Oragenics, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed February 28, 2014. Oragenics is a development-stage biotechnology company with commercial sales of oral probiotics and early-stage antibiotic and therapeutic-probiotic programs.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $1.03 million | $1.33 million |
| Gross profit | $0.69 million | $0.45 million |
| Gross margin | 66.7% | 34.0% |
| Research and development | $9.36 million | $7.86 million |
| Selling, general and administrative | $7.54 million | $5.02 million |
| Operating loss | $(16.21) million | $(12.43) million |
| Net loss | $(16.07) million | $(13.09) million |
| Operating cash use | $6.76 million | $5.21 million |
| Cash and cash equivalents at year-end | $16.28 million | $9.93 million |
| Working capital | $15.81 million | $9.15 million |
- ProBiora3 product sales were $949,593, down from $1,194,878 in 2012. Total revenue also included grant revenue; product sales remained the company’s only commercial product revenue.
- Gross profit and margin improved as cost of sales fell, chiefly because 2012 included substantially higher inventory scrap charges. The margin improvement did not offset the much larger operating expense base.
- Management said year-end cash was expected to fund operations through March 2015, while noting that additional financing would be needed to execute longer-term plans. The company had no committed future financing.
- Year-end current liabilities were $992,847, including $64,051 in short-term notes payable; the balance sheet showed no material long-term debt. Financing cash flow was $13.13 million, primarily from equity issuance.
- Net loss per share was $(0.56), compared with $(0.74) in 2012. Weighted-average shares increased to 28.78 million from 17.74 million, reflecting substantial equity financing and share issuance.
Changes and unusual items
- Revenue declined 22.5% year over year; ProBiora3 sales fell about 20.5%. Management said its 2013 probiotic marketing plan did not meet expectations and reduced spending on outside sales consultants.
- Research and development expense increased 19.1%, while SG&A increased 50.1%. SG&A growth included higher stock-based compensation and advertising costs.
- 2013 R&D included a $6.0 million non-cash charge for the Probiotic ECC access fee to Intrexon, paid through stock and a convertible note. The note and accrued interest were converted into 698,241 shares in December 2013.
- 2012 R&D included a $5.80 million non-cash share-based access fee for the Lantibiotic ECC. The 2013 net loss also included $3.45 million of stock-based compensation across the business.
- In the fourth quarter, revenue was $434,784 and net loss was $3.08 million, versus revenue of $430,582 and net loss of $1.99 million in the prior-year quarter. Fourth-quarter R&D was $1.07 million and SG&A was $2.36 million.
- Equity issuance increased common shares outstanding from 27.38 million at year-end 2012 to 35.99 million at year-end 2013. The company reported 36.13 million shares outstanding as of February 26, 2014.
Business, outlook and principal risks
- Antibiotics: MU1140 and related lantibiotics remained preclinical. Work with Intrexon increased fermentation titers and yielded a new purification process, but further manufacturing and preclinical testing were still required. Management anticipated FDA pre-IND discussions in the second half of 2014 and, if development and manufacturing succeeded, an IND filing by the second half of 2015.
- Therapeutic probiotics: The September 2013 Intrexon collaboration targets genetically modified probiotics for oral, throat, sinus and esophageal diseases, initially including Behçet’s disease and aphthous stomatitis. Research prototypes were anticipated in the second half of 2014. The agreement includes potential milestone payments of $2 million, $5 million and $10 million, payable in cash or shares at the company’s election, subject to the agreement. None had been achieved at year-end.
- ProBiora3: A December pilot study showed positive trends in some groups but no clear statistically significant improvement over the existing once-daily tablet format. The company was reanalyzing the data. U.S. marketing relies on self-affirmed GRAS status and limited food claims; the filing notes that regulators have not independently determined the ingredient’s GRAS status.
- Other programs: Oragenics discontinued its SMaRT Replacement Therapy Phase 1b trial because restrictive enrollment criteria made recruitment difficult and was seeking a partner. It licensed LPT3-04 to LPThera in December 2013 for further development; LPThera was newly formed and needed to raise capital.
- Funding and dilution: The company has recurring losses and negative operating cash flow and expects losses to continue. Its ability to advance programs depends on raising capital, partnering or licensing; financing may be unavailable or dilutive. Intrexon’s Probiotic ECC milestones create potential future cash or share obligations, and the Lantibiotic ECC also provides for milestone share issuances.
- Development and commercial risks: MU1140 has not been tested in human trials, and commercial-scale production has not been established. Clinical success, FDA approval, market acceptance, and successful commercialization are uncertain. ProBiora3 sales have been modest, and the company relies on a limited number of third-party suppliers.
- Controls: Management concluded internal control over financial reporting was not effective at December 31, 2013 because of inadequate segregation of duties associated with the company’s small staff. The independent auditor did not attest to internal-control effectiveness. The financial statement audit opinion was unqualified.
Key facts for investors to verify
- Cash runway assumptions behind management’s estimate of funding through March 2015, and financing needs if development costs or timelines exceed plan.
- Progress and cost of MU1140 manufacturing, preclinical testing, FDA engagement and the targeted IND timeline.
- ProBiora3 sales trends, marketing efficiency, study results and the basis for continued reliance on self-affirmed GRAS status.
- Intrexon agreement economics, including milestone payment or share obligations, royalty/profit-sharing terms, and the potential dilutive effect of future equity issuance.
- LPThera’s ability to fund and meet its development milestones, and the status of the proposed SMaRT partnership.
- Remediation of the segregation-of-duties material weakness and any changes in internal-control effectiveness.