Oragenics, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Oragenics is a development-stage healthcare company marketing oral probiotics and developing antibiotic and other product candidates. Its unaudited interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2012 | Nine months ended Sep. 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $264,248 | $901,182 | $350,351 quarter; $1,047,857 nine months |
| Gross profit (margin) | $100,189 (37.9%) | $426,656 (47.3%) | $215,940 (61.6%) quarter; $489,652 (46.7%) nine months |
| Research and development | $600,208 | $7,130,780 | $562,723 quarter; $1,606,987 nine months |
| Operating expenses | $2,196,762 | $10,870,802 | $1,927,049 quarter; $6,020,522 nine months |
| Net loss | $(2,555,941) | $(11,101,620) | $(1,807,290) quarter; $(5,739,546) nine months |
| Net loss per share | $(0.11) | $(0.76) | $(0.32) quarter; $(1.01) nine months |
- Nine-month operating cash use was $3,470,975, down from $4,103,502 in 2011. Financing activities provided $15,057,011; cash and cash equivalents increased to $11,757,775 from $171,739 at year-end 2011. Investing activities had no cash flow.
- At September 30, current assets were $12,491,091 and current liabilities were $1,752,936, yielding reported working capital of $10,738,155. Total assets were $12,583,984 and shareholders’ equity was $10,831,048, versus a deficit at year-end 2011.
- Current liabilities included $88,492 of short-term notes and $265,841 of deferred revenue; no shareholder convertible note remained outstanding. The $2.5 million secured shareholder loan plus accrued interest was automatically converted into 1,692,123 shares in July. Earlier, $8,737,011 of shareholder debt and accrued interest had been exchanged for shares and warrants.
Material changes versus the prior period
- Q3 revenue fell about 25% year over year; management attributed the decline primarily to reduced advertising and promotion. Nine-month revenue fell about 14%.
- Nine-month R&D rose $5.52 million, principally due to the $5,798,001 noncash Intrexon technology-access fee recorded in stock. Excluding this one-time fee, reported R&D growth was materially different; the filing does not provide a formal adjusted figure.
- Nine-month SG&A declined $673,513, reflecting lower advertising and payroll costs, partly offset by legal, professional and consulting costs. Q3 SG&A increased 17% year over year, with higher stock compensation and professional costs.
- Interest expense increased substantially, including $443,970 recognized when the shareholder loan and related warrant discount were converted or written off. Q3 total other expense was $459,368, versus $96,181 in Q3 2011.
- The July equity placement raised approximately $13 million gross and $12.046 million net, but substantially increased shares outstanding. Shares issued and outstanding rose from 5,894,176 at December 31, 2011 to 27,204,721 at September 30, 2012; 27,382,830 were outstanding November 1.
Outlook, management commentary and risks
- Management said September 30 working capital was expected to fund the business as then structured through at least December 2013; elsewhere it estimated the placement proceeds and available resources would fund operations for at least 18 months. The filing also says there are no committed additional financing sources and future funding may not be available on acceptable terms.
- Management expects substantial losses and increasing R&D and operating costs. It plans to focus on ProBiora3 sales and marketing and antibiotic development with Intrexon, while seeking partners or licensees for other programs. Current product candidates were not expected to be commercially available before 2016.
- The Intrexon collaboration covers lantibiotics, including MU1140. Oragenics is responsible for much of development funding and commercialization; Intrexon is entitled to 25% of product gross profits and 50% of sublicense revenue, subject to contract terms. Future clinical and regulatory milestones may trigger additional share issuances or cash payments. No milestones had been achieved by September 30.
- MU1140 production at commercial scale remains unresolved. Management planned further preclinical work on synthetic MU1140-S, with toxicity testing expected in the first half of 2013 and a possible IND filing in mid-2014 if work succeeded. SMaRT trial enrollment had been slow under restrictive criteria, and the company planned to seek revised FDA criteria; a clinical hold remained on the non-attenuated strain.
- Oragenics has incurred recurring losses and negative operating cash flows since inception, with a $52.1 million accumulated deficit. Its 2011 auditor’s report included a going-concern paragraph; management believed the recent financing addressed the concern, but the filing continues to describe material financing and going-concern risks.
- Disclosure controls were deemed ineffective at quarter-end because material weaknesses remained: limited control documentation, insufficient segregation of duties, and inadequate formal accounting and SEC-reporting policies. Management said remediation was ongoing.
- Other risks include dependence on third-party manufacturers and suppliers, uncertain regulatory approval and product acceptance, potential dilution, substantial influence by the Koski family (approximately 46% beneficial ownership including warrants, as disclosed), and UFRF license obligations including $1 million annual combined development spending and $100,000 annual minimum royalties.
Important facts for investors to verify
- Cash burn and actual runway against management’s December 2013 / 18-month estimates, including whether further financing is needed.
- ProBiora3 sales trends, marketing spend, product returns and inventory obsolescence; Q3 sales declined and gross margin compressed.
- Progress, cost allocation and termination provisions under the Intrexon collaboration, and the potential dilution or cash cost of milestone obligations.
- MU1140 manufacturing feasibility and development timetable, plus FDA progress and enrollment under the SMaRT clinical program.
- Fully diluted share count and resale supply: warrants, options, Intrexon participation rights and milestone shares, as well as post-quarter equity awards. The filing reports additional LTIP shares issued after quarter-end and an 83,500-share CFO award approved October 23.
- Resolution of internal-control material weaknesses and the continuing implications of the prior auditor’s going-concern statement.