10-K 1 xon-20161231x10k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-K
 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-36042
 INTREXON CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
26-0084895
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
20374 Seneca Meadows Parkway
Germantown, MD
 
20876
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code (301) 556-9900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Intrexon Corporation Common Stock, No Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of June 30, 2016, the aggregate market value of the registrant's common stock held by non-affiliates based upon the closing price of such shares on the New York Stock Exchange on such date was approximately $1.4 billion.
As of February 15, 2017, 118,730,518 shares of common stock, no par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Definitive Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2016.
 



TABLE OF CONTENTS

 
 
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Item 1.
Item 1A.
Item 1B.
Item 2.
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Item 4.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
 
 
 
 
Item 10.
Item 11.
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Item 14.
 
 
 
 
Item 15.
Item 16.
________________________
Intrexon®, Oxitec®, Arctic®, Viagen®, Biopop®, ActoBiotics®, UltraVector®, Trans Ova Genetics®, RheoSwitch®, RheoSwitch Therapeutic System®, RTS®, LEAP®, Design-Build-Test-Learn® and AquAdvantage® are our and/or our affiliates' registered trademarks in the United States and AquaBounty™, EnviroFlight™, AttSite™ and Okanagan Specialty Fruits™ are our and/or our affiliates' common law trademarks in the United States. This annual report and the information incorporated herein by reference contain references to trademarks, service marks and trade names owned by us or other companies. Solely for convenience, trademarks, service marks and trade names referred to in this annual report and the information incorporated herein, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, service marks and trade names. We do not intend our use or display of other companies' trade names, service marks or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Other trademarks, trade names and service marks appearing in this annual report are the property of their respective owners.

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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding our strategy, future events, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
our current and future exclusive channel collaborations ("ECCs"), license agreements and other collaborations;
developments concerning our collaborators and licensees;
our ability to successfully enter new markets or develop additional products, whether with our collaborators or independently;
competition from existing technologies and products or new technologies and products that may emerge;
actual or anticipated variations in our operating results;
actual or anticipated fluctuations in our competitors' or our collaborators' and licensees' operating results or changes in their respective growth rates;
our cash position;
market conditions in our industry;
our ability, and the ability of our collaborators and licensees, to protect our intellectual property and other proprietary rights and technologies;
our ability, and the ability of our collaborators and licensees, to adapt to changes in laws or regulations and policies;
the ability of our collaborators and licensees to secure any necessary regulatory approvals to commercialize any products developed under the ECCs, license agreements and joint ventures;
the ability of our collaborators and licensees to develop and successfully commercialize products enabled by our technologies;
the rate and degree of market acceptance of any products developed by a collaborator under an ECC or through a joint venture or license under a license agreement;
our ability to retain and recruit key personnel;
the result of litigation proceedings that we face currently or may face in the future;
our expectations related to the use of proceeds from our public offerings and other financing efforts; and
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.
Forward-looking statements may also concern our expectations relating to our subsidiaries and other affiliates. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in Item 1A, "Risk Factors," that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements

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do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.
You should read this Annual Report on Form 10-K, the documents that we reference in this Annual Report on Form 10-K, the audited consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K and the documents that we have filed as exhibits to our filings with the Securities and Exchange Commission completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
PART I
Item 1.
Business
At present rates of global industrialization and population growth, food and energy supplies and environmental and healthcare resources are becoming more scarce and/or costly. We believe it is not a viable option for mankind to continue on this path — new solutions will be necessary to preserve and globally expand a high quality of life. We believe that synthetic biology is a solution.
We believe we are a leader in the field of synthetic biology, an emerging and rapidly evolving discipline that applies engineering principles to biological systems to enable rational, design-based control of cellular function for a specific purpose. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs, which are DNA sequences that consist of key genetic components. A single gene program or a complex, multi-genic program is fabricated and stored within a DNA vector. Vectors are segments of DNA used as a vehicle to transmit genetic information. DNA vectors can, in turn, be introduced into cells in order to generate a simple or complex cellular system, which are the basic and complex cellular activities that take place within a cell and the interaction of those systems in the greater cellular environment. It is these genetically modified cell systems that can be used to produce biological effector molecules, or be employed directly to enable the development of new and improved products and manufacturing processes across a variety of end markets, including health, food, energy, environment and consumer. Our synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.
Working with our collaborators, we seek to create more effective, less costly and more sustainable solutions than can be provided through current industry practices. We believe our approach to synthetic biology can enable new and improved biotherapeutics, increase the productivity and quality of food crops and livestock, create sustainable alternative energy sources and chemical feed stocks, utilize biologically-based applications for the delivery of innovative consumer products and provide for a diverse set of environmental solutions. Our business model is to commercialize our technologies through exclusive channel collaborations, or ECCs, with collaborators that have industry expertise, development resources and sales and marketing capabilities to bring new and improved products and processes to market.
Our technologies combine the principles of precision engineering, statistical modeling, automation and production at an industrial scale. We efficiently engineer precise and complex gene programs across many cell types. We apply the engineering principle of a design-build-test-learn continuum, through which we accumulate knowledge about the characteristics and performance of gene programs and cell lines. This process of continuous learning allows us to enhance our ability to design and build improved and more complex gene programs and cellular systems.
While the field of synthetic biology is still emerging, the addressable markets that may benefit from this approach are large and well-established. In health, synthetic biology may provide new approaches to treating diseases, as well as improvements to the manufacture of existing products. It is estimated that the global biopharmaceuticals market is over $160 billion. While genetically modified salmon or trout may be considered new products, the global market for aquaculture was valued at approximately $157 billion in 2013. Genetically modified agricultural plants are already grown on approximately 180 million hectares around the world and are worth an estimated $15 billion. In energy, we are working to create novel, highly engineered organisms that use specific feedstocks to create commercially valuable end products, such as isobutanol, which already has a variety of technical and industrial applications and is also being investigated as a gasoline alternative.
We believe our technologies are broadly applicable across many diverse end markets, including some end markets that have failed to recognize the applicability of synthetic biology or failed to efficiently utilize biologically-based processes to produce products. Our business model entails the formation of ECCs with collaborators that have expertise within specific industry sectors. In our ECCs, we provide expertise in the engineering, fabrication and modification of gene programs and cellular

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systems, and our collaborators are responsible for providing commercial market and product development expertise, as well as sales and marketing capabilities. Generally, our collaborators compensate us through technology access fees, royalties, milestones and reimbursements of certain costs. This business model allows us to leverage our capabilities and capital across a broader landscape of product opportunities and end markets than we would be capable of addressing on our own. Alternatively, we may execute a research collaboration to develop an early-stage program pursuant to which we receive reimbursement for our development costs but the grant of exclusive commercial rights, and payment of the related access fee, are deferred until completion of an initial research program.
In certain strategic circumstances, we may enter into a joint venture, or JV, with a third party collaborator whereby we may contribute access to our technology, cash or both into the JV which we will jointly control with our ECC collaborator. We may be required to contribute additional capital to the JV, and we may be able to receive a higher financial return than we would normally receive from an ECC to the extent that we and our collaborator are successful in developing one or more products.
As we consider the broad potential applications of our synthetic biology techniques, we have identified a number of ventures that are already enabling products that benefit from the application of such technology. We believe that the strategic acquisition of certain such companies will allow us to develop and commercialize innovative products and create significant value for Intrexon. Our business model therefore includes the acquisition of certain product-focused companies that may leverage our technologies and expertise in order to expand their respective product applications.
What is synthetic biology?
History
Synthetic biology entails the application of engineering principles to biological systems for the purpose of designing and constructing new biological systems or redesigning/modifying existing biological systems. Biological systems are governed by DNA, the building blocks of gene programs, which control cellular processes by coding for the production of proteins and other molecules that have a functional purpose and by regulating the activities of these molecules. This regulation occurs via complex biochemical and cellular reactions working through intricate cell signaling pathways, and control over these molecules modifies the output of biological systems.
In the early 1970s, scientists utilized basic tools and procedures for transferring DNA from one organism to another. Foundational tools included: gene programs contained in vectors; enzymes that could cut DNA at specific sites; and enzymes that could "glue" two complementary segments of DNA together. Developments between 1980 and the end of the 20th century advanced the field of genetic engineering, including automated DNA sequencing, DNA amplification via PCR and the creation of genetically modified organisms. However, the simplistic "cut-and-paste" nature of the available tools, and the absence of genomic sequence information, significantly restricted the scope of early synthetic biology efforts.
More recently, synthetic biology has been enabled by the application of information technology and advanced statistical analysis, also known as bioinformatics, to genetic engineering, as well as by improvements in DNA synthesis. Synthetic biology aims to engineer gene-based programs or codes to modify cellular function to achieve a desired biological outcome. For example, applications may include the replacement of a defective protein with a functional protein to treat a broad range of human and animal disease states, or the production of multiple proteins through the regulation of several genes in a cell to produce petrochemicals.
Our approach
The essence of our approach is to apply synthetic biology by using an iterative process that is rapid, automated and highly reproducible, in which we:
Design genes of interest and gene programs utilizing knowledge of cellular pathways and protein function;
Build biological molecules, gene programs and their variants to optimize performance of the biological system;
Test gene programs by inserting them into cellular systems and comparing the result(s) to the intended effects; and
Learn by utilizing information gained in our iterative processes to create better gene programs and cellular systems using a more informed and efficient process to achieve improved outcomes.

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As a result of our approach, we have developed extensive knowledge about many classes of DNA components and the rules governing their expression and activity. We have also assembled an inventory of these DNA components that we can use to rationally construct unique vectors rapidly and with predictable outcomes. The knowledge embedded in our DNA database allows us to create single gene and highly complex multigenic gene programs (an individual gene program containing multiple genes).
To support our approach, we have developed, acquired, and integrated a unique suite of technologies, and we continue to expand upon their capabilities. These technologies include: our UltraVector gene design and fabrication platform and its associated library of modular DNA components; Cell Systems Informatics; RheoSwitch inducible gene switch; AttSite Recombinases; Protein Engineering; Laser-Enabled Analysis and Processing, or LEAP; and ActoBiotics platform. These technologies are complementary in nature and share the following key characteristics:
Platform neutral — outcome oriented. We can work across different cell types with the objective of achieving the intended biological outcome allowing for product development across a broad spectrum of end markets.
Knowledge driven. We use statistical modeling tools and computational analysis to continually acquire more knowledge about biological systems and their design to continually improve our ability to develop new and improved products and processes for our collaborators.
Rationally designed. Our knowledge of biological systems and components allows us to design, build and select gene programs and predict the probable outcome of these programs.
Capable of complexity. Our technologies enable the design and precise control of complex biological molecules and multigenic gene programs.
Industrial scale. We use engineering principles and automation to enable products based on synthetic biology that are commercially viable.
Our competitive strengths
We believe that our technologies, our ability to work across multiple host systems and our approach to synthetic biology — design-build-test-learn — give us a competitive advantage over traditional industrial processes as well as current approaches to synthetic biology.
We believe that we have the following competitive strengths:
We have a suite of proprietary and complementary technologies
We have built a suite of proprietary and complementary technologies that provides us with a comprehensive ability to design, create, modify and regulate gene programs and cellular systems across multiple host systems (human, animal, insect, plant, fungi, and bacteria). By virtue of the complementary nature of our technologies, we are able to provide our collaborators with a diverse array of capabilities, representing a "one stop shop" to potentially develop and commercialize new and differentiated products enabled by synthetic biology.
Our design-build-test-learn continuum allows us to design and build improved and more complex gene programs
We have developed a core expertise and technologies to design, build and test complex gene programs, as well as technologies to isolate cells that best express the desired biological output. We have also developed an extensive bioinformatic software platform that combines information technology with advanced statistical analysis for DNA design and genetic engineering, enabling us to continually learn and create optimal conditions for our gene programs. Our approach allows us to build improved and more complex gene programs.
We believe we are a leader in synthetic biology
We believe we are the first company focused exclusively on applying synthetic biology across a broad spectrum of end markets and have been working in the field since 1998. Over the last 19 years, we have accumulated extensive knowledge and experience in the design, modification and regulation of gene programs. We believe all of these factors, coupled with our suite of proprietary and complementary technologies, provide us with a first-mover advantage in synthetic biology.

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We serve large and diverse end markets with high built-in demand
A vast number of products consumed globally are or can be produced using biologically-based processes. Natural resources are becoming more scarce as demand exceeds supply, creating unmet needs for improvements in development and manufacturing. As a result, the need for complex biologically engineered molecules such as those enabled by our synthetic biology technologies is large and spans multiple industries, including health, food, energy, environment, and consumer. Each of these markets faces unique challenges, however all have unmet needs for improvements in product development and manufacturing that can result in savings of both cost and time as compared to traditional means of industrial design and production. Because synthetic biology has the potential to deliver against these unmet needs, we believe that significant demand already exists for improved products enabled by synthetic biology. Additionally, there are markets utilizing traditional industrial processes that have failed to recognize the significant improvement in performance that could be achieved using synthetic biology.
We have a scalable ECC business model that allows us to leverage the broad potential of synthetic biology
We believe our ECC business model is a capital efficient and rapid way for us to participate in a more diversified range of product opportunities and industrial end markets than would otherwise be possible, including health, food, energy, environment, and consumer. Our collaborators are primarily responsible for providing market and product development expertise, as well as sales and marketing capabilities. Generally, our collaborators compensate us through technology access fees, royalties, milestones and reimbursements of certain costs. Our ECC business model allows us to participate in the potential upside from products that are enabled by our technologies across an extensive range of industries, without the need for us to invest considerable resources in bringing individual programs to market. Moreover, we believe that we will increasingly engage in ECCs in new fields at an accelerating pace with well-recognized collaborators.
We have experienced management and employees
Our management team, including our Chief Executive Officer, Randal J. Kirk, and our President, Geno Germano, consists of executives with a track record of success in building and managing research and development-driven companies. Our Chief Science Officer, Thomas D. Reed, was responsible for the initial conception and creation of our UltraVector technology platform. As of December 31, 2016, we had 446 research and development employees.
Our suite of proprietary and complementary technologies
We apply the potential of synthetic biology through our suite of proprietary and complementary technologies that combine the principles of precision engineering, statistical modeling, automation and production at an industrial scale. This enables us to engineer precise and complex gene programs across many cell types rapidly and inexpensively. These technologies include: our UltraVector gene design and fabrication platform and its associated library of modular DNA components; Cell Systems Informatics; RheoSwitch inducible gene switch; AttSite Recombinases; Protein Engineering; LEAP processing; and ActoBiotics platform.
In order to create a highly functional biological system, we recognize the complexity of cellular processes and the necessity to construct an optimized gene program in conditions reflective of the natural environment to allow for the creation of the optimal biological product. This requires a rigorous understanding of cell signaling pathways as well as the interactions that influence the expression of protein. This knowledge is captured in our advanced Cell Systems Informatics, which uses statistical modeling and other analytic frameworks to determine the most efficient pathways for an intended biochemical result, and also plays a critical role in our research and development as this database of information allows us to explore new targets of potential interest to our current or future collaborators. Moreover, our bioinformatics and computational modeling platform is central to our Protein Engineering, which focuses on designing enhanced and/or novel protein functionalities, including stability, localization, and catalytic activity.
In addition to creating optimized gene programs via the most efficient cell signaling pathways and in the relevant cellular environments, we have a growing library of genetic components with our UltraVector platform that enable design and assembly of gene programs which facilitate control over the quality, function, and performance of living cells. Our RheoSwitch inducible gene switch provides quantitative dose-proportionate regulation of the amount and timing of target protein expression, thereby providing another mechanism to closely control activity of a newly constructed gene program. Further, our AttSite Recombinases allow for stable, targeted gene integration and expression. Once cells have been engineered for the desired biological output, the LEAP automated platform can be used to identify and purify cells of interest, such as antibody expressing cells and stem cells. Furthermore, our ActoBiotics platform allows for targeted in situ expression of proteins and peptides from engineered microbes.

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Our technology platform is designed to provide a "one stop shop" for start-to-finish conceptualization, engineering, regulation, optimization and production of biologically-based solutions that we believe possess many advantages over traditional processes. Our leading-edge toolkit can empower many different cell platforms allowing for selection of the most effective host to create a desired product or solution for our partners.
Our markets
Synthetic biology has applicability across many diverse end markets. Our goal is to be a leader in the application of synthetic biology for products currently utilizing biologically-based processes, and a leader in the replacement of conventional processes and products with biologically-based substitutes. Through the application of our suite of proprietary and complementary technologies, we believe we can create optimized biological processes and create substitutes for traditional industrial techniques, leading to improved products that are developed and manufactured faster and more cost-effectively.
Health Sector
It is estimated that the global biopharmaceuticals market is over $160 billion. Additionally, the market for animal health therapeutics is currently estimated to be valued at more than $20 billion globally. The unreliable, costly discovery and development process for new medicines is being replaced by the engineering of biology at the genetic, molecular, and cellular level. Our ability to regulate complex gene programs and cellular systems by applying the principles of science, engineering, and computational bioinformatics with proprietary technologies is being utilized to design new therapies for humans and animals. We are applying our approach to develop targeted gene therapy applications and novel solutions within oncology, rare skin disorders, active pharmaceutical ingredients, ocular diseases, human infertility, infectious diseases, and animal health, as well as autoimmune, metabolic, and gastrointestinal disorders.
Food Sector
The Food and Agriculture Organization (FAO) of the United Nations predicts that by 2050 the world's population will exceed 9 billion, global demand for animal protein will more than double, food production will need to increase by 70 percent, and global consumption of dairy and beef products will increase by 158 percent. We are focused on enabling efficient, high-quality food production that sustainably supports the necessities of our growing population. By applying our suite of technologies, we aim to facilitate development of agricultural, livestock and aquaculture resources that deliver innovative approaches and superior production yields in an environmentally responsible manner.
Energy Sector
Biological approaches hold significant potential to efficiently yield energy products. Despite this, existing attempts to produce "clean" energy are incredibly expensive, not achievable at an industrial scale, or require massive resources with low productivity. Additionally many alternative energy initiatives use food sources, like corn and sugarcane, which compete for arable land and water with sustenance crops. With our unique cellular engineering capabilities, we are developing microbial cell lines for bioconversion of methane to higher carbon content compounds. This proprietary platform holds the potential to transform the gas-to-liquids industry by generating valuable fuels and chemicals at a fraction of the cost of more traditional conversion methods. Our bioconversion approach seeks to attain the optimal balance of sustainable productive yield and attractive economic returns.
Environment Sector
As a result of industrialization and rapidly growing global populations, chemicals, heavy metals, oil products and various other pollutants are pervasive in the environment. These pollutants result in poor quality of drinking water, loss of water supply, contaminated ground water and soil, high clean-up costs, and potential health problems. We seek to engineer biological solutions that are designed to preserve or restore the environment and promote sustainability of natural resources. These biological approaches may replace products that present an environmental hazard. Examples include toxin-free, species-specific insect control methods that do not persist in the environment and microbial-based strategies for bioremediation of soil and water contamination.
Consumer Sector
Global consulting firm A.T. Kearney has estimated consumer spending will grow to $40 trillion by 2020 including an increase in spending on durable goods and personal care items. Despite its size and the number of products that can be achieved through biological means, the consumer market has experienced limited impact from synthetic biology. We are committed to partnering

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with diverse companies to develop biologically-based processes that displace petroleum-derived ingredients and polymers. Additionally, we are focused on reducing the wasteful practices associated with extracting compounds that occur in limiting amounts in plants and animals. Through our synthetic biology capabilities, we plan to utilize innovative biologically-based applications for the development of products, such as personal care items and decorative arts, to improve the lives of consumers every day.
Our business model
We believe that because synthetic biology has applicability across many diverse end markets, we cannot take full advantage of synthetic biology with internal development programs alone. To address this, we have devised our business model to allow us to focus on our core expertise in synthetic biology while bringing many different commercial products to market via collaborations in a broad range of industries or end markets, thus minimizing and leveraging the use of our own capital.
Our business model is built primarily around the formation of ECCs. An ECC is an agreement with a collaborator to develop products based on our technologies in a specifically defined field. We seek collaborators that have expertise within a specific industry sector and the commitment to provide resources for the commercialization of products within that industry sector. In our ECCs, we provide expertise in the engineering of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as sales and marketing capabilities.
This business model allows us to leverage our capabilities and capital across numerous product development programs and a broader landscape of end markets than we would be capable of addressing on our own. Our ECC business model also allows us to participate in the potential upside from products that are enabled by our technologies across an extensive range of industries, without the need for us to invest considerable resources in bringing individual products to market. Additionally, the flexibility of the business model allows us to collaborate with a range of counterparts, from small innovative companies to global multinational conglomerates.
Alternatively, we may execute a research collaboration to develop an early-stage program pursuant to which we receive reimbursement for our development costs but the exclusive commercial rights, and related access fees, are deferred until completion of an initial research program.
In certain strategic circumstances, we may enter into a JV with a third party collaborator whereby we may contribute access to our technology, cash or both into the JV which we will jointly control with our collaborator. Pursuant to a JV agreement, we may be required to contribute additional capital to the JV, and we may be able to receive a higher financial return than we would normally receive from an ECC to the extent that we and our collaborator are successful in developing one or more products.
As we consider the broad potential applications of our synthetic biology technologies, we have identified a number of ventures that are already enabling products that benefit from the application of such technology. We believe that the strategic acquisition of certain such companies will allow us to develop and commercialize innovative products and create significant value for Intrexon. Our business model therefore includes the acquisition of certain product-focused companies that may leverage our technologies and expertise in order to expand their respective product applications.
As a means to further the development of our business model, in June 2015, we entered into an agreement with Harvest Intrexon Enterprise Fund I, LP, or Harvest, an investment fund sponsored by Harvest Capital Strategies, LLC, and a related party based on ownership in the fund by affiliates of Third Security, LLC, or Third Security. Harvest was established to invest in life science research and development opportunities that we offer to Harvest. These are investment proposals that are suitable for pursuit by a start-up venture, characterized by the agreement as "start-up opportunities." For such start-up opportunities, we provide Harvest with exclusive rights of first-look and first negotiation. For any opportunities it decides to pursue, Harvest establishes new collaboration entities which enter into an ECC with us in a designated field. The terms of such ECCs are negotiated between us and Harvest. In addition, the agreement provides us the right to present to Harvest the opportunity to invest in other ventures, including investment opportunities with respect to our existing collaborations. Any such opportunities are presented at our discretion on a non-exclusive basis. The agreement with Harvest does not limit our ability to execute other collaborations and JVs with third parties. As consideration for providing exclusive rights of first-look and first negotiation for start-up opportunities, we receive a portion of the management fee collected by the fund sponsor of Harvest.
Our ECCs
Our ECCs typically share a number of key features. Each ECC is an agreement with a collaborator to develop products based on our technologies in one or more specifically defined fields. These fields may be narrowly defined (representing, for

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example, a specific therapeutic approach for a single indication) or may be broad (representing, for example, an entire class of related products). In each case, we and the collaborator precisely define the field based on factors such as the expertise of the collaborator, the relative markets for the prospective products, the collaborator's resources available to commit to the ECC and our expectations as to other prospective ECCs in related areas. Regardless of the size of the field, under each ECC we grant the collaborator exclusive rights to our services and our suite of technologies to commercialize products within the field. So long as our collaboration continues, the parties agree that each will not, alone or with another party, develop and commercialize products within the field of the ECC.
We may realize four general categories of revenue under our ECCs: (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.
Pursuant to our business model, we may receive equity in lieu of cash for technology access fees and milestones and also may participate in capital raises to allow earlier-stage collaborators to focus their resources on product development. When such a collaborator develops greater operational or financial resources, however, its shares become a financial asset within Intrexon that is independent of our operational or collaborative purposes.
Generally, each of our ECCs is designed to continue in perpetuity unless terminated. Given the relatively long development cycle for many of the products that could be enabled by our technologies, as well as our belief that we can enable the continual improvement of product offerings, it is our expectation that our ECCs will continue for many years and result in the development of multiple products. Each of our collaborators, however, retains the right to terminate the ECC for any reason by providing us written notice a certain period of time prior to such termination, generally ninety days. The ECC is also terminable by either party upon the other party's breach of material provisions of the ECC. The failure of our collaborator to exercise diligent efforts to develop products within the field of the ECC constitutes such a breach.
In the event one of our ECCs terminates, we are entitled to immediately pursue a collaboration with a different counterparty within the field of the terminated ECC. Moreover, technologies and product candidates in a relatively early stage of development revert to us, along with data, materials and the rights to applicable regulatory filings related to the reverted products, enabling us to develop those product candidates ourselves or incorporate them into a future collaboration. Product candidates that are at a more advanced stage of development, such as those already generating revenue or being considered for approval by an applicable regulatory body at the time of the ECC's termination are retained by the former collaborator. The collaborator has the right to commercialize such retained products although we are entitled to the royalties or other compensation to which we would be entitled as if the ECC were still in effect. Upon termination, we generally retain any technology access fees or other payments to which we are entitled through the date of termination.
In our ECCs, we retain rights to our existing intellectual property and generally any intellectual property developed using, or otherwise incorporating, our technologies. In addition, we are generally responsible for controlling the prosecution and enforcement of this intellectual property with the exception of the enforcement of patents directed solely and specifically to products developed within the field of each ECC.
Each of our ECCs requires the collaborator to indemnify us for all liability related to products produced pursuant to the ECC and to obtain insurance coverage related to product liability.
See Note 5 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a discussion of the key financial terms of our significant ECCs.
Joint ventures
The following represent our significant JVs as of December 31, 2016.
S & I Ophthalmic
In September 2013, we entered into a Limited Liability Company Agreement, or the Sun LLC Agreement, with Caraco Pharmaceutical Laboratories, Ltd., or Sun Pharmaceutical Subsidiary, an indirect subsidiary of Sun Pharmaceutical Industries Ltd., or Sun Pharmaceutical, an international specialty pharmaceutical company focused on chronic diseases, to form S & I Ophthalmic, LLC, or S & I Ophthalmic. The Sun LLC Agreement governs the affairs and the conduct of business of S & I Ophthalmic. S & I Ophthalmic leverages experience and technology from both us and Sun Pharmaceutical. Both we and Sun Pharmaceutical Subsidiary made an initial capital contribution of $5 million in October 2013 for a 50 percent membership

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interest in the JV. S & I Ophthalmic is governed by the S & I Ophthalmic board of managers, or the S & I Ophthalmic Board, which has four members, two each from us and Sun Pharmaceutical Subsidiary. In cases in which the S & I Ophthalmic Board determines that additional capital contributions are necessary in order for the JV to conduct business and comply with its obligations, each of us and Sun Pharmaceutical Subsidiary have committed to making additional capital contributions to S & I Ophthalmic, subject to certain limits defined in the agreement. Each has the right, but not the obligation, to make additional capital contributions above the defined limits when and if solicited by the S & I Ophthalmic Board.
Beginning on the seventh anniversary of the effective date of the Sun LLC Agreement, and upon the second anniversary thereafter, we, as well as Sun Pharmaceutical Subsidiary, may make a cash offer to purchase all of the other party's interest in S & I Ophthalmic. Upon receipt of such an offer, the other party must either agree to tender its interests at the offered price or submit a counteroffer at a price higher than the original offer. Such offer and counteroffer may continue until one party agrees to the other's price.
OvaXon
In December 2013, we entered into an ECC with OvaScience, Inc., or OvaScience, a life sciences company focused on the discovery, development and commercialization of new treatments for infertility. Additionally, we and OvaScience formed OvaXon, LLC, or OvaXon, a JV to create new applications for improving human and animal health. Both we and OvaScience made an initial capital contribution of $1.5 million in January 2014 for a 50 percent membership interest in OvaXon. OvaXon is governed by the OvaXon board of managers, or the OvaXon Board, which has four members, two each from us and OvaScience. In cases in which the OvaXon Board determines that additional capital contributions are necessary in order for OvaXon to conduct business and comply with its obligations, each of us and OvaScience have the right, but not the obligation, to make additional capital contributions to OvaXon subject to the terms of the agreement. OvaScience also licensed certain technology relating to egg precursor cells to OvaXon pursuant to a separate license agreement.
Intrexon Energy Partners
In March 2014, we and certain investors, or the IEP Investors, entered into a Limited Liability Company Agreement which governs the affairs and conduct of business of Intrexon Energy Partners, LLC, or Intrexon Energy Partners, a JV formed to optimize and scale-up our gas-to-liquid bioconversion platform for the production of certain fuels and lubricants. We also entered into an ECC with Intrexon Energy Partners providing exclusive rights to our technology for the use in bioconversion, as a result of which we received a technology access fee of $25 million while retaining a 50 percent membership interest in Intrexon Energy Partners. The IEP Investors made initial capital contributions, totaling $25 million in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners totaling 50 percent. We committed to make additional capital contributions of up to $25 million, and the IEP Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners, have committed to make additional capital contributions of up to $25 million, at the request of the Intrexon Energy Partners' board of managers, or the Intrexon Energy Partners Board, and subject to certain limitations. 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 us and three members are designated by a majority of the IEP Investors. We 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.
Contemporaneously with the formation of the JV and entry into the ECC, we entered into securities purchase agreements with the IEP Investors for the private placement of 972,004 shares of our common stock for gross proceeds of $25 million.
Intrexon Energy Partners II
In December 2015, we and certain investors, or the IEPII Investors, entered into a Limited Liability Company Agreement which governs the affairs and conduct of business of Intrexon Energy Partners II, LLC, or Intrexon Energy Partners II, a JV formed to utilize our natural gas bioconversion platform for the production of 1,4-butanediol, an industrial chemical intermediate used to manufacture spandex, polyurethane, plastics, and polyester. We also entered into an ECC with Intrexon Energy Partners II providing exclusive rights to our technology for use in the field, as a result of which we received a technology access fee of $18 million while retaining a 50 percent membership interest in Intrexon Energy Partners II. The IEPII Investors made initial capital contributions, totaling $18 million in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners II totaling 50 percent. In December 2015, the owners of Intrexon Energy Partners II made a capital contribution of $4 million, half of which was paid by us. We committed to make additional capital contributions of up to $10 million, and the IEPII Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners II, have committed to make additional capital contributions of up to $10 million, at the request of the

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Intrexon Energy Partners II's board of managers, or the Intrexon Energy Partners II Board, and subject to certain limitations. 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 us and four members are designated by a majority of the IEPII Investors. We 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.
EnviroFlight
In February 2016, we entered into a series of transactions involving EnviroFlight, LLC, or Old EnviroFlight, Darling Ingredients Inc., or Darling, and a newly formed venture between us and Darling, or New EnviroFlight. This series of integrated transactions resulted in us acquiring substantially all of the assets of Old EnviroFlight and contemporaneously contributing all of these assets, with the exception of certain developed technology, and $3 million of cash to New EnviroFlight in exchange for a non-controlling, 50 percent membership interest in New EnviroFlight. Our contributions to New EnviroFlight included an exclusive license to the developed technology that was retained by us. Darling received the remaining 50 percent membership interest in New EnviroFlight as consideration for terminating rights previously held in the developed technology with Old EnviroFlight. New EnviroFlight was formed to generate high nutrition, low environmental impact animal and fish feed, as well as fertilizer products. We and Darling as members have each agreed to make additional capital contributions of up to $5 million to fund ongoing operations of New EnviroFlight. All of the employees of Old EnviroFlight became employees of New EnviroFlight.
Intrexon T1D Partners
In March 2016, we and certain investors, the T1D Investors, including affiliates of Third Security, entered into a Limited Liability Company Agreement which governs the affairs and conduct of business of Intrexon T1D Partners, LLC, or the Intrexon T1D Partners, a JV formed to utilize our proprietary ActoBiotics platform to develop and commercialize products to treat type 1 diabetes. We also entered into an ECC with Intrexon T1D Partners which provides the exclusive rights to our technology for use in the field, as a result of which we received a technology access fee of $10 million while retaining a 50 percent membership interest in Intrexon T1D Partners. The T1D Investors made initial capital contributions, totaling $10 million in the aggregate, in exchange for pro rata membership interests in Intrexon T1D Partners totaling 50 percent. We committed to make capital contributions of up to $5 million, and the T1D Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon T1D Partners, have committed to make additional capital contributions of up to $5 million, at the request of Intrexon T1D Partners' board of managers, or the Intrexon T1D Partners Board, and subject to certain limitations. Intrexon T1D Partners is governed by the Intrexon T1D Partners Board, which has five members. Two members of the Intrexon T1D Partners Board are designated by us and three members are designated by a majority of the T1D Investors. We and the T1D Investors have the right, but not the obligation, to make additional capital contributions above these limits when and if solicited by the Intrexon T1D Partners Board.
See Note 5 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a discussion of significant ECCs between us and our JVs.
Primary operating subsidiaries
Primary wholly owned operating subsidiaries
Trans Ova Genetics, L.C.
Trans Ova Genetics, L.C., or Trans Ova, is internationally recognized as a provider of industry-leading bovine reproductive technologies. Intrexon and Trans Ova are building upon Trans Ova's original platform with a goal of achieving higher levels of delivered value to dairy and beef cattle producers. ViaGen, L.C., or ViaGen, a wholly owned subsidiary of Trans Ova, is a provider of cloning technology for non-primate species. Exemplar Genetics, LLC, or Exemplar, a wholly owned subsidiary through the combined ownership of Trans Ova, ViaGen and us, is committed to enabling the study of life-threatening human diseases.
Okanagan Specialty Fruits, Inc.
Okanagan Specialty Fruits, Inc. and its affiliates, or Okanagan, is the pioneering agricultural company behind the world's first non-browning apple without the use of any flavor altering chemical or antioxidant additives. Okanagan is scaling up its commercial supplies of non-browning apples and developing new commercial tree fruit varieties intended to provide benefits to the entire supply chain, from growers to consumers.

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Oxitec Limited
Oxitec Limited, or Oxitec, is a pioneering company in biological insect control solutions. Oxitec is developing products that use genetic engineering to control insect pests that spread disease and damage crops. Using advanced genetics and molecular biology, Oxitec has developed a new and innovative solution to controlling Aedes aegypti, a mosquito that is a known vector for the transmission of infectious disease including dengue fever, chikungunya, and Zika virus.
Primary majority-owned operating subsidiary
AquaBounty Technologies, Inc.
AquaBounty Technologies, Inc., or AquaBounty, of which we own approximately 70 percent as of December 31, 2016, is focusing on improving productivity in commercial aquaculture, including the development of the AquAdvantage® Salmon, or AAS, an Atlantic salmon that has been genetically enhanced to reach market size in less time than conventionally farmed Atlantic salmon and approved by the Food and Drug Administration, or FDA. In January 2017, we invested $25 million in AquaBounty through an equity purchase and subsequently, we distributed 1,776,557 of our AquaBounty shares to our shareholders, decreasing our ownership to approximately 58 percent.
Mergers, acquisitions, and technology in-licensing
We may augment our suite of proprietary technologies through mergers or acquisitions of technologies which then become available to new or existing collaborators. Among other things, we pursue technologies that we believe will be generally complementary to our existing technologies and also meet our desired return on investment and other economic criteria. In certain cases, such technologies may already be applied in the production of products or services and in these cases we may seek to expand the breadth or efficacy of such products or services through the use of our technologies. In 2016, we acquired all of the assets of Old EnviroFlight, as described above and also in the "Notes to Consolidated Financial Statements" appearing elsewhere in this Annual Report on Form 10-K.
GenVec acquisition
In January 2017, we entered into a definitive agreement to acquire GenVec, Inc., or GenVec, a clinical-stage company and pioneer in the development of AdenoVerse™ gene delivery technology. Upon closing of the transaction, GenVec stockholders will receive 0.297 of a share of our common stock in exchange for each share of GenVec common stock. This exchange ratio represents $7.00 per share of GenVec's common stock divided by our five-day volume weighted average price as of January 23, 2017. GenVec stockholders may also receive contingent consideration equal to 50 percent of any milestone or royalty payments received under one of GenVec's collaboration agreements, provided such payments are received within three years after the closing of the transaction.  Consummation of the transaction, anticipated in the second quarter of 2017, is subject to customary closing conditions, including GenVec stockholder approval.
Competition
We believe that we are a leader in synthetic biology. We do not believe that we have any direct competitors who provide similar technologies which fully enable the commercialization of products developed using synthetic biology across a broad spectrum of biologically based industries. As a result, we believe our competition is more indirect and general in nature, and falls into three broad categories:
Synthetic biology service providers. There are companies that have competing technologies for individual pieces of our suite of complementary technologies. For example, there are companies that can synthesize DNA, and there are companies that can develop monoclonal antibodies. One portion of our proprietary technology related to DNA synthesis and assembly includes the ability to de novo synthesize DNA. We believe the following companies engage in the manufacture of DNA componentry: ATUM, Inc., Blue Heron Biotech, LLC (a subsidiary of OriGene), Integrated DNA Technologies, Inc. (IDT), Gen9, Inc., GenScript USA, Inc., and Life Technologies Corporation, now part of Thermo Fisher Scientific Inc.
Industrial companies who may develop their own approach to synthetic biology. Rather than becoming a collaborator with us, potential collaborators may decide to invest time and capital to internally develop their own synthetic biology capabilities. For example, large biopharmaceutical companies, energy companies, and ag-bio companies may pursue a proprietary synthetic biology strategy.

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Industrial companies who may develop competing products using other technologies. Products enabled by our synthetic biology will face competition in the market, including from products which have been developed using other industrial technologies. For example, large biopharmaceutical companies pursue other technologies for drug development, and large ag-bio companies pursue other technologies for the development of genetically modified crops. The rapidly evolving market for developing genetically engineered T-cells in particular, a primary focus of our collaboration with ZIOPHARM Oncology, Inc., or ZIOPHARM, is characterized by intense competition and rapid innovation. Genetically engineering T-cells faces significant competition in the chimeric antigen receptor (CAR) technology space from multiple companies and their collaborators, such as Novartis/University of Pennsylvania, Bluebird Bio/Celgene/Baylor College of Medicine/Five Prime/KitePharma/ViroMed Laboratories, Kite Pharma/National Cancer Institute, Juno Therapeutics/Fred Hutchinson Cancer Research Center/Memorial Sloan-Kettering Cancer Center/Seattle Children's Research Institute, Cellectis/Pfizer/Servier, Adaptimmune/GSK and Bellicum Pharmaceuticals. We face competition from non-cell based treatments offered by other companies such as Amgen, AstraZeneca, Bristol-Myers, Incyte, Merck, and Roche.
Intellectual property
As we advance technologies across multiple platforms and synthetic biology areas, correspondingly, we apply a multilayered approach for protecting intellectual property relating to the inventions we have developed internally as well as those we have acquired from third parties, such as by assignment or by in-license. We seek patent protection in the United States and in other countries for our inventions and discoveries, and we develop and protect our key know-how and trade secrets relating to our platform technologies as well as to the products we are developing with our collaborators.
We seek patent protection for our platform technologies, including but not limited to our (i) switch technology; (ii) activator ligands for our switch technology; (iii) portfolio around various genetic componentry such as vectors, cells and organisms containing these genetic componentry; and (iv) cell identification and selection platform. In addition, we seek patents covering specific collaborator's products. With respect to a particular collaborator's product, we may seek patent protection on some or all of the following aspects of the invention such as: the compound or material composition of matter and/or the method or process of making or using the composition.
Through the use of our various platform technologies we seek to design and build proprietary compounds, vectors, methods and processes across a variety of end markets. In particular, we focus our intellectual property on synthetic biology technologies that provide platforms for the design and creation of cells, vectors and components for our collaborators. In addition, we may pursue intermediate and product-specific patents associated with our collaborators' lead programs.
Our success depends, in part, upon our ability to obtain patents and maintain adequate protection for our intellectual property relating to our technologies and products and potential products. We have adopted a strategy of seeking patent protection in the United States and in other jurisdictions globally as we deem appropriate under the circumstances, with respect to certain of the technologies used in or relating to our products and processes. For instance, where we believe appropriate, we have also filed counterpart patents and patent applications in other countries, including Australia, Argentina, Brazil, Canada, China, Europe, Hong Kong, India, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Philippines, Russia, Singapore, South Africa and Taiwan. In the future we may file in these or additional jurisdictions as deemed appropriate for the protection of our technologies.
As of December 31, 2016, we owned at least 55 issued U.S. patents and 55 pending U.S. patent applications relating to certain aspects of our technologies, and we have pursued counterpart patents and patent applications in other jurisdictions around the world, as we have deemed appropriate. We continue to actively develop our portfolio through the filing of new patent applications, provisional and continuations or divisionals relating to our technologies, methods and products as we and our collaborators deem appropriate.
We have strategic positioning with respect to our key technologies including our owned patent portfolios directed to: our switch technology covering aspects of our switches and gene modulation systems, with a last to expire patent currently in 2029; our portfolio around various genetic componentry, such as vectors, cells and organisms containing these genetic componentry, and their use, with a last to expire patent in 2032; our activator ligand technology covering aspects of our activator ligands and their use, with a last to expire patent in 2034; and our cell identification and selection technology covering aspects of our cell identification and selection platform, including our cell purification, isolation, characterization and manipulation technologies, with a last to expire patent in 2031. Although we cannot be assured that these patents may not be subject to challenge in the future, as of this filing, there are currently no material contested proceedings and/or third party claims with respect to any of these patent portfolios.

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Additionally, we complement our intellectual property portfolio with exclusive and non-exclusive patent licenses and options for licenses to third party technologies.
A principal component of our strategy is maximizing the value of our ECCs through our intellectual property that covers our technologies, which is accentuated by intermediate and program-specific intellectual property protections. In addition to owned and in-licensed patents, we solidify our intellectual property protection through a combination of trade secrets, know-how, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information related to each platform and collaborator program. We regularly assess and review the risks and benefits of protecting our developments through each aspect of intellectual property available to us.
Because we rely on trade secrets, know-how and continuing technological advances to protect various aspects of our core technology, we require our employees, consultants and scientific collaborators to execute confidentiality and invention assignment agreements with us to maintain the confidentiality of our trade secrets and proprietary information. Our confidentiality agreements generally provide that the employee, consultant or scientific collaborator will not disclose our confidential information to third parties. These agreements also provide that inventions conceived by the employee, consultant or scientific collaborator in the course of working for us will be our exclusive property. Additionally, our employees agree to take certain steps to facilitate our assertion of ownership over such intellectual property. These measures may not adequately protect our trade secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technologies, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.
Regulatory environment
Regulations affecting Intrexon
Our ongoing research and development relies on evaluations in animals, which may become subject to bans or additional regulations. As described below, our research operations are also subject to various environmental regulations. However, while most of the current laws and regulations concerning synthetic biology relate to the end products produced using synthetic biology, this may change. For example, in December 2010, the Presidential Commission for the Study of Bioethical Issues recommended that the federal government oversee, but not regulate, synthetic biology research. The Presidential Commission also recommended that the federal government lead an ongoing review of developments in the synthetic biology field and that the federal government conduct a reasonable risk assessment before the field release of synthetic organisms.
As discussed below, the products our collaborators produce are subject to extensive regulation. Refer to "Risk factors — The markets in which our collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our collaborators to comply with all applicable laws and regulations" for more discussion of regulatory risks.
Environmental regulations affecting Intrexon, our subsidiaries and our collaborators
Our collaborators, our subsidiaries and we are subject to various federal, state and local environmental laws, rules and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials and the health and safety of employees with respect to laboratory activities required for the development of products and technologies. These laws and regulations require us and our collaborators to obtain environmental permits and comply with numerous environmental restrictions. These laws and regulations also may require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.
Our laboratory activities and those of our collaborators inherently involve the use of potentially hazardous materials, which are subject to health, safety and environmental regulations. We design our infrastructure, procedures and equipment to meet our obligations under these regulations. We perform recurring internal and third-party audits and provide employees ongoing training and support, as required. All of our employees must comply with safety instructions and procedures, which are codified in our employment policies. Federal and state laws and regulations impose requirements on the production, importation, use and disposal of chemicals and genetically modified microorganisms, which impact us and our collaborators. Our subsidiaries' and our collaborators' processes may contain genetically engineered organisms which, when used in industrial processes, are considered new chemicals under the Toxic Substances Control Act program of the U.S. Environmental Protection Agency, or EPA. These laws and regulations would require our subsidiaries and collaborators to obtain and comply with the EPA's Microbial Commercial Activity Notice process to operate. In the European Union, our subsidiaries and collaborators may be subject to a chemical regulatory program known as REACH (Registration, Evaluation, Authorization and Restriction of

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Chemical Substances). Under REACH, companies are required to register their products with the European Commission, and the registration process could result in significant costs or delay the manufacture or sale of products in the European Union.
Regulations affecting our collaborators and subsidiaries
Human therapeutics regulation
As discussed in "Risk factors — Risks associated with our business model," the products produced by our collaborators enabled by our technology platforms are subject to extensive regulation. We rely on our collaborators' compliance with laws and regulations applicable to the products they produce. We do not independently monitor whether our collaborators comply with applicable laws and regulations. Please see the risk factor entitled "The markets in which our collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our collaborators to comply with all applicable laws and regulations."
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical products such as those being developed by our collaborators. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.
In addition to regulations in the United States, our collaborators will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of the products enabled by our technologies. Whether or not our collaborators obtain FDA approval for a product, they must obtain approval by the comparable regulatory authorities of foreign countries or economic areas, such as the European Union, before they may commence clinical trials or market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.
Animal health regulation
The sale of animal health products is governed by the laws and regulations specific to each country. In the majority of our target markets, the relevant health authority is separate from those governing human medicinal products. In the United States, the FDA regulates animal health pharmaceuticals, the United States Department of Agriculture, or USDA, regulates veterinary vaccines, and EPA regulates veterinary pesticides. Each U.S. agency has its own rules and regulations with which our collaborators must comply. In Europe, the European Medicines Agency, or EMA, is responsible for the scientific evaluation of medicines, including animal health products being developed by our collaborators with our technology platforms. Most other countries' regulatory agencies will generally refer to the FDA, USDA, European Union and other international animal health entities.
Oxitec has produced a genetically engineered line of the mosquito Aedes aegypti (OX513A) with the intent of suppressing the population of that mosquito at the release site(s). Oxitec's genetically engineered insect products are subject to regulation. The FDA's Center for Veterinary Medicine is currently the lead regulatory body, working in association with EPA and the Centers for Disease Control and Prevention, and has reviewed information supplied by Oxitec in an Investigational New Animal Drug, or INAD, regarding the company's genetically engineered mosquitoes. As part of the review, the FDA published in August 2016 a final environmental assessment (EA) and Finding of No Significant Impact (FONSI) regarding impacts on human health, animal health and the environment based on their review of information and evidence provided on the conduct of an investigational trial in Key Haven, Florida. In November 2016, the Board of the Florida Keys Mosquito Control District (FKMCD) voted to approve the use of the OX513A mosquitoes in an effectiveness trial. FKMCD and Oxitec are currently working together to identify possible sites for this trial.  We do not currently have a timeline for when the trial will occur. The OX513A genetically engineered mosquito has been approved by Brazil's National Biosafety Committee (CTNBio) for unrestricted releases throughout the country, and open field trials of these mosquitoes have been conducted in Brazil, the Cayman Islands, Panama, and Malaysia under relevant permits or approvals. Further approvals will be required for commercial production and use.
Food product regulation
The manufacturing, marketing and certain areas of research related to some of the potential food products developed by our subsidiaries and collaborators are subject to regulation by federal and state governmental authorities in the United States, including the FDA, the USDA, and the EPA. The FDA regulates genetically engineered animals under new animal drug

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provisions of the law, and the agency must approve them before they are allowed on the market. Following marketing approval, the FDA continues to regulate drug and biological products extensively.
Okanagan's Arctic apple products are subject to such regulation. In February 2015, the USDA announced its decision to deregulate Okanagan's Golden Delicious apple variety and Granny Smith apple variety, or together the Arctic apples. In reaching its decision, the USDA conducted a final plant pest risk assessment, or PPRA, concluding that Arctic apples are unlikely to pose a plant pest risk to agriculture and other plants in the United States. The USDA also completed an EA to comply with the National Environment Policy Act, or NEPA, and concluded that deregulation is not likely to have a significant impact on the human environment. Concurrent with the USDA, Okanagan also engaged in a voluntary food safety assessment consultation with the FDA regarding its Arctic apples. The FDA completed its assessment in March 2015. Based on the information provided by Okanagan and other information available to the agency, the FDA did not identify any safety or regulatory issues under the Federal Food, Drug & Cosmetic Act that would require further evaluation. As part of bringing the assessment to closure, Okanagan was required to submit summaries of its safety and nutritional assessments for its Arctic apples. In August 2016, the USDA announced its decision to extend a preliminary determination of nonregulated status to Okanagan's Arctic Fuji apple variety
Comparable authorities to the federal and state governmental authorities in the United States are involved in other countries, such as the European Food Safety Authority, or EFSA, in Europe and Health Canada in Canada. In relation to Okanagan, Health Canada announced its decision in March 2015 that it has no objection to the food use of the Arctic apple in Canada. In reaching its decision, Health Canada conducted a comprehensive assessment of the Golden Delicious and Granny Smith varieties according to its Guidelines for the Safety Assessment of Novel Foods. These guidelines are consent with internationally accepted principles for establishing the safety of foods with novel traits adopted by the Codex Alimentarius Commission. Following this assessment, it was determined that the changes made to the Arctic apple did not pose a greater risk to human health than apples currently available on the Canadian market. In addition, Health Canada also concluded that the Arctic apple would have no impact on allergies and that there are no differences in the nutritional value of the Arctic apple compared to other traditional apple varieties available for consumption.
AquaBounty's AAS is also subject to such regulation. The FDA published in December 2012 an EA for AAS along with its FONSI in the Federal Register, confirming that an approval of the pending New Animal Drug Application would not have an adverse effect on the environment and opened up a 60 day period for public comment. In February 2013, the FDA extended the period for public comment by an additional 60 days, which expired in April 2013. Prior to the publication of the EA and FONSI, in September 2010, the FDA held a public meeting of its Veterinary Medicine Advisory Committee to review its findings regarding AAS. The conclusion of its panel of experts was that AAS is indistinguishable from other farmed Atlantic salmon, is safe to eat and does not pose a threat to the environment under its conditions of use. Subsequently, the FDA initiated an EA in compliance with its obligations under the U.S. NEPA, which requires that all federal agencies consider the possible environmental impacts of any action that they authorize. Subsequently, in November 2015, the FDA approved the New Animal Drug Application for the production, sale and consumption of AAS. AquaBounty is subject to on-going post approval responsibilities as detailed in the FDA letter of approval and summarized in the EA dated in November 2015. In the event that AquaBounty seeks to modify or expand its production sites and methods, the company may require further regulatory approvals. In May 2016, Health Canada concluded its review of AAS and approved it for commercial sale in Canada and the Animal Feed Division of the Animal Health Directorate of the Canadian Food Inspection Agency (CFIA), authorized AAS for use in livestock feeds.
Energy and chemical regulation
Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture and marketing of biofuels. The biofuels developed by our collaborators with our technology platforms may require regulatory approval by governmental agencies prior to commercialization. In the United States, various federal, and, in some cases, state statutes and regulations also govern or impact the manufacturing, safety, storage and use of biofuels. The environmental regulations discussed above also govern the development, manufacture and marketing of energy and chemical products.
Research and development
As of December 31, 2016, we had 446 research and development employees. We incurred expenses of $112.1 million, $147.5 million and $59.0 million in 2016, 2015, and 2014, respectively, on research and development activities. We anticipate that our research and development expenditures will increase substantially as we investigate other applications for our synthetic biotechnologies. Our primary domestic research and development operations are located in laboratory facilities in Germantown, Maryland; South San Francisco, California; Davis, California; and San Diego, California; and our primary

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international research and development operations are located in laboratory facilities in Budapest, Hungary; Oxford, England; Ghent, Belgium; and Campinas, Brazil.
Financial Information
Collaboration revenues, product revenues, service revenues and other revenues and operating income for each of the last three fiscal years, along with assets as of December 31, 2016 and 2015, are set forth in the consolidated financial statements, which are included in Item 8 of this Annual Report. Financial information about geographic areas is set forth in Note 2 to the consolidated financial statements.
Production
Our primary domestic production facilities, including approximately 380 acres of land, are located in Sioux Center, Iowa. The land and facilities are primarily used for our embryo transfer and in vitro fertilization processes, as well as housing livestock used in such processes. We also lease or own regional production facilities and land in Maryland, Missouri, New York, Oklahoma, South Dakota and Texas for these purposes. Additionally, we have commenced initial scale up of commercial production of our non-browning apples in Washington and our genetically engineered mosquitoes in Piracicaba, Brazil, in anticipation of generating future revenues.
Employees
As of December 31, 2016, we had 832 full-time and 103 part-time employees. We consider our employee relations to be good.
Corporate information
We are a Virginia corporation and our principal executive offices are located at 20374 Seneca Meadows Parkway, Germantown, MD 20876, and our telephone number is (301) 556-9900.
Additional Information
Our website is www.dna.com. The information on, or that can be accessed through, our website does not constitute part of this Form 10-K. We post regulatory filings on this website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports on Forms 3, 4, and 5, and any amendments to those reports filed with or furnished to the SEC. Access to these filings on our website is available free of charge. Copies are also available, without charge, from Intrexon Corporation Investor Relations, 20374 Seneca Meadows Parkway, Germantown, Maryland 20876. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. We also post our press releases on our website. Information on our website is not deemed to be incorporated by reference into this Annual Report.
In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and charters for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee are available free of charge to shareholders and the public through the "Corporate Governance" section of our website. Printed copies of the foregoing are available to any shareholder upon written request to our Communications Department at the address set forth on the cover of this Annual Report or may be requested through our website, www.dna.com.
Item 1A.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this Annual Report, including our consolidated financial statements and the related notes appearing at the end of this Annual Report, before making your decision to invest in shares of our common stock. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition or prospects. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.
This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks

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faced by us described below and elsewhere in this Annual Report. See "Special note regarding forward-looking statements" for information relating to these forward-looking statements.
Risks related to our financial position, operating results and need for additional capital
We have a history of net losses, and we may not achieve or maintain profitability.
We have incurred net losses attributable to Intrexon since our inception, including losses attributable to Intrexon of $186.6 million, $84.5 million and $81.8 million in 2016, 2015 and 2014, respectively. As of December 31, 2016, we had an accumulated deficit of $729.3 million. We may incur losses and negative cash flow from operating activities for the foreseeable future. To date, we have derived a significant portion of our revenues from ECCs and license agreements and expect to derive a substantial portion of our revenues from these and additional ECCs, license agreements and JVs, as well as from sales of products and services for the foreseeable future. If our existing collaborators terminate their ECCs, license agreements or JVs with us or we are unable to enter into new ECCs, license agreements or JVs, our revenues could be adversely affected. In addition, certain of our collaborations and license agreements provide for milestone payments, future royalties and other forms of contingent consideration, the payment of which are uncertain as they are dependent on our collaborators' abilities and willingness to successfully develop and commercialize products. We expect a significant period of time could pass before the achievement of contractual milestones and the realization of royalties on products commercialized under our collaborations or before commercialization of our various products and revenues is sufficient to achieve profitability. As a result, our expenses may exceed revenues for the foreseeable future, and we may not achieve profitability. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
We may need substantial additional capital in the future in order to fund our business.
We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our synthetic biology technology platform and for capital investment needed to scale up our commercial operations. Although we believe that our existing cash and cash equivalents and short-term and long-term investments and cash expected to be received from our current collaborators and for sales of products and services provided by our consolidated subsidiaries will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months, we may need additional capital if our current plans and assumptions change. Our need for additional capital will depend on many factors, including:
the commercial success of our ECCs, license agreements and JVs;
whether we are successful in obtaining payments from our collaborators and licensees;
whether we can enter into additional ECCs, license agreements or JVs;
the progress and scope of the collaborative and independent research and development projects performed by us and our collaborators and licensees;
the timing and capital requirements to scale up our various products and services offerings;
the effect of any acquisitions of other businesses or technologies that we may make in the future;
whether we decide to develop internal development or manufacturing capabilities;
the filing, prosecution and enforcement of our intellectual property;
investments we may make in current and future collaborators, including JVs;
our ability to maintain or improve the volume and pricing of our current product offerings and to develop new offerings, including those which may incorporate new technologies; and
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 action.

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In November 2015, we entered into an "at-the-market" sales agreement with Cantor Fitzgerald & Co., or Cantor, under which we may offer and sell from time to time our common stock with aggregate proceeds of up to $200 million through Cantor as our sales agent. To date, no offerings have occurred under this agreement. If future financings involve the issuance of equity securities, our existing shareholders would suffer further dilution. If we raise debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through ECCs, JVs or other collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.
Our quarterly and annual operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.
Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this Annual Report:
our ability to achieve or maintain profitability;
our relationships, and the associated exclusivity terms, with collaborators and licensees in our target end markets;
our ability to develop and maintain technologies that our collaborators and licensees continue to use and that new collaborators are seeking;
our ability to enter into ECCs, license agreements or JVs;
the feasibility of producing and commercializing products enabled by our technologies;
obligations to provide resources to our collaborators or to the collaborations themselves pursuant to the terms of the relevant ECC, license agreement or JV agreement;
our ability to manage our growth;
the outcomes of research programs, clinical trials, or other product development and approval processes conducted by our collaborators and licensees;
the ability of our collaborators and licensees to develop and successfully commercialize products enabled by our technologies;
risks associated with the international aspects of our business;
our ability to integrate any businesses or technologies we may acquire with our business;
our ability to accurately report our financial results in a timely manner;
our dependence on, and the need to attract and retain, key management and other personnel;
our ability to obtain, protect and enforce our intellectual property rights;
our ability to prevent the theft or misappropriation of our intellectual property, know-how or technologies;
potential advantages that our competitors, the competitors of our collaborators, and potential competitors may have in securing funding or developing competing technologies or products;
our ability to obtain additional capital that may be necessary to expand our business;

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our collaborators' ability to obtain additional capital that may be necessary to develop and commercialize products under our ECCs, license agreements and JVs;
our exposure to the volatility associated with recording the fair value of securities of our collaborators held by us;
business interruptions such as power outages and other natural disasters;
public concerns about the ethical, legal and social ramifications of genetically engineered products and processes;
our ability to use our net operating loss carryforwards to offset future taxable income; and
the results of our consolidated subsidiaries.
Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
We have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.
We have been in existence since 1998. From 1998 until 2010, our operations focused primarily on organizing and staffing our company and developing our technologies. On August 8, 2013, we completed our initial public offering and our stock was listed on the New York Stock Exchange, or NYSE. Our current business model is still being tested. In January 2011, we recognized our first revenues from our first ECC and many of our products and services offerings are either awaiting regulatory approvals or in the early stage of commercialization. Because our revenue growth has occurred in recent periods, our limited operating history may make it difficult to evaluate our current business and predict our future performance. Any assessments of our current business and predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business will be harmed.
We may pursue strategic acquisitions and investments which could have an adverse impact on our business if they are unsuccessful.
We have made acquisitions in the past and, if appropriate opportunities become available, we may acquire additional businesses, assets, technologies or products to enhance our business in the future. In connection with any future acquisitions, we could:
issue additional equity securities, which would dilute our current shareholders;
incur substantial debt to fund the acquisitions; or
assume significant liabilities.
Although we conduct due diligence reviews of our acquisition targets, such processes may fail to reveal significant liabilities. Acquisitions involve numerous risks, including:
problems integrating the purchased operations, facilities, technologies or products;
unanticipated costs and other liabilities;
diversion of management's attention from our core businesses;
adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers;
risks associated with entering markets in which we have no or limited prior experience; and
potential loss of key employees.

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Acquisitions also may require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.
We may encounter difficulties in connection with our acquisitions.
We cannot be certain that any acquisition will be successful or that we will realize the anticipated benefits of the acquisition. In particular, we may not be able to realize the strategic and operational benefits and objectives we had anticipated. In addition, we may face increased competition in the markets for any acquired products. Any of the following factors may have a material adverse effect on our business, operating results and financial condition. These factors may include:
the potential disruption of our ongoing business and diversion of management resources;
unanticipated expenses related to the acquired operations;
the impairment of relationships with the acquired customers;
the impairment of relationships with key suppliers and their ability to meet our demand;
potential unknown liabilities associated with the acquired business and technology;
potential liabilities related to litigation involving the acquired companies;
potential periodic impairment of goodwill and intangible assets acquired; and
potential inability to retain, integrate and motivate key personnel.
We own equity interests in several of our collaborators and have exposure to the volatility and liquidity risks inherent in holding their equity.
Our collaborators may have limited capital in which case we may allow them to pay technology access fees, milestone payments or other contractual payments in shares of their common stock or other equity. As a result, we own equity interests in several of our collaborators. Owning equity in our collaborators further increases our exposure to the risks of our collaborators' businesses beyond our dependence on these collaborators to provide market and product development expertise, as well as sales, marketing and regulatory capabilities. Our equity ownership in our collaborators exposes us to volatility and the potential for negative returns. We may have restrictions on resale and/or limited markets to sell our equity ownership. In many cases, our equity position is a minority position which exposes us to further risk as we are not able to exert control over the companies in which we hold securities.
We evaluate prospective collaborators based on a variety of factors such as their capabilities, capacity and expertise in a defined field. The process by which we obtain equity interests in our collaborators and the factors we consider in deciding whether to acquire, hold or dispose of these equity positions may differ significantly from those that an independent investor would consider when purchasing equity interests in the collaborator. One significant factor would include our own expectation as to the success of our efforts to assist the collaborator in developing products enabled by our technologies.
We own common stock of several publicly traded companies and the values of those equity interests are subject to market price volatility. We own preferred stock of a publicly traded company that may be converted into shares of common stock in the future and the value of this equity interest is subject to fluctuation due to uncertainties of the timing and occurrence of the defined conversion events, the volatility of the underlying common stock, and changes in general economic and financial conditions of the collaborator. For each collaborator where we own equity securities, we make an accounting policy election to present them at either the fair value at the end of each reporting period or using the cost or equity method depending on our level of influence. We have adopted the fair value method of accounting for certain of these securities, and therefore, have recorded them at fair value at the end of each reporting period with the unrealized gain or loss recorded as a separate component of other income or expense, net, for the period. As of December 31, 2016 and 2015, the aggregate original cost basis of these common stock investments was $104.0 million and $107.2 million, respectively, and the market value was $23.5

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million and $83.7 million, respectively. As of December 31, 2016, the aggregate original cost basis of our preferred stock investment was $127.4 million and the market value was $129.5 million. The fair value of these securities is subject to fluctuation in the future due to the volatility of the stock market, changes in general economic conditions and changes in the financial conditions of one or more collaborators.
The equity of our collaborators may not be publicly traded, and if it is traded publicly, the trading market could be limited or have low trading volume. In some cases, we could hold unregistered shares and we may not have demand registration rights with respect to those shares. We own preferred stock of a publicly traded company that may be converted into shares of common stock, but the timing of that conversion is uncertain and may never occur. If the conversion does not occur, there is a risk that we may not be able to sell the preferred stock. We evaluate whether any discounts for trading restrictions or other basis for lack of marketability should be applied to the fair value of the securities at inception of the ECC or JV. In the event we conclude that a discount should be applied, the fair value of the securities is adjusted at inception of the ECC or JV and re-evaluated at each reporting period thereafter. In all of these instances, we have substantial liquidity risk related to these holdings, and we may not be able to sell, or sell quickly, all or part of these equity interests.
In connection with future ECCs or JVs, we may, from time to time, receive from collaborators, both public and private, warrants, rights and/or options, all of which involve special risks. To the extent we receive warrants or options in connection with future ECCs or JVs, we would be exposed to risks involving pricing differences between the market value of underlying securities and our exercise price for the warrants or options, a possible lack of liquidity and the related inability to close a warrant or options position, all of which could ultimately have an adverse effect on our financial position.
We use estimates in determining the fair value of certain assets and liabilities. If our estimates prove to be incorrect, we may be required to write down the value of these assets or write up the value of these liabilities, which could adversely affect our financial position.
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from management's judgments and assumptions, then they may have an adverse impact on our results of operations and cash flows.
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
As a result of our ongoing and potential future business activities, the number and complexity of estimates we use in determining fair value has increased. As of December 31, 2016 and 2015, 35 percent and 30 percent of our consolidated total assets, respectively, were measured at fair value on a recurring basis, including 14 percent as of December 31, 2016 which were considered Level 3 valuations. Our largest Level 3 asset carried at fair value is our investment in preferred stock of ZIOPHARM. As of December 31, 2016 and 2015, liabilities measured at fair value on a recurring basis were not a significant portion of our total liabilities. We estimate the fair value of our assets and liabilities using assumptions that we believe are appropriate and are used by market participants. The methodology used to estimate these values is complex and uses asset- and liability-specific data and market inputs for assumptions including interest and discount rates and expected future performance and liquidity dates.
Valuations are highly dependent upon the reasonableness of management's assumptions and the predictability of the relationships that drive the results of our valuation methodologies. Because of the inherent unpredictability in the future performance of the investments requiring Level 3 valuations, we may be required to adjust the value of certain assets, which could adversely affect our financial position.
We rely on our collaborators, subsidiaries and other third parties to deliver timely and accurate information in order to accurately report our financial results in the time frame and manner required by law.
We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely basis. We rely on our collaborators and subsidiaries to provide us with complete and accurate

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information regarding revenues, expenses and payments owed to or by us on a timely basis. In addition, we intend to rely on current and future collaborators under our collaboration agreements and JVs to provide us with product sales and cost saving information in connection with royalties, if any, owed to us. If the information that we receive is not accurate, our consolidated financial statements may be materially incorrect and may require restatement, and we may not receive the full amount of consideration to which we are entitled under our collaboration agreements or JVs. Although we have audit rights with these parties, performing such an audit could be expensive and time consuming and may not be adequate to reveal any discrepancies in a timeframe consistent with our reporting requirements. We own a significant equity position in several of our collaborators, including a majority position in two of our collaborators. In the future, we may need to consolidate the financial statements of one or more other collaborators into our consolidated financial statements. Although we have contractual rights to receive information and certifications allowing us to do this, such provisions may not ensure that we receive information that is accurate or timely. As a result, we may have difficulty completing accurate and timely financial disclosures, which could have an adverse effect on our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2016, we had net operating loss carryforwards of approximately $253.0 million for U.S. federal income tax purposes available to offset future taxable income and U.S. federal and state research and development tax credits of $7.5 million prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382. These carryforwards begin to expire in 2022. Our past issuances of stock and mergers and acquisitions have resulted in ownership changes within the meaning of Section 382. As a result, the utilization of portions of our net operating losses may be subject to annual limitations. As of December 31, 2016, approximately $15.1 million of our domestic net operating losses generated prior to 2008 are limited by Section 382 to annual usage limits of approximately $1.5 million. As of December 31, 2016, approximately $18.6 million of domestic net operating losses were inherited via acquisition 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. As of December 31, 2016, our direct foreign subsidiaries had foreign loss carryforwards of approximately $119.2 million, most of which do not expire.
Risks related to our technologies and business operations
Ethical, legal and social concerns about synthetic biologically engineered products and processes could limit or prevent the use of products or processes using our technologies and limit our revenues.
Our technologies involve the use of synthetic biologically engineered products or synthetic biological technologies. Public perception about the safety and environmental hazards of, and ethical concerns over, genetically engineered products and processes could influence public acceptance of our technologies, products and processes. If we and our collaborators are not able to overcome the ethical, legal and social concerns relating to synthetic biological engineering, products and processes using our technologies may not be accepted. These concerns could result in increased expenses, regulatory scrutiny, delays or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. The ability of our collaborators to develop and commercialize products, or processes using our technologies could be limited by public attitudes and governmental regulation.
The subject of genetically modified organisms has received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products. Further, there is a risk that products produced using our technologies could cause adverse health effects or other adverse events, which could also lead to negative publicity.
The synthetic biological technologies that we develop may have significantly enhanced characteristics compared to those found in naturally occurring organisms, enzymes or microbes. While we produce many of these synthetic biological technologies only for use in a controlled laboratory and industrial environment, the release of such synthetic biological technologies into uncontrolled environments could have unintended consequences. Any adverse effect resulting from such a release could have a material adverse effect on our business and financial condition, and we may have exposure to liability for any resulting harm.
We may become subject to increasing regulation in the future.
Our ongoing research and development relies on evaluations in animals, which may become subject to bans or additional regulations. As described above, our research operations are also subject to various environmental regulations. However, while most of the current laws and regulations concerning synthetic biology relate to the end products produced using synthetic biology, this may change. For example, the Presidential Commission for the Study of Bioethical Issues in December 2010 recommended that the federal government oversee, but not regulate, synthetic biology research. The Presidential Commission

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also recommended that the government lead an ongoing review of developments in the synthetic biology field and that the government conduct a reasonable risk assessment before the field release of synthetic organisms. Synthetic biology may become subject to additional government regulations as a result of the recommendations, which could require us to incur significant additional capital and operating expenditures and other costs in complying with these laws and regulations.
We have limited experience bringing new products through development and successful commercialization. Even if our technologies enable new products, we or our collaborators may not be successful in commercializing the products that result from our technologies.
Even if our technologies enable new products, there is no guarantee that we or our collaborators will be successful in creating additional products enabled by our technologies. Furthermore, our collaborators may not be able to commercialize the resulting products or may decide to use other methods competitive with our technologies that do not utilize synthetic biology. Several of our wholly and majority-owned subsidiaries have recently received regulatory approvals, including AquaBounty and Okanagan. These approvals do not, however, guarantee our success in commercializing the products of these subsidiaries. If we are not successful in commercializing our products, our business could be harmed.
The FDA has not yet approved any gene therapies for use in humans or animals.
The FDA has not yet approved any gene therapies for use in humans or animals. The field of gene therapies is experimental and has not yet proven successful in many clinical trials. Clinical trials with gene therapies have encountered a multitude of significant technical problems in the past, including unintended integration with host DNA leading to serious adverse events, poor levels of protein expression, transient protein expression, viral overload, immune reactions to either viral capsids utilized to deliver DNA, DNA itself, proteins expressed or cells transfected with DNA. There can be no assurance that our development efforts or those of our collaborators will be successful, that we or they will receive the regulatory approvals necessary to initiate clinical trials, where applicable, or that we will ever be able to successfully commercialize a product enabled by our technologies. To the extent that we or our collaborators utilize viral constructs or other systems to deliver gene therapies and the same or similar delivery systems demonstrate unanticipated and/or unacceptable side effects in preclinical or clinical trials conducted by ourselves or others, we may be forced to, or elect to, discontinue development of such products.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.
Our business involves complex operations across a variety of markets and requires a management team and employee workforce that is knowledgeable in the many areas in which we operate. The loss of any key members of our management, including our Chief Executive Officer, Randal J. Kirk; our President, Geno Germano; or our Chief Science Officer, Thomas D. Reed, or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We currently maintain key man insurance on Dr. Reed in the amount of $25 million; however, that coverage would likely be inadequate to compensate for the loss of his services. In addition, the loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing our technologies for our target markets and entering into ECCs, JVs or licensing arrangements or from further developing and commercializing our products and services offerings to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology, synthetic biology and other technology-based businesses, or due to the unavailability of personnel with the qualifications or experience necessary for our business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our collaborators and customers in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to attract and retain such personnel on acceptable terms.
Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to develop the necessary expertise could impair our ability to grow our business.

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We may encounter difficulties managing our growth, which could adversely affect our business.
Currently, we are working simultaneously on multiple projects targeting several market sectors, including activities in the health, food, energy, environment and consumer sectors. These diversified operations place increased demands on our limited resources and require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians, scientists and other personnel. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various customers, collaborators, suppliers and other third parties. Our ability to manage our operations, growth and various projects effectively will require us to make additional investments in our infrastructure to continue to improve our operational, financial and management controls and our reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do effectively. As a result, we may be unable to manage our expenses in the future, which may negatively impact our gross margins or operating margins in any particular quarter. In addition, we may not be able to successfully improve our management information and control systems, including our internal control over financial reporting, to a level necessary to manage our growth.
Competitors and potential competitors may develop products and technologies that make ours obsolete or garner greater market share than ours.
We do not believe that we have any direct competitors who provide comparable technologies of similar depth and breadth which enable to the same extent the commercialization of products developed using synthetic biology across a broad spectrum of biologically-based industries. However, there are companies that have competing technologies for individual pieces of our proprietary suite of complementary technologies. One portion of our proprietary technology related to DNA synthesis and assembly includes the ability to synthesize new DNA. We believe the following companies engage in the manufacture of DNA components: ATUM, Inc., Blue Heron Biotech, LLC (a subsidiary of OriGene), Integrated DNA Technologies, Inc. (IDT), Gen9, Inc., GenScript USA, Inc., and Life Technologies Corporation, now part of Thermo Fisher Scientific Inc.
The synthetic biology industry and each of the commercial sectors we have targeted are characterized by rapid technological change and extensive competition. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Academic institutions also are working in this field. Technological development by others may result in our technologies, as well as products developed by our collaborators using our technologies, becoming obsolete.
The rapidly evolving market for developing genetically engineered T-cells in particular, is characterized by intense competition and rapid innovation. Genetically engineering T-cells faces significant competition in the chimeric antigen receptor (CAR) technology space from multiple companies and their collaborators, such as Novartis/University of Pennsylvania, Bluebird Bio/Celgene/Baylor College of Medicine/Five Prime/Kite Pharma/ViroMed Laboratories, Kite Pharma/National Cancer Institute, Juno Therapeutics/Fred Hutchinson Cancer Research Center/Memorial Sloan-Kettering Cancer Center/Seattle Children's Research Institute, Cellectis/Pfizer/Servier, Adaptimmune/GSK and Bellicum Pharmaceuticals. We face competition from non-cell based treatments offered by other companies such as Amgen, AstraZeneca, Bristol-Myers, Incyte, Merck, and Roche.
Our ability to compete successfully will depend on our ability to develop proprietary technologies that can be used by our collaborators to produce products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Certain of our competitors may benefit from local government subsidies and other incentives that are not available to us or our collaborators. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we or our collaborators can. As more companies develop new intellectual property in our markets, a competitor could acquire patent or other rights that may limit products using our technologies, which could lead to litigation.
We may be sued for product liability.
Each of our collaborations requires the collaborator to indemnify us for liability related to products produced pursuant to the ECC or JV and to obtain insurance coverage related to product liability in amounts considered standard for the industry. We believe that these industry-standard coverage amounts range from $10 million to $40 million in the aggregate. Even so, we may be named in product liability suits relating to products that are produced by our collaborators using our technologies. These claims could be brought by various parties, including other companies who purchase products from our collaborators or by the end users of the products. We cannot guarantee that our collaborators will not breach the indemnity and insurance coverage provisions of the ECCs or JVs. Further, insurance coverage is expensive and may be difficult to obtain, and may not be available to us or to our collaborators in the future on acceptable terms, or at all. We cannot assure you that our collaborators will have adequate insurance coverage against potential claims. In addition, although we currently maintain product liability insurance for our technologies in amounts we believe to be commercially reasonable, if the coverage limits of these insurance

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policies are not adequate, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on our business, results of operations, financial condition and cash flows. This insurance may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, we may go out of business. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:
reduced resources of our management to pursue our business strategy;
decreased demand for products enabled by our technologies;
injury to our or our collaborators' reputations and significant negative media attention;
withdrawal of clinical trial participants;
initiation of investigations by regulators;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
significant costs to defend resulting litigation;
substantial monetary awards to trial participants or patients;
loss of revenue; and
the inability to commercialize any products using our technologies.
We depend on sophisticated information technology and infrastructure.
We rely on various information systems to manage our operations. These systems are complex and include software that is internally developed, software licensed from third parties and hardware purchased from third parties. These products may contain internal errors or defects, particularly when first introduced or when new versions or enhancements are released. Failure of these systems could have an adverse effect on our business, which in turn may materially adversely affect our operating results and financial condition.
We may incur significant costs complying with environmental, health and safety laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
We use hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state, local and international laws and regulations governing, among other matters, the use, generation, manufacture, transportation, storage, handling, disposal of, and human exposure to these materials both in the United States and overseas, including regulation by governmental regulatory agencies, such as the Occupational Safety and Health Administration and the U.S. EPA. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.
We have international operations and assets and may have additional international operations and assets in the future. Our international operations and assets may be subject to various economic, social and governmental risks.
Our international operations and any future international operations may expose us to risks that could negatively impact our future results. Our operations may not develop in the same way or at the same rate as might be expected in a country with an economy similar to the United States. The additional risks that we may be exposed to in these cases include, but are not limited to:
tariffs and trade barriers;
currency fluctuations, which could decrease our revenues or increase our costs in U.S. dollars;
regulations related to customs and import/export matters;
tax issues, such as tax law changes and variations in tax laws;

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limited access to qualified staff;
inadequate infrastructure;
cultural and language differences;
inadequate banking systems;
different and/or more stringent environmental laws and regulations;
restrictions on the repatriation of profits or payment of dividends;
crime, strikes, riots, civil disturbances, terrorist attacks or wars;
nationalization or expropriation of property;
law enforcement authorities and courts that are weak or inexperienced in commercial matters; and
deterioration of political relations among countries.
Our plans to pursue development and commercialization of adoptive cellular therapies based on chimeric antigen receptor (CAR) T-cell therapies, or CARs, are new approaches to cancer treatment that present significant challenges in a competitive landscape and the success of our efforts depends in large part on our owned and licensed intellectual property, and our efforts may be affected by litigation and developments in intellectual property law outside of our control.
We intend to employ technologies licensed from the University of Texas MD Anderson Cancer Center, or MD Anderson, together with our existing suite of proprietary technologies, through both our existing exclusive collaboration agreement with ZIOPHARM and our existing collaboration with Ares Trading S.A., or Ares Trading, a subsidiary of the biopharmaceutical business of Merck KGaA, to pursue the development and commercialization of adoptive cellular therapies based on CARs under control of RheoSwitch technology targeting a variety of cancer malignancies. Because this is a new approach to cancer immunotherapy and cancer treatment generally, developing and commercializing product candidates subjects us and our collaborators to a number of challenges, including:
obtaining regulatory approval from the FDA and other regulatory authorities that have very limited experience with the commercial development of genetically modified T-cell therapies for cancer;
developing and deploying consistent and reliable processes for engineering a patient's T-cells ex vivo and infusing the engineered T-cells back into the patient;
possibly conditioning patients with chemotherapy in conjunction with delivering each of the potential products, which may increase the risk of adverse side effects of the potential products;
educating medical personnel regarding the potential side effect profile of each of the potential products, such as the potential adverse side effects related to cytokine release;
developing processes for the safe administration of these potential products, including long-term follow-up for all patients who receive the potential products;
sourcing additional clinical and, if approved, commercial supplies for the materials used to manufacture and process the potential products;
developing a manufacturing process and distribution network with a cost of goods that allows for an attractive return on investment;
establishing sales and marketing capabilities after obtaining any regulatory approval to gain market acceptance;
developing therapies for types of cancers beyond those addressed by the current potential products; and

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not infringing the intellectual property rights, in particular, the patent rights, of third parties, including competitors developing alternative CAR T-cell therapies.
We cannot be sure that T-cell immunotherapy technologies developed in our collaborations will yield satisfactory products that are safe and effective, scalable, or profitable.
We and our collaborators are dependent on patents, know-how, and proprietary technology in our collaborations, both our own and licensed from others. Any termination of these licenses could result in the loss of significant rights and could harm our ability to commercialize our product candidates. Disputes may also arise between us and these licensors regarding intellectual property subject to a license agreement, including those relating to:
the scope of rights granted under the license agreement and other interpretation-related issues;
whether and the extent to which our technology and processes, and the technology and processes of our collaborators, infringe on intellectual property of the licensor that is not subject to the license agreement;
our right to sublicense patent and other rights to third parties under collaborative development relationships;
whether we and our collaborators are complying with our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our potential products under our collaborations; and
the allocation of ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and by us and our collaborators.
If disputes over intellectual property that we or our collaborators have licensed in connection with our collaboration prevent or impair our or our collaborators ability to maintain our current licensing arrangements, particularly with MD Anderson, on acceptable terms, we may be unable to successfully develop and commercialize the affected potential products. We are generally also subject to all of the same risks with respect to protection of intellectual property that we license as we are for intellectual property that we own. If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize potential products under our collaborations could suffer.
Risks associated with our business model
If we fail to maintain and successfully manage our existing, or enter into new, ECCs or JVs, we may not be able to develop and commercialize our technologies and achieve or sustain profitability.
Our ability to enter into, maintain and manage collaborations in our target markets is fundamental to the success of our business. We currently rely, and intend to rely for the foreseeable future, on our collaborators to develop products enabled by our technologies and then to manufacture, market, distribute and sell these products. We intend to enter into other strategic ECCs or JVs to produce, market and sell products enabled by the technologies that we have developed and will continue to develop. However, we may not be successful in entering into ECCs or JVs with future strategic collaborators. Any failure to enter into ECCs or JVs in our target market sectors on favorable terms could delay or hinder our ability to develop and commercialize our technologies and could increase our costs of development and commercialization.
We have entered into ECCs or JVs with strategic collaborators to develop products enabled by our technologies. There can be no guarantee that we can successfully manage these ECCs or JVs. Under the ECCs, we must use diligent efforts to carry out development activities under the ECC. The exclusivity provisions of the ECCs restrict our ability to commercialize our technologies in the designated field covered by the ECC. In most cases, the collaborator may terminate the ECC with us for any reason upon 90 days' notice. In all cases, the ECC may be terminated if we fail to exercise diligent efforts or breach, and fail to cure, other provisions of the ECC. In addition, since our efforts to date have focused on a small number of collaborators in certain targeted sectors, our business would be adversely affected if one or more of these collaborators terminate their ECCs or JVs, fail to use our technologies or fail to develop commercially viable products enabled by our technologies.
Dependence on ECCs or JVs also will subject us to other risks, including:
we have relinquished important rights regarding the commercialization, marketing and distribution of products and we may disagree with our collaborators' plans in these areas;

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although we retain broad rights with respect to intellectual property developed under the ECCs, our collaborators have the right, under certain circumstances, to take control of the enforcement of such intellectual property;
we may have lower revenues than if we were to develop, manufacture, market and distribute products enabled by our technologies ourselves;
a collaborator could, without the use of our synthetic biology technologies, develop and market a competing product either independently or in collaboration with others, including our competitors;
our collaborators could be undercapitalized or fail to secure sufficient resources to fund the development and/or commercialization of the products enabled by our technologies in accordance with the ECC;
our collaborators could become unable or less willing to expend their resources on research and development or commercialization efforts with respect to our technologies due to general market conditions, their financial condition or other circumstances beyond our control;
we may be unable to manage multiple simultaneous ECCs or JVs or fulfill our obligations with respect thereto;
disagreements with a collaborator could develop and any conflict with a collaborator could reduce our ability to enter into future ECCs or JVs and negatively impact our relationships with one or more existing collaborators;
our collaborators could terminate our ECC or JV with them, in which case, our collaborators may retain rights related to certain products, we may not be able to find another collaborator to develop different products in the field and we may not be able to develop different products in the field ourselves;
our business could be negatively impacted if any of our collaborators undergo a change of control to a third party who is not willing to work with us on the same terms or commit the same resources as our current collaborator; and
our collaborators may operate in countries where their operations could be adversely affected by changes in the local regulatory environment or by political unrest.
If any of these events occur, or if we fail to maintain our ECCs or JVs with our collaborators, we may not be able to commercialize our existing and potential technologies, grow our business or generate sufficient revenues to support our operations.
Our subsidiaries and certain of our collaborators, including some businesses over which we have significant influence, will need additional capital.
In order for our subsidiaries and certain of our collaborators to execute on their business plans, they will have future capital requirements. We may be asked to, or need to, invest additional funds in these subsidiaries or collaborators so that they can execute on their business plans. If we fail to invest such additional funds, the subsidiary or collaborator, as the case may be, may not have sufficient capital to continue operations.
We rely on our collaborators to develop, commercialize and market products, and they may not be successful.
We depend on our collaborators to commercialize the products enabled by our technologies. If our collaborators are not able to successfully develop the products enabled by our technologies, none of our enabled products will become commercially available and we will receive no back-end payments under our ECCs or JVs. Because we do not currently and may never possess the resources necessary to independently develop and commercialize all of the potential products that may result from our technologies, our ability to succeed in markets we have currently targeted depends on our ability to enter into ECCs or JVs to develop and commercialize potential products. Some of our existing collaborators do not themselves have the resources necessary to commercialize products and they in turn will need to rely on additional sources of financing or third party collaborations. In addition, pursuant to our current ECCs or JVs and similar ECCs or JVs that we may enter into in the future, we have limited or no control over the amount or timing of resources that any collaborator is able or willing to devote to developing products or collaborative efforts. Any of our collaborators may fail to perform its obligations under the ECC. Our collaborators may breach or terminate their ECCs or JVs with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. If any of these events were to occur, our revenues, financial condition and results of operations could be adversely affected.

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The sales process for our ECCs or JVs may be lengthy and unpredictable, and we may expend substantial funds and management effort with no assurance of successfully entering into new collaborations to commercialize our technologies.
The sales process for our ECCs or JVs may be lengthy and unpredictable. Our sales and licensing efforts may require the effective demonstration of the benefits, value, differentiation, validation of our technologies and services and significant education and training of multiple personnel and departments within the potential collaborator's organization. Though we have made efforts to standardize our ECCs or JVs, we may be required to negotiate ECCs or JVs containing terms unique to each collaborator, which would lengthen the sales cycle. We may expend substantial funds and management effort with no assurance that we will execute an ECC, JV or otherwise sell our technologies or services. In addition, this lengthy sales cycle makes it more difficult for us to accurately forecast revenue in future periods and may cause revenues and operating results to vary significantly in such periods.
We have entered into a number of ECCs and JVs to date, and we require collaborators to successfully commercialize the products enabled by our technologies.
Our success depends upon entering into ECCs and JVs with a number of collaborators across a broad spectrum of industries. There is a risk that we may not be able to demonstrate the value proposition of our technologies with enough collaborators across enough industries for us to be successful. We intend to pursue additional ECCs and JVs, but may be unable to do so on terms satisfactory to us, or at all. Our current ECCs and JVs and any new collaborations we are able to enter into in one or more of the markets we have targeted may not be successful. Moreover, because we have limited financial and managerial resources, we will be required to prioritize our application of resources to particular development efforts. Any resources we expend on one or more of these efforts could be at the expense of other potentially profitable opportunities. If we focus our efforts and resources on one or more of these markets and they do not lead to commercially viable products, our revenues, financial condition and results of operations could be adversely affected.
Many of our current collaborators have no experience producing products at the commercial scale needed for the development of their business, and they will not succeed if they cannot effectively commercialize their products.
In addition to developing products using our technologies, our collaborators must demonstrate the ability to utilize our technologies to produce desired products at the commercial scale and on an economically viable basis or they must collaborate with others to do so. The products and processes developed using our technologies may not perform as expected when applied at commercial scale, or our collaborators may encounter operational challenges for which we and they are unable to devise a workable solution. For example, contamination in the production process could decrease process efficiency, create delays and increase our collaborators' costs. Moreover, under the terms of our ECCs or JVs, we limit the ability of our collaborators to partner their programs with third parties. We and our collaborators may not be able to scale up our production in a timely manner, if at all, even if our collaborators successfully complete product development in their laboratories and pilot and demonstration facilities. If this occurs, the ability of our collaborators to commercialize products and processes using our technologies will be adversely affected, and, with respect to any products that are brought to market, our collaborators may not be able to lower the cost of production, which would adversely affect our ability to increase the future profitability of our business.
The markets in which our collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our collaborators to comply with all applicable laws and regulations.
Our technologies are used in products that are subject to extensive regulation by governmental authorities. We depend on our collaborators to comply with these laws and regulations with respect to products they produce using our technologies and we do not independently monitor whether our collaborators comply with applicable laws and regulations. If our collaborators fail to comply with applicable laws and regulations, we are subject to substantial financial and operating risks because we depend on our collaborators to produce the end products enabled by our technologies for sale, and because in many cases we have, or in the future may have, a substantial equity interest in our collaborators. These regulatory risks are extensive and include the following:
complying with these regulations, including seeking approvals, the uncertainty of the scope of future regulations, and the costs of continuing compliance with regulations could affect the sales and profitability of our collaborators and materially impact our operating results;
our business could be adversely affected if the processes used by our collaborators to manufacture their final products fail to be approved by the applicable regulatory authorities;

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where products are subject to regulatory approval, the regulatory approval process can be lengthy, costly, time consuming and inherently unpredictable, and if our collaborators are ultimately unable to obtain regulatory approval for products using our technologies, our business will be substantially harmed;
even if our collaborators are able to commercialize products using our technologies, the product may become subject to post-approval regulatory requirements, unfavorable pricing regulations, third-party payor reimbursement practices or regulatory reform initiatives that could harm our business;
we and our collaborators conduct on-going research and development that relies on evaluations in animals, which may become subject to bans or additional regulations;
compliance with existing or future environmental laws and regulations could have a material adverse impact on the development and commercialization of products using our technologies; and
to the extent products produced using our technologies are commercialized outside the United States, they will be subject to additional laws and regulations under the jurisdictions in which such products are commercialized.
The markets in which we and our collaborators are developing products using our technologies are highly competitive.
The markets in which we and our collaborators are developing products are, and will continue to be, highly competitive, and there can be no assurance that we or our collaborators will be able to compete effectively. There are numerous companies presently in these markets that are developing products that may compete with, and could adversely affect the prices for, any products developed by our collaborators using our technologies. Many of these competitors and potential competitors are well-established companies with significant resources and experience, along with well-developed distribution systems and networks for their products, valuable historical relationships with potential customers and extensive sales and marketing programs for their products. Some of these competitors may use these resources and their market influence to impede the development and/or acceptance of the products developed by our collaborators using our technologies.
To the extent that any of our collaborators' competitors are more successful with respect to any key competitive factor or our collaborators are forced to reduce, or are unable to raise, the price of any products enabled by our technologies in order to remain competitive, our operating results and financial condition could be materially adversely affected. Competitive pressure could arise from, among other things, safety and efficacy concerns, limited demand or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure products similar or equivalent to those of our collaborators at lower costs and the ability of competitors to access more or newer technology than our collaborators can access (including our own).
Our right to terminate our ECCs is limited.
Generally, we do not have the right to terminate an ECC except in limited circumstances such as the collaborator's failure to exercise diligent efforts in performing its obligations under the ECC, including its development of products enabled by our technologies, or its breach of a term of the ECC that remains uncured for a specified period of time. Moreover, each of our collaborators receives an exclusive license to use all of our technologies in a designated field, potentially in perpetuity. The collaborators we choose in particular fields may not be in the best position to maximize the value of our technologies in that field, if they are capable of commercializing any products at all. In addition, the scope of the field for a particular ECC may prove to be too broad and result in the failure to maximize the value of our technologies in that field.
A significant portion of our business is conducted by joint ventures that we cannot operate solely for our benefit.
In JVs we share ownership and management of a company with one or more parties who may not have the same goals, strategies, priorities or resources as we do and may compete with us outside the JV. JVs are intended to be operated for the benefit of all JV partners, rather than for our exclusive benefit. Operating a business as a JV often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In JVs we are required to foster our relationships with our JV partners as well as promote the overall success of the JV, and if a JV partner changes or relationships deteriorate, our success in the JV may be materially adversely affected. The benefits from a successful JV are shared among the JV partners, so we do not receive all the benefits from our successful JVs. Moreover, as a partial owner of a JV, we are exposed to potential risks and liabilities that we do not face when we enter into an ECC.

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Risks related to our intellectual property
Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights through costly litigation or administrative proceedings.
Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property in the United States and abroad for our suite of technologies and resultant products and potential products. We have adopted a strategy of seeking patent protection in the United States and abroad with respect to certain of the technologies used in or relating to our products and processes. We have also in-licensed rights to additional patents and pending patent applications in the United States and abroad. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.
We have strategic positioning with respect to our key technologies including patent portfolios directed to: our switch technology covering aspects of our gene switches, such as our RheoSwitch Therapeutic System, and gene modulation systems, vectors, cells and organisms containing these switches, and their use; our activator ligand technology covering aspects of our activator ligands and their use; and our cell identification and selection technology covering aspects of our cell identification and selection platform, including our cell purification, isolation, characterization and manipulation technologies. We have also filed counterpart patents and patent applications in other jurisdictions, including Australia, Argentina, Brazil, Canada, China, Europe, Hong Kong, India, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Philippines, Russia, Singapore, South Africa and Taiwan. In the future we may file in these or additional jurisdictions as deemed appropriate for the protection of our technologies.
The enforceability of patents, as well as the actual patent term and expiration thereof, involves complex legal and factual questions and, therefore, the extent of enforceability cannot be guaranteed. Issued patents and patents issuing from pending applications may be challenged, invalidated or circumvented. Moreover, the United States Leahy-Smith America Invents Act, enacted in September 2011, brought significant changes to the U.S. patent system, which include a change to a "first to file" system from a "first to invent" system and changes to the procedures for challenging issued patents and disputing patent applications during the examination process, among other things. The effects of these changes on our patent portfolio and business have yet to be determined, as the final substantive provisions of the America Invents Act took effect on March 16, 2013. The United States Patent and Trademark Office, or the USPTO, only recently finalized the rules relating to these changes and the courts have yet to address the new provisions. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights. Additional uncertainty may result from legal precedent handed down by the United States Court of Appeals for the Federal Circuit and United States Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other companies' patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that we were the first to invent the inventions covered by our pending patent applications, we were the first to file patent applications for these inventions, the patents we have obtained, particularly certain patents claiming nucleic acids, proteins, or methods, are valid and enforceable, and the proprietary technologies we develop will be patentable.
In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technologies, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover, third parties could practice our inventions in territories where we do not have patent protection. Such third parties may then try to import into the United States or other territories products, or information leading to potentially competing products, made using our inventions in countries where we do not have patent protection for those inventions. If competitors are able to use our technologies, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could harm our business.
We also rely on trade secrets to protect our technologies, especially in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require our employees, academic collaborators, collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed information. If we cannot maintain the confidentiality of our proprietary and licensed technologies and other confidential information, our ability and that of our licensor to receive patent protection and our ability to protect valuable information owned or licensed by us may be imperiled. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time consuming, and the

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outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from commercializing our technologies or impact our stock price.
Our commercial success also depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot ensure that patents have not been issued to third parties that could block our or our collaborators' ability to obtain patents or to operate as we would like. There may be patents in some countries that, if valid, may block our ability to make, use or sell our products in those countries, or import our products into those countries, if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in patent applications filed in some countries that, if granted and valid, also may block our ability to commercialize products or processes in these countries if we are unable to circumvent or license them.
The biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage. Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, may divert management time from focusing on business operations and could cause us to spend significant amounts of money. Some of our competitors may have significantly greater resources and, therefore, they are likely to be better able to sustain the cost of complex patent or intellectual property litigation than we could. The uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our business or to enter into additional collaborations with others. Furthermore, any potential intellectual property litigation also could force us or our collaborators to do one or more of the following:
stop selling, incorporating or using products that use the intellectual property at issue;
obtain from the third party asserting its intellectual property rights a license to sell or use the relevant technology, which license may not be available on reasonable terms, if at all; or
redesign those products or processes that use any allegedly infringing technology, or relocate the operations relating to the allegedly infringing technology to another jurisdiction, which may result in significant cost or delay to us, or which could be technically infeasible.
The patent landscape in the field of synthetic biology is particularly complex. We are aware of U.S. and foreign patents and pending patent applications of third parties that cover various aspects of synthetic biology including patents that some may view as covering aspects of our technologies. In addition, there may be patents and patent applications in the field of which we are not aware. In many cases, the technologies we develop are early-stage technologies and we and our collaborators are just beginning the process of designing and developing products using these technologies. Although we will seek to avoid pursuing the development of products that may infringe any patent claims that we believe to be valid and enforceable, we and our collaborators may fail to do so. Moreover, given the breadth and number of claims in patents and pending patent applications in the field of synthetic biology and the complexities and uncertainties associated with them, third parties may allege that we or our collaborators are infringing upon patent claims even if we do not believe such claims to be valid and enforceable.
Except for claims we believe will not be material to our financial results, no third party has asserted a claim of infringement against us. Others may hold proprietary rights that could prevent products using our technologies from being marketed. Any patent-related legal action against persons who license our technologies, our collaborators or us claiming damages and seeking to enjoin commercial activities relating to products using our technologies or our processes could subject us to potential liability for damages and require our licensor or us to obtain a license to continue to manufacture or market such products or any future product candidates that use our technologies. We cannot predict whether we or our licensor would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that any such products or any future product candidates or processes could be redesigned to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent our collaborators from developing and commercializing products using our technologies, which could harm our business, financial condition and operating results.
If any of our competitors have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention and, thus, the right to

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the patents for these inventions in the United States. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference may result in loss of certain of our important claims.
Any litigation or proceedings could divert our management's time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. Given the size of our intellectual property portfolio, compliance with these provisions involves significant time and expense. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our technologies, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of products using our technologies, one or more of the U.S. patents we own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.
Enforcing our intellectual property rights may be difficult and unpredictable.
If we were to initiate legal proceedings against a third party to enforce a patent claiming one of our technologies, the defendant could counterclaim that our patent is invalid and/or unenforceable or assert that the patent does not cover its manufacturing processes, manufacturing components or products. Proving patent infringement may be difficult, especially where it is possible to manufacture a product by multiple processes. Furthermore, in patent litigation in the United States, defendant counterclaims alleging both invalidity and unenforceability are commonplace. Although we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity of our patent rights, we cannot be certain, for example, that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would not be able to exclude others from practicing the inventions claimed therein. Such a loss of patent protection could have a material adverse impact on our business. Even if our patent rights are found to be valid and enforceable, patent claims that survive litigation may not cover commercially valuable products or prevent competitors from importing or marketing products similar to our own, or using manufacturing processes or manufacturing components similar to those used to produce the products using our technologies.
Although we believe we have obtained assignments of patent rights from all inventors, if an inventor did not adequately assign their patent rights to us, a third party could obtain a license to the patent from such inventor. This could preclude us from enforcing the patent against such third party.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to synthetic biology. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and

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attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.
If our technologies or products using our technologies are stolen, misappropriated or reverse engineered, others could use the technologies to produce competing technologies or products.
Third parties, including our collaborators, contract manufacturers, contractors and others involved in our business often have access to our technologies. If our technologies, or products using our technologies, were stolen, misappropriated or reverse engineered, they could be used by other parties that may be able to reproduce our technologies or products using our technologies for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require our new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual's relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse engineer our technologies or products using our technologies and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Risks related to our subsidiary operations
We may have limited success in gaining consumer acceptance of the products of our operating subsidiaries, particularly in the face of current public opposition and current and potential future laws.
There is an active and vocal group of opponents to genetically modified organisms who wish to ban or restrict the technology and who, at a minimum, hope to sway consumer perceptions and acceptance of this technology. Their efforts include regulatory legal challenges and labeling campaigns for genetically modified products, as well as application of pressure to consumer retail outlets seeking a commitment not to carry genetically modified products. Under current labeling laws, we are not required to label our AAS or our Arctic apples at the retail level as containing genetically modified ingredients. However, because several states either passed or considered new laws specifying varying requirements for labeling products sold at the retail level that contain genetically modified ingredients, the United States Congress passed the Labeling Act to establish a national standard for package labeling for foods containing genetically modified ingredients. The USDA has until July 2018 to implement this new law. Labeling requirements could cause consumers to view the label as either a warning or as an indication that AAS is inferior to traditional Atlantic salmon, which could negatively impact consumer acceptance of our product. Further, these groups have a history of bringing legal action against companies attempting to bring new biotechnology products to market. For example, on March 30, 2016, a coalition of non-governmental organizations filed a complaint against the FDA, the United States Fish and Wildlife Service, and related individuals for their roles in the approval of AAS. We may be subject to future additional litigation brought by one or more of these organizations in their attempt to block the development or sale of our products. In addition, animal rights groups and various other organizations and individuals have attempted to stop genetic engineering activities by pressing for legislation and additional regulation in these areas. We may not be able to overcome the negative consumer perceptions and potential legal hurdles that these organizations seek to instill or assert against our products and our business could be harmed.
The agricultural products of several of our operating subsidiaries are subject to disease outbreaks which can increase the cost of production and/or reduce production harvests, and the loss of existing organisms and germplasm would result in the loss of commercial technology.
Several of the products of our operating subsidiaries, including Trans Ova, Exemplar, AquaBounty and Okanagan, are subject to periodic outbreaks of a variety of diseases. Although these companies take measures to protect their stock, there can be no assurance that a disease will not damage or destroy existing organisms or germplasm. The economic impact of disease to our subsidiaries' production systems can be significant, as farmers must incur the cost of preventive measures, such as vaccines and antibiotics, and then if infected, the cost of lost or reduced harvests.

37


We are exposed to exchange rate fluctuation.
We have international subsidiaries in a number of foreign countries, including Belgium, Brazil, Canada, England and Hungary. As a consequence, we are exposed to risks associated with changes in foreign currency exchange rates. We present our consolidated financial statements in U.S. dollars. Our international subsidiaries have assets and liabilities denominated in currencies other than the U.S. dollar. Future expenses and revenues of our international subsidiaries are expected to be denominated in currencies other than in U.S. dollars. Therefore, movements in exchange rates to translate from foreign currencies may have an impact on our reported results of operations, financial position and cash flows.
Risks related to our common stock
We do not anticipate paying cash dividends, and accordingly, shareholders should rely on stock appreciation for return on their investment.
We have never declared or paid cash dividends on our capital stock. We do not anticipate paying cash dividends in the future and intend to retain all of our future earnings, if any, to finance the operations, development and growth of our business. As a result, appreciation of the price of our common stock, which may never occur, will provide a return to shareholders. Investors seeking cash dividends should not invest in our common stock. We have on two occasions distributed equity securities to our shareholders as a special stock dividend: 17,830,305 shares of ZIOPHARM common stock were distributed in June 2015 and 1,776,557 shares of AquaBounty common stock were distributed in January 2017. However, it is possible that we may never declare a special dividend again and shareholders should not rely upon potential future special dividends as a source of return on their investment.
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
Our stock price has been, and is likely to continue to be, volatile. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this "Risk Factors" section, or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our collaborators regarding their own performance, as well as industry conditions and general financial, economic and political instability. From January 1, 2015 through February 15, 2017, our common stock has traded as high as $69.45 per share and as low as $18.52 per share. The stock market in general as well as the market for biopharmaceutical companies in particular has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may be influenced by many factors, including, among others:
announcements of acquisitions, collaborations, financings or other transactions by us;
public concern as to the safety of our products;
termination or delay of a development program;
the recruitment or departure of key personnel; and
the other factors described in this "Risk Factors" section.
If securities or industry analysts do not publish research or reports, or publish inaccurate or unfavorable research or reports about our business, our share price and trading volume could decline.
The trading market for our shares of common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If securities or industry analysts do not continue to cover us, the trading price for our shares of common stock may be negatively impacted. If one or more of the analysts who covers us downgrades our shares of common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares of common stock could decrease and we could lose visibility in the financial markets, which could cause our share price and trading volume to decline.
If our executive officers and directors choose to act together, they may be able to control our management and operations, acting in their own best interests and not necessarily those of other shareholders.
As of December 31, 2016, our executive officers and directors owned approximately 55 percent of our voting common stock, including shares subject to outstanding options and warrants. As a result, these shareholders, acting together, would be able to

38


significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions, as well as our management and affairs. The interests of this group of shareholders may not always coincide with the interests of other shareholders, and they may act in a manner that advances their best interests and not necessarily those of other shareholders. This concentration of ownership control may:
delay, defer or prevent a change in control;
entrench our management and/or the board of directors; or
impede a merger, consolidation, takeover or other business combination involving us that other shareholders may desire.
We have engaged in transactions with companies in which Randal J. Kirk, our Chief Executive Officer, and his affiliates have an interest.
We have engaged in a variety of transactions, including ECCs, with companies in which Mr. Kirk and affiliates of Mr. Kirk have a direct or indirect interest. See Notes 5 and 18 in our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a discussion of such transactions. For example, we are party to a services agreement with Third Security for which Third Security provides certain services to us in return for a monthly fee of shares of our common stock. Mr. Kirk serves as the Senior Managing Director and Chief Executive Officer of Third Security and owns 100 percent of the equity interests of Third Security. We believe that each of these transactions was on terms no less favorable to us than terms we could have obtained from unaffiliated third parties, and each of these transactions was approved by at least a majority of the disinterested members of the audit committee of our board of directors. In addition, subsequent to our consummation of the ECCs with ZIOPHARM, Oragenics, Inc., Synthetic Biologics, Inc., Soligenix, Inc., Agilis Biotherapeutics LLC, and OvaScience, Mr. Kirk and his affiliates invested in these companies. Furthermore, as we execute on these ECCs or JVs going forward, a conflict may arise between our interests and those of Mr. Kirk and his affiliates. We will continue to ensure that all future transactions, if any, between us and our officers, directors, principal shareholders and their affiliates, are approved by the audit committee or a majority of the independent and disinterested members of the board of directors in accordance with our written related person transaction policy, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.
As of December 31, 2016, Randal J. Kirk controlled approximately 52 percent of our common stock and is able to control or significantly influence corporate actions, which may result in Mr. Kirk taking actions contrary to the desires of our other shareholders.
We have historically been controlled, managed and principally funded by Randal J. Kirk, our Chief Executive Officer, and affiliates of Mr. Kirk. As of December 31, 2016, Mr. Kirk and shareholders affiliated with him beneficially owned approximately 52 percent of our voting stock. Mr. Kirk is able to control or significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of Mr. Kirk may not always coincide with the interests of other shareholders, and he may take actions that advance his personal interests and are contrary to the desires of our other shareholders.
A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. If Mr. Kirk or any of his affiliates were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.
In addition, as of December 31, 2016, there were 11,640,383 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Shares issuable upon the exercise of such options can be freely sold in the public market upon issuance and once vested.

39


We are subject to anti-takeover provisions in our articles of incorporation and bylaws and under Virginia law that could delay or prevent an acquisition of our Company, even if the acquisition would be beneficial to our shareholders.
Certain provisions of Virginia law, the commonwealth in which we are incorporated, and our articles of incorporation and bylaws could hamper a third party's acquisition of us, or discourage a third party from attempting to acquire control of us. These provisions include:
a provision allowing our board of directors to issue preferred stock with rights senior to those of the common stock without any vote or action by the holders of our common stock. The issuance of preferred stock could adversely affect the rights and powers, including voting rights, of the holders of common stock;
establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at shareholder meetings;
the inability of shareholders to convene a shareholders' meeting without the support of shareholders owning together 25 percent of our common stock;
the application of Virginia law prohibiting us from entering into a business combination with the beneficial owner of 10 percent or more of our outstanding voting stock for a period of three years after the 10 percent or greater owner first reached that level of stock ownership, unless we meet certain criteria;
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the manner in which shareholders can remove directors from the board;
require that shareholder actions must be effected at a duly called shareholder meeting and prohibit actions by our shareholders by written consent; and
limit who may call a special meeting of shareholder meetings.
These provisions also could limit the price that certain investors might be willing to pay in the future for shares of our common stock. In addition, these provisions make it more difficult for our shareholders, should they choose to do so, to remove our board of directors or management.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Item 1B.
Unresolved Staff Comments
Not applicable.

40


Item 2.
Properties
We establish the geographic locations of our research and development operations based on proximity to the relevant market expertise and access to available talent pools. The following table shows information about our primary lab operations as of December 31, 2016:
Location
 
Square Footage
Germantown, Maryland
 
56,258

Davis, California
 
40,000

South San Francisco, California
 
29,409

San Diego, California
 
23,409

Budapest, Hungary
 
18,116

Campinas, Brazil
 
17,728

Oxford, England
 
10,000

Ghent, Belgium
 
8,611

Our primary domestic production facilities are located in Sioux Center, Iowa, and include approximately 274,000 square feet of production and office facilities and approximately 380 acres of land. The land and production facilities are primarily used for embryo transfer and in vitro fertilization processes, as well as housing livestock used in such processes. We also lease or own regional production facilities and land in Maryland, Missouri, New York, Oklahoma, South Dakota and Texas for these purposes. Additionally, we have commenced initial scale up of commercial production of our non-browning apples in Washington and our genetically engineered mosquitoes in Piracicaba, Brazil, in anticipation of generating future revenues.
We lease an additional 43,000 square feet of administrative offices in South San Francisco, California; West Palm Beach, Florida; Germantown, Maryland; and Blacksburg, Virginia. The original terms of our leases range from one to seven years. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments."
Item 3.
Legal Proceedings
We are involved in litigation or legal matters incidental to our business activities.
In May 2016, two putative shareholder class action lawsuits, captioned Hoffman v. Intrexon Corporation et al. and Gibrall v. Intrexon Corporation et al., were filed in the U.S. District Court for the Northern District of California on behalf of purchasers of our common stock between May 12, 2015 and April 20, 2016, or the Class Period. In July 2016, the court consolidated the lawsuits and appointed a lead plaintiff. The consolidated amended complaint names as defendants us and certain of our current and former officers, or the Defendants. It alleges, among other things, that the Defendants made materially false and/or misleading statements during the Class Period with respect to our business, operations, and prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The plaintiffs' claims are based in part upon allegations in a report published in April 2016 on the Seeking Alpha financial blog. The plaintiffs seek compensatory damages, interest and an award of reasonable attorneys' fees and costs. The Defendants moved to dismiss the case. On February 24, 2017, the court granted our motion to dismiss the lawsuit on the grounds that plaintiff failed to state a claim, while granting plaintiff leave to amend. Any such amended complaint must be filed by the plaintiff within 30 days. We intend to continue to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this case.
In July 2016, a putative shareholder derivative action captioned Basile v. Kirk et al. was filed in the Circuit Court of Fairfax County, Virginia, against certain of our directors, our CEO, and Third Security, and naming us as a nominal defendant. The complaint alleges causes of action for breaches of fiduciary duty and unjust enrichment relating to the entry by us into the Services Agreement with Third Security. The plaintiff seeks, among other things, damages in an unspecified amount, disgorgement of improper benefits, appropriate equitable relief, and an award of attorney fees and other costs and expenses. The complaint is substantially similar to two separate demands made by shareholders concerning the Services Agreement and Mr. Kirk's compensation. Our board of directors appointed a Special Litigation Committee, or the SLC, consisting of independent directors to investigate the claims and allegations made in the derivative action and in the two shareholder demands and to decide on our behalf whether the claims and allegations should be pursued. The Basile case was stayed pending the report of the SLC. In November 2016, the SLC completed its review and evaluation and unanimously determined that the claims were without merit because the compensation arrangements were the result of an informed and disinterested decision-making process and were fair to the Company, and that prosecution of the asserted claims was not in our or our shareholders'

41


best interest. Based upon the determination of the SLC, on February 24, 2017 we moved to dismiss the court action pursuant to Virginia statute. There can be no assurance, however, regarding the ultimate outcome of the case.
In addition to the shareholder demands described above, in June and July 2016, two shareholders made separate demands under Virginia law demanding that we file suit against certain of our current officers and directors for alleged breaches of fiduciary duty and other claims. The demands were based upon and asserted the allegations previously published in April 2016 in the Seeking Alpha financial blog. In July 2016, our board of directors authorized the SLC to expand its review to include all such allegations. In February 2017, the SLC completed its review and evaluation and unanimously determined that there was no basis for any of the allegations, that our officers and directors did not breach their fiduciary duties or any other applicable law, and that prosecution of the asserted claims was not in our or our shareholders' best interest.
The Division of Enforcement, U.S. Securities and Exchange Commission is conducting an investigation which we believe concerns certain issues raised by the foregoing matters. We have met with the SEC staff and are voluntarily cooperating with their investigation. Our board of directors has authorized the SLC to monitor our interaction with the SEC staff.
While the outcome of these matters cannot be predicted with certainty, we do not currently expect that any of these matters will have a material adverse effect on our business or financial position. However, should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on our results of operations for a particular fiscal reporting period could be material.
Item 4.
Mine Safety Disclosures
Not applicable.

42


PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock trades on the NYSE under the symbol "XON". The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the NYSE:
 
High
 
Low
Year Ended December 31, 2016
 
 
 
Fourth Quarter
$
32.90

 
$
24.01

Third Quarter
30.56

 
22.88

Second Quarter
38.60

 
22.81

First Quarter
40.24

 
18.52

Year Ended December 31, 2015
 
 
 
Fourth Quarter
$
43.76

 
$
27.52

Third Quarter
69.45

 
28.39

Second Quarter
51.44

 
37.30

First Quarter
50.98

 
25.23

As of February 15, 2017, we had 237 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders and includes shareholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. We have on two occasions distributed equity securities of other companies we owned to our shareholders as a special stock dividend: 17,830,305 shares of ZIOPHARM common stock were distributed in June 2015 and 1,776,557 shares of AquaBounty common stock were distributed in January 2017. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, provisions of applicable law and other factors that our board of directors deems relevant.
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Intrexon Corporation under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison from August 8, 2013 (the date our common stock commenced trading on the NYSE) through December 31, 2016 of the cumulative total return for our common stock, the Standard & Poor's 500 Stock Index (S&P 500 Index) and the NYSE MKT ARCA Biotechnology Index. The graph assumes that $100 was invested at the market close on August 8, 2013 in the common stock of Intrexon Corporation, the S&P 500 Index and the NYSE MKT ARCA Biotechnology Index and data for the S&P 500 Index and the NYSE MKT ARCA Biotechnology Index assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.

43


xon-2014123_chartx58805a02.jpg
Company / Index
 
Base
Period
8/8/2013
 
9/30/2013
 
12/31/2013
 
3/31/2014
 
6/30/2014
 
9/30/2014
 
12/31/2014
Intrexon Corporation
 
$
100.00

 
$
95.79

 
$
96.24

 
$
106.31

 
$
101.62

 
$
75.13

 
$
111.32

S&P 500 Index
 
100.00

 
99.38

 
109.82

 
111.81

 
117.66

 
118.99

 
124.86

NYSE MKT ARCA Biotechnology Index
 
100.00

 
103.12

 
110.29

 
122.45

 
131.51

 
146.60

 
163.14

Company / Index
3/31/2015
 
6/30/2015
 
9/30/2015
 
12/31/2015
 
3/31/2016
 
6/30/2016
 
9/30/2016
 
12/31/2016
Intrexon Corporation
$
183.46

 
$
198.01

 
$
129.03

 
$
122.34

 
$
137.51

 
$
99.86

 
$
113.69

 
$
98.60

S&P 500 Index
126.04

 
126.39

 
118.26

 
126.59

 
128.29

 
131.44

 
136.50

 
141.72

NYSE MKT ARCA Biotechnology Index
189.33

 
198.84

 
162.87

 
181.72

 
141.07

 
144.32

 
160.93

 
147.87

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
(a) Sales of Unregistered Securities
From January 1, 2016 through December 31, 2016, we consummated the following transactions involving the issuance of unregistered securities:
the issuance of 337,163 unregistered shares of our common stock during 2016, as payment under the Services Agreement entered into and effective as of November 1, 2015, as amended, by and between us and Third Security as previously discussed in our Current Report on Form 8-K filed on October 30, 2015;

44


the issuance of 136,340 unregistered shares of our common stock on February 25, 2016 in connection with our acquisition of the assets of Old EnviroFlight as previously disclosed in our Quarterly Report on Form 10-Q filed on May 10, 2016; and
the issuance of 59,337 unregistered shares of our common stock on October 14, 2016 as consideration for the achievement of a milestone in connection with our acquisition of the assets of Old EnviroFlight.
On September 22, 2016, pursuant to NYSE Rule 303A.08 and in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, we granted Geno Germano an employment inducement award in connection with Mr. Germano's appointment as President, as previously disclosed in our Quarterly Report for Form 10-Q filed on November 9, 2016. The inducement award was a stock option award of 1,000,000 shares at an exercise price of $29.94. The award vests in four equal annual installments beginning on June 1, 2017. The award is subject to accelerated vesting in certain situations and expires on May 31, 2026. The award will generally be subject to the same terms and conditions as apply to awards granted under the 2013 Omnibus Incentive Plan. No commissions or other remuneration was paid in connection with the grant of the award.
(b) Use of Proceeds
On January 27, 2015, we closed a public offering of 4,312,500 shares of our common stock (inclusive of 562,500 shares of common stock sold by us pursuant to the full exercise of an option granted to the underwriters in connection with the offering) at a public offering price of $27.00 per share for aggregate gross offering proceeds of approximately $116.4 million. J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as joint book-running managers. Net proceeds to us were approximately $110.0 million after deducting underwriting discounts and commissions of approximately $6.1 million and other offering expenses of approximately $0.3 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. We invested the funds received in cash equivalents and other short-term and long-term investments in accordance with our investment policy. There has been no material change in the planned use of proceeds from this offering as described in our final prospectus, dated January 21, 2015, and filed with the SEC on January 22, 2015 pursuant to Rule 424(b).
On August 26, 2015, we closed a public offering of 5,609,756 shares of our common stock (inclusive of 731,707 shares of common stock sold by us pursuant to the full exercise of an option granted to the underwriters in connection with the offering) at a public offering price of $41.00 per share for aggregate gross offering proceeds of approximately $230.0 million. JMP Securities LLC acted as sole book-running manager. Stifel, Nicolaus & Company, Incorporated acted as lead manager. Griffin Securities, Inc. and Wunderlich Securities, Inc. acted as co-managers. Net proceeds to us were approximately $218.2 million after deducting underwriting discounts and commissions of approximately $11.5 million and other offering expenses of approximately $0.3 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. We invested the funds received in cash equivalents and other short-term and long-term investments in accordance with our investment policy. There has been no material change in the planned use of proceeds from this offering as described in our final prospectus, dated August 21, 2015, and filed with the SEC on August 25, 2015 pursuant to Rule 424(b).
(c) Issuer Purchases of Equity Securities
None.
Item 6.
Selected Financial Data
The following tables set forth our selected consolidated financial data for the periods and as of the dates indicated. You should read the following selected consolidated financial data in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report.
The selected consolidated financial data set forth below as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, are derived from our audited consolidated financial statements included elsewhere in this report. The selected consolidated financial data set forth below as of December 31, 2014, 2013, and 2012, and for the years ended December 31, 2013 and 2012, are derived from our audited consolidated financial statements contained in reports previously filed with the SEC, not included herein. Our audited and unaudited consolidated financial statements have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

45


Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year.
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In thousands, except share and per share amounts)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Collaboration and licensing revenues
$
109,871

 
$
87,821

 
$
45,212

 
$
23,525

 
$
13,706

Product revenues
36,958

 
41,879

 
11,481

 
164

 

Service revenues
43,049

 
42,923

 
14,761

 

 

Total revenues
190,926

 
173,605

 
71,930

 
23,760

 
13,774

Total operating expenses
316,092

 
320,469

 
141,892

 
81,783

 
88,931

Operating loss
(125,166
)
 
(146,864
)
 
(69,962
)
 
(58,023
)
 
(75,157
)
Net loss
(190,274
)
 
(87,994
)
 
(85,616
)
 
(40,908
)
 
(81,874
)
Net loss attributable to noncontrolling interests
3,662

 
3,501

 
3,794

 
1,928

 

Net loss attributable to Intrexon
(186,612
)
 
(84,493
)
 
(81,822
)
 
(38,980
)
 
(81,874
)
Accretion of dividends on redeemable convertible preferred stock

 

 

 
(18,391
)
 
(21,994
)
Net loss attributable to common shareholders
(186,612
)
 
(84,493
)
 
(81,822
)
 
(57,371
)
 
(103,868
)
Net loss attributable to common shareholders per share, basic and diluted
$
(1.58
)
 
$
(0.76
)
 
$
(0.83
)
 
$
(1.40
)
 
$
(18.77
)
Weighted average shares outstanding, basic and diluted
117,983,836

 
111,066,352

 
99,170,653

 
40,951,952

 
5,533,690

 
December 31,
 
2016
 
2015(4)
 
2014(3)
 
2013(2)
 
2012
 
(In thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
62,607

 
$
135,782

 
$
27,466

 
$
49,509

 
$
10,403

Short-term and long-term investments
180,595

 
207,975

 
115,608

 
188,561

 
260

Equity securities
23,522

 
83,653

 
164,889

 
141,525

 
83,116

Investment in preferred stock
129,545

 

 

 

 

Total assets
949,068

 
982,046

 
576,272

 
469,472

 
151,646

Deferred revenue, current and non-current
310,142

 
197,729

 
113,209

 
73,571

 
58,636

Other liabilities(1)
69,678

 
79,431

 
53,774

 
14,558

 
7,904

Redeemable convertible preferred stock

 

 

 

 
406,659

Total Intrexon shareholders' equity (deficit)
560,237

 
694,078

 
384,761

 
366,722

 
(321,553
)
Noncontrolling interests
9,011

 
10,808

 
24,528

 
14,621

 

Total equity (deficit)
569,248

 
704,886

 
409,289

 
381,343

 
(321,553
)
(1)
Other liabilities include $7,948, $8,528, $10,369 and $1,653 of long term debt as of December 31, 2016, 2015, 2014 and 2013, respectively; and $8,801, $15,629 and $20,485 of deferred consideration as of December 31, 2016, 2015 and 2014, respectively.

46


(2)
In 2013, we acquired ownership interests in AquaBounty and Biological & Popular Culture, Inc., or BioPop, which resulted in our gaining control over these entities, resulting in consolidation effective on the respective acquisition dates.
(3)
In 2014, we acquired Medistem, Inc. and Trans Ova and began including the results of their operations effective on the respective acquisition dates.
(4)
In 2015, we acquired ActoGeniX NV, or ActoGeniX, Okanagan, and Oxitec and began including the results of their operations effective on the respective acquisition dates.
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. We have never generated any royalty revenues from sales of products by our collaborators and may never be profitable. Certain of our consolidated subsidiaries require regulatory approval and/or commercial scale-up before they may commence significant product sales and operating profits.
We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our synthetic biology technology platform. We believe that our existing cash and cash equivalents, short-term and long-term investments, and cash expected to be received from our current collaborators and for sales of products and services provided by our consolidated subsidiaries will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.
Sources of revenue
We derive our collaboration and licensing revenues through the execution of 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.
From time to time, we and certain collaborators may cancel the agreements, relieving us of any further performance obligations under the agreement. When no further performance obligations are required of us under an agreement, we recognize any remaining deferred revenue.
We generate product and service revenues primarily through sales of products or services which are created from technologies developed or owned by us. Our current offerings include sales of advanced reproductive technologies, including our bovine embryo transfer and in vitro fertilization 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.  Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered or delivery has occurred such that risk of loss has passed to the customer, (iii) the price is fixed or determinable, and (iv) collection from the customer is reasonably assured.
In future periods, our revenues will depend on the number of collaborations to which we are party, the advancement and creation of programs within our collaborations and the extent to which our collaborators bring products enabled by our

47


technologies to market. Our revenues will also depend upon our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop new offerings from the various technologies of our subsidiaries. Our future revenues may also include additional revenue streams we may acquire through mergers and acquisitions. In light of our limited operating history and experience, 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 the embryo transfer and in vitro fertilization 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;
costs related to certain in-licensed technology rights;
depreciation of leasehold improvements and laboratory equipment;
amortization of patents and related technologies acquired in mergers and acquisitions; and
rent and utility costs for our research and development facilities.
We have no individually significant research and development projects and our research and development expenses primarily relate to either the costs incurred to expand or otherwise improve our multiple platform technologies, the costs incurred to develop a specific application of our technologies in support of current or prospective collaborators, or costs incurred to expand or otherwise improve our products and services. Research and development expenses, including costs for preclinical and clinical development, incurred for programs we support pursuant to an ECC agreement are typically reimbursed by the collaborator at cost and all other research and development programs may be terminated or otherwise deferred at our discretion. The amount of our research and development expenses may be impacted by, among other things, the number of ECCs and the number and size of programs we may support on behalf of an ECC.
The table below summarizes our research and development expenses incurred to expand or otherwise improve our multiple platform technologies, the costs incurred to develop a specific application of our technologies in support of current or prospective collaborators and licensees, or costs incurred to expand or otherwise improve our products and services for the years ended December 31, 2016, 2015, and 2014. Other research and development expenses for these periods include indirect salaries and overhead expenses that are not allocated to either expanding or improving our multiple platform technologies, specific applications of our technologies in support of current or prospective collaborators and licensees, or expanding or improving our product and services offerings. Research and development expenses for the year ended December 31, 2015 include a $59.6 million payment in our common stock for an exclusive license to certain technologies owned by MD Anderson to be used in the expansion and improvement of our platform technologies.

48


 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In thousands)
Expansion or improvement of our platform technologies
$
12,195

 
$
75,779

 
$
13,858

Specific applications of our technologies in support of current and prospective collaborators and licensees
62,960

 
41,306

 
26,643

Expansion or improvement of our product and service offerings
17,585

 
10,537

 
4,730

Other
19,395

 
19,861

 
13,752

Total research and development expenses
$
112,135

 
$
147,483

 
$
58,983

We expect that our research and development expenses will increase as we continue to enter into collaborations and as we expand our offerings across additional market sectors. We believe these increases will likely include increased costs related to the hiring of additional personnel in research and development functions, increased costs paid to consultants and contract research organizations and increased costs related to laboratory supplies. Research and development expenses may also increase as a result of ongoing research and development operations which 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, sales and marketing, information technology, legal and corporate communications functions. Other significant SG&A expenses include rent and utilities, insurance, accounting and legal services and expenses associated with obtaining and maintaining our intellectual property.
We expect that our SG&A expenses will increase as we continue to operate as a public company and expand our operations. We believe that these increases will likely include costs related to the hiring of additional personnel and increased fees for business development functions, costs associated with defending the Company in litigation matters, the costs of outside consultants and other professional services, including costs to comply with corporate governance, internal controls and similar requirements applicable to public companies. SG&A expenses may also increase as a result of ongoing operations which we might assume through mergers and acquisitions.
Other income (expense), net
We hold equity securities and preferred stock received and/or purchased from certain collaborators. Other than investments accounted for using the equity method discussed below, we elected the fair value option to account for our equity securities and preferred stock held in these collaborators. These equity securities and preferred stock are recorded at fair value at each reporting date. Unrealized appreciation (depreciation) resulting from fair value adjustments are reported as other income (expense) in the consolidated statement of operations. As such, we bear the risk that fluctuations in the securities' share prices may significantly impact our results of operations. In June 2015, we recorded a realized gain related to the distribution of all our shares of ZIOPHARM to our shareholders as a special stock dividend.
Interest income consists of interest earned on our cash and cash equivalents and short-term and long-term investments. Dividend income consists of the monthly preferred stock dividend received from ZIOPHARM.
Interest expense pertains to deferred consideration payable to the former members of Trans Ova and long term debt.
As consideration for providing exclusive rights of first-look and first negotiation, we receive a portion of the management fee collected by the fund sponsor of Harvest for our obligation to provide Harvest with investment proposals that are suitable for pursuit by a start-up. These fees are included in other income.
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 have accounted for investments in our JVs and start-up entities backed by Harvest 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.

49


Results of operations
Comparison of the year ended December 31, 2016 to the year ended December 31, 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015, together with the changes in those items in dollars and as a percentage:
 
Year Ended 
 December 31,
 
Dollar
Change
 
Percent
Change
 
2016
 
2015
 
 
 
(In thousands)
 
 
Revenues
 
 
 
 
 
 
 
Collaboration and licensing revenues
$
109,871

 
$
87,821

 
$
22,050

 
25.1
 %
Product revenues
36,958

 
41,879

 
(4,921
)
 
(11.8
)%
Service revenues
43,049

 
42,923

 
126

 
0.3
 %
Other revenues
1,048

 
982

 
66

 
6.7
 %
Total revenues
190,926

 
173,605

 
17,321

 
10.0
 %
Operating expenses
 
 
 
 
 
 
 
Cost of products
37,709

 
40,746

 
(3,037
)
 
(7.5
)%
Cost of services
23,930

 
23,183

 
747

 
3.2
 %
Research and development
112,135

 
147,483

 
(35,348
)
 
(24.0
)%
Selling, general and administrative
142,318

 
109,057

 
33,261

 
30.5
 %
Total operating expenses
316,092

 
320,469

 
(4,377
)
 
(1.4
)%
Operating loss
(125,166
)
 
(146,864
)
 
21,698

 
(14.8
)%
Total other income (expense), net
(47,865
)
 
68,830

 
(116,695
)
 
(169.5
)%
Equity in loss of affiliates
(21,120
)
 
(8,944
)
 
(12,176
)
 
136.1
 %
Loss before income taxes
(194,151
)
 
(86,978
)
 
(107,173
)
 
123.2
 %
Income tax benefit (expense)
3,877

 
(1,016
)
 
4,893

 
>200%

Net loss
(190,274
)
 
(87,994
)
 
(102,280
)
 
116.2
 %
Net loss attributable to noncontrolling interests
3,662

 
3,501

 
161

 
4.6
 %
Net loss attributable to Intrexon
$
(186,612
)
 
$
(84,493
)
 
$
(102,119
)
 
120.9
 %

50


Collaboration and licensing revenues
The following table shows the collaboration and licensing revenue recognized for the years ended December 31, 2016 and 2015, together with the changes in those items. See Note 5 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further discussion of our collaboration and licensing revenues.
 
Year Ended 
 December 31,
 
Dollar
Change
 
2016
 
2015
 
 
(In thousands)
ZIOPHARM Oncology, Inc.
$
33,836

 
$
19,306

 
$
14,530

Oragenics, Inc.
2,752

 
6,535

 
(3,783
)
Fibrocell Science, Inc.
5,942

 
12,179

 
(6,237
)
Genopaver, LLC
6,117

 
3,829

 
2,288

S & I Ophthalmic, LLC
6,141

 
4,115

 
2,026

OvaXon, LLC
2,934

 
2,540

 
394

Intrexon Energy Partners, LLC
17,552

 
13,447

 
4,105

Persea Bio, LLC
1,278

 
1,241

 
37

Ares Trading S.A.
10,192

 
4,728

 
5,464

Thrive Agrobiotics, Inc.
1,714

 
266

 
1,448

Intrexon Energy Partners II, LLC
3,169

 
167

 
3,002

Exotech Bio, Inc.
792

 

 
792

Relieve Genetics, Inc.
1,239

 

 
1,239

Intrexon T1D Partners, LLC
1,908

 

 
1,908

AD Skincare, Inc.
695

 

 
695

Genten Therapeutics, Inc.
386

 

 
386

CRS Bio, Inc.
148

 

 
148

Other
13,076

 
19,468

 
(6,392
)
Total
$
109,871

 
$
87,821

 
$
22,050

Collaboration and licensing revenues increased $22.1 million over the year ended December 31, 2015 due to (i) the recognition of deferred revenue for upfront payments received from collaborations signed by us in 2016, including the consideration received in June 2016 from ZIOPHARM to amend the collaborations between us; and (ii) increased research and development services for these collaborations and for the expansion of programs or the addition of new programs with previously existing collaborators, including ZIOPHARM, Genopaver, LLC, or Genopaver, Ares Trading, and our JVs with S & I Ophthalmic and Intrexon Energy Partners. This increase is partially offset by the recognition in 2015 of previously deferred revenue related to collaboration agreements for which we satisfied all of our obligations or which were terminated during 2015.
Product revenues and gross margin
Product revenues decreased $4.9 million, or 12 percent, from the year ended December 31, 2015. The decrease in product revenues and gross margin primarily relates to a decrease in the quantities of pregnant cows, livestock previously used in production and live calves sold due to lower customer demand for these products and also due to a decline in average sales price of livestock previously used in production.
Service revenues and gross margin
Revenues and gross margin on services were consistent year over year as anticipated.
Research and development expenses
Research and development expenses decreased $35.3 million, or 24 percent, from the year ended December 31, 2015. The decrease is due primarily to the inclusion in 2015 of a $59.6 million payment in common stock for an exclusive license to

51


certain technologies owned by MD Anderson. This decrease was partially offset by increases in (i) salaries, benefits and other personnel costs for research and development employees, (ii) lab supplies and consulting expenses, and (iii) depreciation and amortization. Salaries, benefits and other personnel costs increased $7.3 million due to (i) an increase in research and development headcount to support new and expanded collaborations and (ii) a full year of costs for research and development employees assumed in our 2015 acquisitions. Lab supplies and consulting expenses increased $10.6 million as a result of (i) the progression into the preclinical phase with certain of our collaborators, (ii) the increased level of research and development services provided to our collaborators, and (iii) a full year of compensation costs incurred for employees assumed in our 2015 acquisitions. Depreciation and amortization increased $5.7 million primarily as a result of (i) inclusion of a full year of depreciation and amortization on property, equipment and intangible assets from our 2015 acquisitions and (ii) a full year of amortization of AquaBounty's intangible assets which commenced upon regulatory approval in November 2015.
Selling, general and administrative expenses
SG&A expenses increased $33.3 million, or 31 percent, over the year ended December 31, 2015. Salaries, benefits and other personnel costs for SG&A employees increased $3.2 million due to (i) increased headcount, including the hiring of two new executive officers and additional business development professionals; (ii) a full year of non-cash compensation paid to our CEO pursuant to the compensation agreement into which we entered in November 2015; and (iii) a full year of salaries, benefits and other personnel costs for employees assumed in our 2015 acquisitions. These increases were partially offset by a decrease in performance-based cash incentives for our executive officers in 2016. Legal and professional expenses increased $18.6 million primarily due to (i) a full year of non-cash consulting expenses pursuant to our services agreement with Third Security into which we entered in November 2015; (ii) expenses incurred to support domestic and international government affairs for regulatory and other approvals necessary to commercialize our products and services; (iii) increased legal fees to defend ongoing litigation; and (iv) incremental costs incurred to support our 2015 acquisitions and other business development activities. In 2016, we also recorded $4.3 million in litigation expenses arising from the entrance of a court order in our trial with XY, LLC, or XY.
Total other income (expense), net
Total other income (expense), net, decreased $116.7 million, or 170 percent, from the year ended December 31, 2015. This decrease was attributable to the $81.4 million realized gain recognized upon the special stock dividend of all of our shares of ZIOPHARM to our shareholders in June 2015 and the decrease in fair value of our equity securities portfolio. These decreases were partially offset by preferred stock dividend income received from ZIOPHARM.
Equity in net loss of affiliates
Equity in net loss of affiliates increased $12.2 million, or 136 percent, over the year ended December 31, 2015. The increase is due to the addition of our new JVs entered into in 2016, including our investments in start-up entities backed by Harvest, as well as additional expenses incurred by our other JVs as their programs continue to progress.

52


Comparison of the year ended December 31, 2015 to the year ended December 31, 2014
The following table summarizes our results of operations for the years ended December 31, 2015 and 2014, together with the changes in those items in dollars and as a percentage:
 
Year Ended 
 December 31,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
 
(In thousands)
 
 
Revenues
 
 
 
 
 
 
 
Collaboration and licensing revenues
$
87,821

 
$
45,212

 
$
42,609

 
94.2
 %
Product revenues
41,879

 
11,481

 
30,398

 
>200%

Service revenues
42,923

 
14,761

 
28,162

 
190.8
 %
Other revenues
982

 
476

 
506

 
106.3
 %
Total revenues
173,605

 
71,930

 
101,675

 
141.4
 %
Operating expenses
 
 
 
 
 
 
 
Cost of products
40,746

 
11,035

 
29,711

 
>200%

Cost of services
23,183

 
8,225

 
14,958

 
181.9
 %
Research and development
147,483

 
58,983

 
88,500

 
150.0
 %
Selling, general and administrative
109,057

 
63,649

 
45,408

 
71.3
 %
Total operating expenses
320,469

 
141,892

 
178,577

 
125.9
 %
Operating loss
(146,864
)
 
(69,962
)
 
(76,902
)
 
109.9
 %
Total other income (expense), net
68,830

 
(10,497
)
 
79,327

 
>200%

Equity in loss of affiliates
(8,944
)
 
(5,260
)
 
(3,684
)
 
70.0
 %
Loss before income taxes
(86,978
)
 
(85,719
)
 
(1,259
)
 
1.5
 %
Income tax benefit (expense)
(1,016
)
 
103

 
(1,119
)
 
<(200)%

Net loss
(87,994
)
 
(85,616
)
 
(2,378
)
 
2.8
 %
Net loss attributable to noncontrolling interests
3,501

 
3,794

 
(293
)
 
(7.7
)%
Net loss attributable to Intrexon
$
(84,493
)
 
$
(81,822
)
 
$
(2,671
)
 
3.3
 %

53


Collaboration and licensing revenues
The following table shows the collaboration and licensing revenue recognized for the years ended December 31, 2015 and 2014, together with the changes in those items. See Note 5 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further discussion of our collaboration and licensing revenues.
 
Year Ended 
 December 31,
 
Dollar
Change
 
2015
 
2014
 
 
(In thousands)
ZIOPHARM Oncology, Inc.
$
19,306

 
$
14,621

 
$
4,685

Oragenics, Inc.
6,535

 
1,643

 
4,892

Fibrocell Science, Inc.
12,179

 
6,192

 
5,987

Genopaver, LLC
3,829

 
1,783

 
2,046

S & I Ophthalmic, LLC
4,115

 
2,832

 
1,283

OvaXon, LLC
2,540

 
2,799

 
(259
)
Intrexon Energy Partners, LLC
13,447

 
6,102

 
7,345

Persea Bio, LLC
1,241

 

 
1,241

Ares Trading S.A.
4,728

 

 
4,728

Thrive Agrobiotics, Inc.
266

 

 
266

Intrexon Energy Partners II, LLC
167

 

 
167

Other
19,468

 
9,240

 
10,228

Total
$
87,821

 
$
45,212

 
$
42,609

Collaboration and licensing revenues increased $42.6 million over the year ended December 31, 2014 due to (i) the recognition of deferred revenue for upfront payments received from our license and collaboration agreement with Ares Trading, which became effective in May 2015, and from other collaborations signed by us in 2015; (ii) increased research and development services performed for both new collaborations and for the expansion or addition of new programs with previously existing collaborators, including primarily ZIOPHARM, Fibrocell Science, Inc., Genopaver, and Intrexon Energy Partners; and (iii) the recognition of $16.0 million of previously deferred revenue related to collaboration agreements for which we satisfied all of our obligations or which were terminated in 2015.
Product revenues and gross margin
Product revenues increased $30.4 million, or 265 percent, over the year ended December 31, 2014. This increase relates primarily to the inclusion of a full year of results for Trans Ova in 2015 versus approximately four and a half months of results in 2014 since the acquisition occurred in August 2014.
Service revenues and gross margin
Service revenues increased $28.1 million, or 191 percent, over the year ended December 31, 2014. This increase relates primarily to the inclusion of a full year of results for Trans Ova in 2015 versus approximately four and a half months of results in 2014 since the acquisition occurred in August 2014.
Research and development expenses
Research and development expenses increased $88.5 million, or 150 percent, over the year ended December 31, 2014. In January 2015, we issued 2,100,085 shares of our common stock valued at $59.6 million to MD Anderson, in exchange for an exclusive license to certain technologies owned by MD Anderson. Salaries, benefits and other personnel costs increased $12.5 million due to (i) an increase in research and development headcount to support new and expanded collaborations, as well as additional compensation expenses related to stock options and performance-based bonus awards for all research and development employees; and (ii) increased headcount from our 2015 acquisitions. Lab supplies and contract research organizations expenses increased $8.2 million as a result of (i) the progression into the preclinical phase with certain of our collaborators; (ii) the increased level of research and development services provided to our collaborators; and (iii) costs

54


incurred by our 2015 acquisitions. Depreciation and amortization increased $4.0 million primarily as a result of acquiring property and equipment and intangible assets in connection with our 2015 acquisitions.
Selling, general and administrative expenses
SG&A expenses increased $45.5 million, or 72 percent, over the year ended December 31, 2014. Salaries, benefits and other personnel costs increased $28.0 million due to (i) the inclusion of SG&A employees of Trans Ova for a full year in 2015 compared to approximately four and a half months in 2014; (ii) increased headcount to support our expanding operations, as well as additional compensation expenses related to stock options and performance-based bonus awards, including those paid under our 2015 annual executive bonus plan, for all SG&A employees; and (iii) salaries, benefits and other personnel costs from our 2015 acquisitions. Legal and professional expenses increased $7.0 million primarily due to costs associated with our 2015 acquisitions, the license agreement with MD Anderson, a full year of legal and professional costs for Trans Ova, our 2015 public offerings, and other business development activity. Other SG&A expenses, including rent and utilities, and depreciation and amortization, have increased in 2015 as a result of our expanding operations, a full year of Trans Ova expenses, and expenses from our 2015 acquisitions.
Total other income (expense), net
Total other income (expense), net, increased $79.3 million, or 756 percent, over the year ended December 31, 2014. This increase was primarily related to the $81.4 million realized gain recognized upon the special stock dividend of all of our shares of ZIOPHARM to our shareholders in June 2015 which was partially offset by unrealized depreciation in fair value of our other publicly traded equity securities for the year ended December 31, 2015.
Equity in net loss of affiliates
Equity in net loss of affiliates increased $3.7 million, or 70 percent, over the year ended December 31, 2014. The increase was primarily due to higher net losses incurred by Intrexon Energy Partners in 2015. Intrexon Energy Partners incurred a full year of losses in 2015 at a higher spend rate due to the program progression compared to only nine months in 2014 when the program was scaling up.
Liquidity and capital resources
Sources of liquidity
We have incurred losses from operations since our inception and as of December 31, 2016, we had an accumulated deficit of $729.3 million. From our inception through December 31, 2016, we have funded our operations principally with proceeds received from private and public offerings, cash received from our collaborators and through product and service sales made directly to customers. As of December 31, 2016, we had cash and cash equivalents of $62.6 million and short-term and long-term investments of $180.6 million. Cash in excess of immediate requirements is invested primarily in money market funds, certificates of deposits and U.S. government debt securities in order to maintain liquidity and preserve capital.
We currently generate cash receipts primarily from technology access fees, reimbursement of research and development services performed by us and sales of products and services.
Cash flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In thousands)
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(55,975
)
 
$
35,669

 
$
(19,858
)
Investing activities
(28,392
)
 
(260,811
)
 
(26,029
)
Financing activities
12,065

 
333,249

 
24,004

Effect of exchange rate changes on cash and cash equivalents
(873
)
 
209

 
(160
)
Net increase (decrease) in cash and cash equivalents
$
(73,175
)
 
$
108,316

 
$
(22,043
)

55


Cash flows from operating activities:
In 2016, our net loss of $190.3 million, after consideration of significant noncash items of (i) $58.9 million of unrealized and realized losses on our equity securities and preferred stock, (ii) $42.2 million of stock-based compensation expense, (iii) $24.6 million of depreciation and amortization expense, (iv) $21.1 million of equity in net loss of affiliates, (v) $10.8 million of shares issued as payment for services, and (vi) $7.4 million of noncash dividend income was $40.1 million. Additionally, we had a $17.7 million net increase in our operating assets and liabilities primarily as a result of the recognition of previously deferred revenue, partially offset by a $10.0 million technology access fee received in cash pursuant to a new collaboration. During 2015, we received net cash receipts for technology access fees of $85.5 million pursuant to new collaborations with Ares Trading, ZIOPHARM, and Intrexon Energy Partners II. Our net loss of $88.0 million, after deduction of noncash items of (i) $59.6 million of common stock issued to MD Anderson for the in-license of certain technologies, (ii) $38.7 million of stock-based compensation expense and (iii) $17.7 million of depreciation and amortization expense and the addition of $66.9 million of noncash unrealized and realized gains on our equity securities was $38.9 million. During 2014, our $85.6 million net loss, after deduction of noncash items of (i) $10.5 million of unrealized depreciation on our equity securities, (ii) $21.8 million of stock-based compensation expense and (iii) $10.4 million of depreciation and amortization expense was $42.9 million. This amount was partially offset by the receipt of a $25.0 million technology access fee from our ECC with Intrexon Energy Partners.
Cash flows from investing activities:
During 2016, we used $31.6 million for purchases of property, plant and equipment; $11.5 million for investments in our JVs; $7.2 million to acquire the assets of Old EnviroFlight; $3.0 million for the issuances of notes receivable; $2.3 million for purchases of equity securities and warrants of certain of our collaborators, and we received $26.7 million of net proceeds from the maturity and sale of short-term and long-term investments. During 2015, we used $123.9 million, net of cash received, for the acquisitions of ActoGeniX, Okanagan and Oxitec; $93.6 million for net purchases of short-term and long-term investments; $17.1 million for the purchase of equity securities and warrants pursuant to public financings by three of our collaborators; $13.4 million for investments in our JVs, and $12.7 million for purchases of property, plant and equipment. During 2014, we received net proceeds from the maturity and sale of short-term and long-term investments of $71.6 million. These net proceeds were offset by net cash outflows of $67.6 million for the acquisitions of Trans Ova and Medistem, Inc., the purchase of $19.5 million common stock from one of our collaborators and $6.4 million in purchases of property, plant and equipment.
Cash flows from financing activities:
During 2016, we received $19.2 million from stock option exercises and paid $6.7 million of deferred consideration to former shareholders of an acquired business. During 2015, we received $328.2 million of net proceeds from our public offerings in January and August. During 2014, we received $25.0 million of proceeds from the private placement of our common stock which closed in March 2014 and $1.5 million of proceeds from stock option exercises. These cash inflows were offset by $1.8 million of net payments on lines of credit used by Trans Ova.
Future capital requirements
We established our current strategy and business model of commercializing our technologies through collaborations with development expertise in 2010 and we consummated our first collaboration in January 2011. We believe that we will continue to consummate collaborations with new companies across our various market sectors, which will result in additional upfront, milestone and cost recovery payments in the future.
We believe that our existing cash and cash equivalents and short-term and long-term investments and cash expected to be received from our current collaborators and for sales of products and services provided by our consolidated subsidiaries will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.
We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. 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;
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 potential products;

56


our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop new offerings, including those which may incorporate new technologies;
the timing, receipt and amount of funding under future government contracts, if any;
our ability to maintain and establish additional collaborative arrangements and/or new business initiatives;
the timing of regulatory approval of products of our collaborations and operations;
the resources, time and cost required for the preparation, filing, prosecution, maintenance and enforcement of patent claims;
investments we may make in current and future collaborators, including JVs;
strategic mergers and acquisitions, including both the upfront acquisition cost as well as the cost to integrate, maintain, and expand the strategic target; and
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.
Until such time, if ever, as we can regularly generate positive operating cash flows, we may finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing arrangements. 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. 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 government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
Contractual obligations and commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2016 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
$
47,473

 
$
5,503

 
$
11,289

 
$
10,502

 
$
20,179

Deferred consideration
8,801

 
8,801

 

 

 

Purchase commitments
7,205

 
2,401

 
4,804

 

 

Long term debt
6,052

 
386

 
773

 
1,101

 
3,792

Contingent consideration
2,081

 

 
2,081

 

 

Total
$
71,612

 
$
17,091

 
$
18,947

 
$
11,603

 
$
23,971

In addition to the obligations in the table above, as of December 31, 2016 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 of at least $45.0 million to the JVs, subject to certain conditions and limitations. As of December 31, 2016, our remaining capital contribution commitments to our JVs were $28.9 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 also 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 which incorporate their technologies. These agreements are generally subject

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to termination by us and therefore no amounts are included in the tables above. As of December 31, 2016, we had research and development commitments with third parties totaling $10.6 million that had not yet been incurred.
In January 2015, we and ZIOPHARM jointly entered into a license agreement with MD Anderson whereby we received an exclusive license to certain technologies owned by MD Anderson. ZIOPHARM will receive access to these technologies pursuant to the terms of our ECC. We and ZIOPHARM are obligated to reimburse MD Anderson for out of pocket expenses for maintaining patents covering the licensed technologies. These reimbursements are not included in the table above due to the uncertainty of the timing and amounts of such reimbursements.
As part of our August 2014 acquisition of Trans Ova, we agreed to pay a portion of certain cash proceeds received from the litigation with XY. These amounts are not included in the table above due to the uncertainty of whether and when any amounts may be due.
In conjunction with a prior transaction associated with Trans Ova's subsidiary, ViaGen, in September 2012, we may be obligated to make certain future contingent payments to the former equity holders of ViaGen, up to a total of $3.0 million if certain revenue targets, as defined in the share purchase agreement, are met. This amount is not included in the table above due to the uncertainty of when we will make any of these future payments, if ever.
In January 2009, AquaBounty was awarded a grant to provide funding of a research and development project from the Atlantic Canada Opportunities Agency, a Canadian government agency. Amounts claimed by AquaBounty must be repaid in the form of a 10 percent royalty on any products commercialized out of this research and development project until fully paid. Because the timing of commercialization is subject to additional regulatory considerations, the timing of repayment is uncertain. AquaBounty has claimed all amounts available under the grant, resulting in total long-term debt of $1.9 million on our consolidated financial statements as of December 31, 2016. This amount is not included in the table above due to the uncertainty of the timing of repayment.
Net operating losses
As of December 31, 2016, we had net operating loss carryforwards of approximately $253.0 million for U.S. federal income tax purposes available to offset future taxable income and U.S. federal and state research and development tax credits of $7.5 million, prior to consideration of annual limitations that may be imposed under Section 382. These carryforwards begin to expire in 2022. Our direct foreign subsidiaries have foreign loss carryforwards of approximately $119.2 million, most of which do not expire.
Our past issuances of stock and mergers and acquisitions have resulted in ownership changes within the meaning of Section 382. As a result, the utilization of portions of our net operating losses may be subject to annual limitations. As of December 31, 2016, approximately $15.1 million of our domestic net operating losses generated prior to 2008 are limited by Section 382 to annual usage limits of approximately $1.5 million. As of December 31, 2016, approximately $18.6 million of domestic net operating losses were inherited via acquisition 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.
We do not file a consolidated income tax return with AquaBounty and BioPop. As of December 31, 2016, AquaBounty had loss carryforwards for federal and foreign income tax purposes of approximately $22.2 million and $12.9 million, respectively, and foreign research tax credits of $2.4 million available to offset future taxable income, prior to consideration of annual limitations that may be imposed under Section 382 or analogous foreign provisions. These carryforwards will begin to expire in 2018. As a result of our ownership in AquaBounty passing 50 percent in 2013, an annual Section 382 limitation of approximately $0.9 million per year will apply to losses and credits carried forward by AquaBounty from prior years, which are also subject to prior Section 382 limitations. As of December 31, 2016, BioPop had loss carryforwards of approximately $1.4 million for federal income tax purposes available to offset future taxable income.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, other than operating leases as mentioned above, as defined under SEC rules.

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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 Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, 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 generate revenue through contractual agreements with collaborators and licensing agreements whereby the collaborators or the licensees 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.
Our collaborations and licensing agreements typically contain multiple elements, or deliverables, including technology licenses, research and development services, and in certain cases manufacturing services. We identify the deliverables within the agreements and evaluate which deliverables represent separate units of accounting. Analyzing the agreements to identify deliverables requires the use of judgment. A deliverable is considered a separate unit of accounting when the deliverable has value to the collaborator or licensee on a standalone basis based on the consideration of the relevant facts and circumstances for each agreement.
Consideration received is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. When available, the relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of the selling price or third-party evidence of the selling price, if VSOE does not exist. If neither VSOE nor third-party evidence of the selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. We recognize the revenue allocated to each unit of accounting as we deliver the related goods or services. If we determine that certain deliverables should be treated as a single unit of accounting, then the revenue is recognized using either a proportional performance or straight-line method, depending on whether we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and whether such performance obligations are provided on a best-efforts basis. As we cannot reasonably estimate our performance obligations related to our collaborations, we recognize revenue on a straight-line basis over the period we expect to complete our performance obligations, which is reevaluated each reporting period.
The terms of our agreements may provide for milestone payments upon achievement of certain defined events. We apply the Milestone Method for recognizing milestone payments. Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:
The consideration is commensurate with either the entity's performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the entity's performance to achieve the milestone;
The consideration relates solely to past performance; and
The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

59


In the event that a milestone is not considered substantive, we recognize the milestone consideration as revenue using the same method applied to the upfront payments.
Research and development services are a deliverable satisfied by us in accordance with the terms of the collaboration and licensing agreements and we consider these services to be inseparable from the license to the core technology; therefore, reimbursements of services performed are recognized as revenue. Because reimbursement (i) is contingent upon performance of the services by us, (ii) does not include a profit component and (iii) does not relate to any future deliverable, the revenue is recognized during the period in which the related services are performed and collection of such amounts is reasonably assured. Payments received for manufacturing services will be recognized when the earnings process related to the manufactured materials has been completed. Royalties to be received under the agreements will be recognized as earned.
From time to time, we and certain collaborators may cancel the agreements, relieving us of any further performance obligations under the agreement. When no further performance obligations are required of us under an agreement, we recognize any remaining deferred revenue.
We recognized $109.9 million, $87.8 million and $45.2 million of collaboration and licensing revenues in the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, we have $297.9 million and $181.3 million, respectively, of deferred revenue related to our receipt of upfront and milestone payments.
We generate product and service revenues primarily through sales of products or services which are created from technologies developed or owned by us. Our current offerings include sales of advanced reproductive technologies, including our bovine embryo transfer and in vitro fertilization 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. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered or delivery has occurred such that risk of loss has passed to the customer, (iii) the price is fixed or determinable, and (iv) collection from the customer is reasonably assured. We recognized $77.9 million, $83.4 million, and $25.9 million of these product and service revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
Valuation of investments in equity securities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset and liability. We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities, which includes our cash equivalents and certain investments in equity securities of our publicly held collaborators; Level 2, defined as inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly, which includes our short-term and long-term investments and certain investments in equity securities of our publicly held collaborators; and Level 3, defined as unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available.
We hold equity securities received and/or purchased from certain collaborators. For each collaborator where we own equity securities, we make an accounting policy election to present them either (i) at the fair value at the end of each reporting period or (ii) using the cost or equity method depending on our level of influence. Other than investments accounted for using the equity method, we have elected to account for certain of these equity securities in publicly held collaborators using the fair value option. These equity securities in publicly held collaborators are recorded at fair value at each reporting date and are subject to market price volatility. Unrealized gains and losses resulting from fair value adjustments are reported as other income (expense) in the consolidated statement of operations. The fair value of these equity securities in publicly held collaborators is subject to fluctuation in the future due to the volatility of the stock market, changes in general economic conditions and changes in the financial conditions of these collaborators. As of December 31, 2016 and 2015, our equity securities in our collaborators are valued at $23.5 million and $83.7 million, respectively.
We record the fair value of securities received on the date the collaboration is consummated or the milestone is achieved using the closing, quoted price of the collaborator's security on that date, assuming the transfer of the consideration is considered perfunctory. If the transfer of the consideration is not considered perfunctory, we consider the specific facts and circumstances to determine the appropriate date on which to evaluate fair value. We also evaluate whether any discounts for trading restrictions or other basis for lack of marketability should be applied to the fair value of the securities at inception of the collaboration. In the event we conclude that a discount should be applied, the fair value of the securities is adjusted at inception of the collaboration and re-evaluated at each reporting period thereafter.

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We account for investments in which we have the ability to exercise significant influence over, but not control, the operating activities of the investee using the equity method or election of the fair value option. If the fair value option is elected, the investment is accounted for as described for equity securities above. Under the equity method, we include our pro-rata share of the investee's operating results, adjusted for accretion of basis difference, in our consolidated statement of operations with the corresponding increase or decrease applied to the carrying value of the investment. We account for investments in our JVs and start-up entities backed by Harvest 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.
Investment in preferred stock
We hold preferred stock received from one of our collaborators, ZIOPHARM, which may be converted to common stock upon the occurrence of certain events in the future. We elected the fair value option to account for our investment in preferred stock whereby the value of preferred stock is adjusted to fair value as of each reporting date and unrealized gains and losses are reported in the consolidated statement of operations.  This investment is subject to fluctuation in the future due to, among other things, the likelihood and timing of conversion of the preferred stock into common stock, the volatility of ZIOPHARM's common stock, and changes in general economic and financial conditions of ZIOPHARM. The investment is classified as noncurrent in the consolidated balance sheet since we do not intend to sell the investment nor expect it to be converted into shares of common stock within one year. As of December 31, 2016, our investment in preferred stock is valued at $129.5 million.
Until such time as we convert the preferred stock into common stock, we are entitled to a monthly dividend payable in additional shares of preferred stock and record dividend income based on the fair value of the preferred shares received. We recorded $7.4 million of dividend income in 2016.
Valuation allowance for net deferred tax assets
We record a valuation allowance to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that we will not recognize some or all of the deferred tax assets. We have had a history of net losses since inception, and as a result, we have established a 100 percent valuation allowance for our net domestic and certain foreign deferred tax assets. If circumstances change and we determine that we will able to realize some or all of these net deferred tax assets in the future, we will record an adjustment to the valuation allowance.
Consolidation of variable interest entities
We identify entities that (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest as variable interest entities ("VIE" or "VIEs"). We perform an initial and on-going evaluation of the entities with which we have variable interests to determine if any of these entities are VIEs. If an entity is identified as a VIE, we perform an assessment to determine whether we have both: (i) the power to direct activities that most significantly impact the VIE's economic performance, and (ii) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, we are identified as the primary beneficiary of the VIE. As of December 31, 2016 and 2015, we determined that certain of our collaborators and JVs were VIEs. We were not the primary beneficiary for these entities since we did not have the power to direct the activities that most significantly impact the economic performance of the VIEs. Our aggregate investment balance of these VIEs as of December 31, 2016 and 2015 was $159.1 million and $3.6 million, respectively, which represents our maximum risk of loss related to the identified VIEs.
Valuation of goodwill and long-lived assets
We evaluate long-lived assets, which include property, plant and equipment and intangible assets, 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 and indefinite-lived intangible assets, which include in-process research and development, are tested for impairment annually, or more frequently if events or circumstances between annual tests indicate that the assets may be impaired. Impairment losses on goodwill and indefinite-lived intangible assets are recognized based solely on a comparison of their fair

61


value to carrying value, without consideration of any recoverability test. We monitor the progression of our in-process research and development, as the likelihood of success is contingent upon regulatory approval.
Stock-based compensation
We record the fair value of stock options issued to employees and non-employees as of the grant date as stock-based compensation expense. Stock-based compensation expense for employees and non-employees is recognized over the requisite service period, which is typically the vesting period. We recorded stock-based compensation expense of $42.2 million, $38.7 million and $21.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. We utilize the Black-Scholes option-pricing model to estimate the grant-date fair value of all stock options. The Black-Scholes option-pricing model requires the use of weighted average assumptions for estimated expected volatility, estimated expected term of stock options, risk-free rate, estimated expected dividend yield, and the fair value of the underlying common stock at the date of grant. Because we do not have sufficient history to estimate the expected volatility of our common stock price, expected volatility is based on a blended approach which utilizes the volatility of our common stock and the average volatility of peer public entities that are similar in size and industry. We estimate the expected term of all stock options based on previous history of exercises. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock option. The expected dividend yield is 0 percent as we do not expect to declare cash dividends in the near future. The fair value of the underlying common stock is determined based on the quoted market price of our common stock on the NYSE. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. Actual forfeitures are recorded when incurred and estimated forfeitures are reviewed and adjusted at least annually. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2016, 2015 and 2014 are set forth below:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Valuation Assumptions
 
 
 
 
 
Expected dividend yield
0%
 
0%
 
0%
Expected volatility
59%—60%
 
59%—62%
 
62%—64%
Expected term (years)
6.25
 
6.25
 
6.25
Risk-free interest rate
1.23%—2.17%
 
1.56%—1.95%
 
1.82%—2.14%
We had 11,640,383 options outstanding as of December 31, 2016 of which 3,418,035 were exercisable. We had 11,043,528 options outstanding as of December 31, 2015 of which 2,494,426 were exercisable. Total unrecognized stock-based compensation expense related to non-vested awards as of December 31, 2016 and 2015, was $94.0 million and $113.7 million, respectively, and is expected to be recognized over a weighted-average period of approximately three years. The weighted average grant date fair value for options granted in 2016, 2015 and 2014 was $16.28, $25.96 and $16.40, respectively.
Inventory
The Company has livestock inventory which primarily includes adult female cows which are used in certain production processes and are recorded at acquisition cost using the first-in, first-out method or at market, whichever is lower.  Work-in-process inventory includes allocations of production costs and facility costs on gestating livestock and are recorded at the lower of cost or market.  Significant declines in the price of cows could result in unfavorable adjustments to inventory balances. As of December 31, 2016 and 2015, total inventory was $21.1 million and $26.6 million, respectively.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business, which is incorporated herein by reference.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The following sections provide quantitative information on our exposure to interest rate risk, stock price risk, and foreign currency exchange risk. We make use of sensitivity analyses which are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.

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Interest rate risk
We had cash, cash equivalents and short-term and long-term investments of $243.2 million and $343.8 million as of December 31, 2016 and 2015, respectively. Our cash and cash equivalents and short-term and long-term investments consist of cash, money market funds, U.S. government debt securities and certificates of deposit. The primary objective of our investment activities is to preserve principal, maintain liquidity and maximize income without significantly increasing risk. Our investments consist of U.S. government debt securities and certificates of deposit which may be subject to market risk due to changes in prevailing interest rates that may cause the fair values of our investments to fluctuate. We believe that a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of our interest-sensitive financial instruments and any such losses would only be realized if we sold the investments prior to maturity.
Investments in publicly traded companies' common stock
We have common stock investments in several publicly traded companies that are subject to market price volatility. We have adopted the fair value method of accounting for these investments, except for our investment in AquaBounty as further described below, and therefore, have recorded them at fair value at the end of each reporting period with the unrealized gain or loss recorded as a separate component of other income (expense), net for the period. As of December 31, 2016 and December 31, 2015 the original aggregate cost basis of these investments was $104.0 million and $107.2 million, respectively, and the market value was $23.5 million and $83.7 million, respectively. The fair value of these investments is subject to fluctuation in the future due to the volatility of the stock market, changes in general economic conditions and changes in the financial conditions of these companies. The fair value of these investments as of December 31, 2016 would be approximately $25.9 million and $18.8 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the value of the investments. The fair value of these investments as of December 31, 2015 would be approximately $92.1 million and $67.0 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the value of the investments.
As of December 31, 2016, the common stock of AquaBounty is traded on the London Stock Exchange. As of December 31, 2016, we owned 4,516,731 shares or approximately 70 percent. The number of shares reflects a 1-for-30 reverse stock split of AquaBounty's common stock which was effective January 4, 2017. The fair value of our investment in AquaBounty as of December 31, 2016 and December 31, 2015 based on AquaBounty's quoted closing price on the London Stock Exchange was $40.1 million and $36.7 million, respectively. The fair value of our investment in AquaBounty as of December 31, 2016 would be approximately $44.1 million and $32.1 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the share price of AquaBounty. The fair value of our investment in AquaBounty as of December 31, 2015 would be approximately $40.4 million and $29.4 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the share price of AquaBounty. In January 2017, in order to improve access to capital markets, AquaBounty common stock also commenced trading on the NASDAQ Stock Market.
Investment in publicly traded company's preferred stock
We have a preferred stock investment in ZIOPHARM, a publicly traded company, which may be converted to common stock upon the occurrence of certain events in the future. We have adopted the fair value method of accounting for this investment whereby the value of preferred stock is adjusted to fair value as of each reporting date. As of December 31, 2016, the original aggregate cost basis of this investment, including shares received as dividends, was $127.4 million and the fair value was $129.5 million. The fair value of this investment is subject to fluctuation in the future due to, among other things, the likelihood and timing of conversion of the preferred stock into common stock, the volatility of ZIOPHARM's common stock, and changes in general economic and financial conditions of ZIOPHARM. The fair value of this investment as of December 31, 2016 would be approximately $142.5 million and $103.6 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the value of the investment.
Foreign currency exchange risk
We have international subsidiaries in Belgium, Brazil, Canada, England, and Hungary. These subsidiaries' assets, liabilities, and current revenues and expenses are denominated in their respective foreign currency. We do not hedge our foreign currency exchange rate risk. The effect of a hypothetical 10 percent change in foreign currency exchange rates applicable to our business would not have a material impact on our consolidated financial statements.
Item 8.
Financial Statements and Supplementary Data
The information required by this Item 8 is contained on pages F-1 through F-56 of this Annual Report on Form 10-K and is incorporated herein by reference.

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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation of our disclosure controls and procedures as of December 31, 2016, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2016.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2016, as stated in their report, which is included in Part II Item 8 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

64


PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is hereby incorporated by reference to our Definitive Proxy Statement relating to our 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website (investors.dna.com) under "Corporate Governance." We will provide a copy of this document, without charge, upon request, by writing to us at Intrexon Corporation, 20374 Seneca Meadows Parkway, Germantown, Maryland 20876, Attention: Investor Relations. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our website at the address and location specified above.
Item 11.
Executive Compensation
The information required by this item is hereby incorporated by reference to our Definitive Proxy Statement relating to our 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is hereby incorporated by reference to our Definitive Proxy Statement relating to our 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is hereby incorporated by reference to our Definitive Proxy Statement relating to our 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.
Item 14.
Principal Accounting Fees and Services
The information required by this item is hereby incorporated by reference to our Definitive Proxy Statement relating to our 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.

65


PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
The following consolidated financial statements of Intrexon Corporation and its subsidiaries, and the independent registered public accounting firm reports thereon, are included in Part II, Item 8 of this Annual Report on Form 10-K:
1.
Financial Statements.
Consolidated Financial Statements of Intrexon Corporation and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Shareholders' and Total Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015, and 2014
2.
Financial Statement Schedules.
Financial Statements of ZIOPHARM Oncology, Inc.
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2015 and 2014
Statements of Operations for the Years Ended December 31, 2015, 2014, and 2013
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2015, 2014, and 2013
Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013
Notes to Financial Statements for the Years Ended December 31, 2015, 2014, and 2013
All other financial statement schedules have been omitted because either the required information is not applicable or the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
3.
Exhibits.
The exhibits are listed in the Exhibit Index to this Annual Report.
(b)
Exhibits
The response to this portion of Item 15 is submitted as a separate section to this Annual Report. See Exhibit Index.
(c)
Financial Statement Schedules
The response to Item 15(a)2 is incorporated herein by reference.
Item 16.
Form 10-K Summary
None.

66


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 1, 2017
 
INTREXON CORPORATION
 
 
 
By:
/S/    RANDAL J. KIRK
 
 
Randal J. Kirk
Chief Executive Officer and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
 
 
 
Signature
  
Title
 
Date
 
 
 
/S/    RANDAL J. KIRK
  
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
 
3/1/2017
Randal J. Kirk
 
 
 
 
 
 
/S/    RICK L. STERLING
  
Chief Financial Officer
(Principal Accounting and Financial Officer)
 
3/1/2017
Rick L. Sterling
 
 
 
 
 
 
/S/ CESAR L. ALVAREZ
 
Director
 
3/1/2017
Cesar L. Alvarez
  
 
 
 
 
 
 
/S/    STEVEN FRANK
  
Director
 
3/1/2017
Steven Frank
 
 
 
 
 
 
 
/S/    FRED HASSAN
 
Director
 
3/1/2017
Fred Hassan
 
 
 
 
 
 
 
/S/    JEFFREY B. KINDLER
  
Director
 
3/1/2017
Jeffrey B. Kindler
 
 
 
 
 
 
 
/S/    DEAN J. MITCHELL
  
Director
 
3/1/2017
Dean J. Mitchell
 
 
 
 
 
 
 
/S/    ROBERT B. SHAPIRO
  
Director
 
3/1/2017
Robert B. Shapiro
 
 
 
 
 
 
 
/S/    JAMES S. TURLEY
  
Director
 
3/1/2017
James S. Turley
 
 
 
 

67


Index to the Financial Statements and Schedules
 
Page(s)

F-1


Intrexon Corporation and Subsidiaries
Consolidated Financial Statements
December 31, 2016, 2015 and 2014

F-2


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Intrexon Corporation

In our opinion, the consolidated financial statements of Intrexon Corporation listed in the accompanying index present fairly, in all material respects, the financial position of Intrexon Corporation and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatem