused since the third quarter of 2019. Segment Adjusted EBITDA improved period over period as a result of the closure of two operating segments in 2019.
Unallocated Corporate Costs
Unallocated corporate costs decreased primarily due to a reduction of corporate employees as well as a decrease in certain professional fees as we scaled down our corporate functions to support our more streamlined organization. These decreases were partially offset by an increase in legal fees associated with litigation matters, including our settlement with the SEC.
Liquidity and capital resources
Sources of liquidity
We have incurred losses from operations since our inception, and as of December 31, 2021, we had an accumulated deficit of $1.9 billion. From our inception through December 31, 2021, we have funded our operations principally with proceeds received from private and public equity and debt offerings, cash received from our collaborators, and through product and service sales made directly to customers. As of December 31, 2021, we had cash and cash equivalents of $42.9 million and short-term and long-term investments of $120.8 million. Cash in excess of immediate requirements is typically invested primarily in money market funds and United States government debt securities in order to maintain liquidity and preserve capital.
We currently generate cash receipts primarily from sales of products and services and from strategic transactions.
Trans Ova is subject to certain restrictive debt covenants under its line of credit which is discussed in "Notes to the Consolidated Financial Statements - Note 11" appearing elsewhere in this Annual Report. As of December 31, 2021, Trans Ova was in compliance with these debt covenants.
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Cash flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (In thousands) | ||||||||||
| Net cash provided by (used in): | ||||||||||
| Operating activities | $ | (55,771) | $ | (77,021) | $ | (135,927) | ||||
| Investing activities | (74,540) | 27,779 | 86,851 | |||||||
| Financing activities | 121,187 | 32,705 | 8,138 | |||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 217 | 353 | (810) | |||||||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (8,907) | $ | (16,184) | $ | (41,748) |
Cash flows from operating activities:
In 2021, our net loss was $92.2 million, which includes the following significant noncash expenses totaling $39.4 million from both continuing and discontinued operations: (i) $13.9 million of stock-based compensation expense, (ii) $13.8 million of depreciation and amortization expense, and (iii) $11.7 million accretion of debt discount and amortization of deferred financing costs. These expenses were partially offset by a $4.6 million noncash gain recognized upon the termination of our MBP Titan facility lease in January 2021.
In 2020, our net loss was $170.5 million, which includes the following significant noncash expenses totaling $107.9 million from both continuing and discontinued operations: (i) $27.0 million of accumulated foreign currency translation losses that were realized upon the closing of the Transactions, (ii) $23.0 million of impairment losses related to goodwill and long-lived assets, (iii) $18.4 million of stock-based compensation expense, (iv) $17.5 million of depreciation and amortization expense, (v) $11.4 million loss on settlement agreement with Harvest, and (vi) $10.6 million accretion of debt discount and amortization of deferred financing costs. These expenses were partially offset by the recognition of $12.8 million of previously deferred revenue upon the mutual terminations of collaboration agreements with Castle Creek and Oragenics in 2020.
In 2019, our net loss was $323.9 million, which includes the following significant noncash expenses totaling $191.0 million from both continuing and discontinued operations: (i) $120.5 million of impairment loss, (ii) $24.9 million of depreciation and amortization expense, (iii) $19.0 million of stock-based compensation expense, (iv) $10.4 million of shares issued for payment of services, (v) $9.5 million accretion of debt discount and amortization of deferred financing costs, and (vi) $6.7 million of equity in net loss of affiliates. These expenses were partially offset by $7.8 million of unrealized and realized appreciation on equity securities and preferred stock, net.
Our 2021 cash outflows from operations decreased $21.3 million from the year ended December 31, 2020 primarily due to (i) increased cash inflows provided by Trans Ova and Exemplar due to increased revenues and gross margins thereon, (ii) the reduction in cash requirements for MBP Titan as we suspended those operations in the second quarter of 2020, and (iii) reductions in operating expenses for our corporate operations as we streamlined operations in order to further prioritize the use of our capital.
Our 2020 cash outflows from operations decreased $58.9 million from the year ended December 31, 2019 primarily due to (i) the reduction in cash required to fund the businesses sold in the TS Biotechnology Sale, (ii) the reduction in cash requirements for MBP Titan as we wound down those operations starting in the second quarter of 2020, and (iii) reductions in operating expenses for our ActoBio and corporate operations as we streamlined both in order to further prioritize the use of our capital.
Cash flows from investing activities:
During 2021, we purchased $174.2 million of investments, primarily using the $121.0 million of proceeds received from the underwritten public offering discussed below. We also reinvested a portion of the $100.2 million proceeds we received during the year from the maturities and sales of investments.
During 2020, we purchased $171.4 million of investments, primarily using the $64.2 million of proceeds received from the Transactions, net of cash sold, and the private placement discussed below. We also reinvested a portion of the $133.0 million proceeds we received during the year from the maturities of investments.
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During 2019, we received proceeds of $111.4 million from the maturities and sales of investments, net of purchases; $21.6 million proceeds from the sale of our AquaBounty securities, and we used $37.9 million for purchases of property, plant and equipment.
Cash flows from financing activities:
During 2021, we received $121.0 million proceeds from the sale of our common stock in an underwritten public offering.
During 2020, we received $35.0 million proceeds from the sale of our common stock in a private placement to TS Biotechnology.
During 2019, we received $6.6 million in net proceeds from underwritten public offerings completed by AquaBounty.
Future capital requirements
We believe our existing liquid assets will enable us to fund our operating expenses and capital requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including:
•progress in our research and development programs, as well as the magnitude of these programs;
•any delays or potential delays to our clinical trials as a result of the COVID-19 pandemic;
•the timing of regulatory approval of our product candidates and those of our collaborations;
•the timing, receipt, and amount of any payments received in connection with strategic transactions;
•the timing, receipt, and amount of upfront, milestone, and other payments, if any, from present and future collaborators, if any;
•the timing, receipt, and amount of sales and royalties, if any, from our product candidates;
•the timing and capital requirements to scale up our various product candidates and service offerings and customer acceptance thereof;
•our ability to maintain and establish additional collaborative arrangements and/or new strategic initiatives;
•the resources, time, and cost required for the preparation, filing, prosecution, maintenance, and enforcement of our intellectual property portfolio;
•strategic mergers and acquisitions, if any, including both the upfront acquisition cost as well as the cost to integrate, maintain, and expand the strategic target;
•the costs associated with legal activities, including litigation, arising in the course of our business activities and our ability to prevail in any such legal disputes; and
•the effects, duration, and severity of the ongoing COVID-19 pandemic and the actions we have taken or may take in response, any of which could significantly impact our business, operations, and financial results.
Until such time, if ever, as we can regularly generate positive operating cash flows, we plan to finance our cash needs through a combination of equity offerings, debt financings, government, or other third-party funding, strategic alliances, sales of assets, and licensing arrangements. As the COVID-19 pandemic continues to impact the economy, our future access to capital on favorable terms may be materially impacted. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common shareholders. Our current stock price may make it more difficult to pursue equity financings and lead to substantial dilution if the price of our common stock does not increase. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional funds through strategic transactions, collaborations, or licensing arrangements with third parties, we may have to relinquish valuable rights to
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our technologies, future revenue streams, research programs, or product candidates, or to grant licenses on terms that may not be favorable to us.
We are subject to a number of risks similar to those of other companies conducting high-risk, early-stage research and development of 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 product candidates. Our success is dependent upon our ability to continue to raise additional capital in order to fund ongoing research and development, adequately satisfy or renegotiate long-term debt obligations, obtain regulatory approval of our products, successfully commercialize our products, generate revenue, meet our obligations, and, ultimately, attain profitable operations. Our ability to achieve what is necessary for our success may be negatively impacted by the uncertainty caused by the COVID-19 pandemic.
See the section entitled "Risk Factors" for additional risks associated with our substantial capital requirements.
Contractual obligations and commitments
The following table summarizes our significant contractual obligations and commitments from continuing operations as of December 31, 2021 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||||||||
| Operating leases | $ | 16,027 | $ | 2,680 | $ | 4,659 | $ | 4,050 | $ | 4,638 | ||||||||
| Convertible debt (1) | 200,000 | — | 200,000 | — | — | |||||||||||||
| Cash interest payable on convertible debt | 14,000 | 7,000 | 7,000 | — | — | |||||||||||||
| Long-term debt, excluding convertible debt | 3,269 | 402 | 743 | 804 | 1,320 | |||||||||||||
| Total | $ | 233,296 | $ | 10,082 | $ | 212,402 | $ | 4,854 | $ | 5,958 |
(1)See "Notes to the Consolidated Financial Statements - Note 11" appearing elsewhere in this Annual Report for further discussion of our convertible debt.
In addition to the obligations in the table above, as of December 31, 2021 we also have the following significant contractual obligations described below.
In conjunction with the formation of our JVs, we committed to making future capital contributions subject to certain conditions and limitations. As of December 31, 2021, our remaining capital contribution commitments to our JVs were $14.2 million. These future capital contributions are not included in the table above due to the uncertainty of the timing and amounts of such contributions.
We are party to in-licensed research and development agreements with various academic and commercial institutions where we could be required to make future payments for annual maintenance fees as well as for milestones and royalties we might receive upon commercial sales of products that incorporate their technologies. These agreements are generally subject to termination by us and therefore no amounts are included in the tables above. As of December 31, 2021, we also had research and development commitments with third parties totaling $22.3 million that had not yet been incurred.
Net operating losses
As of December 31, 2021, we had net operating loss carryforwards of approximately $856.4 million for United States federal income tax purposes available to offset future taxable income, including $603.7 million generated after 2017, United States capital loss carryforwards of $212.5 million, and United States federal and state research and development tax credits of approximately $11.1 million, prior to consideration of annual limitations that may be imposed under Section 382. Net operating loss carryforwards generated prior to 2018 begin to expire in 2022, and capital loss carryforwards will expire if unutilized beginning in 2024. Our foreign subsidiaries included in continuing operations have foreign loss carryforwards of approximately $75.7 million, most of which do not expire. Excluding certain deferred tax liabilities totaling $2.5 million, our remaining net deferred tax assets, which primarily relate to these loss carryforwards, are offset by a valuation allowance due to our history of net losses.
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As a result of our past issuances of our common stock, as well as due to prior mergers and acquisitions, certain of our net operating losses have been subject to limitations pursuant to Section 382. As of December 31, 2021, Precigen has utilized all net operating losses subject to Section 382 limitations, other than those losses inherited via acquisitions. As of December 31, 2021, approximately $42.1 million of domestic net operating losses were inherited via acquisitions and are limited based on the value of the target at the time of the transaction. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.
Critical accounting policies and estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in "Notes to the Consolidated Financial Statements - Note 2" appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Revenue recognition
We recognize revenue when our customer obtains control of the promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the promises and distinct performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligations.
Collaboration and licensing revenues
We have historically generated collaboration and licensing revenues through agreements with collaborators, known as ECCs, and licensing agreements whereby the collaborators or the licensee obtain exclusive access to our proprietary technologies for use in the research, development and commercialization of products and/or treatments in a contractually specified field of use. Generally, the terms of these agreements provide that we receive some or all of the following: (i) upfront payments upon consummation of the agreement; (ii) reimbursements for costs incurred by us for research and development and/or manufacturing efforts related to specific applications provided for in the agreement; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration or licensing agreement. The agreement typically continues in perpetuity unless terminated and each of our collaborators retains a right to terminate the agreement upon providing us written notice a certain period of time prior to such termination, generally 90 days.
Our collaboration and licensing agreements typically contain multiple promises, including technology licenses, research and development services and, in certain cases, manufacturing services. We determine whether each of the promises is a distinct performance obligation. As the nature of the promises in our collaboration and licensing agreements are highly integrated and interrelated, we typically combine most of our promises into a single performance obligation. Because we are performing research and development services during early-stage development, the services are integral to the utilization of the technology license. Therefore, we have determined that the technology license and research and development services are typically inseparable from each other during the performance period of our collaboration and licensing agreements. Options to acquire additional services are considered to determine if they constitute material rights. Contingent manufacturing services that may be provided under certain of our agreements are considered to be a separate future contract and not part of the current collaboration or licensing agreement.
At contract inception, we determine the transaction price, including fixed consideration and any estimated amounts of variable consideration. The upfront payment received upon consummation of the agreement is fixed and nonrefundable. Variable consideration is subject to a constraint and amounts are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the
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variable consideration is subsequently resolved. Variable consideration may include reimbursements for costs incurred by us for research and development efforts; milestone payments upon the achievement of certain development, regulatory and commercial activities; and royalties on sales of products arising from the collaboration or licensing agreement. We determine the initial transaction price and exclude variable consideration that is otherwise constrained pursuant to the guidance in ASC 606.
The transaction price is allocated to the performance obligations in the agreement based on the standalone selling price of each performance obligation. We typically group the promises in our collaboration and licensing agreements into one performance obligation so the entire transaction price relates to this single performance obligation. The technology license included in the single performance obligation is considered a functional license. However, it is typically combined into a single performance obligation as we provide interrelated research and development services along with other obligations over an estimated period of performance. We utilize judgment to determine the most appropriate method to measure our progress of performance under the agreement, primarily based on inputs necessary to fulfill the performance obligation. We evaluate our measure of progress to recognize revenue each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Our measure of performance and revenue recognition involves significant judgment and assumptions, including, but not limited to, estimated costs and timelines to complete our performance obligations. We evaluate modifications and amendments to our contracts to determine whether any changes should be accounted for prospectively or on a cumulative catch-up basis.
Payments received for cost reimbursements for research and development efforts are recognized as revenue as the services are performed, in connection with the single performance obligation discussed above. The reimbursements relate specifically to our efforts to provide services and the reimbursements are consistent with what we would typically charge other collaborators for similar services.
We assess the uncertainty of when and if the milestone will be achieved to determine whether the milestone is included in the transaction price. We then assess 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 we apply the sales- or usage-based royalties recognition exception provided for under ASC 606. We 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.
As we receive upfront payments in our collaboration and licensing agreements, we evaluate whether any significant financing components exist in our collaboration and licensing agreements. Based on the nature of our collaboration and licensing agreements, there are no significant financing components as the purpose of the upfront payment is not to provide financing. The purpose is to provide the collaborator with assurance that we will complete our obligations under the contract or to secure the right to a specific product or service at the collaborator's discretion. In addition, the variable payments generally align with the timing of performance or the timing of the consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the collaborator or us.
From time to time, we and certain collaborators may cancel our agreements, relieving us of any further performance obligations under the agreement. Upon such cancellation or when we have determined no further performance obligations are required of us under an agreement, we recognize any remaining deferred revenue as revenue.
We recognized $0.5 million, $21.2 million, and $14.1 million of collaboration and licensing revenues in the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021 and 2020, we have $23.0 million and $23.4 million, respectively, of deferred revenue related to our receipt of upfront and milestone payments.
Product and service revenues
Our product and service revenues are generated primarily through Trans Ova and include sales of advanced reproductive technologies, including our bovine embryo transfer and IVF processes and from genetic preservation and sexed semen processes and applications of such processes to other livestock, as well as sales of livestock and embryos produced using these processes and used in production. Exemplar also generates product and service revenues through the development and sale of genetically engineered miniature swine models. We evaluate each promised product or service under our contracts and identify performance obligations for each distinct product or services. We then allocate the transaction price of the contract to each performance obligation, recognizing the transaction price as revenue at a point in time when control of the promised product is transferred to the customer or when the promised service is rendered. Payment terms are typically due within 30 days of
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invoicing, which occurs prior to or when revenue is recognized. We recognized $102.9 million, $81.2 million, and $75.6 million of product and service revenues for the years ended December 31, 2021, 2020, and 2019, respectively.
Valuation of goodwill and long-lived assets
We evaluate long-lived assets to be held and used, which include property, plant and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.
Goodwill is tested for impairment annually, or more frequently if events or circumstances between annual tests indicate that the assets may be impaired. We perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the goodwill impairment test. If this is the case, the goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than the carrying amount, the quantitative goodwill impairment test is not required. If the quantitative goodwill impairment test is required or elected to be performed, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). Impairment losses on goodwill are recognized based solely on a comparison of their fair value to carrying value, without consideration of any recoverability test.
When we perform quantitative evaluations, the fair value of the reporting units are primarily determined based on the income approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flows, discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on historical operating results, incorporating adjustments to reflect management's planned changes in operations and market considerations. The discount rate utilizes a risk adjusted weighted average cost of capital. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization) and then assess the reasonableness of our implied control premium.
During the years ended December 31, 2021 and 2020, we recorded $0.5 million and $0.9 million, respectively, of impairment charges from continuing operations to write down the values of other long-lived assets. See additional discussion regarding these impairments in "Notes to the Consolidated Financial Statements - Note 9" appearing elsewhere in this Annual Report.
Recent accounting pronouncements
See "Notes to the Consolidated Financial Statements - Note 2" appearing elsewhere in this Annual Report for a description of recent accounting pronouncements applicable to our business, which is incorporated herein by reference.